Energy East The economic benefits of TransCanada s Canadian Mainline conversion project

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1 Energy East The economic benefits of TransCanada s Canadian Mainline conversion project September, 2013

2 Table of contents Disclaimer... 1 Executive summary... 2 Introduction... 4 Energy East project description... 6 Industry context... 8 Economic benefits Appendix A: Glossary of terms Appendix B: I/O Model methodology Appendix C: I/O Model inputs Appendix D: Detailed I/O Model output tables and charts Appendix E: Pipeline capacity Appendix F: Refinery capacity and supply Appendix G: Calculation of refinery benefits Appendix H: About the authors Deloitte & Touche LLP and affiliated entities. Energy East: The economic benefits of TransCanada s Canadian Mainline conversion project i

3 Disclaimer This report is solely for use in connection with the purposes of the study, as described in the Introduction section. We do not assume any responsibility or liability for losses incurred by any parties as a result of the circulation, publication, reproduction or use of this report. We reserve the right to review all calculations or findings included or referred to in our report and, if we consider it necessary, to revise them in the light of any new information identified. We have relied upon the completeness, accuracy and fair presentation of all the financial and other information, data, advice, opinions or representations obtained from management of TransCanada ( Management ) and/or their agents and advisors (collectively, the Information ). The report is conditional upon the completeness, accuracy and fair presentation of such Information. This report is rendered on the basis of economic, financial and general business conditions prevailing as at the date of publication and the conditions, financial and otherwise, of TransCanada as they were reflected in the Information. In the analyses and in preparing the report, we have made numerous assumptions with respect to industry performance, general business, economic conditions and other matters, which are beyond our control. The computed economic impact of Energy East on incremental Canadian Gross Domestic Product, jobs, and tax revenue (the three principal items comprising economic impact ) throughout this report arise from the use of Statistics Canada s Input/Output Model. This independent, Government of Canada developed economic model is constructed and used by Statistics Canada to measure any given input shock to an economy, such as a major infrastructure project like Energy East, and is designed to model direct, indirect and induced economic effects of such projects. The estimated economic impacts of Energy East were produced by Statistics Canada using their Input/Output Model. It is important to observe that the overall outputs must be considered estimates by their nature, as they are dependent upon estimated capital construction and operating cost inputs which are estimated values, and due to the application of statistical modeling and the significant estimates inherent within such modeling. The study must be considered as a whole and selecting portions of the analyses or the factors considered by it, without considering all factors and analyses together, could create a misleading view of the process underlying the study. The preparation of this study was a complex process, contains significant estimates, and is not necessarily susceptible to partial analysis or summary description. Any attempt to do so could lead to undue emphasis on any particular factor or analysis. Deloitte is Canada s largest professional services firm; Deloitte provides Audit, Financial Advisory, Consulting, Enterprise Risk and Tax services to corporations, families, government, not-for-profit, nongovernmental organizations and other enterprises across Canada. Deloitte has significant experience providing such services to Canada s most prominent entities and industries, including many entities in the oil and gas industry. Deloitte s ability to provide industry-specific, high-quality and relevant professional services is dependent upon this experience; Deloitte s ability to remain a trusted and neutral service provider is also essential to deliver reports on complex projects such as the proposed Energy East conversion project. Accordingly, Deloitte has brought that same objectivity and independence of thought to the work we have performed on our assessment of the net economic benefit of Energy East, and we have prepared this report from that perspective. Our continued ability to serve Canada s most prominent entities is dependent upon our reputation for objectivity and credibility, and no single assignment or report is more important than our professional reputation. Our fees were based on the amount of professional time required and are not contingent on any action or event resulting from the use of the report. Canadian Mainline conversion project 1

4 Executive summary The Oil & Gas sector is a major driver of Canada s economy, representing almost a quarter of Canadian exports 1 and employing more than 500,000 people across the country 2. However, Canada may not realize the full value of its crude oil and natural gas resources due to a lack of infrastructure to transport the extracted resources to refineries in North America and beyond. This infrastructure challenge results in eastern Canadian refineries relying primarily on imported foreign sources of crude oil rather than accessing crude oil from western Canada. TransCanada PipeLines Limited s ( TransCanada s ) proposed conversion of a portion of its Canadian Mainline pipeline is expected to deliver significant economic benefit to Canada, equating to a total of $35.3B in additional 3 GDP 4 over the next five decades. The proposed Energy East project will convert portions of the existing Canadian Mainline natural gas pipeline to transport crude oil from western Canada, including the Bakken oil formation in Saskatchewan and Manitoba, to eastern Canada. To understand the economic implications of the project, TransCanada commissioned Deloitte to perform a study to estimate the project s economic impacts on the Canadian economy. This study was performed using a combination of independent Deloitte analysis and Statistics Canada s economic impact forecasting Input-Output ( I/O ) Model 5. As shown below, the potential benefits derived from this modelling are significant: $10.0B and $25.3B in additional GDP for the Canadian economy during the six-year development and construction phase and the 40-year operations phase, respectively (note: while 40 years was used as the time horizon for the purpose of this economic analysis, regular maintenance is expected to extend the life of the pipeline significantly beyond 40 years). This economic activity will occur within Ontario (37% of total), Alberta (22%), Quebec (18%), New Brunswick (8%), Saskatchewan (7%), and Manitoba (5%) 2,341 additional annual direct 6 full-time equivalent ( FTE ) 7 jobs during the development period (7,118 annual FTE jobs total for three years including direct, indirect and induced impacts) and 7,728 additional annual direct FTE jobs during the construction period (23,498 annual FTE jobs total for three years including direct, indirect and induced impacts), or a total of 91,849 one-year FTE jobs over the entire period, primarily within the construction and engineering industries 8 in Quebec (31%), Ontario (26%), Alberta (16%), New Brunswick (12%), Saskatchewan (6%), and Manitoba (4%) 1,087 additional annual direct FTE jobs would be sustained during operations for 40 years (4,252 annual FTE jobs total including direct, indirect and induced impacts), primarily within the pipeline operation & management and power industries 9 in Ontario (42%), Alberta (21%), Quebec (13%), New Brunswick (9%), Manitoba (6%) and Saskatchewan (6%) 1 Trade Data Online. Industry Canada. Web. Nov Collyer, Dave. Canadian Oil and Gas Industry Outlook Opportunities and Challenges. CAPP. 19 Apr Benefits stated are incremental to operating the Canadian Mainline with natural gas. 4 Gross Domestic Product, the market value of all officially recognized goods and services produced within a country within a period. 5 The study analyzed the economic impacts of the project on refineries, oil and gas producers, consumers and the eastern Canadian shipping industry from a qualitative and strategic perspective; these impacts were not modelled quantitatively with the I/O Model. 6 Direct impact = impact resulting from additional output in directly affected industry (e.g., industry under study). Indirect impact = impact resulting from additional output in inter-related industries. Induced impact = impact from changes in production of goods and services resulting from increased household income (e.g., wages) generated by the additional direct and indirect output 7 FTE is a unit that represents the workload of an employed person in such a way that makes workloads comparable. An FTE of 1.0 is equivalent to one worker working full time, whereas an FTE of 0.5 is equivalent to a worker working half-time. FTE can be calculated by dividing total hours worked by total hours worked annually by a full-time worker under normal working conditions. 8 Statistics Canada industry names are Oil & Gas Engineering Construction and Architectural, Engineering and Related Services 9 Statistics Canada industry names are Crude Oil and Other Pipeline Transportation, Electrical Power Generation, Transmission and Distribution and Pipeline Transportation of Natural Gas Canadian Mainline conversion project 2

5 $3.0B and $7.2B in total additional tax revenue 10 for federal, provincial and municipal governments during the six year development and construction and 40 year operations phases respectively. Considering both phases, this revenue is primarily generated in Ontario (36%), Alberta (21%), Quebec (20%), Saskatchewan (8%), New Brunswick (7%) and Manitoba (6%) An increase in crude oil takeaway capacity from western Canada of approximately 1.1 million barrels per day, leading to an anticipated reduction of the discount to Brent and WTI-based crude oil on Alberta s crude oil for volumes travelling through the pipeline. This is expected to contribute to an overall reduction on the Alberta crude oil price discount to Brent 11 A supply of domestic crude oil sources for eastern refineries, which is expected to result in an annual feedstock cost savings of between $1.55 and $11.49 per barrel based on current refining configurations and the refinery location 12 As shown in Figure 1, the Energy East project is expected to have significant implications for provincial economies across Canada and New Brunswick, Quebec, Ontario, Manitoba, Saskatchewan and Alberta in particular. Figure 1: Summary of economic impacts of the Energy East project 13 The conversion of the Canadian Mainline would provide a much sought-after outlet for western Canada s increasingly productive oil regions. If implemented, the project would demonstrate Canada s strength in engineering and would contribute to sustaining the high standard of living that Canadians have come to expect. 10 Excludes corporate taxes, which are not explicitly estimated by the I/O Model, but are included in GDP figures. 11 The discount has not been precisely estimated as doing so would require making a large number of assumptions (e.g., outcomes of other projects beyond the scope of this report, global supply / demand forecasts, etc.) 12 Based on replacing currently sourced Brent-based crude oils with light western Canadian crude oil. 13 Canadian totals may not directly add up to sum of provinces due to rounding. Canadian Mainline conversion project 3

6 Introduction TransCanada proposes to convert a portion of its existing, underutilized Canadian Mainline ( Mainline ) pipeline from natural gas to crude oil transportation. TransCanada commissioned Deloitte to estimate the magnitude of the economic impacts of the Energy East project on the Canadian economy. This study was performed using a combination of independent Deloitte analysis and Statistics Canada s economic impact forecasting I/O Model. Energy East project background The Mainline is a 14,101 km natural gas pipeline system extending from the Alberta/Saskatchewan border in the west to the Quebec/Vermont border in the east. Through connections with a number of other natural gas pipelines in Canada and the U.S., the Mainline provides natural gas to many markets within North America. The Mainline is regulated by Canada s National Energy Board ( NEB ), which regulates tolls on the pipeline to allow TransCanada to recover the costs of transporting the natural gas as well as to achieve a financial return on the investment. Utilization has decreased from historical levels in the Prairies and Northern Ontario sections in recent times 14. Rapid growth of natural gas shale production from the Marcellus deposit in the northeast U.S. has made it the most productive natural gas field in the region and has dramatically increased the volume of natural gas available in eastern North America. From the end of 2010 to the end of 2012, Marcellus natural gas production increased from approximately 2 billion cubic feet of natural gas per day ( Bcf/d ) to at least 7 Bcf/d 15, 16 and is forecasted to grow to between Bcf/d by , 18, 19, 20. This has reduced demand for western Canadian natural gas in eastern markets. At 141 trillion cubic feet of natural gas reserves 21, the Marcellus deposit has the potential to provide high production rates into the distant future. Decreased utilization has led to increased tolls in recent years (approximately doubling from 2002 to 2012), which has raised the relative cost of western Canadian natural gas versus lower cost Marcellus natural gas and is therefore limiting the viability and competitiveness of the Mainline in its current form. There is increasing demand for North American, and specifically western Canadian, crude oil in eastern Canadian refineries as it is a lower cost feedstock, more stable and longer-term source of crude oil than the currently sourced foreign crude oil supply. As the lower level of utilization provides available capacity on the Mainline, an economic opportunity exists to connect the increasing volumes of western Canadian crude oil to new markets. The proposed project will convert 3,000 km of existing natural gas pipeline to crude oil service and will also include a total of 1,460 km of new pipeline for total pipeline length of 4,460 km. This total includes new pipeline segments within Manitoba and Saskatchewan to connect the Mainline to crude oil produced from the Bakken crude oil formation. The project would link western Canadian crude oil production to eastern Canadian refineries and international markets via the east coast. 14 Internal capacity utilization documents. TransCanada. Aug Zeits, Richard. Marcellus Shale: 10 Bcf Per Day in Seeking Alpha. Web. 11 Mar Manning, Melissa. Marcellus Shale Transformational for Some Companies, Others Still Yet to Realize Full Potential, Says IHS. Web. 18 Mar Deloitte internal estimates. 18 NEXT Project Northern Expansion Transmission. Spectra Energy. Web. 15 Aug Malik, Naureen. Marcellus gas cuts price premiums to decade lows. Bloomberg News. 21 Jun Zeits, Richard. Marcellus Shale: 10 Bcf Per Day in Seeking Alpha. Web. 11 Mar Buurma, Christine. U.S. Cuts Estimate for Marcellus Shale Gas Reserves by 66%. Bloomberg. 23 Jan Canadian Mainline conversion project 4

7 Study objectives, scope and approach TransCanada commissioned Deloitte to estimate the economic impacts of the Energy East project on the Canadian economy. TransCanada provided information on the proposed timelines and budget associated with the project as well as the commercial rationale. TransCanada has not finalized specific decisions regarding the execution of the Energy East project. Particular contracting, employment, material sourcing, and other decisions will influence the impacts of the project on GDP, taxation, and employment. Such decisions are dependent upon matters such as project timing, regulatory issues, final design, pipeline routing, availability of human capital and equipment, materials, and other related variables. This study includes estimated anticipated economic impacts determined through the use of the Statistics Canada I/O Model, which incorporates historical information gathered by Statistics Canada from past oil pipeline projects. As such, specific project decisions can affect the actual impacts realized upon the development of the project. Deloitte worked with Statistics Canada to determine the economic impacts of the project in terms of GDP, job creation and tax revenues using its I/O Model. The I/O Model calculates the economic effects nationally and by province for a given change in the economy (e.g., a change in output of an industry or additional demand for a good or service). Deloitte also performed further qualitative and quantitative analysis to evaluate the broader potential benefits of the project on the Canadian public and industry stakeholders. The scope of the estimated economic impacts analysed in this study are based on a full capacity of approximately 1.1 million barrels per day ( bpd ) for the Mainline. Estimated capital and operating expenditures are based on this capacity. The scope of this study does not include an assessment of the technical, environmental or commercial aspects of the project. Furthermore, the findings in this report are based on preliminary estimates of capital and operating costs and are therefore subject to revision as the project progresses to detailed planning stages. Canadian Mainline conversion project 5

8 Energy East project description The proposed conversion of a section of TransCanada s Mainline pipeline system from natural gas to crude oil service would provide eastern Canadian refineries, and potentially international markets, with western Canadian crude oil. Deliveries to Quebec are targeted to be in service by late 2017, with deliveries to New Brunswick being targeted for The 4,460 km pipeline includes: The conversion of 3,000 km of existing Mainline natural gas pipeline in Saskatchewan, Manitoba, and Ontario with a total capacity of approximately 1.1 million bpd. The conversion represents an approximate 25% reduction in overall combined gas capacity through TransCanada s facilities into Ontario 22 The construction of 1,460 km of new pipelines: New segments on both ends of the converted section within Alberta, Ontario, Quebec and New Brunswick (capacity same as above) New pipeline segments within Manitoba and Saskatchewan to connect the Mainline to crude oil produced from the Bakken crude oil formation The construction of 68 new pumping stations The construction of crude oil storage tank terminals 23 in: Hardisty, Alberta: 4.2 million barrels The Quebec City, Quebec area: 4.95 million barrels The Saint John, New Brunswick area: 7.65 million barrels Manitoba and the Saskatchewan Bakken area: 0.75 million barrels The construction of new marine shipping terminals on the Saint Lawrence River in Quebec and in the Saint John, New Brunswick area As effective 24 crude oil takeaway pipeline capacity from the western Canadian region is currently 3.0 million bpd, the Energy East project represents an approximate one third increase in takeaway capacity from the western Canadian region based on the full approximately 1.1 million bpd capacity. The project s route is shown below in Figure 2. Figure 2: Energy East project map 22 Transportation of crude oil on the Mainline will occur via one pipe. There are currently five, three, and two Mainline pipes running across the country in the Prairies, Northern Ontario, and North Bay Shortcut sections respectively. 23 Capacities refer to tank shell capacity for the ultimate pipeline capacity of approximately 1.1 million bpd. 24 Effective capacity is the capacity available to ship crude oil once. See Appendix E for detail on effective capacity. Canadian Mainline conversion project 6

9 Design details After conversion, the Mainline will handle a variety of crude oil types including light, synthetic and heavy crudes. For the Hardisty interconnection point, existing or planned terminal interconnections will be used to provide crude oil producers with connectivity to existing feeder pipelines or terminals at the Hardisty complex. Downstream interconnections will include the Suncor Montreal and Ultramar/Valero Quebec City refineries, and a new interconnection to the Irving Refinery in Saint John. New interconnections will be established to connect the Bakken feeder pipeline segments to the Mainline. To minimize the impact on land and its effect on the environment, TransCanada will utilize existing rights of way to the greatest extent possible. Of the 4,460 km pipeline, 70% of the pipeline is already in the ground and more than half of the new build portion will follow existing rights of way and infrastructure. For the new Alberta pipeline segment, TransCanada will parallel the rights of way of existing and planned crude oil pipelines. For the new eastern Ontario, Quebec and New Brunswick pipeline segments, TransCanada will parallel existing crude oil or natural gas pipeline systems or other utility rights of way along different portions of the route. To the extent possible, new pump stations will utilize land where existing pump/compressor stations or receipt terminals are located. Project costs Project costs were estimated based on TransCanada s experience with crude oil and natural gas pipeline development, construction and operation across Canada and the U.S. The below expected project development and construction costs of $11.3B are those estimated at the time of report preparation 25. These costs include, but are not limited to, integrity programs (testing, inspection, replacement and repair of converted equipment), new pipeline and facility construction (pumping stations, connection and receipt points, terminals), conversion of existing facilities, power equipment, engineering and other professional services, and land and land rights. Figures shown in Table 1 are in 2013 Canadian dollars unless otherwise stated. Table 1: Project capital expenditures Segment Scope Cost ($M) Alberta & Saskatchewan New Build Bakken Segments in Saskatchewan & Manitoba Conversion Pipeline: Hardisty, AB to Burstall, SK Facilities/pump stations Pipeline: Segments within SK and MB and connections to Mainline Facilities/pump stations Pipeline: Burstall, SK to Stn in ON Facilities/pump stations $598 $561 $63 $142 $596 $2,0970 Ontario New Build Quebec New Build New Brunswick New Build Pipeline: Stn to ON/QC border Facilities/pump stations Pipeline: ON/QC border to QC/NB border Facilities/pump stations Pipeline: QC/NB border to St. John Facilities/pump stations $214 $165 $1,959 $1,262 $1,259 $897 Contingency $1,472 Total estimated project cost $11,285 Project operating expenditures are estimated to have an annual cost of $729M per year and include expenditures for power, operating and maintenance, property taxes, insurance, leases and other taxes New build cost was estimated using per km costs forecasted by TransCanada for the new build sections of the pipeline required for this project as well as per km costs for in-development crude oil pipelines of other companies. 26 The incremental cost of operating the portion of the Mainline impacted by this project with crude oil versus natural gas is $665M and was used in the Statistics Canada I/O Model analysis to calculate the net impact of the project. The cost of operation, and resultant economic impact, is significantly greater due to the additional pumping stations and energy costs required to transport crude oil compared to natural gas. Canadian Mainline conversion project 7

10 Industry context Canada s Oil & Gas industry is, and will continue to be, a major driver for Canada s economy and high standard of living. Pipeline capacity for transporting crude oil from western Canada is forecasted to be constrained over the coming years, potentially reducing the oil industry s ability to meet expected production growth and reducing potential economic growth in Canada. The Energy East project would help alleviate this constrained situation by providing additional takeaway capacity and supplying eastern Canadian refineries and export markets. As such, TransCanada s proposed Energy East project supports the long-term strategic and economic interests of Canada as it unites the abundant crude oil resources of the western Canadian producing regions with eastern Canada s refining capabilities. Canada s Oil & Gas industry Canada s Oil & Gas industry plays a critical role in Canada s economy as it generates more than $52B of GDP annually or 4.2% of the nation s total GDP 27. Taxes and royalties from the Oil & Gas industry contributed more than $20B to governments in 2011 and the industry employs an estimated 550,000 Canadians (direct and indirectly) 28. Canada s Oil & Gas industry is also a significant exporter, with almost one quarter of all Canadian exports deriving from the industry 29. While already a major contributor to Canadian exports, Canada s volume of crude oil available for export is expected to be 5.0M bpd, or 2.5 times what it is today, by This is a result of two major factors. First, western Canada s crude oil supply is expected to more than double by 2030, with light crude oil supply growing until 2025 as a result of increased activity in the Bakken region and in Alberta, and heavy crude oil supply increasing as a result of ongoing activity in the Alberta oil sands [see Figure 3]. Second, Canadian domestic demand for oil is expected to remain flat or decline in the coming years as a result of increased fuel efficiency and demand for products with lower petroleum product inputs 31. Figure 3: Western Canadian forecasted light and heavy crude oil supply Source: CAPP Canadian Crude Oil Supply Forecast Canada could play a significant role in meeting the global demand for crude oil, supporting the development and industrialization of emerging markets such as India and China. 27 Table Statistics Canada. Web. May Collyer, Dave. Canadian Oil and Gas Industry Outlook Opportunities and Challenges, CAPP. 19 Apr Trade Data Online. Industry Canada. Web. May Canada s Energy Future: Energy Supply and Demand Projections to 2035 Energy Market Assessment. NEB. Nov Statistical Review of World Energy. BP. Jun 2011; International Energy Outlook, EIA. Sep Canadian Mainline conversion project 8

11 Crude oil transportation The main transportation method for crude oil on land is via pipelines, though limited volumes of crude oil are transported by rail. For example, Irving Oil is transporting small volumes of crude oil via rail to provide feedstock to its Saint John refinery in the absence of a pipeline from western to eastern Canada. Transportation of crude oil by pipeline has a sizeable cost advantage over rail, as well as some benefits over other transportation methods from a safety and energy-intensity perspective 32, 33, 34. A large network of pipelines provides takeaway capacity from western Canada to refineries in the mid-west U.S., U.S. Gulf Coast and the west coast of North America [see Figure 4 and Appendix E]. However, an oil pipeline that directly links western Canada to the refineries in eastern Canada or the eastern seaboard does not currently exist. Pipeline capacity out of the western Canadian region is currently insufficient to handle local production levels. At the same time, insufficient pipeline capacity to transport crude oil from the Cushing oil hub [see Figure 4] results in a growing inventory of crude oil at this location [see Figure 5]. This oversupply in the region has depressed the price of crude oil in North America, a price derived from the Chicago Mercantile Exchange crude oil futures benchmark contract known as West Texas Intermediate ( WTI ). Historically, WTI has traded slightly above Brent, the global benchmark for crude Figure 4: North American pipelines Source: CAPP Crude Oil Pipeline & Refinery Map (Aug 2013). See Appendix E for more detail. Figure 5: Cushing inventory, Apr Jun Source: EIA, Petroleum and Other Liquids data charts oil that is derived from the IntercontinentalExchange crude oil futures benchmark 35, but this situation has generally been reversed since the mid-2000s. Western Canadian Select ( WCS ), the primary benchmark for western Canadian crude oil, has traded at a further discount to WTI as it is a heavier grade of crude than that on which WTI is based and so has higher processing costs. Additionally, the dependency on the Cushing oil hub as an export destination for western Canadian crude oil contributes to the bottleneck at the storage facility, while leading to further discounts of WCS. In 2012, WTI crude oil sold at an average of $18.72 or 17% below Brent while WCS traded at an average discount of $40.97 or 36% below Brent [see Figure 6]. This double discount on WCS versus Brent crude oil contributes to lower profitability and poorer project economics for crude oil producers in western Figure 6: Historical Brent, WTI and WCS prices Canada. This is likely to result in reduced capital Source: Bloomberg investment, tax revenue, royalty income and economic development for the Canadian economy. This 32 Statistical Summary, Pipeline Occurrences Transportation Safety Board. Web. 9 Oct Energy Efficiency Trends Analysis Tables Canada. Office of Energy Efficiency, Natural Resources Canada. Web. 9 Oct Van Essen, H., Croezen, H.J., Nielsen, J.B. Emissions of pipeline transport compared with those of competing modes: Environmental analysis of ethylene and propylene transport within the EU. CE Solutions for environment, economy and technology Brent is also traded on the New York Mercantile Exchange Canadian Mainline conversion project 9

12 double discount was estimated to have resulted in a $25 billion drop in annual government revenue from taxes and royalties in , while ongoing revenue losses are estimated to be between $15 billion and $27 billion annually if the infrastructure challenge is not addressed 37, 38. The only current export market for western Canadian crude oil is the United States. Dependency upon the U.S. market results in the bottleneck of crude oil in Cushing. To prevent the continued discounting of WCS crude oil, unconstrained access to markets via the west coast, U.S. Gulf Coast and/or east coast of Canada and the U.S is required. If this access is not provided in the future, the bottleneck at Cushing could further shift to western Canada as production levels in the region increase more quickly than takeaway capacity is added. As shown in Figure 7, production is estimated to exceed takeaway capacity if proposed pipeline projects are delayed. Figure 7: Effective takeaway capacity from western Canada 39 Source: CAPP Crude Oil Forecast, Markets and Transportation (2013), 2012 NEB Energy Future s Backgrounder: Addendum to Canada s Energy Future: Energy Supply and Demand Projections to 2035 (2012) The Energy East project would help alleviate this takeaway capacity challenge by providing necessary pipeline capacity from western Canada while providing crude oil producers with access to high potential target markets accessible from the eastern Canadian refineries. The Energy East project is a particularly attractive option for providing the required additional takeaway capacity as it is only a partial new build and therefore has relatively lower environmental impact, requirements for new rights of way, and lower costs. 36 Beltrame, J. Canada to lose $15-billion a year on Keystone, lack of oil pipeline capacity: CIBC. The Financial Post. 03 Apr Ibid. 38 Vanderklippe, N. Oil differential darkens Alberta s budget. The Globe and Mail. 22 Jan Effective capacity is the capacity available to ship crude oil once. See Appendix E for additional detail on the pipeline capacities plotted above. Canadian Mainline conversion project 10

13 Economic benefits Approach The quantifiable impacts of the Energy East project were assessed using Statistics Canada s I/O Model, which measures the detailed economic impacts nationally and by province for a given change or shock to the economy. Industry shocks were generated based on TransCanada s estimated project costs and are shown in Appendix C. Only incremental investments were included (i.e., only the additional operating costs of using the pipeline for crude oil transport versus natural gas transport). The quantifiable impacts measured by the I/O Model include: Gross domestic product (GDP) the market value of all officially recognized goods and services produced within a country in a given period Full-time equivalent (FTE) job creation Government tax revenue The less quantifiable impacts were assessed using primary and secondary market research-based analysis, as they could not be directly measured using the Statistics Canada I/O Model. These include impacts on: Eastern Canadian refineries Canadian crude oil producers Canadian natural gas producers Canadian consumers Canada s shipping industry Benefits to Canada The Energy East project is estimated to drive significant economic activity for the provinces of Alberta, Saskatchewan, Manitoba, Ontario, Quebec and New Brunswick during the development, construction and ongoing operation of the project. Approximately $11.3B in new capital expenditures will be directed toward Canada and will generate spending on equipment pipes, valves, fittings, and pumping equipment as well as on services engineering, design and construction management firms, trades, and professional services. This value represents a large investment in the Canadian economy. The project is also estimated to have ongoing incremental operating expenses of approximately $665M per year for power, property taxes, insurance, leases and operations and maintenance above and beyond the cost of operating the Mainline as a natural gas pipeline 40, or a net present value of $23.3B during the 40 year modeled operating period. These expenditures will likely drive long-term demand for Canadian-generated energy and a highly-skilled workforce in operations and maintenance trades and professions. The increase in employment from the project during development, construction and ongoing operations is expected to have additional follow-on economic benefits for local economies. Incremental wages and salaries earned as a result of the project would drive demand for goods and services, or induced 40 The total annual operating costs for the converted pipeline are $729M, but the incremental cost of running the pipeline with crude oil is $665M. Canadian Mainline conversion project 11

14 benefits, as employees spend their earnings at local retail stores, restaurants and service-providers. This spending on goods and services will also generate additional taxes for governments. While not quantified in this report, the project is also expected to increase government revenues via its expected positive impact of the price of western Canadian crude oil (reducing the discount versus Brent) 41. GDP, job creation and tax revenue expected to result from the project via the model are presented in detail below. Gross domestic product As observed in Table 2, the project is expected to have a significant impact on Canada s GDP over its operating life. In total, the project is expected to create $35.3B in additional GDP as a result of direct, indirect and induced economic impacts. The six-year development and construction phase is expected to generate $10.0B in additional GDP. The operations phase is expected to generate $25.3B in additional GDP over the course of operations, or $632M per year for 40 years. The majority of the GDP benefit occurs in Ontario (37%), Alberta (22%), Quebec (18%), New Brunswick (8%), Saskatchewan (7%) and Manitoba (5%) based on Combined Total figures. Additional detail on GDP impacts is included in Appendix D. Table 2: GDP Impact of project by province (2013 $M) 42 Prov. Development & Construction Phase (6 years) Operations phase (40 years) Combined Direct Indirect Induced Total Direct Indirect Induced Total Direct Indirect Induced Total NB , ,629 1,316 1, ,799 QC 1,391 1, , , ,236 2,136 2,941 1,273 6,350 ON 923 1, ,694 1,409 6,738 2,188 10,335 2,332 7,801 2,896 13,029 MB , ,807 SK , , , ,557 AB ,742 2,890 1,904 1,334 6,128 3,389 2,713 1,768 7,870 BC Oth Total 3,672 4,068 2,306 10,046 6,778 13,370 5,149 25,297 10,450 17,438 7,455 35,343 Source: Statistics Canada Interprovincial I/O Model, Table 1.4 Eastern Canadian refineries may also invest in their operations (e.g., cokers, other enhancements to increase flexibility for processing various crude oil types and/or capacity upgrades) as a result of the Energy East project. In other locations where heavy crude oil refinery capacity exists such as the U.S. Midwest or U.S. Gulf Coast investments in refinery upgrades for processing heavy crude oil were made once increased access to heavy crude oil was provided. A similar outcome may occur in eastern Canada if heavy western Canadian crude oil is more readily accessible. As the exact amount of investment in eastern Canadian refineries is unknown and would require too vast a range of assumptions to estimate, a nominal investment value of $100M in Quebec was provided to the I/O Model to illustrate potential impacts. For the purposes of analysis, Quebec was selected because it is in the approximate geographic centre of Ontario, Quebec, New Brunswick, Nova Scotia and Newfoundland the five eastern provinces with refineries and is therefore expected to nominally 41 The discount has not been precisely estimated as doing so would require making a large number of assumptions (e.g., outcomes of other projects beyond the scope of this report, global supply / demand forecasts, etc.). 42 Some sums may not add up to the component parts due to rounding. Source: Statistics Canada Interprovincial I/O Model, Table 1.4 Canadian Mainline conversion project 12

15 represent a refinery investment in eastern Canada. 43 The outcome of the $100M shock was then scaled up to determine a range of potential impacts on GDP, job creation and taxes based on hypothetical refinery investments of $2.2B and $7.0B. These values were used in this analysis to represent a potential low- and high-cost for refinery upgrades and is based on recent estimates of project costs for upgrades and new builds of refineries within North America 44. These results have not been included as part of the overall project benefits, but are presented as scale indicators of anticipated economic benefits associated with such investments. GDP was found to increase by a total of $95.4M in Canada for every $100M of investment in refineries in Quebec, or $2.1B and $6.7B for hypothetical investments of $2.2B and $7.0B. Please refer to Appendix D for more details. Job creation The project is estimated to have a significant impact on job creation in the Canadian economy as a result of direct, indirect, and induced 45 impacts. As shown in Table 3, approximately 7,118 additional FTE jobs per year are created during the three-year development period, while approximately 23,498 additional FTE jobs per year are created during the three-year construction period 46. In combination, the development and construction phase is expected to generate an additional 91,849 one-year FTE jobs for the six years. As shown in Table 4, 4,252 FTE jobs per year are created during ongoing operations (i.e., 4,252 additional FTE jobs would be sustained over the 40 year operations phase of the Energy East project). 43 To validate that the economic impacts of a refinery investment in Quebec accurately represented eastern Canada on the whole, the I/O Model was also performed using a $100M investment in Ontario. Results were consistent with the Quebec model run. 44 Marathon s Detroit refinery upgrade is estimated to cost $2.2B ( Projects. Downstream Today. Web. Oct. 2012). Cenovus/ConocoPhillips Wood River coker and refinery expansion was completed for $3.8B US (Cenovus website); BP s Whiting refinery expansion is estimated to cost $3.8B US ( Projects. Downstream Today. Web. Oct. 2012); Irving/BP s cancelled new refinery in New Brunswick was estimated to cost $7B CDN ( Irving Oil scraps plan for N.B. refinery. The Globe and Mail. Aug. 23, Direct impact = impact resulting from additional output in directly affected industry (e.g., industry under study). Indirect impact = impact resulting from additional output in inter-related industries. Induced impact = impact from changes in production of good and services resulting from increased household income (e.g., wages) generated by the additional direct and indirect output. 46 For modelling purposes, it has been assumed that FTE jobs are created evenly within both the three year development and three year construction periods. In actuality, some years within each phase may involve more spending than others, so more jobs may be created in certain years than others. The share of jobs generated in the development vs. construction periods are based on the TransCanada s estimated capital expenditure spend profiles for each year. Canadian Mainline conversion project 13

16 Table 3: FTE job creation per year, development and construction phase 47 Prov. Development Period (3 years, ) Construction Period (3 years, ) Overall (6 years) Direct Indirect Induced Total Direct Indirect Induced Total % NB ,095 1, ,866 12% QC ,217 2,764 2,899 1,656 7,319 31% ON ,882 1,743 2,819 1,652 6,214 26% MB % SK ,485 6% AB ,133 1,260 1, ,740 16% BC % Other % Total 2,342 3,152 1,624 7,118 7,729 10,407 5,362 23, % Source: Statistics Canada Interprovincial I/O Model, Table 1.4 Table 4: FTE job creation per year, operations phase Operations Phase (40 years) Prov. Direct Indirect Induced Total % NB % QC % ON 181 1, ,806 42% MB % SK % AB % BC % Other % Total 1,087 1,928 1,237 4, % Source: Statistics Canada Interprovincial I/O Model, Table 1.4 During the development and construction phase, three industries are responsible for 48% of job creation: Oil & Gas Engineering Construction (33%), Architectural, Engineering and Related Services (10%) and Support Activities for Oil and Gas Extraction (5%). During the operations phase, three industries are responsible for 53% of job creation and include Crude Oil and Other Pipeline Transportation 48 (28%), Electric Power Generation, Transmission and Distribution (21%) and Repair Construction (4%). Additional information is provided in Appendix D. On a provincial level, in New Brunswick, the top industries during development and construction are Oil & Gas Engineering Construction (38%), Architectural, Engineering and Related Services (14%) and Machinery, Equipment and Supplies Wholesaler-Distributors (3%); during operations, they are Crude Oil and Other Pipeline Transportation (62%), Electric Power Generation, Transmission and Distribution (12%) and Food Services and Drinking Places (1%). In Quebec, the top industries during development and construction are Oil & Gas Engineering Construction (38%), Architectural, Engineering and Related Services (12%) and Food Services and Drinking Places (2%); during operations, they are Crude Oil and Other Pipeline Transportation (38%), 47 FTE values shown in the table are rounded and so may not directly reconcile with the sums and percentages shown. 48 As a crude oil pipeline does not currently exist in New Brunswick, the I/O Model does not currently include historical data points on which to estimate economic impacts resulting from the project s operating expenditures in the province. As such, NAICS-based code , Natural Gas Pipeline Transportation was shocked for New Brunswick operating expenses as the direct, indirect, and induced impacts resulting from running a natural gas pipeline are expected to be similar to that of running a crude oil pipeline. Canadian Mainline conversion project 14

17 Electric Power Generation, Transmission and Distribution (12%) and Food Services and Drinking Places (3%). In Ontario, the top industries during development and construction are Oil & Gas Engineering Construction (28%), Architectural, Engineering and Related Services (9%) and Building Material and Supplies Wholesaler-Distributors (2%); during operations, they are Electric Power Generation, Transmission and Distribution (33%), Crude Oil and Other Pipeline Transportation (10%) and Repair Construction (5%). In Alberta, the top industries during development and construction are Oil & Gas Engineering Construction (34%), Support Activities for Oil and Gas Extraction (18%) and Architectural, Engineering and Related Services (7%); during operations, they are Crude Oil and Other Pipeline Transportation (48%), Electric Power Generation, Transmission and Distribution (6%) and Food Services and Drinking Places (3%). In the case of refinery investments, 968 FTE jobs are estimated to be created for every $100M of investment in refineries. As such, investments of $2.2B and $7.0B are estimated to generate 4,261 and 13,558 FTE jobs (direct, indirect and induced), respectively, assuming five-year construction phases 49. Benefits to government The table below summarizes the estimated additional annual government tax revenue 50 that is attributable to the project on a direct and indirect 51, as well as induced, basis. The project is expected to generate a total of $3.0B of tax revenue during the development and construction phase from all sources. During the operations phase, a total of $7.2B in tax revenue is estimated to be generated from all sources, an annual amount of $180M. Table 5: Total government tax revenue, (2013 $M) 52 Development & Construction Phase (6 Years) Operations Phase (40 years) Direct & Direct & Prov. Indirect Induced Total % Indirect Induced Total % NB % % QC ,089 36% % ON % 2, ,864 40% MB % % SK % % AB % 1, ,734 24% BC % % Other % % Total 2, , % 5,439 1,765 7, % Source: Statistics Canada Interprovincial I/O Model, Table 1.2 In the case of refinery investments, $29M in total government tax revenue for Canada is expected to be generated for every $100M of investment in refineries, resulting in $634M and $2.0B in tax revenue for hypothetical investments of $2.2B and $7.0B. 49 Or 21,306 and 67,719 total direct, indirect, and induced FTE positions, respectively. 50 Includes taxes on products (HST, GST, PST, federal excise taxes, import duties, and fuel taxes, etc.), production (capital taxes, Canadian Deposit Insurance Corporation premiums, land transfer taxes, property taxes, etc.), and personal income tax. Corporate income taxes were not included as they cannot be modelled accurately by the I/O Model (Corporate income taxes are included within the Other Operating Surplus category in I/O Model output Table 1.2, along with depreciation and extraordinary gains and losses). 51 The I/O Model does not provide a breakdown of direct and indirect taxes or share of taxes to federal, provincial, and municipal governments for all tax categories (Product, Production, and Income Tax). 52 Dollar values shown in the table are rounded and so may not directly reconcile with sums and percentages shown. Canadian Mainline conversion project 15

18 Impacts on Canadian refineries Eastern Canadian refineries could benefit from the Energy East project due to access to lower cost feedstock, a stable and long-term supply of crude oil and increased negotiating power for long-term crude oil supply contracts. Canada s eastern refineries are currently heavily reliant on foreign crude oil based on Brent prices for their feedstock [see Figure 8] as local sources to Atlantic Canada meet only 17% 53 of input requirements. As a pipeline linking eastern and western Canada does not exist today, western Canadian crude oil is only accessible to eastern refineries via rail or truck. For example, Irving Oil is receiving some test shipments of western crude oil at its Saint John, New Brunswick refinery via rail and plans to upgrade its East Saint John terminal to receive future rail deliveries, although volumes are limited 54. Figure 8: Sources of crude oil for Canadian refineries Source: The Supply and Disposition of Refined Petroleum Products in Canada, Tables 2-1 to 7-1. Statistics Canada (March 2013: 2012 Data). Deloitte Analysis As a result, Canada s eastern refineries are economically disadvantaged compared to their U.S. counterparts on the U.S. Gulf Coast and Midwest that are able to access discounted WTI-based crude oil. Assuming that eastern Canadian refineries continue to use light crude oil as their feedstock, it is estimated that Quebec-based refiners would save between approximately $2.80 and $10.24 per barrel as a result of this project and that New Brunswick-based refiners would save between approximately $1.55 and $11.49 per barrel, depending on whether the pipeline is partially or fully utilized 55. As such, a source of western Canadian crude oil would improve the long-term economic viability of eastern refineries. The extent of the benefit to refiners is dependent on many factors, including but not limited to the type of input crude, potential volume discounts if fixed supply arrangements are agreed with producers and the degree of utilization of the supply pipeline. The combination of these factors will determine the extent of the benefit within the ranges described. Based on the above per-barrel savings resulting from this project, on a 100,000 bpd basis, the savings to a Quebec-based refiner would range from $92M to $336M per year. Similarly, New Brunswick-based refiners would see annual savings between $51M and $377M, per 100,000 bpd The Supply and Disposition of Refined Petroleum Products in Canada tables. Statistics Canada. Web Irving Oil's western crude rail plan deemed innovative. CBC News. Web. 8 June See Appendix G for calculations and more detail. 56 These savings are calculated using the per barrel savings annualized with a 90% refinery availability, assuming the feedstock is being supplied by western Canadian producers via a pipeline. Canadian Mainline conversion project 16

19 These light crude oil benefits may be enhanced if eastern refiners invest in coking capacity or crude oil processing type flexibility enhancements to enable them to use heavier crude oils for feedstock, as the long-term supply of WCS-based crude oil could be processed. Suncor has previously considered investing in coking facilities at its Montreal refinery to allow it to process heavier crude oils 57. Upgrade costs would be significant, however; for example, if coking capacity to handle 100,000 bpd, or 11% of the current 899,000 bpd capacity of Atlantic Canada and Quebec refiners was added, an investment of $2B-$8B would be required based on a capital expenditure cost of $20k-$80k/barrel 58. Figure 9: Canadian refinery export capacity, 2012 Source: The Supply and Disposition of Refined Petroleum Products in Canada, Table 2-1. Statistics Canada. An increasing and long-term supply of crude oil from western Canada estimated at over 100 years based on current production rates could also incent refineries to invest in capacity additions. Any additional refined crude oil products would likely be supplied to markets outside of the refineries home provinces, such as Ontario or the northeast U.S., as refineries in Atlantic Canada and Quebec currently produce equal to, or more, petroleum products than are sold within their home provinces [see Figure 9]. Impacts on Canadian crude oil producers While the distance to the east coast from the western Canadian crude oil producing regions is 3-4 times longer than to the west coast, TransCanada estimates that tolls will be competitive with west coast access pipelines. As such, the pipeline will give crude oil producers an attractive alternative route for accessing eastern Canadian, U.S. and other international markets at competitive rates. Producers could benefit from the Energy East project due to increased takeaway capacity, market diversity and reductions in the Alberta discount regardless of where crude oil is shipped, whether it be to eastern Canadian, U.S., or global refiners. A reduced Alberta discount would increase profitability for producers giving them the ability to invest in their operations as well as increase the viability of oil sands projects by lowering the economically viable oil production break-even price. Impacts on natural gas producers The project s impact on Canadian natural gas producers is expected to be neutral to marginally positive on the whole. The Energy East project involves converting an underutilized section of the Mainline pipeline. This conversion of underutilized portions will raise overall pipeline utilization, which may reasonably be expected to decrease tolls on the pipeline, decreasing natural gas producers shipping costs. Impacts on consumers Canadian consumers would benefit from the economic activity of additional spending, job creation, labour-income and taxes estimated to result from the Energy East project as outlined in the outputs of the Statistics Canada I/O Model. In addition, eastern Canadian consumers would be provided with increased energy security as crude oil will be supplied from reliable domestic sources of feedstock. Consumers may experience a decrease in natural gas prices as removing capital in the rate base of the natural gas Mainline may decrease Mainline tolls. 57 Suncor scraps plan for Montreal refinery expansion. Reuters. Web. 9 Sep $/barrel range experienced for refinery upgrades and new builds based on recent projects. Canadian Mainline conversion project 17

20 Impacts on Canada s shipping industry The Energy East project is not likely to have an overall significant impact on Canada s shipping industry as decreases in some shipping activities will be offset by increases in others. If additional capacity was added to eastern refineries in the future, the Canadian shipping industry would likely experience additional exporting activity to foreign locations as domestic demand is forecasted to be flat. Canadian Mainline conversion project 18

21 59 Appendix A: Glossary of terms API gravity: A measure of how heavy or light a petroleum liquid is compared to water. If API gravity is greater than 10, the liquid is lighter than water and floats on water. If API gravity is less than 10, the liquid is heavier than water and sinks in water. Barrel ( bbl ): One barrel is equal to approximately cubic metres, 159 litres or 35 imperial gallons. Barrels per day ( bpd ): A common metric for describing the daily capacity of a process within the oil value chain (e.g., a production facility, transportation method, refinery, etc.) in terms of volume of oil. Billions of cubic feet per day ( Bcf/d ): A common metric, along with millions of cubic feet per day ( Mcf/d ), for describing the daily capacity of a process within the natural gas value chain (e.g., a production facility, transportation method, processing plant, etc.) in terms of volume of natural gas. Brent: Brent is the leading global crude oil price benchmark for Atlantic Basin crude oils and is based on a blend of light, sweet crude oils (though not as light or sweet as WTI) produced from North Sea crude oil fields. Brent is primarily traded on the IntercontinentalExchange. Canadian Association of Petroleum Producers ( CAPP ): CAPP is an advocacy group that provides a public voice for many of the corporations involved in the upstream Canadian crude oil and natural gas industry. CAPP s members produce 90% of Canada s natural gas and crude oil. CAPP s mission is to enhance the economic sustainability of the Canadian upstream petroleum industry in a safe and environmentally and socially responsible manner, through constructive engagement and communication with governments, the public and stakeholders in the communities 60 in which it operates. Canadian Energy Research Institute ( CERI ): CERI is an independent, not-for-profit research establishment created through a partnership of industry, academia, and government. Its mission is to provide relevant, independent, objective economic research in energy and related environmental issues 61. Crude oil: A mix of hydrocarbons of different molecular weights that exists in the liquid phase in underground reservoirs and remains liquid at atmospheric pressure and temperature. Crude oil may contain small amounts of sulphur and other non-hydrocarbons, but does not include liquids obtained from the processing of natural gas. Diluent: Any lighter hydrocarbon, usually pentanes plus, added to heavy crude oil or bitumen in order to facilitate its transport in crude oil pipelines. Direct impact: Measures the initial requirements for an extra dollar's worth of output of a given industry (impact resulting from additional output in directly affected industry (e.g., industry under study). The direct impact on the output of an industry is a one dollar change in output to meet the change of one dollar in final demand. Associated with this change, there will also be direct impacts on GDP, jobs, and imports. Double discount: The price discount that WCS-based Canadian produced crude oil sells at in relation to Brent-based foreign produced crude oil. The price discount is the sum of the discount that WCS-based crude oil sells at in relation to WTI-based U.S. produced crude oil (discount #1) and the discount WTIbased crude oil sells at in relation to Brent-based crude oil (discount #2). Discount #1 is a result of the 59 Some definitions are from Canada s Energy Future: Energy Supply and Demand Projections to 2035 Energy Market Assessment, NEB. Nov CAPP s Mission. CAPP. Web. Nov About CERI. CERI. Web. Nov Canadian Mainline conversion project 19

22 higher cost for processing WCS-based crude oil, which is typically heavier and sourer than sweet, light WTI-based crude oil. Discount #2 is a result of the growing inventory of WTI-based crude oil in Cushing, Oklahoma, which is resulting in an oversupply of this crude oil in the region, and subsequently depressing its price in relation to Brent-based crude oil. U.S. Energy Information Administration ( EIA ): The EIA is a U.S. federal government administration that collects, analyzes, and disseminates independent and impartial energy information to promote sound policymaking, efficient markets, and public understanding of energy and its interaction with the economy and the environment 62. Foreign crude oil: Crude oil supplied to refineries via tanker from foreign locations such as the North Sea, Africa, the Middle East, or South America. Full-time equivalent ( FTE ): FTE is a unit that represents the workload of an employed person in such a way that makes workloads comparable. An FTE of 1.0 is equivalent to one worker working full time, whereas an FTE of 0.5 is equivalent to a worker working half-time (e.g., 20 hours in a 40 hour week). FTE can be calculated by dividing total hours worked by total hours worked annually by a full-time worker. Gross Domestic Product ( GDP ): GDP is a measure of economic activity within a country. It is the market value of all goods and services in a year within Canada s borders. Heavy crude oil: Crude oil that has an API gravity less than 28. Heavy crude oil is denser than light crude oil and so requires the addition of diluent to flow freely in pipelines. Indirect impact: Measures the changes due to inter-industry purchases as they respond to the new demands of the directly affected industries (impact resulting from additional output in inter-related industries). This includes all the chain reaction of output up the production stream since each of the products purchased will require, in turn, the production of various inputs. Induced impact: Measures the changes in the production of goods and services in response to consumer expenditures induced by households' incomes (i.e., wages) generated by the production of the direct and indirect requirements (impact from changes in production of good and services resulting from increased household income (e.g., wages) generated by the additional direct and indirect output. Input / Output ( I/O ) Model: An I/O model is an economical model that measures the detailed economic impacts (outputs) to a region based on a given input shock to the economy. Shocks are commonly provided as either changes in output to an industry or changes in expenditure on a given basket of goods and services. An I/O economic model commonly estimates GDP, jobs, labour income, and taxes, among other metrics due to direct, indirect, and induced effects. Light crude oil: Crude oil with an API gravity greater than 28 API. Also a collective term used to refer to conventional light crude oil, upgraded heavy crude oil and pentanes plus. National Energy Board ( NEB ): The NEB is an independent federal agency established in 1959 by the Parliament of Canada to regulate international and interprovincial aspects of the oil, natural gas, and electric utility industries. The NEB regulates pipelines, energy development, and trade for the public interest of Canadians. Net available for export: Total production of a commodity less domestic demand for that commodity. The remainder equals the net (gross exports less gross imports) of the commodity available for export. Pentanes plus: A low density mixture mainly of pentanes and heavier hydrocarbons obtained from the processing of raw gas, condensate or crude oil. 62 About EIA. EIA. Web. Nov Canadian Mainline conversion project 20

23 Pipeline takeaway capacity: Pipeline capacity available to transport crude oil or natural gas from a specific region. Reserves: Reserves are the estimated remaining marketable quantities of oil and natural gas and related substances anticipated to be recoverable from known accumulations, as of a given date, based on: analysis of drilling, geological, geophysical and engineering data; the use of established technology; and specified economic conditions. Shock: A shock is the input provided to an I/O model for the purposes of economic impact analysis. Shocks represent a change to an industry or commodity, such as a $100M investment in construction project in the Oil & Gas sector or the purchase of $100M of automobiles. An I/O model will measure the economic impacts of this shock to the region under study and any other regions impacted by the shock (that are included in the model). Tolls: The rate a crude oil & gas producer must pay to ship a specific unit of product (in the case of crude oil, usually a barrel) over a given distance. Tolls are set by dividing costs by contract volumes plus a return for operating the asset. Western Canadian Select (WCS): WCS is a Hardisty, Alberta based benchmark for a blend of conventional and oil sands production and is heavier and more difficult to process than WTI and Brentbased crude oils. It is the most prevalent Canadian crude oil benchmark. West Texas Intermediate (WTI): WTI is a Chicago Mercantile Exchange benchmark based on light sweet crude oil, produced in the United States and is used for North American price quotations. Canadian Mainline conversion project 21

24 Appendix B: I/O Model methodology I/O Model overview The Industry Accounts division of Statistics Canada maintains an Input/Output (I/O) Model that measures the detailed economic impacts nationally or by province for a given shock to the economy. Shocks are commonly provided as either changes in output to an industry or changes in expenditure on a given basket of goods and services (a demand shock). An industry output shock, which has been used for this study, can be used to provide an indication of the economic impacts of building a new factory, constructing a new pipeline, or closing an existing facility, for example, based on an estimation of the additional spend within that industry. A demand shock could be used to determine the economic impact of a policy change, such as implementing a new subsidy on a product, based on an estimated change in demand for the product. Using the shocks provided, the I/O Model provides a detailed breakdown of economic activities among industries, industry outputs and inputs, GDP components, jobs, labour income and estimates of taxes and subsidies generated using ratios and multipliers based on historical data contained within the Statistics Canada Input-Output tables. The model also provides supply requirements from other sources such as interprovincial or international imports as well as impacts on energy use and pollutants associated with domestic production. As the I/O Model represents a simplified macroeconomic structure, it has some limitations such as: It does not include some variables of interest for macroeconomic analysis such as price levels, interest rates, employment rates, or labour force measures When calculating economic impacts such as supply requirements and additional jobs, the model calculates impacts on supplies or resources required without considering if they are readily available or if they will need to be diverted away from other uses. The jobs created can be considered incremental as jobs vacated by individuals switching to the created positions may be filled by the unemployed Indirect and induced values could be slightly overstated as the production function generating these values does not factor in economies of scale and is based off of a static multiplier. For example, if 1 FTE is currently required to generate 10 watts of power and now 20 watts are required as a result of the project, two FTEs are estimated by the I/O Model to be required. In reality, the power plant may be able to increase output without a 2 nd employee or the 2 nd employee may not be required until 25 watts are required While input shocks can be provided based on several hundred North American Industry Classification System ( NAICS ) or commodity codes, the codes may not be completely representative of the shock in question. For example, for this study, Energy East project construction costs were modeled as a shock to the Oil & Gas Construction industry. This code represents construction projects related to oil and gas production, pipelines and refining, among others, and applies identical ratios and multipliers to calculate economic impacts regardless of the type of Oil & Gas project being considered Corporate income taxes cannot be accurately estimated as they are not modeled discretely by the I/O Model. Rather, corporate income taxes are included within the Other Operating Surplus category in I/O Model output Table 1.2, along with depreciation and extraordinary gains and losses. As such, corporate income taxes cannot be disaggregated without making a number of assumptions While this approach has limitations, the ratios and multipliers used have been generated using thousands of data points accumulated over years and have been found to generate estimated outputs for subindustries within an industry code that are indicative of realized economic impacts. In consideration of the above limitations, the output economic impacts of this study s I/O Model runs should be considered directionally correct rather than scientifically precise. Canadian Mainline conversion project 22

25 Appendix C: I/O Model inputs Three industry shocks were independently input into the I/O Model for analysis: project capital expenditures, project operating expenditures and refinery capital expenditures. Project capital and operating expenditures were provided by TransCanada. Net new refinery operating expenditures were not estimated as they are expected to be marginal in comparison with project costs. The operating expenditures provided are incremental expenditures in that they are the difference between operating the Mainline as a crude oil pipeline and operating the Mainline as a natural gas pipeline. A nominal value of $100M was provided for refinery capital expenditures. Since the extent to which eastern Canadian refineries will invest in their operations based on this project is unknown, assuming a specific investment value would be misleading. As such, running the model using a nominal value allows for scaling to represent a possible range of investment in eastern refineries. For the purposes of analysis, Quebec was selected as it sits in the approximate geographic centre of Ontario, Quebec, New Brunswick, Nova Scotia and Newfoundland the five eastern provinces with refineries and so is expected to nominally represent a refinery investment in eastern Canada 63. The below values represent the net present value in 2013 Canadian dollars of the project. The timing of capital expenditures for the project was based on a spend profile provided by TransCanada. Operating expenditures are expected to be incurred on a recurring basis over 40 years from 2019 to 2058, although the pipeline will likely last for a longer period assuming regular investments in sustaining capital are made and maintenance is performed dollars were projected into the future using the Bank of Canada s forecasted inflation rates 64. A discount rate of 2.46% - the average Government of Canada benchmark bond yield for a long term bond from July 2, 2012 to July 1, was used to calculate the net present value of the expenditures 65, 66. The long term Government of Canada benchmark bond yield rate was used as opposed to TransCanada s cost of capital as it represents the social discount rate, which is appropriate for valuing the economic impacts to the wider economy. Table 6: I/O Model inputs 67 Industry Shock Project capital expenditures Project operating expenditures Refinery capital expenditures NAICS-based description (Code) Investment ($M) NB QC ON MB SK AB Oil and Gas Engineering Construction (2300D) $2,418 $3,613 $2,172 $596 $913 $1,296 Crude Oil and Other Pipeline Transportation (486A00) $1,889 $2,312 $10,637 $1,361 $2,202 $4,862 Oil and Gas Engineering Construction (2300D) - $ Note: to determine FTE job creation outputs, the project capital expenditure values above were adjusted from 2013 to 2009 dollars (not shown above). This was required as the I/O Model estimates jobs created by multiplying a 2009 multiplier by each $1M spent (2009 is the latest year for which multipliers have been produced). Due to inflation, using 2013 dollars would overestimate the number of jobs created. 63 This was confirmed by performing a model run using a $100M investment in Ontario refineries, which yielded similar results. 64 Monetary Policy Report Summary. Bank of Canada. Jul Canadian bond yields. Bank of Canada. Web. July As a crude oil pipeline does not currently exist in New Brunswick, the I/O Model does not currently include historical data points on which to estimate economic impacts resulting from the project s operating expenditures in the province. As such, NAICS-based code , Natural Gas Pipeline Transportation was shocked for New Brunswick operating expenses as the direct, indirect, and induced impacts resulting from running a natural gas pipeline are expected to be similar to that of running a crude oil pipeline. 67 Values included in this chart do not exactly match those included in the Project costs section as they represent values that have been projected into the future based on when costs are expected to be incurred and discounted to present dollars. Canadian Mainline conversion project 23

26 Appendix D: Detailed I/O Model output tables and charts Project GDP impacts The chart below summarizes the project s impact on GDP over the course of the project (e.g., a six year development and construction phase and 40 year operations phase). On the whole, the project is estimated to have a $35.3B impact on Canada s GDP with the majority of GDP benefit occurring in Ontario (37%), Alberta (22%), Quebec (18%), New Brunswick (8%), Saskatchewan (7%), and Manitoba (5%). As can be seen below, while development and construction impacts are high, the ongoing GDP benefits from operations are expected to be greater. Figure 10: Project impact on GDP, combined total ($M) Source: Statistics Canada Interprovincial I-O Model, Table 1.4 Canadian Mainline conversion project 24

27 Project Full-Time-Equivalent (FTE) job impacts The below chart illustrates the estimated total (direct + indirect + induced impacts) FTE job creation by province for the development and construction and operations phase. Like GDP, this job creation mainly occurs in the provinces of Ontario (37%), Quebec (19%), Alberta (19%), New Brunswick (10%) and Saskatchewan (6%) where the majority of the project investment occurs. Figure 11: FTE job creation by province, combined total Source: Statistics Canada Interprovincial I-O Model, Table 1.4 Canadian Mainline conversion project 25

28 Table 7: Development and construction phase total FTE job creation by industry Province Industry NB QC ON MB SK AB BC Other Total % Oil and gas engineering construction Architectural, engineering and related services Support activities for oil and gas extraction Food services and drinking places Building material and supplies wholesaler-distributors Machinery, equipment and supplies wholesaler-distributors 4,279 10,803 6,813 1,339 2,049 4, ,208 33% 1,533 3,476 2, ,063 10% ,654 2, ,876 5% ,156 2% ,840 2% ,583 2% Food and beverage stores ,505 2% Truck transportation ,475 2% Specialized design services ,240 1% Services to buildings and dwellings Banking and other depository credit intermediation Computer systems design and related services Rental and leasing services (except automotive equipment) ,025 1% % % % Repair construction % General merchandise stores % Accounting, tax preparation, bookkeeping and payroll services Steel product manufacturing from purchased steel % % Motor vehicle and parts dealers % Architectural and structural metals manufacturing Management, scientific and technical consulting services % % Other 3,237 8,558 8, ,160 3,768 1, ,746 31% Total 11,203 28,613 24,290 3,255 5,803 14,617 2,635 1,433 91, % Source: Statistics Canada Interprovincial I/O Model, Table 4.9 Canadian Mainline conversion project 26

29 Table 8: Operations phase total FTE job creation by industry Industry Crude oil and other pipeline transportation Electric power generation, transmission and distribution Province NB QC ON MB SK AB BC Other Total % 9,583 8,136 7,223 2,810 3,751 16, ,237 28% 1,887 2,663 23,969 3,233 1,447 2, ,664 21% Repair construction , ,457 4% Food services and drinking places , , ,640 3% Food and beverage stores , ,178 2% Services to buildings and dwellings Computer systems design and related services , ,931 2% , ,407 1% General merchandise stores ,888 1% Banking and other depository credit intermediation , ,879 1% Motor vehicle and parts dealers ,705 1% Financial investment services, funds and other financial vehicles Personal care services and other personal services Clothing and clothing accessories stores ,438 1% ,425 1% ,317 1% Truck transportation ,316 1% Employment services ,289 1% Building material and supplies wholesaler-distributors Management, scientific and technical consulting services Machinery, equipment and supplies wholesaler-distributors ,244 1% ,234 1% ,224 1% Holding companies ,185 1% Repair and maintenance (except automotive) ,179 1% Other 2,267 6,496 22,309 2,652 2,378 9,005 2, ,262 28% Total 15,419 21,516 72,217 10,615 9,863 35,185 4,000 1, , % Source: Statistics Canada Interprovincial I/O Model, Table 4.9 Canadian Mainline conversion project 27

30 Project tax revenue impacts Figure 12 illustrates the expected total tax revenue distribution by province in absolute terms and share of total. During the development and construction phase, Quebec (36%), Ontario (27%), Alberta (15%), New Brunswick (9%), Saskatchewan (6%), and Manitoba (4%) receive the majority of tax revenue. During the operations phase, Ontario (40%), Alberta (24%), Quebec (13%), Saskatchewan (9%), Manitoba (7%) and New Brunswick (6%) are expected to receive the majority of tax revenue. Figure 12: Total government tax revenue by province, $M CDN Source: Statistics Canada Interprovincial I-O Model, Table 1.5 Canadian Mainline conversion project 28

31 Project major imports during development and construction The table below lists the expected major imports to Canada during the six year development and construction phase. Iron and steel pipes and tubes, metal valves and pipe fittings, measuring and controlling devices, crude oils and architect, engineering and related services are responsible for the largest shares. Table 9: Major imports during development and construction Category Amount ($M) Share Iron and steel pipes and tubes (except castings) % Metal valves and pipe fittings % Measuring, medical and controlling devices % Conventional and synthetic crude oil % Architectural, engineering and related services % Iron and steel basic shapes and ferro-alloy products % Logging, mining and construction machinery and equipment % Other miscellaneous general-purpose machinery % Support services for oil and gas extraction (except exploration) % Light-duty trucks, vans and sport utility vehicles % Turbines and turbine generator set units % Passenger cars % Office administrative services % Rights to non-financial intangible assets % Boiler, tanks and heavy gauge metal containers % Chemical products not elsewhere classified % Men's and women's clothing % Natural gas liquids and related products % Pharmaceutical and medicinal products % Rolled and drawn steel products including wire % Other 1, % Total 3, % Source: Statistics Canada Interprovincial I-O Model, Table 4.16 Canadian Mainline conversion project 29

32 Refinery impacts The $100M nominal value for refinery capital expenditure produced the following multipliers, which can be used to estimate the economic impact of refinery upgrades in Quebec and, implicitly, eastern Canada. Table 10: Refinery economic impact multipliers Multiplier Quebec Canada GDP Total (Direct, Indirect and Induced), Income Based FTE Job Creation Total (Direct, Indirect and Induced) Taxes Total (Direct, Indirect and Induced) Source: Statistics Canada Interprovincial I-O Model, Table 1.2 & 1.4 As recent refinery upgrade or new build projects have cost or were estimated to cost between $2.2B $7B, these values were selected for this analysis. The table below provides GDP impact, job creation and tax revenue for these investment amounts, as well as the base amount of $100M. Table 11: Economic impacts due to potential investments in refineries Province GDP Total, income based ($M) FTE job creation Total (Annual assuming 5 year construction) Taxes Total ($M) $100M $2.2B $7.0B $100M $2.2B $7.0B $100M $2.2B $7.0B Quebec $76.9 $1,691 $5, (154) 16,944 (3,389) 53,911 (10,782) $27.4 $603 $1,918 Rest of Canada $18.5 $407 $1, (40) 4,362 (872) 13,880 (2,776) $1.4 $31 $99 Canada $95.4 $2,098 $6, (194) 21,306 (4,261) 67,791 (13,558) $28.8 $634 $2,017 As seen above, investments in refineries have a significant impact on the economic activity of the province in which the investment is made, in this sample case, Quebec, as well as a less pronounced impact on Canada as a whole. Similar results can be expected for investments in other provinces in eastern Canada. Canadian Mainline conversion project 30

33 Appendix E: Pipeline capacity Table 12: Current and proposed takeaway pipeline capacity from western Canada 68 Pipeline Effective capacity (kbpd) Enbridge 2, Enbridge Gateway 473 Keystone 590 Western Canadian Refinery 400 Kinder Morgan Trans Mountain Pipeline 230 Kinder Morgan Trans Mountain Expansion 531 Kinder Morgan Express Pipeline Milk River Rangeland TransCanada Keystone XL 730 TransCanada Energy East 1,080 Total 6, Company websites, unless otherwise noted. 69 The Enbridge Mainline pipeline transports 400 kbpd from North Dakota so it has an effective capacity from western Canada of 1,744 kbpd (its total capacity of 2,144 kbpd less 400 kbpd). 70 Kinder Morgan s Express Pipeline is operating at around half of its total capacity due to limited demand from PADD IV so has an effective capacity of 140 kbpd (half of its total capacity of 280 kbpd). 71 The NEB imposed pressure restrictions on the Milk River pipeline to 80% in October 2011 due to integrity concerns. (NEB File OF-Surv-OpAud-P , Oct. 20, 2011). 72 At the time of writing, Rangeland was operating at 55 kbpd due to declining Rangeland sour production. Canadian Mainline conversion project 31

34 Figure 13: CAPP North American crude oil pipeline map (June 2013) Deloitte & Touche LLP and affiliated entities. Linking West with East The economic benefits of TransCanada s Canadian Mainline conversion project 32

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