By the Numbers Adding Value to Energy

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Chemistry Industry Association of Canada i Executive Summary Canadian energy is a source of wealth creation contributing to our quality of life. There are a range of ways to further the contribution of energy in our economy. Canada needs to develop and implement policies that enhance the opportunities for extracting maximum value from energy resources while respecting market principles and environmental sustainability. Energy comes in many forms, including electricity, crude oil, natural gas and biomass. Canada can optimize the value of its resources. Some energy can be converted; some can be sequestered. The diversity presented by moving some energy resources along the energy value chain will enable Canadians to share a much greater opportunity, while creating additional wealth and jobs. adding 5, 10 or 20 times and more to the value of the original energy input. In moving along resource value chains, Canada needs to consider those factors that can enhance our global competitiveness in adding value. Where there are duplicative and sometimes conflicting federalprovincial regulations, regulatory streamlining proposed for the energy sector projects should also apply where business is seeking to add value to resources, including energy. Competitive access to resources for upgrading is a crucial component of an integrated energy strategy. Canadian chemical producers are concerned about adequate and sustained access to a supply of competitively-priced raw materials or feedstock to run its plants and provide for future growth. By the numbers adding value to energy proposes that energy resources offer an abundance of opportunities for Canada to become an energy superpower, and also add to our economic diversity and strength. What is envisaged is a strategy that seeks to achieve a portfolio of energy development; some exported, some upgraded, some consumed, some converted. Two strategic goals must be achieved by the joint efforts of government and industry stakeholders: first, to bring long-term balance to Canadian and continental energy markets, and secondly, to add value to at least some of our energy resources in the most sustainable way possible to create wealth in Canada. Chemical manufacturing purchases 18% of gas, 5% of oil and 3% of electricity demand in Canada. The energy is partly consumed and partly converted. Chemical producers convert oil, gas, minerals and electricity into value-added manufactured products,

ii Chemistry Industry Association of Canada Table of Contents Executive Summary... i Background.1 Canada s Economy is Closely Linked to Natural Resources... 4 Canada s Chemical Sector Chemistry Conversion and Value added...5 Petrochemicals..7 Electrochemicals..7 Making it Happen 7 A Broader Dialogue...8 Conclusion...9 Chemistry Value Chains....10 Appendix 1.......11 Climate Change... 11 Energy Use..... 11 Appendix 2....12

Chemistry Industry Association of Canada Background Canada is a resource-rich nation. Resource development is a significant source of wealth creation that enhances our quality of life. Energy comes from many sources, including hydro, wind, solar, oceans (tidal and wave), biomass, uranium, crude oil, natural gas, coal, oil sands bitumen, and coal bed methane; all are in abundance and all offer opportunities for develop- 1 goes further. It proposes that energy and other resources offer a variety of opportunities and challenges. And, it recommends a portfolio approach that recognizes the importance of not only responsible energy development, but also resource upgrading to create value-added products based on energy inputs. Illustration 2 Illustration 1 Illustration 4 Illustration33 Illustration ment and growth. As with each resource area, energy offers a portfolio of opportunities for Canadians and responsibly optimizing these opportunities is a good goal for all of Canada. Canada s chemical industry, through the application of chemistry adds value and jobs, creates wealth, diversifies and optimizes. This assessment of the value-added opportunity presented by the chemistry industry sector builds on the work of the Council of the Federation (COF), the Energy Policy Institute of Canada (EPIC) and the Standing Committee on Energy, the Environment and Natural Resources, but it also In 2007, COF released A Shared Vision for Energy in Canada (http://www.councilofthefederation.ca/ pdfs/energystrategy_en.pdf). In that document, the vision and a seven point action plan were outlined. The shared vision: a secure, sustainable, reliable and competitively-priced supply of energy; a high standard of environmental and social responsibility (see Appendix 1); and, continued economic growth and prosperity. To achieve the vision, the action plan called for the need to: 1. Promote energy efficiency and conservation. 2. Accelerate the development and deployment of energy research and technologies that advance more efficient production, transmission and use of clean and conventional energy sources.

2 Chemistry Industry Association of Canada 3. Facilitate the development of renewable, green and/or cleaner energy sources to meet future demand and contribute to environmental goals and priorities. 4. Develop and enhance a modern, reliable, environmentally safe, and efficient series of transmission and transportation networks for domestic and export/import sources of energy. 5. Improve the timeliness and certainty of regulatory approval decision-making processes while maintaining rigorous protection of the environment and public interest. 6. Develop and implement strategies to meet energy-sector human resource needs now and well into the 21st century. 7. Pursue formalized participation of provinces and territories in international discussions and negotiations on energy. In July 2012, in Halifax, the COF took note of new and urgent priorities that required renewal of this strategy to ensure its continued relevance to Canada s energy challenges. They acknowledged the need for sustainable energy development that recognizes regional strengths and priorities and respects provincial, territorial and legislative jurisdiction over natural resources, a more integrated approach to climate change, reducing greenhouse gas emissions and managing the transition to a lower carbon economy. They went on to identify a number of principles to guide collaborative action under a renewed COF energy strategy (http:// www.councilofthefederation.ca/pdfs/energy- FINAL.pdf), including: Maintain energy policies supported by effective, efficient and transparent regulatory systems. Recognize the importance of socially and environmentally responsible development, transportation and use of energy and enabling technologies. Affirm that intergovernmental cooperation is essential, while respecting constitutional jurisdiction and optimizing the strengths of each province/territory. Governments be committed to transition to lower-carbon alternatives and conservation to meet future energy needs. In the same time frame (August, 2012), EPIC released a guide to building Canada s future as a global energy leader titled A Canadian Energy Strategy Framework (http:// www.canadasenergy.ca/canadian-energystrategy/). Specifically, this discussion paper sought to collect and advance thinking in a number of areas: regulatory reform, innovation, conservation and literacy, market diversification and carbon management. The document recommended that decision-makers take action to create a Canadian energy strategy that addresses five key elements: Respect the market as a primary determinant of choices for energy production, transportation and its use. Create economic development, enhance security, grow energy production and ensure energy infrastructure. Provide reliable and affordable energy to Canadians. Enhance Canada s competitiveness and economy through energy exports, technological expertise and energy related services. Improve energy efficiency and lower our carbon footprint. Some further comments on the EPIC document are provided in Appendix 1. Overall, it is our view that in examining the energy sector and developing an energy strategy or framework, Canadians need to broaden the dialogue and consider our very integrated, resource-based economy. A third study was considered in assessing the role that value added resource upgrading should play in a Canadian energy strategy. In July of 2012, the Standing Senate Committee on Energy,

the Environment and Natural Resources issued a report culminating over three years of study titled Now or Never: Canada Must Act Urgently to Seize its Place in the New Energy World Order (http://www.parl.gc.ca/content/sen/ Committee/411/enev/rep/rep04july12-e.pdf). The core vision statement for this work was: Canada will be the most energy productive nation in the world with the highest level of environmental performance and responsible resource development was set as the guiding principle for this study. Rather than establish specific end points, it identified 13 priorities or focus points for action, all to be tested against the guiding principle. The study noted that Development is responsible when it recognizes the interests and values involved with energy matters in four dimensions, namely economic, environmental, social and energy security. A change in one dimension affects the others. The committee believes the following 13 priorities for action need to be addressed if Canada is to be a world leader in energy production: Chemistry Industry Association of Canada 3 12. Maintain strong support for Canada s nuclear industry; and, 13. Speak for Canada. Based on these studies, the following section elaborates on optimizing energy use as a component part of the development of an energy strategy for Canada. 1. Canada must strive for collaborative energy leadership 2. Advance nation-building through energy infrastructure 3. Natural gas: a game-changing fuel 4. Encourage energy efficiency and conservation from consumers 5. Frame a strong strategy for energy employment 6. Strengthen the foundation for energy innovation 7. Pursue high-level environmental performance of non-renewable energy sources 8. Hydropower superpower: energy of the past for the future 9. Foster renewable fuels 10. Regulatory reform 11. Guide responsible northern and arctic energy exploration and development

4 Chemistry Industry Association of Canada Canada s Economy is Closely Linked to Natural Resources While the Canadian economy is mature and appears to be dominated by the service sector many of these services are related to manufacturing and resource development (Figure 1). Manufacturing is a very important component of our economy and figure 2 further breaks down manufacturing into industries based directly on resource upgrading and other further-downstream industries. A good illustration of the resource-manufacturing linkage is chemical manufacturing which purchases 18% of gas, 5% of oil and 3% of electricity consumed in Canada. Canadian Economy by Sector, 2011 Energy Mining Forestry Construction Agriculture Manufacturing Services Figure 1 Canadian Manufacturing (GDP Comparison, 2011) Downstream Resource-based manufacturing manufacturing Other mfg Food Figure 2 Transportation equipment Machinery Plastics and rubber Wood Paper Chemicals Primary metals Fabricated metal Other resourcebased mfg The chemistry industry consumes 18% of domestic gas, 5% of oil and 3% of electricity in adding value within the Canadian economy.

Chemistry Industry Association of Canada 5 Illustration 5 Canada s Chemical Sector Chemistry Conversion and Value added Chemicals are made from Canada s energy products and minerals. Chemical producers convert oil, gas, minerals and electricity into value-added manufactured products, adding 5, 10, 20 times and more to the value of the original input. The chemical sector (see figure 3) is the fourth largest manufacturing sector in the Canadian economy, and also provides key inputs upstream and downstream (see illustration 5). Canada needs to be globally competitive as it strives to catch the attention of international investors. In moving along resource value chains, including energy, Canada needs to consider those factors that can enhance our global competitiveness. First, where there are duplicative and sometimes conflicting federal-provincial environmental regulations this discourages potential investors. But, there are real efforts to try to move towards one project - one review, and that must apply to more than the energy sector. Regulatory streamlining must be a goal across all sectors of the Canadian economy. In particular, it must be facilitated where business is seeking to add value to resources, including energy. Resins and fibres, 17% Figure 3 Other, 10% Paints and adhesives, 5% Second, competitive access to resources for upgrading is a crucial component of an integrated energy strategy. Canadian chemical producers have been hit by rapid price fluctuations and market uncertainties for energy and are concerned about adequate and sustained access to supply of competitively-priced raw materials or feedstock to run plants and provide for future growth. North America and central Canada in particular, has been experiencing a serious erosion of its manufacturing base. Adding value creates jobs and wealth across the economy. Manufacturing, a key market for the chemical sector, is a competitiveness concern today. Facilities have been closing and to reverse this trend, we need to attract new investments. Adding value to resources is manufacturing, it creates jobs and wealth across the country. The shale gas phenomenon has opened up new opportunities but these advantages are shared by our largest competitor, the U.S. In the U.S., both governments and industry are aggressively pursuing investment opportunities. Canada needs to up its game as well. Competitiveness challenges can and are being addressed. Industry and governments are working together on business and policy issues that will stimulate future growth in the keystone chemical sector of our economy. Canadian Chemical Sector: Revenue Share Ag chemicals, 11% Industrial chemicals, 36% Soaps and toileteries, 6% Pharmaceuticals 15% Source: Statistics Canada

6 Chemistry Industry Association of Canada Canada is a major source of all the necessary ingredients (energy, minerals, skilled workers) to produce chemicals. Canada has the potential to become the world s best upgrader of natural resources into value-added manufactured chemicals for domestic and global markets through several routes, but these require vision at a national as well as provincial level. An energy strategy can optimize and secure opportunities for adding value in the petrochemicals area. All of Canada s resources offer opportunities for adding value. Hydroelectric and major initiatives to advance mineral production in Ontario and Quebec create opportunities for inorganic chemical production. Forest products and agriculture are sources for making biochemicals. And sustainable development in all resource sectors opens up new and growing opportunities for chemistry solutions and service providers. An energy strategy must be more than facilitation of energy project approvals and expeditious delivery of our energy to a broader suite of export markets. Our energy extraction and production must also serve Canadians, serve them well and serve them responsibly. Specifically, Canada s chemical sector relies on access to affordable energy to add value to resources and manufacture products for Canadians and for export (see figure 5). These are good jobs, good careers (see figure 4). Each chemistry industry job results in 5 additional jobs across the Canadian economy Percentage of Employees with University Degrees Figure 4 Computer and Electronic Products Chemicals Petroleum Refining Textile Mills Other Manufacturing Electrical Equipment Machinery Transportation Equipment Beverage and Tobacco Clothing 25.4 23.1 21.7 20.3 19.8 19.1 18.2 16.0 34.4 41.5 Source: Industry Canada Canada can supply the world with value-added products. Export Ranking - $ Billion Transportation Equipment 65.8 Primary Metals 33.8 Chemicals 31.3 Machinery 24.3 Food 22.5 Petroleum Refining 22.3 Paper 16.9 Computers and electronics 15.3 Figure 5 Plastics and rubber products Wood 10.6 8.5 Source: Statistics Canada

Chemistry Industry Association of Canada 7 Petrochemicals Chemical companies use energy as both a fuel and as a raw material or feedstock for chemical production. The energy may be oil, gas, electricity or bio-based materials (see illustrations 1,2,3 and 4). For the petrochemical sub-sector, members take energy products, mainly the natural gas liquid ethane and convert it into a broad range of petrochemicals such as ethylene glycol, styrene and polyethylene and beyond into fabricated products and formulations. Feedstock or raw materials are core to the competitiveness of chemical producers, to move along the value chains (see figure 6). Recently across Canada there have been supply-side constraints to growth and even to operating existing assets at capacity. Canada s business of chemistry consumes and converts 15%-20% of the domestic gas barrel, yet we are still short of supply to operate existing plants. Electrochemicals In the chemical sector, electricity is a raw material for manufacturing electrochemicals. Through electrolytic chemistry our members produce necessary products such as chlorine, hydrogen peroxide and sodium chlorate for many applications including water treatment and pulp and paper production. Similar to oil and gas, these manufactured goods represent 5 times to 10 times added value, along with added jobs, added taxes for governments and a diversification of our economy, in particular in B.C., Manitoba and Quebec. Competitive pricing and reliable delivery of electricity are essential for our members and the factors driving these can vary considerably from one province to the next. Chemistry solutions can address Canada s environmental issues. Making it Happen Canada needs to develop and implement the policies that enhance the opportunities for extracting maximum value from energy resources, while respecting market principles. Extending the accelerated capital cost allowance (ACCA) on a permanent basis for manufacturing machinery and equipment will enhance the competitiveness of value-added projects for Canada. Adjustments to royalties to favour resource upgrading can pay big dividends for Canadians as and when corporate income tax is applied to higher value goods produced here. In turn, the resultant diversified economy smoothes out the government revenues equation, could dampen resource-base swings and could diversify employment and career opportunities right across Canada. The chemical industry has potential for further expansion and wealth creation, provided we realize our goal to access new energy and feedstock supply. Manufactured Products Styrene Ethylene Propylene Xylenes Ethane Gasoline Propane Natural Gas Diesel Fuel SCO Bitumen Coal/Coke Figure 6 Future feedstock sources could include northern gas and new supplies from B.C., Saskatchewan and Alberta through a Western Canada Energy Hub in addition to continued growth in oil sands upgrading capacity. For a review of competitiveness factors specific to the development of the chemical sector, refer to the Chemistry Industry Association of Canada The hydrocarbon value chain 16.6 11.1 10.9 9.7 9.4 8.3 8.2 6.9 2.7 0.6 26.8 19.7 Value multiplier Using Nat Gas to produce bitumen decreases value 124.5 Upgrading & Gasification increase value of low grade fuels Source: Alberta Government (Adapted from Purvin & Gertz, March 20, 2004)

Emissions in Thousand of Tonnes Emissions per unit of output (1992=100%) 8 Chemistry Industry Association of Canada (CIAC) competitiveness scorecards and supporting texts (http://www.canadianchemistry.ca/ industrybrnbspcompetitiveness/ competitivenessbrscorecardsbr/tabid/81/ctl/ detail/mid/455/itemid/195/national-and-regional -competitiveness-scorecards-for-2012-2013.aspx). A Broader Dialogue wealth and jobs, products that improve everyday living, and reduce our environmental footprint. The chemistry industry is actively engaged in finding solutions; our members are working with partners in the energy sector to address emissions, water use and site remediation issues (see figure 7 and Appendix 2). CIAC believes that energy must become a matter of Canadian priority, bringing together the federal and provincial governments and energy stakeholders to develop a modern, comprehensive energy framework. This should be designed to achieve two strategic goals: first, to bring long-term balance to Canadian and continental energy markets; and secondly, to add value to at 300 250 200 150 100 Figure 7 least a portion of our energy resources in the most sustainable way possible to create Canadian 50 0 Total Emissions (Excluding Carbon Dioxide) vs. Production All Members Intensity Current Members Intensity All Members Emissions Current Members Emissions Projections 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 100% 80% 60% 40% 20% 0% Source: CIAC Report, Reducing Emissions 19

Chemistry Industry Association of Canada 9 Conclusion CIAC supports policy initiatives that promote sustainable development of diverse energy supplies, energy conservation, and the concept of using energy feedstock to produce high value-added chemical products. At the same time, energy development, environmental improvements and societal expectations should advance cooperatively and not in conflict. Chemistry solutions can address environmental concerns and issues. Canada s energy, environmental and societal goals must be mutually reinforcing and take industrial competitiveness, value-added upgrading and sustainability into account or risk creating significant investment uncertainty. Energy is a key component of economic wellbeing and an essential input into an economy. In summary: 1. Canada should take full advantage of our abundant resources to maximize our resource development opportunities in the energy industry in a sustainable and responsible way. As a nation we should take full advantage of major projects that will build our national economy and multiply the benefits of our resources across the country. 2. Canada should recognize explicitly in any energy strategy, framework or policy discussion that energy cost, availability and access is a key to a highly competitive and productive economy and can produce huge value added manufacturing opportunities throughout the country (i.e. chemistry, steel, petroleum products, aluminum, forest products) as well as related service and technology sectors. 3. The chemistry industry is a key enabling sector that can transform resources whether oil, gas, biomass, and electricity into high value added products. It should be recognized as an integral part of any energy strategy or framework at the federal or provincial levels. Across Canada, access to affordable and competitivelypriced energy drives economic growth and sustains competitive advantage. Figure 8 illustrates where we are located as we convert basic resources into products for Canadians and for export. Competitive and market-based access to energy for the chemical sector is crucial to Canada s value-added growth and capacity for further value-added manufacturing. Our industry is located across Canada, upgrading our resources BC AB SK MB QC ON Figure 8

10 Chemistry Industry Association of Canada Chemistry Value Chains

Appendix 1 CIAC Comments on A Canadian Energy Strategy Framework To optimize a strategy one must carefully critique what is presented and consider the issue in terms of overall benefits to Canadians. An energy strategy is about more than optimizing projects or profits or optimizing markets or processes; it is also about achieving optimal quality of life and overall public interest. In the EPIC document, the core or fundamental principle is outlined on page 121, paragraph 2: A fundamental principle in this discussion, however, is that ultimately decisions about how Canadian energy resources should be developed, produced and sold are best left to energy markets themselves, both domestic and international, to resolve. Individual decisions about who and where to sell an individual firm s energy production to and on what terms will continue to be made by firms involved and different market participants will have different opportunities, with different views on which market opportunities are most favourable for them. A critical role for governments in this is to ensure that markets are enabled to work efficiently, openly and fairly, while appropriately safeguarding the environment and the rights of all participants. This includes helping ensure that Canadian energy markets are open to global energy markets. And that in turn means, among other elements, ensuring efficient, fair regulatory processes that can expeditiously provide necessary energy transportation infrastructure developed in a safe, environmentally and socially responsible manner. While this optimizes development of primary energy, it does not acknowledge the very real societal partnership that is already taking place throughout the energy value chain globally and the need to balance optimizing development and markets with public interest. Decisions that impact the nation require national consideration of options. The energy sector can and should provide solid analysis and options and recommendations. The EPIC paper does that. But energy, like any resource is a means to an end. And any energy strategy is more than extraction and export optimization. Chemistry Industry Association of Canada 11 There is a portfolio approach to energy development that sees some extraction and export, some upgrading and some further refining into finished products. Adding some further value to some basic resources provides a diversity that optimizes opportunities for Canadians. That is portfolio development. Climate Change There are other areas that need serious debate and coming back to the fundamental, the debate must centre around optimizing; not just being fair or sharing the pain. In the EPIC analysis, on page 27, carbon management in the context of climate change is discussed. But, can the climate change issue be addressed by incrementality? If there is to be a global solution to a global issue, then working at the margins is not enough and imposing costs our competitors do not will hurt the economy and not help the environment. Alberta is already imposing greater climate change obligations than nearly all other jurisdictions and should not be looking to get even more out of step by introducing additional requirements. Along with continuous improvement we also need breakthrough technologies, ones that are currently unavailable or seem unattainable, must be sought and found. In the meantime, a necessary alternative is adaption. Globally every economy must invest in the research and development that will provide future solutions. Energy Use Beyond expanding energy markets, an energy strategy for Canada must recognize that the use of energy must also be included in discussions. Energy (electricity, oil, gas, biomass, nuclear, wind, water, solar) has many uses; consumption for its energy value is just one use. Energy can be converted or sequestered. CIAC will speak out on behalf of diversity. This is about much more than market diversity; it is about how Canadians can optimize the value of energy and any other resources. Moving along the value chain adds value, wealth and opportunities for good careers the diversity it presents enables sharing a bigger opportunity. Chemistry can add value across energy and resource value chains across our country.

12 Chemistry Industry Association of Canada Appendix 2 Responsible Care - Our Commitment to Sustainability CIAC is the national trade association of Canadian chemical manufacturers, representing companies that manufacture basic chemicals and resins. Members range from family-owned companies to affiliates of global enterprises. Together, these companies generate revenues of more than $26 billion, representing over half of the total chemical sector which also includes fertilizers, pharmaceuticals and formulated products. Responsible Care is the Association s commitment to sustainability the betterment of society, the environment and the economy. Our member operations are bound and guided by the ethics and principles of Responsible Care. A consequence of these ethics, our members constantly innovate for safer, more environmentally-friendly products and processes, and work cooperatively to identify and eliminate harm throughout the entire life cycle of their products. For a more complete description of the ethic and the membership commitment to sustainable development principles, visit www.canadianchemistry.ca.

For Further information, please contact: David Podruzny Vice-President, Business and Economics Tel: (613) 237-6215 ext. 229 e-mail: dpodruzny@canadianchemistry.ca