Shale energy: A potential

game-changer
Implications for the US
transportation & logistics industry
At a glance
Each segment of the
transportation and logistics
industries railroads,
trucking, shipping, and
airlines is experiencing
the dramatic impact of the
shale energy revolution

Since 2010, the US has

emerged as the largest gas
producer in the world.
In 2000, shale gas provided
only 1% of US natural gas
production; by 2011, it was
over 34%.
The shale industry
supported 1.7 million jobs
in 2012 and contributed
$62 billion in state and
federal tax revenue.
The U.S. Energy Information
Administration (EIA) forecasts
that by 2040, 50% of the United
States natural gas supply will
come from shale gas.
In 2000, shale gas provided
only 1% of US natural gas
production; by 2011, it was
over 34%.

Introduction
The shale energy revolution is gaining speed in the United
States, transforming the way we do business. A recent article
in The Wall Street Journal called it one of the biggest forces to
hit the US economy in modernhistory.1
Transportation and logistics companies are experiencing the
immediate and dramatic impact of this revolution. They are
essential to the movement of people and equipment to the
shale fields and the transportation of shale oil and gas from the
fields to processing plants. Longer-term, there will be additional opportunities for transportation and logistics companies
as the major energy players in the United States look to export
liquefied natural gas (LNG) derived from shale. There are
currently about 20 applications before the US Department of
Energy from companies wanting authorization to export LNG.2
Shale energy is also having a major effect on the chemicals and
manufacturing industries in this country, with clear ramifications for transportation and logistics companies. This new
source of abundant, low-cost energy is proving to be a significant incentive for chemical producers and manufacturers to
shorten their supply chain and bring production facilities back
to the United States. A revived manufacturing sector would
increase the need for rail and trucking to move more products
domestically and for shipping exports abroad.
Following is a look at the implications of shale energy for
different segments of the transportation & logistics industry.

1 http://online.wsj.com/article/SB10001424127887324263404578614122954685146.html
2 http://fossil.energy.gov/programs/gasregulation/reports/summary_lng_applications.pdf

Shale energy: A potential game-changer Implications for US transportation & logistics industry

Railroads: expanded opportunities

Rail car companies
are reaping the
benefits, experiencing
a backlog of orders
for petroleumcarrying cars...4

The shale oil boom is creating significant opportunities for the railroads as a
means to transport people, equipment,
and oil. Railroads are being used to
haul the special sand, known as frac
sand, pipes, acids, and other chemicals needed in the shale extraction
process. After extraction, rail is being
used to carry away waste products
and shale oil and gas. Rail carloads
of crude oil tripled last year to more
than200,000.3
The inbound and outbound use of
rail has led to a surge in demand for
cars that can carry crude oil. At new
production sites, which do not have
existing pipelines, rail cars are being
used to transport oil and gas from the
fields to the refineries. Pipelines are
costly and time-consuming to build
and often subject to construction
delays because of the need to obtain
various permits. Rail car companies
are reaping the benefits, experiencing
a backlog of orders for petroleumcarrying cars, and reporting strong
financial results.4

In some shale-producing regions, the

railroads have had to build additional
infrastructure to keep up with demand.
The Bakken shale field in North Dakota
is a good example. By the end of 2010,
daily production had grown to the
point that it exceeded the capacity
of available transportation options,
requiring increases in rail infrastructure.5 This April, Bakken oil output
hit a record 727,149 barrels a day, and
about 75% of the oil was carried out
by trains.6 Rail has become the favored
mode of transport in the area because
it is cheaper than trucking and more
flexible than pipeline.
With the movement from coal to shale
as an energy source, the rail industry
will increasingly move shale-related
products. Based on the US Energy
Information Administrations estimates
of shale oil, shale gas, and coal production, and conservative assumptions
about rails market share of shale oil
transportation, the increase in shalerelated carloads should more than
offset the decline in carloads of coal by
2020 (see chart).

3 http://www.bloomberg.com/news/2013-01-03/buffett-like-icahn-reaping-tank-car-boom-from-shale-oil.html
4 http://www.bloomberg.com/news/2013-01-03/buffett-like-icahn-reaping-tank-car-boom-from-shale-oil.html
5 http://www.progressiverailroading.com/rail_industry_trends/article/
Railroads-aim-to-tap-Bakken-Shales-vast-traffic-potential--26587
6 http://www.bloomberg.com/news/2013-06-14/north-dakota-s-bakken-hits-record-oil-production-level-in-april.html

PwC

Forecasted net impact of shale and coal production on

Class I carloads
Projected

Historical
8,000

145

226

406

6,686

6,737

6,595

2010
(6,831 total
carloads)

2011
(6,963 total
carloads)

2020
(7,001 total
carloads)

7,000
6,000
5,000
4,000
3,000
2,000
1,000
0

Coal

Shale oil and frac sand

Source: EIA, PwC Analysis

Note: Numbers only include shale oil carloads from wells and frac sand carloads to
shale oil and gas wells and not carloads of pipe for wells and new pipelines. Also,
the numbers assume that rails share of transporting shale oil as compared with
pipelines stays close to historical (and low) norms.

Forecasted net impact of shale and coal

production on Class I carloads
Railroads are also getting a boost from
the positive effects of shale on the US
chemical industry, which has been
transformed into a low-cost producer
of petrochemicals. Rail is essential
to the movement of chemicals in the
United States; nearly a quarter of US
shipments of chemicals are transported
by rail.8 A recent American Chemistry
Council study found that, as of March
2013, more affordable domestic energy
has contributed to the announcement
of 97 new chemical industry projects in
the United States with an approximate
value of $72 billion.9 As production

at these new plants comes online,

rail carloads of chemical products are
expected to increase as well.
In addition to the increased demand
for rail transport, the natural gas
derived from shale deposits has the
potential to provide a cheaper source
of fuel. BNSF Railway, one of the
biggest US consumers of diesel fuel,
plans to test the use of natural gas to
power its locomotives this year.10 If
successful, this could result in a significant cost reduction for rail companies.

The powering of
locomotives with
natural gas could
potentially result
in a significant cost
reduction for rail
companies.7

7 http://www.championgroup.com/news/worlds-largest-producer-of-natural-gas-now-its-u.s
8 http://www.americanchemistry.com/Policy/Rail-Transportation
9 http://chemistrytoenergy.com/shale-study
10 http://www.bnsf.com/employees/communications/bnsf-news/2013/march/2013-03-06-a.html

Shale energy: A potential game-changer Implications for US transportation & logistics industry

Trucking: lower-cost fuel

In addition to
changing fuel
dynamics, trucking
activity has increased
as a result of shale
production.

The low price of liquefied natural

gas (LNG) prices relative to the more
expensive diesel fuel has led many
companies to switch to vehicles run on
natural gas. UPS is a case in point with
its large fleet of more than 2,700 vehicles that use alternative fuel, including
liquefied natural gas and compressed
natural gas engines.11 FedEx also
uses a large number of alternativefuel vehicles in Asia, Europe, and
LatinAmerica.12
However, in order for trucking companies to expand their use of more
affordable fuels, there needs to be
infrastructure support. Clean Energy,
the largest provider of natural gas for

transportation, is building a network of

LNG truck fueling stations on interstate
highways. As part of the first phase
of this initiative, known as Americas
Natural Gas Highway (ANGH),
approximately 150 stations are scheduled to be in operation by the end of
2013.13
In addition to changing fuel dynamics,
trucking activity has increased as a
result of shale production. Trucks are
used to haul fresh water, frac sand,
waste products, and heavy equipment. Longer-term, trucks will benefit
from the shale-related manufacturing
renaissance in the United States.

11 http://www.ups.com/content/us/en/bussol/browse/leadership-afvfleet.html
12 http://about.van.fedex.com/article/cleaner-vehicles
13 www.cleanenergyfuels.com/buildingamerica.html

PwC

Shipping: poised to grow

The North American shipping industry
may become a major exporter of
natural gas, thanks to the aggressive
drilling of shale. There are more than
20 proposed LNG export terminals
in the United States seeking permits
to allow total processing of about 30
billion cubic feet a day, according
to the United States Department of
Energy. If currently pending applications are approved, US exports could
result in approximately 3,600 new LNG
tanker departures peryear.
The shipping industry could benefit
from the shale boom in other ways as
well. Recently, it was announced that
gas drillers in West Virginia had made
inquiries regarding the shipment of
shale waste by barge,15 since it is less
costly than using trucks for transport.
(At this time, however, no shipments

are being allowed until the US Coast

Guard determines how to ensure
environmental safety.) Also, shipping
is expected to play an increasing role
in the transportation of machinery and
other products needed for exploration
and production.
Furthermore, shipping will play an
increasingly important role in the
export of chemicals and manufactured
goods. The United States is becoming
a major global player in petrochemical
production, with half of new investment coming from firms outside
the United States, and producing
many chemicals and plastics for the
export market.16 Longer-term, the
chemical advantage will also result in
more manufactured goods available
forexport.

If pending
applications are
approved, US exports
could result in
approximately 3,600
new LNG tanker
departures per year.14

14 http://www.eia.gov/todayinenergy/detail.cfm?id=811
15 http://www.statejournal.com/story/20505904/ shipment-of-shale-gas-waste-liquids-awaits-coast-guard-go-ahead
16 http://www.americanchemistry.com/Media/PressReleasesTranscripts/RelatedPDF/ACC-Report-Reveals Economic-Benefits-of-Announced-Chemical-Industry-Investments.pdf

Shale energy: A potential game-changer Implications for US transportation & logistics industry

Airlines: short- and long-term opportunities

Airports and airlines

are benefiting from
the increased traffic
to and from the
major shale gas
regions.17

The high price of jet fuel, the single

largest cost component for airlines,
coupled with the volatility of crude oil
prices, is spurring a search for cheaper
alternatives, such as those based on
natural gas. Qatar Petroleum and Shell
(RDSA) have completed an $18 billion
gas-to-liquid (GTL) plant that produces
jet fuel from natural gas.18 Shell is now
exploring a similar facility on the US
Gulf Coast.19 In addition, Sasol, a South
Africa energy company, announced
in late 2012 that it would build a new
GTL plant in Louisiana that will be the
second largest GTL plant in the world,
second only to the plant inQatar.20
In 2009, Qatar Airways conducted the
first commercial flight to be powered
by fuel derived from natural gas.21
The following year, United Airlines
conducted the first US commercial
flight using a synthetic jet fuel blend
derived from natural gas.22 In 2012,
Boeing submitted a design proposal to
NASA for a plane designed to run on
liquefied natural gas.23

The use of natural gas for jet fuel is still

years away from widespread commercial use. Much depends on its pricing
in relation to the price of crude oil
as well as other possible alternative
fuels. Certainly, the impetus is there
for additional development, given
todays environment concerns around
CO2emissions.
In the nearer-term, airports and
airlines are benefiting from the
increased traffic to and from the
major shale gas regions. For example,
flights originating in North Dakota
airports serving the Bakken shale field
have experienced an increase in load
factors of almost 10% over the last
five years as traffic has nearly doubled
(seechart).

17 http://www.iea.org/publications/freepublications/publication/English.pdf
18 http://oilprice.com/Energy/Natural-Gas/Qatars-Giant-Gas-To-Liquids-Plant-To-Yield-Profits-Of-6-Billion-A-Year.html
19 http:/www.shell.com/global/future-energy/natural-gas/gtl.html
20 http://www.nytimes.com/2012/12/04/business/energy-environment/sasol-plans-first-gas-to-liquids-plant-in-us.html?_r=0
21 http://www.reuters.com/article/2009/10/13/us-britain-gas-flight-idUSTRE59C1NJ20091013
22 http://www.greenaironline.com/news.php?viewStory=810
23 http://www.wired.com/autopia/2012/03/boeing-freezes-design-with-liquid-natural-gas-powerd-airliner/

PwC

Domestic load factors higher at North Dakota airports

Domestic load factors higher at North Dakota airports

86%
84%
82%
80%
78%
76%
74%
72%
70%
68%
66%
64%

2008
All

2009

2010

2011

2012

ND

Source: US Bureau of Transportation Statistics, PwC Analysis

Shale energy: A potential game-changer Implications for US transportation & logistics industry

Taking advantage of opportunities

This is an exciting time for US transportation & logistics companies.
As production of shale gas and oil
continues to grow, so, too, do the
opportunities. In addition to serving
shale energy production during the
drilling and completion stages of new
wells, transport is needed to move gas,
oil, and waste by-products.
Railcars, planes, and trucks are all
serving the major shale regions in
North Dakota, Ohio, and Pennsylvania.
But there are significant shale deposits
in other areas of North America that
present additional opportunities. The
Marcellus Shale, most actively being
drilled today in Pennsylvania, spans
West Virginia, New York, Ohio, and
Maryland and is considered to have
a great deal of unrealized potential.24
It may be the second largest natural
gas field in the world.25 Under the
Marcellus Shale is the Utica Shale,
which is thicker and even more extensive than the Marcellus, and covers
much of the Appalachian Basin.

The number of active oil and natural

gas rigs in the Utica Shale formation doubled from 2011 to 2012,26
and seven processing plants and four
delivery pipelines valued at more than
$7 billion are under construction.27
Additional major shale plays are the
Barnett Shale in North Texas and the
Haynesville Shale in Louisiana and
Texas. The latest examples of potentially abundant deposits are the Antrim
Shale that covers most of Michigan and
the Eagle Ford Shale in South Texas.28

24 http://www.iea.org/publications/freepublications/publication/English.pdf
25 anga.us/why-natural-gas/abundant/shale-plays#.UeL1PHTs
26 http://www.eia.gov/todayinenergy/detail.cfm?id=8850
27 www.ohio.com/blogs/drilling/ohio-utica-shale
28 anga.us/why-natural-gas/abundant/shale-plays#.UeL1PHTs

10

PwC

The shale plays in Canada are for

the most part in an earlier stage of
development than in the United
States. There are large, rich deposits
in Alberta and British Columbia, with
the most intense focus to date on the
Duvernay formation in Alberta.29
While pipelines may eventually move
the bulk of shale oil and gas, it will
take time to develop the infrastructure; and rail, trucks, and planes will
still be needed to transport people
and equipment. In the not-too-distant
future, ships will carry LNG to other
parts of the world. And, as shale
energy helps to revive the US manufacturing industry, it will help most
transportation modes, as they will be
needed to move products domestically
and abroad.

Transportation and logistics executives should consider the opportunities currently presented by the
rapid growth of shale energy. The
winners will develop strategic
plans that consider the impact of
shale on the overall economy and the
potential it presents for the growth
of their businesses now and for the
foreseeablefuture.

29 www.ogfj.com/articles/print/volume -10/issue-7/features/canadian-shale-update.html

Shale energy: A potential game-changer Implications for US transportation & logistics industry

11

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To have a deeper conversation

about how this subject
may affect your business,
please contact:
US Transportation & Logistics
Industry Leader
Jonathan Kletzel
+1.312.298.6869
jonathan.kletzel@us.pwc.com
US Transportation & Logistics
Assurance Leader
Andre Chabanel
+1.973.236.4549
andre.chabanel@us.pwc.com
US Transportation & Logistics
Tax Leader
Michael Muldoon
+1.904.366.3658
michael.j.muldoon@us.pwc.com
US Transportation & Logistics
Research Analyst
Michael Portnoy
+1.813.348.7805
michael.j.portnoy@us.pwc.com

For general inquiries:

US Transportation & Logistics
Marketing Sr. Manager
Diana Garsia
+1.973.236.7624
diana.t.garsia@us.pwc.com

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