OIL SANDS MANUFACTURING

Transcription

1 OIL SANDS MANUFACTURING NOVEMBER 2013

2 About CME Canadian Manufacturers & Exporters (CME), established in 1872 by an Act of Parliament, is Canada s largest trade and industry association and is the voice of manufacturing and global business in Canada. With offices in every province across Canada and partnerships globally, CME directly represents more than 10,000 leading companies in every sector and every region of the country. Its membership network accounts for an estimated 82 per cent of Canadian manufacturing production and 90 per cent of goods and services exports. Its membership is primarily small and mid-sized companies, however it also includes global multinationals involved in manufacturing, supplying, and investing in Alberta s oil sands. For more than a decade, CME has been actively helping its members do business in the oil sands. In 2000, CME founded the National Buyer-Seller Forum (now National Supply Chain Forum) as a mechanism to connect manufacturers from across Canada with oil sands investors and owners. CME also provides direct match-making services for our members to access the oil sands and other natural resource projects across Canada. CME is also the Chair of the Canadian Manufacturing Coalition, which represents over 50 sectoral manufacturing associations which join together to speak collectively about the critical importance of the future of manufacturing in Canada. More information is available at

3 Table of contents Content Executive Summary 1 Alberta s Oil Sands Production and Investment 4 Future Investment 6 New Capital Investment 7 Maintenance, Repair, and Operations Expenditures 8 Manufacturing Supply Chains in Alberta s Oil Sands 10 Future Manufacturing Opportunities 11 Oil Sands Manufacturing Supply Chain Impact on Provincial Economies 14 Newfoundland and Labrador 15 Nova Scotia 16 Prince Edward Island 17 New Brunswick 18 Quebec 19 Ontario 20 Manitoba 21 Saskatchewan 22 Alberta 23 British Columbia 24 Value-Added Manufacturing Imports 25 Maximizing Investment Opportunities and Developing Sustainable Manufacturing Supply Chains 27 Conclusions 31 Figures Figure 1 Oil Sands Projects Phase of Operation 5 Figure 2 Number of Active Oil Sands Extraction Projects 5 Figure 3 Oil Sands Production Potential 6 Figure 4 History of Annual Capital Investment 7 Figure 5 Projected Capital Investment ( ) 8 Figure 6 History of Annual MRO Expenditure 9 Figure 7 Projected MRO Expenditure ( ) 10 Figure 8 Provincial Share of Manufacturing Sales from Capital Investment (2009) 14 Figure 9 Provincial Share of Manufacturing Sales from MRO Expenditure (2009) 14 Figure 10 Newfoundland and Labrador Manufacturing Sales from Capital Investment (2009) 15 Figure 11 Newfoundland and Labrador Manufacturing Sales from MRO Expenditure (2009) 15 Figure 12 Nova Scotia Manufacturing Sales from Capital Investment (2009) 16 Figure 13 Nova Scotia Manufacturing Sales from MRO Expenditure (2009) 16 Figure 14 PEI Manufacturing Sales from Capital Investment (2009) 17 Figure 15 PEI Manufacturing Sales from MRO Expenditure (2009) 17 Figure 16 New Brunswick Manufacturing Sales from Capital Investment (2009) 18 Figure 17 New Brunswick Manufacturing Sales from MRO Expenditure (2009) 18 Continue

4 Table of contents Figure 18 Quebec Manufacturing Sales from Capital Investment (2009) 19 Figure 19 Quebec Manufacturing Sales from MRO Expenditure (2009) 19 Figure 20 Ontario Manufacturing Sales from Capital Investment (2009) 20 Figure 21 Ontario Manufacturing Sales from MRO Expenditure (2009) 20 Figure 22 Manitoba Manufacturing Sales from Capital Investment (2009) 21 Figure 23 Manitoba Manufacturing Sales from MRO Expenditure (2009) 21 Figure 24 Saskatchewan Manufacturing Sales from Capital Investment (2009) 22 Figure 25 Saskatchewan Manufacturing Sales from MRO Expenditure (2009) 22 Figure 26 Alberta Manufacturing Sales from Capital Investment (2009) 23 Figure 27 Alberta Manufacturing Sales from MRO Expenditure (2009) 23 Figure 28 British Columbia Manufacturing Sales from Capital Investment (2009) 24 Figure 29 British Columbia Manufacturing Sales from MRO Expenditure (2009) 24 Tables Table 1 Canadian Manufacturing Sales From Capital Investment ( ) 12 Table 2 Canadian Manufacturing Sales From MRO Expenditure ( ) 13 Table 3 Manufacturing Imports related to Capital Investment (2009) 25 Table 4 Manufacturing Imports Related to MRO (2009) 26 Appendix Appendix 1 Complete List of Oil Sands Projects Appendix 1.1 Oil Sands Projects InSitu (Announced) 32 Appendix 1.2 Oil Sands Projects InSitu (Application) 33 Appendix 1.3 Oil Sands Projects InSitu (Approved) 35 Appendix 1.4 Oil Sands Projects InSitu (Construction) 36 Appendix 1.5 Oil Sands Projects InSitu (Operational) 37 Appendix 1.6 Oil Sands Projects (Announced) 39 Appendix 1.7 Oil Sands Projects (Application) 39 Appendix 1.8 Oil Sands Projects (Approved) 39 Appendix 1.9 Oil Sands Projects (Construction) 40 Appendix 1.10 Oil Sands Projects (Operational) 40 Appendix 2: Complete list of all manufacturing inputs into oil sands in 2009 from Statistics Canada Appendix 2.1 Capital Investment Input-Output Summary (Thousands) Based on 1 Billion Shock Value 41 Appendix 2.2 MRO Input-Output Summary (Thousands) Based on 1 Billion Shock Value 44

5 Executive Summary Manufacturing is vital to Canada s national economy and to the prosperity and living standards of all Canadians. As the country s largest business sector, Canadian manufacturers directly employ 1.8 million Canadians, create 13 per cent of Canada s Gross Domestic Product, export 63 per cent of Canada s total goods and services, and are responsible for more than 50 per cent of all private sector research and development. While Canadian manufacturing is a critically important part of Canada s overall economic success, the industry faces unprecedented challenges including significant bottom-line pressures with the continued strength of the Canadian dollar and increasing input costs such as labour, energy and raw materials. These pressures, added to the longer-term impacts of increased global competition, demographic shifts and rapid technological changes are presenting daunting challenges to their long-term success. Despite these challenges, Canadian industry is recovering from the global economic downturn of 2008 and 2009 and is investing in their operations, research and development and their people. Most importantly for their long term success, companies are once again aggressively looking to apply their expertise to develop new products, find new customers, enter new markets and expand their relationships with customers around the world. Domestically, one of the increasingly important areas of growth for manufacturers is the development and investment by governments and the private sector in major industrial projects such as shipbuilding, and defence contracts, electricity supply, and natural resource development. In all these projects manufacturers are playing a critically important role in project development operation and completion by supplying a wide range of technologies, goods and services into project supply chains. Alberta s oil sands are a prime example of a major development project that is of increasing importance to Canadian manufacturers and Canadian industry critical to the overall success of their development. Alberta s oil sands are among the largest proven oil reserves on the planet, containing an estimated billion barrels, or about 11 per cent of global reserves. Even while large scale production has only been underway for about 15 years, the oil sands have already attracted hundreds of billions in cumulative investment. With oil expected to remain a critical component of the global energy use mix into the future, and with a politically stable and investment friendly business environment here in Canada, it is expected that investment will remain strong in Alberta`s oil sands and output will continue to grow, for the foreseeable future. With the promise of billions more in investment in the coming decades in Alberta`s oil sands, Canadian manufacturers have a significant opportunity to not only continue selling into the oil and gas supply chains, but expanding their business as investment grows. In recent years, much of the discussion linking the oil sands with manufacturing has included so-called Dutch disease, with any supposed relationship being characterized as inherently negative. While the effect of the rising dollar has impacted the competitiveness of the Canadian manufacturing sector, especially exports, the underlying problem has been poor labour productivity, lack of diversity among customers, and lower rates of overall capital investment. While increased investment in the oil sands may have strengthened the Canadian dollar, it is by no means the root cause of the challenges faced by Canadian manufacturing. Rather than having a negative impact on Canadian industry, the oil sands are providing a customer base for manufacturers. 1

6 To date, only a handful of reports have examined in detail the economic effects of the oil sands and the specific business opportunities available for Canadian companies to participate. One of the most recent examples is the 2012 Fuel for Thought report by the Conference Board of Canada that looked at the level of employment today and into the future that can be traced to oil sands development in each province. That report concluded that the effects of the oil sands were felt in every region of the country and more strongly in wholesale trade, financial services, and manufacturing. In each case billions of dollars of capital investment was found to be moving through the regions of Canada, directly or indirectly supporting the livelihoods of countless individual Canadians. While Conference Board provided an excellent framework for understanding the benefits of the oil sands in a number of sectors across Canada, its focus did not provide a detailed description of specific inputs, or potential long-term opportunities for specific sectors. This report aims to reveal the specific regional impact of the oil sands on Canada s manufacturing sector, provide insight into the products being sold into the oil sands today, and project the future opportunities that could be available to Canadian industry from ongoing development and expansion. To accomplish this goal, Canadian Manufacturers & Exporters (CME) consulted companies involved in oil sands development, including manufacturers, engineering, procurement and construction management companies (EPCs), and the project owners themselves. CME also examined production and investment trends in the oil sands and conducted two detailed economic simulations of interprovincial trade to examine the level of direct and indirect impacts of oil sand investment on Canadian manufacturers. Using the results of our investigation, this report includes analysis of the following: 1. Using the historical investment and output performance, along with the expected expansion in oil sands development over the coming decades, it is anticipated that between $972 billion and $1.8 trillion spent on oil sands development between 2012 and Investment in new capital will fall between $476.8 billion and $905.5 billion and between $496 and $912.1 billion for maintenance, repair and operations. 2. Canadian manufacturers are critical to the ongoing development and success of Alberta`s oil sands and have an enormous opportunity for expanding sales over the coming decades. In total manufacturers from across Canada sold a combined total of $4.8 billion in manufactured goods and services into Alberta s oil sands in That year, when new capital investment in the oil sands was at $11 billion, purchases of Canadian manufactured goods accounted for 27 per cent of that total or nearly $3 billion in total sales. In the same year, roughly 14 per cent of the nearly $12 billion spent on maintenance, repair and operations (MRO) costs was spent purchasing Canadian manufactured goods. These manufacturing sales into the oil sands were from all regions of Canada and cover wide range of industrial goods including chemicals, steel products, machinery and equipment, forged and stamped metals, and electrical components. 3. While the majority of these manufacturing sales are being supplied by Alberta manufacturers, manufacturers from every region of Canada are actively selling into 2

7 oil sands supply chains. Leading the way are Ontario manufacturers who capture roughly 14 per cent of sales, manufacturers from the Manitoba and Saskatchewan combined for 8 per cent of sales, and Quebec nearly six per cent. 4. With a forecast of new projects coming online and an understanding of the direct impact on manufacturing sales as a result of historical oil sands investment, Canadian manufacturers could sell between $211.3 and $386.9 billion supplying oil sands development between 2012 and For new capital investment the opportunity ranges between $137.8 and $251.5 billion of cumulative sales and for ongoing maintenance, repair and operation from $73.5 to $135.4 billion. These future sales estimates are broken down into product level detail to specify potential manufacturing opportunities for Canadian industry through While oil sands development and investment will occur in Alberta, there are no guarantees where the value-added supply chain will be developed and the extent that it will occur within Canada. With the ability for capital to be invested anywhere and for supply chains to be developed anywhere in the world, Canada must ensure that Canada s manufacturing environment business is world class and supports manufacturing investment and growth. This also means that the domestic supply chain itself must be world class to reduce costs and improve the quality and timeliness of project delivery which are undermining ongoing investment today. For Canada to fully capitalize economically on this critical natural resource, it is essential that investment and production in the oil sands continues to grow and that the advanced manufacturing supply chains are developed domestically to support the investments. Domestic strategies need to be developed and implemented to support these end objectives to help Canada fully capture these opportunities, specifically: 1. Improve supporting mechanisms and dialogues between oil sands producers and Canadian manufacturers to strengthen supply chains and expand opportunities to directly sell into oil sands supply chains; 2. Canadian governments should understand the economic benefits of oil sands development and support ongoing investment in their development, including efficient East-West and international transportation corridors for production output and the upstream and downstream manufacturing supply chains; 3. Strengthen Canada s manufacturing business environment to support competitive Canadian participation in oil sands supply chains with a focus on investment in production and processes as well as research and development and commercialization to bring new products relating to oil sands production to market. 3

8 Alberta s Oil Sands Production and Investment Alberta s oil sands producers and their respective suppliers have enjoyed a significant period of expansion during the first decade of this new millennium. Even while chronic labour shortages, gaps in infrastructure and the protracted 2008 financial crisis served to undermine the commercial viability of certain oil extraction projects, the oil sands have nevertheless marked significant year-over-year growth both in terms of investment and output. During the 16 years from 1997 (the first year of detailed breakdown of investments are available) and 2012 (the most recent year available), annual investment went from $3.6 to $47.3 billion in combined nominal capital investment and MRO costs. Cumulative nominal investment during this period reached a staggering $290 billion. At the same time total output from Alberta s oil sands increased to nearly 1.7 million barrels per day (MBD) in 2011, of which about 1.3 MBD were exported to the United States. Given the global demand for energy, especially among emerging markets, it is expected that investment in the oil sands will continue to grow and output capacity will continue to expand. According to the International Energy Agency s world energy outlook, by 2035 global energy demands are projected to grow by more than one-third. China, India and the Middle East are expected to account for 60 per cent of the increase. With such significant proven oil reserves in a politically stable environment, Canada is ideally positioned to benefit from the insatiable demand for energy, and continued growth in investment from Alberta s oil sands operations are expected for decades to come. There are many estimates for future oil sands output, but provided the oil sands can reach their targeted consumer base, production will increase significantly over the coming decades. The Government of Alberta is forecasting an increase of production to over 3.7 MBD by The Canadian Association of Petroleum Producers (CAPP) similarly estimates significant increases in production over the coming decades with total production reaching 5.21 MBD by Out of this total, 1.68 MBD will come from traditional open-pit mining operations while 3.52 MBD will stem from the more advanced in-situ production. In order to meet these output levels, the oil sands will require a tripling of production by 2030 from current levels with significant increases in both open-pit mining and in-situ production. As part of our attempt to understand the growth patters of the oil sands, and how that growth will continue going forward, CME has reviewed all oil sands projects under legislative review or are in some phase of construction. As of 2013, there are 49 oil sands projects in operation, of which 39 are in-situ and 10 are open-pit. These projects are responsible for the current 1.7 MBD of production, and account for nearly all of the oil sands investment to date. In addition to those projects that are currently Open mining is perhaps the most commonly imagined process of oil sands extraction. Massive trucks and wide swaths of exposed earth are commonly imagined when envisioning oil sands production. In-situ is far less visible but makes up a much larger growing percentage of oil sands recovery efforts. In-situ, of which SAGD is the most common process, forces high pressure air or water into a deposit of bitumen (deeper than 70 metres). The surrounding rock structure is then fractured, and the bitumen is extracted and processed. 4

9 operational, there are an additional 178 projects either under construction (23), approved (40), going through the application and approval process (66) or announced (49) [see Appendix 1 for a complete list of projects and their current status]. It is to be expected that not all announced projects will be developed and that current schedules for construction will change. Our findings show that over the next two decades, the total number of extraction sites will increase from the 49 that exist today to 150 by The increase in the number of oil sands extraction projects between 2012 and 2030 would be necessary if we are to accept production forecasts made by CAPP and others. Their forecasting of production capacity and actual output will result in a tripling of output to 5.4 MBD by Figure 1 Oil Sands Projects Phase of Operation Figure 2 Number of Active Oil Sands Extraction Projects 5

10 Figure 3 Oil Sands Production Potential Future Investment The sustained expansion of the oil sands will lead to increased costs associated with all aspects of production, including new capital investment and ongoing maintenance, repair and operations costs. However, production potential is not the only pressure that will impact investment decisions. Other pressures that will come to impact the ongoing expansion of production and investment are tied to the legislative and political realities as well as the capacity to move upgraded product to customers across Canada and globally. With an understanding of past growth of investment - factoring in various environmental constraints on growth - it is possible to construct a number of possible development scenarios that will aid in our later conclusions of how the oil sands will impact manufacturing over the coming decades. This latter component makes forecasting an important part of this report. If we are to accept a number of assumptions about growth in oil sands production, and about capital investment and MRO expenditures, we can begin to work out the impact on Canadian manufacturing and what is needed to aid domestic manufacturing firms in their effort to realize a greater share of oil sands capital costs. As with any forecasting, especially in areas of economic activity as critical and expansive as the oil sands, accurate projections are always challenging. For our purposes, projecting future growth as well as interprovincial flows of capital, is an exercise in demonstrating economic growth that could be realized under a number of scenarios. As such, our outlook has been designed to include a low-growth, standard-growth, and high-growth scenario for oil sands investment and costs. In each case, the forces limiting or encouraging growth of the oil sands are constructed in such a way as to imagine a future where the resulting economic footprint of the oil sands may be properly analyzed. In our lower-bound growth scenario the ongoing global economic recovery, particularly among Western nations like the United States, Canada, and Europe, remains subdued for much of the coming decade. Politically, environmental policy has come to dominate any discussion about expansion of the oil sands, severely limiting increases to production or discussion about added pipeline capacity. The combined pressure of lower oil prices and stagnant economic activity in North America, and an inability to reach energy-hungry foreign markets severely restricts growth. Further still, many oil sands projects are targeted by new legislation or are deemed unprofitable. Increased legislative burdens and targeted fiscal measures serve to increase the cost of Canadian oil sands bitumen, placing the oil sands at a competitive disadvantage to foreign supplies of energy, further restricting growth. The cumulative effect on investment is a slowing of both new capital investment and MRO expenditures. For manufacturers, proposed infrastructure improvements remain mired in legislative delays but the absence of significantly increased demand for energy make the issue effectively moot. Conversely, our upper-bound scenario imagines a future investment climate that is entirely friendly to oil sands development. In this scenario, demand for commodities emanating from the Asia Pacific region is complemented by a steady recovery in North America. Increased pipeline capacity provides oil sands producers with the option of sending bitumen east across Canada to refineries, South to the United States, and West to Asia. By diversifying the sale of Canadian crude capital investment becomes insulated from the effects of global economic volatility. This scenario 6

11 would see a period of continued expansion for the oil sands, and both capital investment and MRO continue to grow at the impressive annual rates that have become common in previous decades. The standard scenario imagines a combination of outcomes. Environmental policy is evenly weighted with economic priorities, and progress on additional pipeline infrastructure is brought online gradually. In this scenario we imagine a future characterized by continued economic volatility and only moderate growth in the United States and Europe. Increased pipeline capacity is nevertheless mired in government reviews, but is supplemented with rail transport of bitumen. This scenario culminates in a slow but steady growth in both new capital investment and MRO to support gradual oil sands output capacity. New Capital Investment Capital investment is the spending associated with the installation of a new part of a mine or extraction site, or the purchasing of new equipment for use on that site. In many cases, this type of investment is better characterized as initial set-up costs, and involves the purchasing of trucks, mining machinery, large boiler tanks, and other modular equipment. New capital investment in all parts of oil sands operations increased substantially over the past 16 years, from $1.94 billion in 1997 to $27.19 billion in 2012, an increase or 1,301 per cent. In 1997 in-situ accounted for $1.06 billion of overall new capital investment and it now accounts for $13.8 billion. Investment in mining operations has grown significantly as well, from $847.3 million in 1997 to $10.9 billion in Cumulative capital investment in the oil sands for the considered 16-year period was $172.2 billion dollars, or an average of $10.75 billion a year. Past rates of growth for both capital investment and its subcomponents allow us to arrive at several critical initial conclusions. First, despite the traditional boom and bust cycle of oil sands development, it is always the case that rebounds in investment outstrip any short-term declines. In 2003, and again in 2009 when dramatic economic contractions resulted in decreased investment, these periods were followed by years of rapid growth. For example, by 2010 capital investment had nearly returned to its 2008 pre-recession levels, and by 2012 it had increased by an additional $10 billion to $27.19 billion. Second, even with this occasional dramatic volatility, the actual nominal growth in new capital investment shows a substantial and sustained investment pattern, one that is continuing to increase. Using both these historical investment trends and the expected increase in oil sands production, we are able to develop future investment forecasts for capital investment as far out as As noted in the preceding section, this study provides a rage of three possible scenarios for growth: low, standard, and high, with an estimated range of investment between 2012 and 2030 of between $ billion and $ billion. In each scenario capital investment is under pressure from both global economic trends and pressures from a domestic political environment. The low-end scenario envisions a future investment of roughly Figure 4 History of Annual Capital Investment 7

12 one quarter of the historical new capital investment levels, or two per cent. The standard growth scenario envisions a future growth rate at roughly half the rates of historical investment growth or five per cent and projects it forward. The high-end scenario projects into the future a nine per cent growth rate. The lower-bound scenario anticipates that new capital investment in all types of oil sands production will slow dramatically from historical levels. In-situ production will become the dominant type of production in the oil sands, and although investments will slow, it will remain relatively stable. In this scenario it is estimated that there will be $ billion of nominal new capital investment between 2012 and This would require an average new capital investment of just over $25.6 billion a year in nominal dollars, or an average annual investment amount $2 billion below the total reached in The standard scenario envisions many of the anticipated oil sands projects moving ahead, business conditions remaining roughly what they have been over the past 16 years, including relatively strong demand for oil energy between now and This scenario would result in a cumulative new capital investment totalling $637 billion during the period between 2012 and This would require an average annual new capital investment of $33 billion, again in nominal figures. Oil output would also slow and fall below the expected daily production rate anticipated by CAPP and other forecasters. In the high-growth scenario, nominal yearly investment remains largely consistent with historical growth trends and amounts to $ billion in combined new capital investment between 2012 and In this scenario, oil sands capital investment is least constrained by domestic public policy, even while legislative reform and pipeline capacity still involve vigorous debate, additional capacity is brought on at regular intervals to deal with the increase in production. Average annual new capital investment over the 19 year period would be $47 billion, a 75 per cent increase from current investment levels. While this is a significant increase, it is lower than historical increases in new capital investment and is supported by the corresponding tripling in oil production as expected by CAPP from 1.7 MBD in 2011 to 5.1 MBD by Maintenance, Repair, and Operations Expenditures Maintenance, repair and operations (MRO) expenditures are the ongoing investments required to keep oil sand operations running efficiently. These investments cover everything from replacement components of machinery and equipment to the salaries of the workers. Given the specialized nature of oil sands extraction, products included in MRO expenses are often raw steel or pre-fabricated components that are assembled or even built on-site for use in specialized extraction Figure 5 Projected Capital Investment ( ) 8

13 processes. Maintaining an ongoing oil sands extraction operation, in either in-situ or opening mining, is a very technical and specialized process involving machinery that has been specially designed for a particular project. Few reports of oil sands activity have made MRO investments a point of detailed consideration. In order to maintain and expand operations in existing facilities investment in maintenance, repair and operations (MRO) has had to grow significantly during the period from 1997 to In fact, total MRO expenditures increased from $1.66 billion in 1997 to $20.08 billion in 2012, an increase of 1,109 per cent. In 1997, in-situ accounted for $418.3 million and 25 per cent of overall MRO investment. It now accounts for $6.92 billion and 34 per cent. MRO investment in mining operations rose significantly as well, from $1.2 billion in 1997 to $7.56 billion in The total invested in MRO over the previous 16 years was $118 billion and has averaged an annual increase of investment throughout this period of 15 per cent. Similar to historical new capital investment increases, we can tell a lot about the growth patterns of MRO simply by examining past rates of increases and decline. Unlike capital investment, which saw significant declines in 2003 and 2009, MRO costs have only decreased twice during the reported 16-year period in 2002 and 2007 and in both instances the declines have been very mild. In both years, the decline in growth corresponded with gradual but consistent recovery and returned to positive rates of nominal investment in the following fiscal year. By examining historical trends in MRO investment in the oil sands we are able to draw some specific conclusions that point to future trends. First, the noted trend towards in-situ impacts the way MRO costs grow. The very nature of in-situ involves stationary structures as well as highly specialized drilling and extraction equipment. As capital investment and initial investment continue to grow, it will naturally result in an increasing amount of material being purchased to maintain, replace, and repair this equipment. As a result, the replacement of in-situ related extraction equipment has been far more consistent, resulting in a more gradual, but regular growth pattern. In fact, nominal MRO investment in the oil sands averaged 17.3 per cent growth per year in the 16 years between 1997 and This has resulted in MRO investment outpacing new capital spending on the oil sands in the past and over a long enough period will become the dominant area of cost among oil sand producers. Using both historical investment trends and the expected increase in oil sands production, we are able to develop future investment forecasts for MRO to Similar to new capital investment, this study provides three possible ranges of growth: low, standard and high, with an ultimate range of investment between 2012 and 2030 of $496 Figure 6 History of Annual MRO Expenditure 9

14 and $912.1 billion. The lower-bound scenario projects a subdued rate of growth for MRO investment. This rate of MRO expense would require a corresponding substantial slowdown in new capital investment and overall oil sands output. This scenario also assumes that the business environment for oil sands extraction changes dramatically over the coming years and that the infrastructure necessary to move the energy is not developed, both of which severely restrict output. By 2030, cumulative nominal MRO investment is only $404 billion, or $21 billion a year (in constant 2012 dollars). In the standard scenario for MRO between 2012 and 2030, the cumulative investment is $579 billion (in constant 2012 dollars), or an average of $30 billion a year. This estimate is consistent with continued moderate growth in oil sands investment and output over the course of the 19-year period. In the upper-bound growth scenario, MRO costs follow the same trajectory as capital investment, and increased oil production as well as very strong international demand for commodities support a continued expansion of the oil sands similar to what has been witnessed over the past 16 years. By 2030, nominal MRO expenses have vastly exceeded that of capital investment and the combined total in nominal dollars is nearly $912 billion for the time period. Manufacturing Supply Chains in Alberta s Oil Sands Since the development of Alberta s oil sands began in the early 1950s, the Canadian manufacturing sector has been a constant fixture supplying technologies, machinery and equipment in support of extraction and upgrading operations. Even while there has been success in understanding the type of manufacturing inputs required by oil sands producers, developing an accurate picture of where in Canada those inputs originate, or the impact on Canada s provincial economies, has remained stubbornly illusive. Accounting for the specifics of the oil sand s industrial demand is critical if we are to develop an appreciation for the impact that this critically important natural resource has on the rest of the Canadian economy. Further still, such an understanding would provide a roadmap for Canadian manufacturers fully capitalize on any future opportunities. To obtain detail on domestically sourced manufacturing inputs used in oil sands operations, CME commissioned two economic simulations from Statistics Canada. These input-output models simulate the linkages between initial demand and industrial output within and between given economies, and produce invaluable data on the direct Figure 7 Projected MRO Expenditure ( ) 10

15 and indirect impact of economic activity. Input-Output tables cover all economic activities conducted in the market economies of each province and territory, encompassing persons, businesses, government and non-government organizations, and entities outside its jurisdiction. The simulations used data from 2009, the most recent year available, and are best characterized as an audit of oil sands industrial demand impacting the sales of Canadian manufacturers. This data is then broken into national, provincial and international value-added manufacturing inputs to provide a detailed description of the regional impact of oil sands development both from new capital and ongoing MRO investments on Canada s manufacturing sector. Based on cumulative 2009 oil sands investment of $23 billion, Canadian manufacturers sold over $4.8 billion of manufactured goods and serviced into Alberta s oil sands 20 per cent of the total investment. The top manufacturing sub-sectors supplying these products included agricultural, construction and mining machinery manufacturing ($1,399,831,265), petroleum and coal production ($647,041,265), steel product manufacturing from purchased steel ($340,106,436), general-purpose machinery manufacturing ($313,404,021), and architectural and structural metals manufacturing ($262,645,581). Consistent with earlier sections of this report, the simulations are able to provide a specific breakdown of Canadian manufacturing sales into oil sands development for both capital investment and MRO expenditures. In 2009 when new capital investment was $11 billion, Canadian manufacturers sold $3.1 billion of products into the oil sands 27 per cent of the total investment. The largest categories of direct and indirect manufacturing sales related to capital investment included agricultural, construction and mining machinery manufacturing ($1,197,650,660), other general-purpose machinery manufacturing ($259,515,897), petroleum and coal production manufacturing ($223,888,721), architectural and structural metals manufacturing ($190,943,981) and steel product manufacturing from purchased steel ($144,099,284). When run through the input-output model, 2009 manufacturing sales related to oil sands MRO costs showed similar results, both in terms of the range of manufacturing sub-sectors selling into the oil sands and the broad-based economic benefits for all Canadian provinces. In 2009, when MRO spending in the oil sands was $11.8 billion, the cumulative direct and indirect manufacturing sales were $1.8 billion or 14 per cent of the total investment. The top manufacturing sub-sectors included petroleum and coal product manufacturing ($423,152,544), agricultural, construction and mining machinery manufacturing ($202,180,605), steel product manufacturing from purchased steel ($196,007,152), iron and steel mills and ferro-alloy manufacturing ($81,574,414) and architectural and structural metals manufacturing ($71,701,600). The top 15 manufacturing sub-sectors for 2009 are listed in the section below and the entire list of inputs from the Statistics Canada input/out model are in Appendix 2 below. Future Manufacturing Opportunities While it is important to understand the types of manufactured goods being sold into the oil sands today, it is more important to use this data to project future opportunities of Alberta s oil sands production across Canada and on the manufacturing sector. By using projections of oil sands production and investment detailed in previous sections, and by applying what is understood from current sales into the resource extraction projects, we are able to develop a national projection of the economic opportunity for Canada s manufacturers. These simulations of economic activity provide us with valuable insight into the ways in which manufacturers participate in oil sands supply chains. However, an important limitations of our input-output models is that they cannot give an indication of changes in the share enjoyed by each province. Changes to the percentage of benefit enjoyed by each province will be as a result of interprovincial shipping capacity, how competitive the Canadian manufacturing sector is compared to foreign supplies of manufactured goods. In previous sections we projected growth for oil sands capital investment between 2012 and 2030 under three scenarios: low, standard, and high, which produced cumulative investment ranges from $476.8 billion and $905.1 billion. Applying these investment scenarios against what is known about manufacturing sales into the oil sands for capital investment, we can build a detailed projection of future business opportunities for Canadian 11

16 manufacturers. Based on these calculations total projected cumulative direct and indirect manufacturing sales opportunities of between $137.8 billion and $251.5 billion for capital investment in the oil sands to Below are the top 15 manufacturing sub-sectors, representing roughly 80 per cent of total sales into new capital investment, and the projected ranges of future sales opportunities. The above section also projected future growth in MRO investments in the oil sands between 2012 and 2030 under three possible scenarios: low, standard, and high. Table 1 Canadian Manufacturing Sales From Capital Investment ( ) Canadian Manufacturing Sales Projections for New Capital Investment Manufacturing Sub-Sector 2009 Actual 2030 Lower Bound 2030 Standard 2030 Upper bound Construction and mining machinery manufacturing $1,197,650,660 $3,211,428,443 $5,098,895,759 $8,752,544,180 Other general-purpose machinery manufacturing $259,515,897 $695,876,319 $1,104,866,845 $1,896,566,695 Petroleum and coal product manufacturing $223,888,721 $600,344,183 $953,187,175 $1,636,199,926 Architectural and structural metals manufacturing $190,943,981 $512,004,839 $812,927,751 $1,395,436,657 Steel product manufacturing from purchased steel $144,099,284 $386,393,590 $613,490,436 $1,053,091,179 Machine shops, turned product, and screw, nut and bolt manufacturing $140,539,293 $376,847,688 $598,334,078 $1,027,074,430 Iron and steel mills and ferro-alloy manufacturing $129,441,731 $347,090,242 $551,087,155 $945,972,403 Cement and concrete product manufacturing $120,065,634 $321,948,800 $511,169,220 $877,450,999 Boiler, tank and shipping container manufacturing $77,674,861 $208,280,483 $330,694,109 $567,655,222 Industrial, commercial and service industry machinery manufacturing $64,714,039 $173,526,816 $275,514,515 $472,936,313 Cutlery, hand tools and other fabricated metal product manufacturing $64,363,444 $172,586,716 $274,021,884 $470,374,129 Plastic product manufacturing $36,793,661 $98,659,995 $156,645,879 $268,891,548 Coating, engraving, heat treating and allied activities $32,057,707 $85,960,820 $136,482,960 $234,280,754 Engine, turbine and power transmission equipment manufacturing $31,511,136 $84,495,222 $134,155,979 $230,286,358 Non-ferrous metal (except aluminum) production and processing $27,717,034 $74,321,566 $118,002,914 $202,558,705 12

17 Applying these investment scenarios against what is known about manufacturing sales into the oil sands for MRO investment from the input/output tables, a detailed projection as to the possible future business opportunities for Canadian manufacturers can be developed in similar ranges. Based on these calculations, we are able to project total cumulative direct and indirect manufacturing sales opportunities of between $73.5 billion to $135.4 billion investment to Below are the top 15 manufacturing sub-sectors, representing roughly 80 per cent of total sales into MRO investment, and the projected ranges of future sales opportunities. Table 2 Canadian Manufacturing Sales Projection From MRO Expenditure ( ) Canadian Manufacturing Sales Projections for MRO Investments Manufacturing Sub-Sector 2009 Actual 2030 Lower Bound 2030 Standard 2030 Upper Bound Petroleum and coal product manufacturing $423,155,520 $951,440,838 $1,650,351,065 $3,358,015,291 Construction and mining machinery manufacturing $202,184,854 $454,601,011 $788,542,212 $1,604,468,808 Steel product manufacturing from purchased steel $196,002,704 $440,700,803 $764,431,177 $1,555,409,412 Iron and steel mills and ferro-alloy manufacturing $81,570,381 $183,406,308 $318,133,071 $647,314,223 Architectural and structural metals manufacturing $71,706,174 $161,227,207 $279,661,627 $569,035,304 Basic chemical manufacturing $68,330,890 $153,638,075 $266,497,664 $542,250,221 Machine shops, turned product, and screw, nut and bolt manufacturing $68,172,039 $153,280,906 $265,878,126 $540,989,630 Other general-purpose machinery manufacturing $53,885,797 $121,159,113 $210,160,278 $427,618,973 Printing and related support activities $53,568,758 $120,446,269 $208,923,793 $425,103,062 Other chemical product manufacturing $38,105,867 $85,678,850 $148,616,893 $302,394,934 Boiler, tank and shipping container manufacturing $32,609,447 $73,320,465 $127,180,274 $258,777,247 Cutlery, hand tools and other fabricated metal product manufacturing $30,822,736 $69,303,148 $120,211,913 $244,598,529 Motor vehicle parts manufacturing $29,562,207 $66,468,921 $$115,295,718 $234,595,410 Plastic product manufacturing $29,329,395 $65,945,456 $114,387,726 $232,747,894 Electrical equipment manufacturing $22,293,217 $50,125,015 $86,945,891 $176,911,226 13

18 Oil Sands Manufacturing Supply Chain Impact on Provincial Economies Annually, Canadian manufacturers supply billions of dollars worth of manufactured products into Alberta s oil sands, including chemicals, steel products, machinery and equipment, forged and stamped metals, plastics, boilers, automotive parts, and electrical components. While Alberta manufacturers supplied the majority of industrial demand ($2.1 billion) for the 2009 capital investment classification, manufacturers in other parts of Canada nevertheless enjoyed significant business related to oil sands development. In 2009, nearly $1 billion worth of manufactured goods were purchased from Canadian provinces, excluding Alberta. As detailed in the chart below, Ontario companies captured 13 per cent of total sales, Manitoba and Saskatchewan combined received eight per cent of the total, while the remaining provinces secured nine per cent of manufacturing sales. For MRO expenditures, manufacturers from across the Canada show evidence of participating in oil sands supply chains. Where MRO differs from capital investment is in the distribution among Canada s regions. Our simulations show only 59 per cent ($1.03 billion) of MRO expenditures remaining in the provincial boundaries of Alberta. As detailed in the chart below, Ontario companies captured 17 per cent ($295 million) of the sales, Manitoba and Saskatchewan combined for 11 per cent ($196 million), while the rest of the provinces, Quebec, British Columbia and Atlantic Canada enjoyed 13 per cent ($127.4, $64.8, $27.6 million respectively) of direct and indirect Canadian manufactured products sold into Alberta oil sands. The details of the impact of manufactured goods from each province being sold into oil sands supply chains are provided in greater detail through the examination of the specific manufacturing sub-sectors that comprise the top 15 segments of direct and indirect shipments. Figure 8 Provincial Share of Manufacturing Sales from Capital Investment (2009) Figure 9 Provincial Share of Manufacturing Sales from MRO Expenditure (2009) 14

19 Newfoundland and Labrador Newfoundland and Labrador manufacturers sold $5.5 million of direct and indirect value-added goods into Alberta s oil sands extraction in Sales relating to new capital investment totaled $3.3 million. The top-performing sectors include petroleum refineries, structural metals manufacturing, and machined metals manufacturing. Combined, these capital investments resulted in critically important manufacturing activity within the province. Total Newfoundland and Labrador manufacturing sales relating to MRO expenditures was $2.16 million in Of the manufacturing sub-sectors, petroleum refineries and construction machinery accounted for almost half of this total. Figure 10 Newfoundland and Labrador Manufacturing Sales from Capital Investment (2009) Figure 11 Newfoundland and Labrador Manufacturing Sales from MRO Expenditure (2009) 15

20 Nova Scotia Nova Scotia s manufacturers directly and indirectly sold a total of $51 million into Alberta s oil sands in Sales of new capital investments accounted for $22 million of this total. The top sales performers of manufactured goods include petroleum refineries, architectural and structural metals, as well as electronic and rubber product manufacturing. In 2009, Nova Scotia s manufacturers sold an additional $29 million directly and indirectly into the oil sands for MRO. Manufacturing s top sales relating to MRO were products relating to petroleum refineries, structural metals manufacturing, as well as many examples of chemical product manufacturing. Figure 12 Nova Scotia Manufacturing Sales from Capital Investment (2009) Figure 13 Nova Scotia Manufacturing Sales from MRO Expenditure (2009) 16

21 Prince Edward Island As a province separated from the oil sands by 5,000 Km and with a population of only 130,000 people, PEI was the smallest example of oil sands industrial demand selling $647,016 of value-added products to support oil sands extraction in Sales into new capital investments were $258,230 and the top performing manufacturing sub-sectors included veneer, plywood engineered wood, machine shops turned product and screws, architectural and structural metals manufacturing, as well as hand tools and other fabricated metal products. PEI s manufacturers sold an addition $388,786 worth of products to support MRO. The top performing manufacturing sub-sectors for MRO sales include veneer plywood and engineered wood, aerospace products and parts as well as pesticide and fertilize and other agricultural chemicals manufacturing. Figure 14 PEI Manufacturing Sales from Capital Investment (2009) Figure 15 PEI Manufacturing Sales from MRO Expenditure (2009) 17

22 New Brunswick New Brunswick s manufacturers sold a total of $ million into Alberta s oil sands extraction activities in Sales relating to new capital investment accounted for $20.1 million of this total. The top performing manufacturing sub-sectors include mining and construction machinery, structural metals manufacturing, machine ships and turned product manufacturing, as well as manufacturing related to petroleum refineries. New Brunswick s manufacturers sold an additional $17.6 million worth of products to support oil sands MRO. The top performing manufacturing sub-sector for MRO sales was, by a large measure, manufactured goods relating to petroleum refinement. Figure 16 New Brunswick Manufacturing Sales from Capital Investment (2009) Figure 17 New Brunswick Manufacturing Sales from MRO Expenditure (2009) 18