Logistics Control Towers for Reduced Costs and Complexity in Hydraulic Fracturing

Confidential and Proprietary

Logistics Control Towers for Reduced

Costs and Complexity in Hydraulic

Fracturing

Brittain Ladd

Global Supply Chain and Logistics

June 2012


Executive summary

• Average cost to frack a well = $8.4 million to $8.8 million

• Each well requires three to five million gallons of water and three to

five million pounds of proppants

– An average of 400 tanker truck loads per well

• An average of 40,000 pounds of chemicals are used per well

• Each well requires specialized tools and equipment to complete the

fracking and capping process

• The bottom line is that fracking is labor and cost intensive

• Applying the science of supply chain optimization and logistics best

practices will reduce costs and complexity and increase profit

margins per well

2


The Shale Game – growing year after year

3


Hydraulic Fracturing explained

4


Frac sand – The lifeblood of the fracking industry

• Frac sand is key to hydraulic fracturing as the sand holds open the fractures created

• Frac sand grains must have a high compressive strength of between 6,000 psi and 14,000 psi

• Sands that meet these specifications are mined from Cambrian and Ordovician sandstones (more specifically, from the Jordan, Wonewoc, Mt. Simon, and St. Peter Formations)

• The sandstone is found mainly in Wisconsin and Minnesota and mined primarily by four companies: – Ottawa Sand Company LLC

– Winn Bay Sand,

– Taylor Frac LLC

– Unimin Corporation

5


The biggest challenge of fracking - logistics

6


Industry challenges

• High logistics costs due to:

– A shortage of rail cars and increasing rail lease costs for covered hopper

cars

– Inefficient rail car utilization

– Expensive and less efficient truck transportation

• Logistics challenges have become so great that companies are going

to extremes to ensure availability of supply:

– Preferred Sands LLC is building their own railway

– Halliburton is investing $20MM to build their own frac sand terminal to

supply their operations in the Denver-Julesburg (DJ) basin

– EOG Resources announced plans to build their own 1.7m tpa frac sand

plant

– Pioneer Natural Resources Company acquired Carmeuse Industrial Sands

in order to provide frac sand below market value

• Estimated savings of $75MM to $80MM

7


Potential solutions to meeting the logistics challenges related to

fracking

• Acquire a 3PL with established rail contracts, sand and water storage tanks, sand hauler relationships or a private fleet, and transloading facilities

– Operate the company as a separate entity to continue servicing the needs of customers

– Expand the operations to meet the logistics requirements for the known shale fields currently in operation

– Leverage infrastructure and assets to meet corporate logistics needs at the lowest costs

• Enter into a collaborative procurement agreement to purchase sand, water, chemicals and transportation as part of a co-op to leverage combined spend

– Enter into long-term contracts with semi-annual contractual review periods

• Vertically integrate by purchasing mining rights for sand, build rail capability

– Not recommended due to capital requirements and risk

8


Supply chain network optimization – getting supply closer to the

operations

• Today, the majority of oilfield services companies transport sand from mines by rail to transloading facilities where sand is then trucked to the final well destination

– Cost intensive

– High risk due to increasing rail congestion

• Frac sand demand planning can be utilized to store sand in locations to service well operations cost effectively

– Locations are selected that will minimize logistics costs

– Replenishment of sand can be done cost-effectively by rail without paying expedited freight charges; repeatable and reproducible

– Trucking costs are reduced by minimizing miles travelled

9


Logistics Control Towers for the

Fracking Industry


Overview

• The term “control tower” refers to a centralized location whereby a

highly skilled and well-managed team of supply chain professionals

are organized and equipped to:

– Provide detailed data analysis of the supply chain for the purpose

of identifying opportunities to reduce costs and complexity

– Assure oversight of the supply chain from end-to-end utilizing

technology and best practices across suppliers to customers

– Strategically align with operations to conduct advanced analysis of

the drivers of logistics costs (supply, inventory, transportation) and

collaborate on strategies to reduce costs

– Provide an optimal platform for analyzing day-to-day tactical

requirements while analyzing data for increased demand planning

• Most importantly, Logistics Control Towers accelerate

execution!

11


The Logistics Control Tower – achieving best-in-class supply chain

and logistics management

• Control towers combine organizations

(people), systems and processes in

order to provide supply chain partners

with a high-level of product visibility

along the entire supply chain

• This enables three levels of

management control:

Strategic – provides control over the

design of the overall supply chain network

Tactical – enables proactive planning of procurement, operations and distribution according to demand

Operational – encompasses various real-time functionality including transportation management, inventory tracking and exception management to maximize execution while reducing costs

• Ensures “one version of the truth” as it

relates to the supply chain

• Aligns “The Voice of the Network” with

“The Voice of the Customer”


Functions performed in a Logistics Control Tower

13


Real-time data analysis and predictive analytics are a key feature

of Logistics Control Towers

• Data is analyzed to identify the optimal logistics response while

reducing costs:

– Sand requirements by well location (red, yellow, green)

– Water requirements by well location (red, yellow, green)

– Chemical requirements by well location (red, yellow, green)

– Total inventory on hand and in safety stock (sand, water,

chemicals)

– Forecasted demand of product (sand, water, chemicals) by well

location

– Transportation across all modes planned and inbound

– Logistics costs vs. plan

– On-time delivery across all modes

– Risk analysis and recommendations for reducing/eliminating risk

– Cost-to-Serve Optimization

14


Key Business Issues Addressed – Reduce transportation spend by analyzing and identifying the optimal transportation strategy by mode

Transportation & Network Analysis

• Optimal sourcing

• Mode selection (ocean, rail, truck, LTL, parcel)

• Shipment sizing & scheduling

• Asset utilization (railcars, trucks, etc.)

• Intra-company shipping

• Transportation needs by region

• Transportation forecasting

• What If? analysis

Network & Transportation Analysis

As the single largest driver of logistics costs, Logistics Control

Towers focus on reducing transportation costs across all modes


Examples of transportation metrics and KPI’s captured within a

Logistics Control Tower

Rail

Ocean / Barge

Express/Parcel

Air

TL/LTL

Container

• Lane utilization by Mode and Carrier

• Lane utilization by Forecasted Volumes

• Lane variance by Mode

• On-time pick-up

• On-time Delivery

• Transportation as a Percentage of the COGS

• Load Factor by LTL

• Percentage of Claims by Mode

• Fuel as a Percentage of Costs by Mode

• Contracted Carrier Performance vs. Actual

• Weight Break Analysis (LTL vs. Parcel)

• LTL to TL Consolidation Percentage

• Global Carrier Optimization

• Percentage of Business by Carrier

• What If? analysis to consider scenario tradeoffs

• Can costs be reduced

increasing/decreasing business with a

specific carrier?

• Total Cycle Time

• Mode Trade-Off


Example of how global logistics needs can be monitored and

managed via the use of Logistics Control Towers

Logistics Control Towers provide global visibility of all logistics needs from inventory to transportation. Supply chain network and transportation optimization software evaluates the

logistics needs of the global network aligning supply with demand on a continuous basis.

Inbound Shipments

and Data

Outbound Shipments

and Data


Projected Logistics Control Tower design and implementation

timeline

18


Assessing the Logistics Network to

Identify Opportunities to Reduce Costs

Confidential and Proprietary 20

The first step in reducing logistics costs is to conduct an

assessment of the supply chain end-to-end


Few areas within business are more complicated than supply

chain management and logistics

21

Enterprise Asset Management

Finance & Accounting

Human Capital Management

Enterprise Performance Mgmt

Integration & Analysis

Service Definition

Customer Service & Operation Center

Execution

Sales and Marketing

Settlement

Planning & Order Management

Regulatory Compliance

Pickup Scheduling

Order & Shipment

Monitoring

Delivery

Scheduling

Invoices

& Payments Order Monitoring

Order &

Shipment

Quotes

Sales &

Customer

On-boarding


The four-step Logistics Assessment methodology – average of

one to three months to complete

• Identify scope and objectives for assessment

• Mobilize joint project team

• Conduct focus interviews with key stakeholders

• Identify top issues

• Define data requirements

• Collect and validate data

• Conduct site visits

• Leading practice comparison

• Peer group KPI benchmark comparison

• Business process review

• Technology assessment

• Organizational assessment

• High-level network modeling

• Identify / socialize improvement opportunities

• Prioritize improvement opportunities for further evaluation

• Identify potential solutions

–People –Process –Technology

• Develop “benefits logic”

linking potential solutions and benefits

• Identify go-forward opportunities

• Confirm stakeholder alignment

• Estimate timing and investment for each opportunity

• Develop transition / implementation plan

• Construct business case with estimated ROI

• Summarize and document findings

• Present findings

• Identify next steps to drive agreed-upon improvements

Step 1

Mobilize Team & Collect Data

Step 2

Identify Opportunities

Step 3

Refine Opportunities & Define Solutions

Step 4

Formulate Business Case

The assessment creates a portfolio of cost improvement opportunities, vetted by stakeholders, and supported by a high-level business case and implementation plan


The objective of a Logistics Assessment project is to answer these types of questions and

identify the best opportunities for cost and service improvements

“

“Are we leveraging our transportation spend? How do we

know?”

“How do we increase our

visibility globally?”

“How can we reduce our need for transportation in

the first place?”

“Do we know what it costs to serve our

customers?”

“How can we mitigate rising freight costs?”

“ How do we maximize our carrier relationships and

leverage our carriers globally?”

“How do we know that we’re making the best decisions for the company?”

“How can we benchmark our logistics costs?”

“What are we really paying for inbound freight? How can we take control of our inbound

transportation?”

“Why are our competitors better at managing their

supply chains?”

Example of questions asked during a Logistics Assessment

“Are we best-in-class or just trying to do our best? Are we working hard or

working smart?”


Examples of outputs from a Logistics Assessment

IT Requirements

SOP’s

Network, Transportation

Modeling & Analysis Strategies

Metrics and KPI’s

Transportation and Logistics

Best Practices

Cost and Trend

Analysis

As Is & To Be Process Flows


Strategic Analysis Business Transformation Design & Delivery

Target Operating Model Design

Strategic Analysis & Design

Transformation Strategy & Design

Transformation Delivery

Identify the Challenge

Agree the Challenge

Creating the Vision

Establishing the Intent

Building the Insight

Designing the Solution

Delivering the Change

Completing the Transformation

“I think there is a problem”

“We have a problem that we

must solve”

“We see what we must achieve”

“We really understand what we must do - and why”

“We are building our future”

“We’ve done it!

The Business Transformation Methodology

OperationalAnalytics

Market and Customer Analytics

FinancialAnalytics

CapabilityAnalytics What is my current financial

position?

How does what I do generate revenue and costs?

How do the options close the gaps in my financial position?

How is the business positioned in the industrial and competitive landscape?

Who are the attractive customers, what do they want and howcan I target them?

How am I currently structured?

How do I collaborate with suppliers, partners and customers to deliver services?

What channels do I exploit to deliver services?

How does this need to change?

What are my core competencies and capabilities?

How do these need to change?

How can I leverage what I

have to gain competitive advantage?

Vision

Customer vision

ROI objectives

Corporate / national objectives

Organisational outcomes The Strategic Operating Model undertakes to translate the corporate strategy into a practical, high-level view of the target operating modelsufficient to target and scope transformation opportunities.

The primary purpose is to identify where the existing operating model is unable to deliver the business strategy and where change is required to achieve the target model.

CorporateStrategy

Detailed Operating Model Design

Transformation

Process Design

IT Architecture

Organisation

Infrastructure

StrategicOperating Model

BusinessContext

TargetValue

Drivers

AssessCurrentModel

IdentifyPrioritise

Gaps

TARGETOPERATING

MODEL

BusinessTransformationProgrammeDesign


Summary

• Increasing costs across all areas of the

supply chain

– Sand

– Water

– Chemicals

– Transportation

• Increasing scrutiny by state and federal

authorities related to fracking

– Concerns about water contamination

– Concerns about earthquakes

– Concerns about the future

– Concerns about unknown unknowns

Realities of the Industry

• Oilfield services companies will not be

competitive if they cannot manage the

logistics required for fracking

• Oilfield services companies must

become agile, adaptable, and aligned

with the changing nature of the fracking

industry in order to remain competitive

• The logistics methodologies utilized in

the past are no longer capable of

meeting the challenges of today due to

growing complexity and supply

constraints

The Need for Logistics Excellence

Industry recommendation: Invest in the design and implementation of Logistics

Control Towers in conjunction with collaborative demand planning, forecasting, and

replenishment.

Logistics Control Towers for Reduced Costs and Complexity in Hydraulic Fracturing

Documents

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