Attachment 3 to Northern Gateway Reply Evidence

Reply Evidence of Roland Priddle prepared on behalf of Enbridge Northern Gateway Pipelines

______In Respect of the Enbridge Northern Gateway Project: National Energy Board Hearing Order OH-4-2011

July 2012 Attachment 3 to Northern Gateway Reply Evidence

Table of Contents Introduction ...... 3 1 Need for the Enbridge Northern Gateway Project ...... 3 1.1 ENGP provides efficient access to high-netback Asian Markets and is in the tradition of Canadian oil pipeline expansions ...... 4 1.1.1 Efficient access ...... 4 1.1.2 The tradition of Canadian crude oil pipeline expansions ...... 4 1.2 ENGP creates the intangible benefit of market diversification ...... 5 1.2.1 Export trade diversification is in the national and sectoral interest ...... 5 1.2.2 But Canadian crude oil markets are strikingly concentrated ...... 6 1.2.3 Historically, lack of interest in crude oil market diversification has been rational ...... 6 1.2.4 Now, diversified markets are needed for Canadian crude oil ...... 7 1.2.5 But Canada cannot “just go ahead” and diversify her crude oil markets to include Northeast Asia ...... 8 1.2.6 ENGP provides that needed geographical crude oil market diversification ...... 8 1.2.7 Diversification is now an urgent consideration ...... 9 1.3 Equally urgent is the need for new pipeline infrastructure ...... 10 1.4 ENGP presents the Joint Review Panel (JRP) with an historic decision-taking challenge and opportunity ...... 11 2 The Eastern Canada market as an alternative to the ENGP ...... 12 2.1 The eastern Canada market ...... 13 2.2 Accessing western Canadian crude oil ...... 13 2.3 If an opportunity exists or develops to provide crude oil transportation east of Montreal, investors will respond ...... 13 2.4 Loss of upgrading jobs ...... 13 2.5 Allowing market forces to work ...... 14 3 Should the JRP examine pipeline options before making a decision on the ENGP? ...... 14 3.1 Established policy and commercial practice is to allow market forces to determine the geographical disposition of Canadian crude oil and this has been consistently reflected in regulatory decisions ...... 14

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3.1.1 Established policy ...... 14 3.1.2 Commercial Practice ...... 15 3.1.3 Regulatory decision-taking ...... 16 3.2 The implications of established policy, commercial and regulatory practice for the JRP’s decision-taking in OH-4-2011 ...... 17 4 Canada’s long-established oil-supply logistics do not impair security ...... 18 5 Regional costs and benefits ...... 19 6 Conclusions ...... 21

List of Acronyms

AFL Alberta Federation of Labour B.C. British Columbia b/d barrels daily CAPP Canadian Association of Petroleum Producers CEP Communications Energy and Paperworkers Union of Canada CERI Canadian Energy Research Institute CFN Coastal First Nations CPA Canadian Petroleum Association CPCN Certificate of Public Convenience and Necessity EIA Energy Information Administration (of the U.S.) ENGP Enbridge Northern Gateway Project IEA International Energy Agency IRPP Institute for Research in Public Policy JRP Joint Review Panel MM Million NEB National Energy Board OECD Organization for Economic Cooperation and Development OPEC Organization of Petroleum Exporting Countries U.S. United States of America ULCC Ultra Large Crude Carrier VLCC Very Large Crude Carrier WCSB Western Canadian Sedimentary Basin

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Introduction

This Reply Evidence is structured to address the evidence submitted by certain intervenors and positions taken in oral statements regarding the following matters:

1. The need for the Enbridge Northern Gateway Project (ENGP) is challenged; 2. The Eastern Canada market is a preferable alternative to ENGP; 3. The Joint Review Panel (JRP) should examine “pipeline options” before taking a decision on ENGP; 4. The export of oil via ENGP impairs security of oil supply for Eastern Canada and results in lost upgrading job opportunities; and 5. Regional costs and benefits.

1 Need for the Enbridge Northern Gateway Project

Summary position of intervenors: ENGP is not needed nor is it in the public interest.1 ENGP is predicated on unreasonable rates of expansion of oil sands production.2 The argument of diversifying markets for Canadian oil with the Northern Gateway Pipeline is moot. 3 The pipeline supply and demand analyses indicate that there will be sufficient pipeline capacity to accommodate Western Canadian Sedimentary Basin (WCSB) forecast oil transportation needs until after 2020.4 The fact that current and planned export pipeline capacity is sufficient to handle existing and under construction oil sands projects without the Northern Gateway Pipeline. 5

Summary position of this Reply Evidence: the ENGP is needed in the public interest because it provides efficient access to high-netback Asian markets, creates the intangible benefit of market diversification and will help ensure that critically important pipeline infrastructure will be adequate to the longer-term needs of WCSB oil producers. Failure to provide such infrastructure will be enormously costly for the industry and the country. Together, these considerations present the Joint Review Panel with an historic decision-taking challenge and opportunity.

The issue of “need” for ENGP is dealt with elsewhere in the Applicant’s Reply Evidence: by Muse Stancil in the report Update of Market Prospects and Benefits Analysis for the Northern Gateway Project, July 2012, at pages 38-45 under the caption Canadian Crude Oil Export Pipeline Utilization, and by Wright Mansell Research Ltd., in the report Public Interest Benefits of the Enbridge Northern Gateway Pipeline Project: Update and Reply Evidence, July 10, 2012, at page 74 under the caption “Need” for the NGP and elsewhere in that report.

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1.1 ENGP provides efficient access to high-netback Asian Markets and is in the tradition of Canadian oil pipeline expansions

1.1.1 Efficient access

ENGP offers a unique combination of: substantial initial volume; expansion without looping; large-vessel loading capability; shortest sea route; and largest market. Thus:

• The initial design capacity is 83,000 m3/525,000 barrels daily; • If the market eventually required additional capacity, then subject to further regulatory application and public review, the single line of pipe fully powered would have a capacity of 135,000 m3/850,000 barrels daily, which could be achieved without any significant additional land disturbance; • The tanker loading facilities can handle vessels up to Very Large Crude Carrier (VLCC) sizes; • The round-trip steaming time from Kitimat to Northeast Asia destinations is about three days less than from the Port of Vancouver, resulting in useful savings in ship-chartering and bunkering costs; • ENGP plus tanker transportation efficiently accesses markets in four major oil import jurisdictions (China, Japan, South Korea and Taiwan) which together represent the world’s second-largest refinery market, and in volume terms the fastest growing one; and • The opportunities for shippers using ENGP are not limited to Northeast Asia: tanker- borne shipments could readily access refinery markets in Southeast Asia, India and California, whenever pricing conditions and other inducements are present.

The filed evidence shows that the Northeast Asia market reached via ENGP offers Alberta producers higher delivered prices, with smaller transportation costs to deduct, than does the United States (U.S.) Gulf Coast refinery concentration. The result is of course better netbacks to western Canadian crude oil producers and royalty owners.6

1.1.2 The tradition of Canadian crude oil pipeline expansions

Generally speaking, the higher the transportation cost to get crude oil to market, the lower will be the netback to the producer and royalty owner. Canadian pipelines, specifically Interprovincial, applied the principle of minimizing long-term transportation costs in the 1950s by building eastwards from Alberta with pipe sizes larger than the prairies market alone could support.

As a further generalization, the larger the market that can be attached, always of course within the producing capability of the oil resource, the more economically efficient will that

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transportation be as volumes dilute unit costs. Enbridge’s predecessor, Interprovincial Oil Pipeline, applied this principle: the company’s successive market expansions across the Canadian prairies, then to the American Lakehead, to the Twin Cities, Lower Michigan and eventually southern Ontario resulted in the least impairment of crude oil prices in Alberta and the largest available market attachment.7

Both principles were upheld by the National Oil Policy of 1961 when Canadian industry and governments chose to focus on the economically more proximate, higher-priced and larger markets of the mid-western U.S. and Ontario rather than on domestic markets further east which were served by lower-priced imported oil.

This policy approach was symbolized by the extension of the Lakehead pipeline to the Chicago area about 1970 in preference to serving the Montreal refinery market. The NEB in 1969 advised that had the decision in 1961 been to market Canadian oil in Montreal, this could not have been done without either a substantial across the board reduction in Canadian crude oil prices or a significant increase in refined products price structures in Québec (or both).8

The most economically efficient oil pipeline infrastructure continues to be one that uses large diameter pipelines to connect large, economically-proximate refinery concentrations, domestic and international.

1.2 ENGP creates the intangible benefit of market diversification

1.2.1 Export trade diversification is in the national and sectoral interest

In almost every area of commodity trade, for sound business and strategic reasons, suppliers seek to diversify markets and buyers to diversify supply sources.

In the international oil trade, on behalf of sellers, the Organization of Petroleum Exporting Countries (OPEC) urges an evolving understanding of energy security: “Consumers seek a secure and predictable flow of oil; producers want predictable demand and non-discrimination against their products.” 9 On behalf of buyers, the International Energy Agency (IEA) counsels that “Diversity, efficiency and flexibility within the energy sector are basic conditions for longer-term energy security: the fuels used within and across sectors and the sources of those fuels should be as diverse as practicable.” (italics added in both quotes) 10 11

From time to time, think tanks12 and commentators13 14urge the importance of diversification of Canada’s international trade. Canada’s export trade is becoming strikingly more diversified: currently, the U.S. accounts for about 70% of Canadian sales abroad, the lowest since late 1982, and down from nearly 85% in 2001.15

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1.2.2 But Canadian crude oil markets are strikingly concentrated

It is an extraordinary fact that Canada is the only major world crude oil exporter which serves on a continuing basis a single importing jurisdiction.16

The contrast is striking with another oil exporting jurisdiction and with other Canadian minerals exports. Thus:

• Kazakhstan: this country, which ranks with Canada in terms of net exports, found itself with only one customer when the former Soviet Union broke up in 1989. It subsequently mounted vigorous and successful efforts to open markets in the Mediterranean area via new pipeline connections westwards to the Black Sea. And a pipeline connection eastwards to China was completed in 2006.17 • Other minerals exports: the orientation of Canadian minerals exports has changed significantly in the 21st century. The federal Department of Natural Resources commented in 2010: “The United States continues to be Canada’s leading partner in the trade of mining and mineral commodities, accounting for 52.6% of total Canadian exports in 2009 (down from 56.8% in 2008) and 54.9% of total imports (down from 57.3% in 2008). As a fraction of total mineral exports, Canada’s exports to the United States have been declining steadily since 2000 when the figure was 77.8%.”18

1.2.3 Historically, lack of interest in crude oil market diversification has been rational

Heretofore there has been little commercial interest in diversifying markets for Canadian oil because:

• The U.S. industry for decades has been characterized by growing oil demand, refinery capacity roughly matching demand for most oil products, falling crude oil production and rising imports. The market was there and Canadian exporters were rewarded with large volumes and strongly competitive pricing. • Following nearly two decades of import quotas19, first “voluntary” later mandatory, designed to foster indigenous production, U.S. oil policy has since the early 1970s been strongly market-oriented without duties, quotas or other discriminatory restrictions. The policy environment for Canadian oil has been favourable for decades. • There seemed to be no need for the industry to seek additional crude oil markets in an environment where U.S. markets appeared able to absorb at attractive prices all the Canadian oil that was prospectively available for export . • At the same time, it is appropriate to note that the NEB has in the past publicly canvassed the potential of Pacific Rim markets for Canadian crude oil, in the following terms. 20

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• In 1986: “Beyond markets accessible by pipeline, some countries in the Pacific Rim, notably Japan and South Korea, could provide an outlet for Cold Lake type crude oils if competitively priced.”21 • In 1988: “The Trans Mountain expansion would provide access to markets in the U.S. and other Pacific rim countries, particularly Japan and the rapidly growing economies of the far east such as South Korea…the advantages for Canadian producers of a diverse market, may make the expansion of offshore sales likely.”22

In summary there has been little industry interest in diversifying Canada’s crude oil markets because: commercially it seemed that the U.S. market could accept all the oil Canada had available; politically, non-discriminatory U.S. policies appeared to be firmly established; and in terms of need for market, the Canadian oil supply outlook until a few years ago appeared to indicate a decline in exports in the long term.

1.2.4 Now, diversified markets are needed for Canadian crude oil

After positing for three decades an ultimate long term decline, the NEB now anticipates a continuously rising curve of Canadian crude oil exports in a 25-years time horizon, based essentially on its view of the growth potential of the oil sands resource. Exports are projected to increase from some 350,000 cubic metres (m3)/2.2 million barrels daily (MMb/d) in 2012 to 800,000 m3/5.0 MMb/in 2035.23

For the wealth-creating potential24 of this enormous resource25 to be fully realized, a market larger than the North American refining industry can provide is critically important. Saudi Arabia, for example, the world’s second largest crude oil exporter, markets its product in three continents.26

Moreover, in the view of the NEB, supply costs for oil-sands derived Canadian crude oil are now roughly competitive on a world-wide basis, and (as a result) expanding markets in Asia represent an additional opportunity. 27

Such an approach would be congruent with established thinking about imports. Canada has long been active in developing and supporting the oil-import security policies of the IEA, an agency of the Organization for Economic Cooperation and Development (OECD), which focus on supply diversity. There surely is an equally strong case for oil-export security measures focussing on market diversity.

The need for crude oil market diversification got the attention of the IEA in its 2009 review of Canadian energy policy. After noting Canada’s huge reliance on the U.S. market and the policy uncertainties that were undermining confidence in forecast levels of Canadian exports to the U.S., the report stated:

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“Policy makers and industry must start to focus on identifying new export markets and the infrastructure needed to access those markets. Proposals for the Northern Gateway pipeline...are evidence that project developers have started to look beyond the United States.”28

The IEA’s review of Canadian policy was published two years ago. Clearly policy makers and industry have since then increasingly focussed on the crude oil market diversification issue.

1.2.5 But Canada cannot “just go ahead” and diversify her crude oil markets to include Northeast Asia

Professor William Watson of McGill takes the position that there is no need for “policy” to encourage diversification, let diversification of trade occur as a result of multiple corporate decision-taking, “go right ahead”, Professor Watson counsels.29

Such decision-taking has indeed been going on respecting diversification to Northeast Asia of Canadian crude oil markets. Enbridge, North America’s most experienced oil pipeline developer, assessed many alternatives; a comprehensive project has been developed; a pipeline route was identified; open seasons conducted seven years ago resulted in strong expressions of commercial interest; some of the prospective shippers have become funding participants; Enbridge and its partners have invested more than $250 million to further develop the project; extensive First Nations, public and government consultations have been undertaken, resulting in numerous route changes before determining the pipeline corridor that has been submitted to the JRP. But Enbridge cannot “just go ahead”: what is needed to open market access to the Pacific is a world scale energy bridge. By recommending issuance of an appropriately conditioned certificate of public convenience and necessity (CPCN), the JRP can enable Northern Gateway to create that bridge.

Diversification of Canadian crude oil markets will not “just happen”--regulatory and policy action is needed to achieve it.

1.2.6 ENGP provides that needed geographical crude oil market diversification

Consider China among the Asian markets: • Her 10-plus MMb/d refining industry alone is expected to account for about one-third of global capacity additions over the next five years30 to supply an oil products market that has demonstrated continuous growth for 30 years.31 • Looking further ahead, the IEA’s 2011 World Energy Outlook is for China similarly to account for almost one half of global oil demand growth through 2035.32 • The country has transitioned from a balanced crude oil supply/demand position in the early 1990’s to becoming in 2009 the world’s second largest crude oil importer, after the U.S. 33

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• Despite prodigious efforts of national and international companies, China’s domestic crude oil supply seems to have plateaued at about four MMb/d, leaving the balance— currently about six million--of rapidly growing demand to be met by imports.34 • China’s “growing sense of energy insecurity” has been found to be justified by the World Bank. The Bank has recommended diversification of supply and greater investment in refinery flexibility to handle heavier and sourer crude oils as some of the many means of ensuring the continuity and security of China’s oil products supply.35 36 • China has developed the most diverse portfolio of crude oil import sources of any east Asian country. She imports from more than a dozen overseas sources, some of which such as Venezuela are logistically counter-intuitive, possibly reflecting policy rather than commercial drivers.37

Other Asia-Pacific markets are of course available to ENGP shippers: tanker transportation provides extraordinary logistical flexibility. Japan’s oil products consumption has experienced a slow decline for some years, but its refining industry has a crude oil capacity of some 4.7MMb/d, second only to China in Asia.38 The Korean industry has about 2.7 MMb/d of refining capacity and consumes around 2.3MMb/d of oil products39—appreciably more than Canada does. Taiwan’s oil industry has refineries that can use about 1.3 MMb/d of feedstock.40 The refinery capacity total for just these three countries—all of it entirely dependent on imported crude oil-- is some 8.7MMb/d.

1.2.7 Diversification is now an urgent consideration

The U.S. is clearly destined to be the largest continuing market for Canadian oil exports as far ahead as one may care to look.41 This is not anywhere in dispute. What is for discussion is the need for a diversified incremental market for Canadian crude oil.

Market diversification is now in the public interest: the oil sands resource is enormous on a world scale; the North American refinery feedstock market may now be shrinking; U.S. crude oil imports are officially forecasted to decline steadily; the Canadian Association of Petroleum Producers (CAPP) notes that Asia is the world’s fastest growing energy market, China and Japan are the second and third largest oil markets in the world and that producers are seeking to establish relationships with Asian refiners in order to diversify their export markets.42 In the Asia-Pacific area, China’s historical and potential growth, her sense of energy insecurity and her consequent desire for supply diversification are strikingly congruent with what Canada has to offer her in terms of oil sands supply; and Asian markets offer a premium crude oil price over distant U.S. markets (Houston TX), in both cases netted back to Edmonton.

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1.3 Equally urgent is the need for new pipeline infrastructure

This evidence is not the place for quantitative examination of the need for expanded infrastructure to handle the growing volumes of oil sands material that will be available from the mid-teens of this century.

It is sufficient simply to quote from an authoritative and exhaustive March 2012 study by the Canadian Energy Research Institute (CERI):

“The oil sands production projection profile under the Reference Case Scenario forecasts a significant increase; add to that the forecast for Western Canadian crude oil production, and it becomes apparent that the current pipeline infrastructure will not be sufficient to transport forecasted oil sands volumes. In fact, the current pipeline infrastructure out of Western Canada will not be adequate to transport the forecasted oil sands volumes by 2015, and will need to be expanded, as seen in Figure 6.2. Capacity additions are needed to both transport blended or upgraded bitumen to refineries, and to supply diluents/condensate necessary to operate the oil sands projects.”43

The effects of a failure to expand pipeline capacity are clearly dire. To quote the recent CERI report again:

“In other words, if no other pipeline is constructed, the oil sands projects that are currently above the red line (this is a reference to a text figure) will not proceed because there will be no takeaway capacity to move these crude volumes to markets. The projects affected include those categorized as approved, approved-on hold, awaiting approval and announced.”44

Similar conclusions were expressed by CAPP in its annual crude oil forecast published in June 2012. The Association states that “...additional [pipeline] capacity exiting western Canada will need to be built if growing production is to avoid facing chronic apportionment as a result of limited pipeline capacity to desired markets...This analysis indicates that additional pipeline capacity exiting western Canada will be required by 2014.”45 As well, the Association presents a forward picture under which, assuming the existence of existing and presently proposed ex- WCSB oil pipeline capacity, a shortfall of capacity against CAPP’s forecast of western Canadian supply, plus movements of U.S. Bakken oil would arise from 2022.46

The effects of the existing market characterized by tight pipeline capacity are highlighted by CAPP in the following comments: “As a result, the price of crude oil in the [USA] Mid-continent has been depressed relative to global crude oil prices...for example in the past year the price of West Texas Intermediate...has sold at a discount at times well over $20 per barrel compared to North Sea Brent...a light crude oil of similar quality that is sold on world markets.”47 48 The issue of the adverse impact on producer prices of inadequate pipeline capacity out of the WCSB is not

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confined to the crude oil segment of the industry: there have been past periods when huge revenue losses occurred because of lack of gas transmission capacity out of the basin. 49

The costs, in terms of discounting of WCSB crude oil prices, resulting from the existence or re- emergence of shortfalls in pipeline capacity could be enormous. Consider, for example, a situation resulting from a $20 per barrel on a CAPP projected total volume of more than 6.0 MMb/d in the early 2020s. Place those costs accumulated over a few weeks against the $5.5 billion estimated cost of the ENGP (including the condensate pipeline). And note that those costs would be apportioned by the fiscal system over producers, royalty owners, and federal and provincial taxes. In that perspective, the value to the region and the nation of always having adequate takeaway capacity for WCSB crude oil is enormous.

1.4 ENGP presents the Joint Review Panel (JRP) with an historic decision-taking challenge and opportunity

ENGP, the first-ever Canadian crude oil pipeline50 with an east-west orientation, is of the same national strategic importance as the Interprovincial and Trans Mountain projects of 60-plus years ago. The oil flows, respectively south-eastwards and south-westwards of Edmonton, which those pipelines established, have endured and expanded.

Interprovincial Oil Pipeline (now Enbridge) and Trans Mountain (now owned by Kinder Morgan) have been an important regional and national cause of economic development and wealth creation for more than half a century. They have served Canada well by safely transporting billions of barrels of WCSB crude oil to markets. The more recent Express, Keystone and Keystone XL projects have essentially built on connecting progressively more distant U.S. refinery markets, a strategy that was first established, and for decades continued, by Interprovincial.

ENGP has the same potential as Interprovincial and Trans Mountain had at their beginnings, but in the context of a vastly larger current and prospective western Canadian oil producing industry and a huge potential refinery feedstock demand in Northeast Asia.51 ENGP’s certificate application therefore comes before the JRP with greater certainty than those earlier projects because the supplies and markets that it connects are so much more assured. The supplies in question are of course principally of oil sands material.

In that connection, the following observations made in the submission of the Canadian Petroleum Association to the 1957 Royal Commission on Energy52 should still commend themselves to policymakers and regulators more than half a century later: “The problem of the bituminous sands, therefore, if they are to be developed, is not one of reserves, but of incentive for development, and this incentive can only be provided by assured future markets for oil and gas.”53 54

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The Royal Commission on Energy stated that “The building of the Interprovincial and Trans Mountain pipe line systems for the transmission of crude oil, immense steps forward in the evolution of the Canadian economy, involved certain risks but were the result of private enterprise without government intervention.”55 Exactly the same can be said today of ENGP. Let it be noted that the risks that the Commission saw as having been involved in these two pipelines were market-risks rather than supply, technical or environmental ones.

From the standpoint of the broad Canadian public interest, ENGP therefore presents a decision- taking challenge and opportunity which occurs only once in a generation, if that. ENGP incarnates a repetition, on a much greater scale, of the petroleum resource boom of the 1950’s which engendered an enormous sense of national optimism, transformed the western Prairies and adjacent areas of British Columbia, laid the foundation for continuing wealth generation regionally and nationally and has been an enduring source of funds for interprovincial transfers through equalization payments.

A decision by the JRP to recommend the issuance of a suitably conditioned CPCN to ENGP would, by adding an economically-robust, critically important element to our national energy infrastructure, undoubtedly continue and enhance these effects for decades to come.

2 The Eastern Canada market as an alternative to the ENGP

Summary position of intervenors and persons making oral statements: ENGP will do nothing to assist provinces in central and eastern Canada which are currently dependent on imports.56 The ENGP must be assessed in the broader context of Canadian needs, including the energy security and refining needs of eastern Canada.57 Take the oil across to the Maritimes, transport to our own markets, sell the oil to eastern Canada rather than continue with importing around 50% of its oil, use it in eastern Canada to offset our oil imports, lessen our dependence on imported oil, build our own economy by keeping this product in Canada, a pipeline to the east from Alberta would be a much better plan.58 ENGP is not in the public interest because it would result in the loss of tens of thousands of potential jobs in upgrading, refining and petro-chemical production.59

Summary position in this Reply Evidence: The three refineries east of Montreal are geographically dispersed. Provision of WCSB crude oil by pipeline would be costly and those costs would have to be reflected in higher prices for locally-used oil products or lower prices for WCSB producers of the oil. However, if WCSB producers or eastern buyers identify a market opportunity then investors in transportation infrastructure can be expected to respond with projects. The Canadian public interest is best served by allowing market forces to work.

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2.1 The eastern Canada market

There are three significant but geographically-dispersed oil refineries in mainland Canada east of Montreal: Valero at St Romuald QC (265,000 b/d)60; Irving Oil at Saint John NB (more than 300,000 b/d)61; and Imperial Oil at Halifax-Dartmouth NS (82,000 b/d)62 an operation which is currently threatened with sale or closure.63 All three plants have for decades been supplied exclusively with Canadian east coast offshore or foreign crude oil, delivered by tankers, for which they have specialized unloading and oil storage facilities.64

2.2 Accessing western Canadian crude oil

These plants do not have pipeline access to western Canadian crude oil. The construction of a connecting pipeline or pipelines would be necessary and the refineries would have to invest in new equipment if they were to handle heavy western Canadian crude oils. If the delivered cost of western Canadian crude oils reaching these plants through new pipelines were higher than that of imported or Atlantic Canada feedstock, two economic choices would be posed, both of them difficult. Either consumers in Quebec and the Maritimes would have to pay more for their oil products or producers in western Canada would have to accept a lower price for oil shipped there.

2.3 If an opportunity exists or develops to provide crude oil transportation east of Montreal, investors will respond

In mid-2012, the outlook does not seem propitious for the extension of pipelines east of Montreal to deliver WCSB crude oil to eastern refineries. But conditions for the supply of domestic and foreign crude oil and refiners’ interests may change. If they do, then it can confidently be expected that investors in transportation infrastructure—rail and marine as well as pipeline—will respond. If the economics for delivery of WCSB feedstock east of Montreal appear favourable to participants in this business, the market will provide the transportation facilities without the need for government policy or regulatory assistance. Such a development would be entirely consistent with the construction of the ENGP: the market east of Montreal is small, the demand is likely for conventional light crude oil, and if the requirement is for heavy crude there is going to be more than enough available to supply this market and fill ENGP.

2.4 Loss of upgrading jobs

The ENGP could handle many grades of crude oil including synthetic crude oil upgraded from oil sands raw material. Decisions to invest in further upgrading in Canada, whether in Alberta or in eastern Canada, will be formed by a complex of market factors. The creation of a new outlet for

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WCSB crude oil accessing large, high value markets neither fosters nor inhibits upgrading in Canada.

2.5 Allowing market forces to work

On the one hand, no evidence is provided that western producers or eastern refiners wish governments or regulators to “take the oil across to the Maritimes” for whatever purpose. On the other hand, there is clear evidence in the application that the project is supported by prospective shippers, including by their substantial financial support already given. In this situation, the Canadian public interest will best be served by allowing Canadian oil producers to respond to market forces, as they have for the past quarter century been able to do, which will maximize the benefits of resource development for the country as a whole. Conversely, it would be inconsistent with the public interest to constrain market choices and deprive producers’ access to attractive new markets for Canadian crude oil.

3 Should the JRP examine pipeline options before making a decision on the ENGP?

Summary position of intervenor: We urge the NEB to do additional analysis of the supply/demand of the WCSB oil pipeline system to identify the need for the combination of the most cost-effective transportation options for shipping WCSB oil before making any decision on the ENGP.65

Summary position in this Reply Evidence: It is established federal policy, commercial practice and regulatory decision-taking to allow markets to work. There is a market in Canada for the provision of pipeline services. A recommendation by the JRP to issue a suitably-conditioned CPCN for the ENGP would not prevent this market from working. Moreover, this is not a competitive proceeding and the JRP does not have before it evidence by providers of other transportation options against which to assess the ENGP. This assessment will be made by pipeline users in the normal course of their business.

3.1 Established policy and commercial practice is to allow market forces to determine the geographical disposition of Canadian crude oil and this has been consistently reflected in regulatory decisions

3.1.1 Established policy

The foundation of today’s federal policy is the Western Accord of March 28, 1985, being an agreement between the Governments of Canada, Alberta, Saskatchewan and British Columbia on oil and gas pricing and taxation.

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The four governments agreed that the best way of meeting their objectives of stimulating investment and job creation in the energy sector would be within a regime of market-sensitive pricing for both oil and gas within a fiscal regime based on profit-sensitive taxation.66

In that connection, the Accord provided that oil may be purchased from Canadian or foreign sources without restrictions on volume and at prices freely negotiated between buyers and sellers. Restrictions on short-term exports of crude oil and petroleum products were discarded and the practice of allocating light crude oil among eastern Canadian refineries was discontinued.67 This is the only policy bearing on the overall disposition of crude oil in Canada enunciated in the past 27 years.

The Government of Canada’s policy of allowing and encouraging energy markets to work, initiated by the Western Accord, was followed by the seven succeeding federal governments.68 It remains in place today, a quarter century later.

Twenty-five years after it was promulgated, the first principle of the current federal government’s energy policy is stated to be that :

“Markets are the most efficient means of determining supply, demand, prices and trade while ensuring an efficient, competitive and innovative energy system that is responsive to Canada's energy needs.” 69

Canada’s energy policy is clearly understood internationally in those terms. The following statement is from a review by the IEA:

“Canadian energy policy relies on competitive markets to determine supply, demand, prices and trade…” 70

This federal energy, oil and gas policy is by far the most enduring of the post-World War II period. It is accepted and supported by the governments of producing and consuming provinces; it is substantially uncontroversial in both producer and consumer circles; and it appears to have alleviated previous longstanding inter-regional, inter-provincial and inter-sectoral frictions.

3.1.2 Commercial Practice

Within frameworks established by governments, the geographical disposition of Canadian crude oil has for more than 60 years been determined by pipeline investors’ assessments of the availability of supplies and of market opportunities, leading to regulatory applications, approvals, construction and operation. This has been the practice since Canada’s first interprovincial oil pipeline, between Edmonton and Regina, was approved by order of the Board of Transport Commissioners for Canada in September 1949 pursuant to an application by the Interprovincial Pipeline Company. This is the course of action now being followed by Northern Gateway.

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In recent years, with heightening competition in the North American crude oil transportation business, investors have looked for commercial support going into the regulatory phase of project development.

This approach was initiated by Express Pipeline in OH-1-95. That company offered lower tolls, renewal rights, and preferred access for contract shippers. The Board found that to be justified by the support those shippers provide for the financing of the pipeline and their sharing with Express of the risks associated with the pipeline.71

Similarly, ENGP states in its Application that it has secured substantial commercial support for the Project, in the form of Funding Support Agreements (FSA), with a variety of producers and market interests. Northern Gateway’s dealings with prospective shippers have been based on developing precedent agreements that will enable all parties to resolve uncertainties and issues before entering into long-term, firm shipping commitments.72 As to those commitments, ENGP states that for the Project to go into construction, it is essential that prospective shippers enter into firm, long-term commitments to ship, or pay for, capacity on the pipeline in question. Such contracts are required to provide assurances—to both project lenders and equity investors— that the Project will provide stable long-term cash flows. ENGP states that the long term commitments made by sophisticated, credit-worthy parties to ship or pay for pipeline capacity on the Project will ensure that tolls are paid.73

The working of the market is reflected in Enbridge’s initial identification of the Project, by the expressions of interest yielded by the open season process in 2005 and by its subsequently obtaining Funding Support Agreements. Shippers’ commitments to long-term firm transportation service will be the ultimate confirmation that ENGP is the market’s choice to provide the next large-volume outlet for western Canadian crude oil.

3.1.3 Regulatory decision-taking

The commercial practice of identifying and responding to the market’s needs has been reflected in regulatory decision-taking. Thus, the Board has since 1985 dealt with applications pursuant to Part III of its act for new, expanded or reversed oil pipeline capacity. These include applications by Enbridge, Express, TransCanada and TransMountain and their successor or predecessor companies. In every instance, the Board has accepted the applicant’s evidence respecting oil supply and markets and has provided the requested facilities approvals, with appropriate conditioning. The Board has always preferred to “let markets work” in relation to such matters as: the timing of the east-to-west reversal of Interprovincial Line-9 (OH-2-97); the effect of that reversal in terms of re-directing the flow of western Canadian oil to export rather than to Ontario refineries; and the impact of large increments of pipeline capacity on the utilization of existing facilities (OH-1-2009).

Conversely, therefore, the Board has never attempted to “shape” the disposition of Canadian crude in directions different than the market was signalling to pipeline investors and shippers.

Reply Evidence of Roland Priddle Page 16 Attachment 3 to Northern Gateway Reply Evidence

Indeed, when in 1991 the responsible Minister requested the Board to review and report on the prospects for and implications of closure of the Sarnia-Montreal pipeline and the options for maintaining the line in an operating mode with west-east or east-west flow, the Board’s response was suitably agnostic. It simply reported that there appeared to be no serious engineering or environmental implications to continued west to east flow, reversal, or deactivation. It stated that the possibility exists for economic forces to take their course and for changes in the use of the pipeline to be addressed, as necessary, through NEB regulatory proceedings.74

3.2 The implications of established policy, commercial and regulatory practice for the JRP’s decision-taking in OH-4-2011

There is no indication of change in the policies and practices outlined in the foregoing. Moreover, if there were to be a policy shift it would be initiated by government and implemented by regulators, as was the case with the National Oil Policy of 196175 and the 1974 policy to support the construction of a Sarnia to Montreal pipeline.76 Any attempts by intervenors to use the OH-4-2011 proceeding, or any other oil pipeline regulatory process, to try to bring about a change in policy as to the disposition of Canadian oil should be roundly rejected.

In this second decade of the century, there are projects and concepts to add pipeline capacity out of western Canada westwards (ENGP), southwards (Kinder Morgan), southeastwards (Keystone and others) and eastwards (Enbridge Line-9 partial reversal and the possible conversion of TransCanada mainline to oil service). However, this is not a competitive proceeding.77 There is no applicant evidence before the JRP other than that of the ENGP. The JRP therefore does not have before it evidence that would enable it to make choices as between competing transportation options.

The only appropriate course of action for governments and regulators is to let markets and their choices work to the greatest extent possible. Therefore projects that can pass rigorous regulatory scrutiny in regard to their environmental and socio-economic impacts should receive approval. After that, markets should be allowed to make the ultimate choices as to which are to be brought to operational fruition and therefore in which directions Canadian crude oil should flow.

It is suggested that there is only one relevant question for the JRP in the context of this broad issue of the national and international distribution of Canadian crude oil. The question is whether the Panel’s recommendation of approval of ENGP would somehow prevent the market from making appropriate choices to build other new pipelines or reconfigure existing ones to ship Canadian oil in other directions. The answer, which does not require debate, is clearly “no”.

Reply Evidence of Roland Priddle Page 17 Attachment 3 to Northern Gateway Reply Evidence

4 Canada’s long-established oil-supply logistics do not impair security

Summary position of intervenors and persons making oral statements: The ENGP is not in the public interest because it will compromise Canada’s long-term energy security by doing nothing to assist provinces in central and eastern Canada which are currently dependent on imports.78 [ENGP] represents the willing abandonment of Canadian energy security and an abdication of national energy policy by federal and provincial governments.79The ENGP must be assessed in the broader context of Canadian needs, including the energy security…needs of Eastern Canada.80 Most of eastern Canada is dependent on foreign oil…if our government really cared about the best interests of Canadians they would at least be considering Canadian domestic energy security.81

Summary position of this Reply Evidence: Established energy security policies work well: eastern Canadian consumers have never experienced oil shortages. In crisis circumstances, Canada’s large net oil exports are a “credit” for purposes of international oil sharing. In the global environment, the oil supply security of our trading partners is of economic importance to Canada.

For more than half a century, Canada has imported oil to the east and exported oil from the west. In 2011, domestic crude oil accounted for just over half of Canadian gross supply and imports of crude oil and oil products just under half. Oil products exports, mostly from imported crude oil, reduced the proportion of imported oil meeting domestic requirements to about 37%.82

This situation attracts the critical attention of some lobby groups. They question whether Canada can replace the oil it imports with resources from its own territory if our (overseas) suppliers become unreliable, or if an oil crisis becomes a reality. They suggest that a pipeline should link Alberta with eastern Canada and call for a strategy that will give Canadians security of their energy supplies and guaranteed access to energy reserves in time of need.83

The response to these concerns includes the following:

• Established energy security policies have served us extremely well: Canada is probably unique among the industrialized countries, members of the Organization for Economic Cooperation and Development, in that her consumers have never experienced shortages of oil products in any peacetime situation.

• Canada’s very large net oil export position means that if the IEA Emergency Oil Sharing System (EOSS) were to be implemented in supply crisis circumstances, she would experience minimal domestic supply disruption : after a small initial “share the pain”

Reply Evidence of Roland Priddle Page 18 Attachment 3 to Northern Gateway Reply Evidence

demand curtailment carried out across the board, the shortfall in available international supplies is allocated among IEA members proportionately to their net imports84

• Canada is a founding member of the IEA (more correctly referred to as the Agency created by the 1974 Agreement on an International Energy Program) and has always taken an active part in all its activities including the regular emergency response simulation exercises for oil supply disruptions and in the Emergency Coordinated Action approach which would precede any implementation of the EOSS.85

• Where eastern Canadian markets are now supplied on a commercial basis with products from imported crude oil, measures to “force” western Canadian oil into those markets would be interventionist and costly. Moreover they would be counterproductive because they would not achieve for Canada any greater security than Canada now enjoys in the context of the IEA’s EOSS or Emergency Coordinated Action approaches.

• Intervenors and persons commenting on this matter do not address the question who is to pay if western Canadian oil were to be “forced” into eastern markets. Would it be producers by way of lower netbacks, refiners in terms of higher crude oil costs or governments as providers of transportation subsidies?

• Finally, in a world where the economic well-being of industrialized countries like Canada depends enormously on international trade, energy and oil supply security must be addressed on a multilateral basis. In that connection, World Bank authorities advised the Government of China that “Any major disruption of supplies…will therefore have global impacts on oil volumes and prices. In today’s interdependent world, no trading country is likely to avoid the risk of economic harm, no matter how well prepared it may be in terms of strategic stocks.”86 The Canadian economy and employment would be imperiled if Chinese factories were shut down by lack of oil or if American businesses could not buy our goods because their trucking industry was crippled by shortages of diesel.

5 Regional costs and benefits

Summary position of persons making oral comments: And of course, another certainty is the overwhelming absence of any benefit to anyone except those few promised jobs, and of course, to Canada's GDP.87 The risk borne by individuals in northwest B.C. far exceeds the benefits.88 It has been said at previous hearings, but it bears repeating, the benefits of this project do not come close to outweighing the costs.89

Reply Evidence of Roland Priddle Page 19 Attachment 3 to Northern Gateway Reply Evidence

Summary position in this Reply Evidence: The Applicant evidence is that the risks of the project are small and can be addressed. They are assessed in relation to marine and pipeline technologies of the second decade of the twenty first century, not against incidents that occurred 30 years before Project will come onstream. The Applicant evidence is that the benefits are huge. The individual beneficiaries are, like the risk-bearers who have appeared, real people. However, they have rarely been heard from in this proceeding.

Discussion

The Applicant evidence in this proceeding contains extensive, carefully researched factual material on costs and benefits.90

Like virtually every other human activity—agricultural, commercial, industrial or recreational—a west coast port and pipeline project poses environmental risks for our society. Some people self-identify as risk bearers and consider the potential costs to be unacceptable. The JRP has made commendable efforts to listen to and learn from these people up and down the coast and inland.

The project also creates broad benefits for our society. Most of the recipients of those benefits do not self-identify: they cannot draw a line between the project and their welfare. As a result, the JRP will not hear the Aboriginal youth who stands to get an apprenticeship, the elderly candidate for hip-surgery whose waiting-time could be shortened, or the academic whose research might receive funding. But these are some of the human faces behind the benefits analysis that the Applicant has presented and it is respectfully suggested that the JRP can itself envisage them as it examines the written evidence on the project’s benefits and the witnesses who are responsible for it.

These benefits are indisputable certainties. The costs are possibilities. The costs can be mitigated: state of the art engineering reduces already low risks;91 the consequences of risks that materialize are limited by response preparation; and costs that remain are addressed by insurance.

Risk and costs in a time perspective: In assessing the risks and therefore costs of environmental damages arising from an oil spill, whether marine or terrestrial, there is an understandable tendency to look for and apply to the ENGP, elements of historical experience. This for example leads to repeated citations, in terms of environmental consequences and clean-up costs, of a marine oil spill that occurred 23 years ago. In regard to terrestrial incidents, a river-crossing incident on a 40-year old pipeline that took place two years ago is similarly cited.

This approach wrongly extrapolates to ENGP facilities, that will become operational late in the second decade of the 21st century, the impacts of failures of 20th century equipment (tanker, pipeline) and controls (navigation, leak-detection) together with the results of clean-up and

Reply Evidence of Roland Priddle Page 20 Attachment 3 to Northern Gateway Reply Evidence

remediation processes that will surely be improved-upon half a dozen years from now. It ignores as well the continuous improvement that has been recorded by the international tanker industry92 and the Canadian oil pipeline business93 in terms of reducing the amount of oil that escapes into the environment. In relation to pipelines, this improvement largely results from the operations of the existing stock rather than from recent increments to the stock.

A more sound approach would be to project continuing improvement in all of the relevant areas, based on what has been observed and documented over a lengthy time-period. And based on the historical record, it can confidently be stated that the safety performance of the ENGP facilities—high though that will initially be—will improve over their operating lifetime.

Risks and costs in a national and international perspective: The position of some intervenors and commenters is that the risks and associated environmental costs of the ENGP are unacceptable. That position necessarily raises questions, national in scope and extending beyond western Canada indeed beyond our borders. For Canadians, those questions would include the acceptability of the existing oil pipeline network serving domestic markets, some of it over half a century old, which crosses thousands of streams and most of the major rivers of southern Canada; the consideration that two-thirds of Canada’s oil production gets to market in the U.S. by pipeline; that hundreds of thousands of barrels of crude oil are shipped daily by tanker around Canada’s coasts to Canadian and American destinations; that, astonishingly, some 2.0 MMb/d of tanker-borne crude , domestic and internationally-sourced plus about 600,000 b/d of products are safely received at and shipped from major Canadian oil ports94; and that the population of the north coast of British Columbia is almost wholly dependent on oil products which reach it by tanker and fuel barge. Considerations for Americans would include the risks of providing pipeline transit for Canadian crude oil from which much of Ontario’s and southern Quebec’s oil products supply is refined; that volumes of oil destined for Canada by tanker are discharged in Portland ME; and that oil for Canada transits the New England states by a pipeline system that was established in 1941.

6 Conclusions

The need for Northern Gateway has been challenged. ENGP’s application has great substance behind it and nowhere more than in this area. The project is needed in the public interest because it provides economically efficient access to large and valuable new markets for Canadian crude oil, diversifies Canada’s strikingly concentrated oil export trade, and contributes an increment to Canada’s pipeline infrastructure which is equally urgently needed within a decade in order to avoid the costly consequences of insufficient takeaway capacity. The JRP’s recommendation to approve this application will create a large volume flow of Canadian crude oil in an entirely new direction with favourable consequences regionally, nationally and internationally that will endure for decades to come.

Reply Evidence of Roland Priddle Page 21 Attachment 3 to Northern Gateway Reply Evidence

Views have been expressed that the eastern Canadian market is a preferable alternative and that Northern Gateway will result in losses of potential upgrading jobs: they are unfounded. The market for crude oil in mainland Canada east of Montreal is geographically dispersed and presently supplied almost entirely by tanker-borne domestic and foreign oil. If after weighing considerations of cost and quality, the regional refiners were to conclude that it would be in their long term interest to obtain supplies from western Canada, then investors in transportation infrastructure—rail and marine as well as pipeline—can be expected to respond. There is no need for this contingency to be factored into the JRP’s decision in the ENGP application: Northern Gateway will neither help nor harm refinery feedstock sourcing in eastern Canada. The same can be said of the effect of the project on the upgrading in Canada of oil sands material: if the market signals that upgrading in Canada is profitable, investors will respond. As to markets for the upgraded product, Northern Gateway can handle a variety of oil grades.

The JRP has been urged to examine pipeline options before making its decision on ENGP. Such an approach would be contrary to long-established federal policy which is to allow markets to determine energy supply, demand, prices and trade. Similarly, in dealing with oil pipeline certificate applications, the Board’s practice has been to grant suitably-conditioned approvals and then leave markets to work in terms of the resulting initiation of or change in oil flows. It has never attempted to shape the direction of oil movements in response to some preconceived notion of optimality but has instead left economic forces to take their course.

It has been submitted that approval of the ENGP will prejudice Canada’s energy security particularly of our eastern provinces. There is no factual basis for this position. Canada’s record of energy and oil supply security is probably uniquely favourable among industrialized countries. As a founding signatory of the Agreement on an International Energy Program, Canada is committed to the comprehensive emergency measures procedures of the IEA, under which the allocation of oil shortfalls is based on each country’s net imports position. Measures to “force” western Canadian oil into eastern markets would not achieve any greater security than Canada already enjoys under the IEA’s sharing scheme because it would not change our net exports position. Moreover, energy security is increasingly seen as a collective rather than as a national preoccupation: oil shortages affecting our trading partners could have severe economic repercussions for Canada even if her supplies remained secure.

Finally, the JRP has been told that the risks that the ENGP presents for the northwest B.C. region and individuals in it exceed the national benefits. In seeking a balance, in the public interest, of the environmental, economic and social considerations which have been placed before it, the Panel will recognize that like virtually every other human activity, the ENGP poses environmental and related social costs and at the same time presents very large economic and social benefits. The costs are possibilities and can be mitigated and insured against. The benefits are indisputable certainties. Risks and their costs must be assessed against second decade twentieth century technologies and in light of the continuous safety improvement that the pipeline and marine industries have recorded. Behind the positive results of the applicant’s cost

Reply Evidence of Roland Priddle Page 22 Attachment 3 to Northern Gateway Reply Evidence

benefit analysis are the individuals across the country, largely unrepresented in this proceeding who will get training, jobs and improved public services of all kinds as a result of the capital investments, operations, employment, revenues and tax generation of this project.

1 Alberta Federation of Labour (AFL), Attachment 46, An Economic Assessment of Northern Gateway, Robyn Allan, page 6.

2 Communications Energy and Paperworkers Union of Canada (CEP), Attachment B, The Northern Gateway Pipeline: An Affront to the Public Interest and Long Term Energy Security of Canadians, page 4.

3 CEP, op.cit., page 8.

4 Coastal First Nations (CFN), Appendix 1, Public Interest Report, A Public Interest Assessment of the Enbridge Northern Gateway Project, Dr.Thomas Gunton and Mr. Sean Broadbent, page 9.

5 CEP, op.cit., page 3.

6 Muse Stancil, Update of Market Prospects and Benefits Analysis for the Northern Gateway Project, July 2012.

7 This phenomenon is described in the Second Report of the Royal Commission on Energy (Henry Borden, Chairman), July 1959, page13-15 under the heading Eastward Expansion from Alberta.

8 National Energy Board (NEB). A Review of National Oil Policy, page 14.

9 This typical reflection of this OPEC position is found in the presentation by Secretary General El Badri (he remains the Secretary General in 2012) Energy and Economic Interdependence between East and West Asia given at the Second Asian Ministerial Energy Roundtable, Riyadh, 2 May 2007 Source: http://www.opec.org/opec_web/static_files_project/media/downloads/publications/2nd%20AsianMinEn ergyRoundtable.pdf page 7, Evolving Understanding on Energy Security.

10 This statement is found in the IEA’s seminal policy position “Shared Goals” adopted by the organzation’s Council of Ministers 4 June 1993 and which remains foundational. Source: http://www.iea.org/about/sharedgoals.htm

11 Note that among the oil importing nations of northeast Asia, Japan and Korea are members of the IEA. The Agency has longstanding relationships with China. There exists an IEA China Memorandum of Policy Understanding in the field of Energy, which was entered-into as long ago as 1996 (Source: http://www.iea.org/press/pressdetail.asp?PRESS_REL_ID=214). The Agency maintains a portion of its website in Chinese and a search of the site for “IEA and China” produces nearly 3,000 hits. Also, “IEA executive director Nobuo Tanaka is reported to have invited China to join the organisation at an International Energy Policy Forum held in Beijing in July. Meanwhile, Daniel Sullivan, assistant US Secretary of State, told a business meeting organised by the US Chamber of Commerce in Beijing in May that China's participation in the IEA's collective emergency response system would strengthen its decision-making powers and that the IEA has developed strong ties with China.” Source: http://www.rsc.org/chemistryworld/News/2008/August/06080801.asp

Reply Evidence of Roland Priddle Page 23 Attachment 3 to Northern Gateway Reply Evidence

12 Goldfarb, Danielle. Too Many Eggs in One Basket? Evaluating Canada’s Need to Diversify Trade. C.D.Howe Institute, Commentary Number 236, July 2006. http://www.cdhowe.org/pdf/commentary_236.pdf

13 Hall, Peter G., Vice President and Chief Economist. The Diversification Dividend. Export Development Canada: Weekly Commentary, October 1, 2008. Hall, Peter G. The Diversification Solution. Weekly Commentary, March 10, 2010.

14 The Institute for Research in Public Policy (IRPP), Montréal, QC has been considering trade diversification on the context of its research program on Competitiveness, Productivity and Economic Growth. A recent publication is: Georges, Patrick and Mérette, Marcel. Canada’s Trade Policy Options: Deeper Continental Integration or Diversification? IRPP Study No. 11, December 2010. Source: http://www.irpp.org/pubs/IRPPstudy/IRPP_Study_no11.pdf The essential finding of this study by two University of Ottawa researchers is that “There may be considerable economic benefits to Canada of diversifying some of its trade away from the United States, provided that countries with more youthful populations and rapid economic growth, such as India, are targeted.” The study tended to focus on manufactured goods, not on commodity exports. The accompanying press release and discussion can be found at the IRPP website at: http://www.irpp.org/summary.php?id=354

15 Source: Financial Post, December 11, 2010. Canadian firms cull new markets other than U.S., page FP7. In that article, Peter Hall (see endnote 13) is quoted as saying “It’s a great development but a continuation of what began years ago. The recession didn’t interrupt the trend towards (export) diversification.”

16 Application, B1-4, volume 2, page 1-1 and Appendix B, pages 5 and 21

17 This was China’s first “transnational pipeline” and it connects Kazakh oilfields with Chinese pipelines and refineries in the Xinjiang region of that country. The pipeline opened with a capacity of 200,000 barrels daily and is to be expanded to 400,000 in 2011. Source: http://www.eia.gov/countries/cab.cfm?fips=CH

18 Source: Natural Resources Canada. Mineral Trade Information Bulletin. June 2010, Trade by Country. http://www.nrcan.gc.ca/minerals-metals/publications-reports/3264

19 The Eisenhower Administration instituted “voluntary” oil import controls in 1956 and mandatory measures in 1959. Imports of Canadian oil by overland means of transportation had been exempted from those mandatory measures in April 1959, but were brought under them in March 1970. Source: NEB, Annual Report, 1970, page 19. The quota system was abolished by the Nixon Administration in 1973. Source: Yergin, Daniel, The Prize. New York: Simon & Schuster, 1991, pages 536, 538, 590.

20 The references are as follows:

21 The NEB. Canadian Energy Supply and Demand 1985-2005. October 1986. 6.9 Supply/Demand Balances, page 95, column 2.

Reply Evidence of Roland Priddle Page 24 Attachment 3 to Northern Gateway Reply Evidence

22 The NEB. Canadian Energy Supply and Demand 1987-2005. September 1988. 7.9 Supply/Demand Profiles, page 157, column 3, page 158, column 1.

23 Source: NEB. Canada’s Energy Future: Energy Supply and Demand Projections to 2035: An Energy Market Assessment. November 2011. Appendices, Tables A3.9 and A3.10, Supply and Disposition of Light (A3.9) and Heavy (A3.10) Domestic Crude Oil and Equivalent, Canada, Reference Case.

24 The following are three relevant statements from Statistics Canada: • The integration of emerging nations, particularly China, and a global economic expansion have led to increased demand for raw materials and falling manufactured goods prices. As a result, there has been an increase in commodity prices, which has created a resource boom. In Canada, the boom is leading to changes in wage growth, relative prices, output, employment and migration (pages 3-4). • The combination of rising prices and new extraction technologies made the more-intensive and thus costly oil extraction from the oil sands of northern Alberta feasible (page 5). • The resource boom has benefited many areas of the economy, either directly or indirectly, while Canadian manufacturing overall has demonstrated resilience and adaptability...manufacturers in some areas have benefited from the resource boom (page 14).

Source: Macdonald, Ryan. Not Dutch Disease, It’s China Syndrome. Ottawa: Statistics Canada, Micro- economic Analysis Division, August 2007 (pages as indicated)

25 Oil sands reserves are put at more than 170 billion barrels, second in the world to Saudi Arabia’s 264 billion. Source: Application, Exhibit B1-4, Table 1-1, page 1-3 and Government of Alberta http://www.energy.alberta.ca/OilSands/791.asp

26 Saudi Arabia, the world’s largest holder of oil reserves and largest oil producer in 2009 exported its crude oil to the Far East (57%), the U.S. (14%), the Mediterranean area (5%), and Western Europe (4%). Source: USA Energy Information Administration (EIA): http://205.254.135.7/countries/cab.cfm?fips=SA

27 NEB, op.cit., footnote 3, box “Oil Sands: Opportunities and Challenges”, page 59 http://www.neb- one.gc.ca/clf-nsi/rnrgynfmtn/nrgyrprt/spplydmnd/spplynddmndt20252003/spplydmnd2003-eng.pdf This may have been the NEB’s first reference since 1991 (see endnote 20) to the potential for markets outside of North America for Canadian crude oil.

28 IEA, Energy Policies of IEA Countries, CANADA 2009 Review, page 188.

29 Source: Watson, William. Diversify our trade? Go right ahead. Ottawa Citizen July 7,2010

30 IEA. Medium Term Oil Market Report. Paris: OECD 2009, heading “Refinery Investment Overview”, page 77. That “one-third” of global refinery capacity additions amounts to 2.4 million barrels daily. Source: http://omrpublic.iea.org/omrarchive/mtomr2009.pdf

31 The IEA presents a striking chart of the growth of oil products consumption in the People’s Republic of China, showing an increase from about 100 million tonnes per annum in 1987 to 360 million in 2009. Source: http://www.iea.org/stats/pdf_graphs/CNOIL.pdf Note that the IEA is forecasting 2012 China oil demand at about 9.7 million barrels daily, equivalent to about 500 million tons. Source: IEA Monthly Oil Report, June 2012, Table 1 World Oil Supply and Demand. http://omrpublic.iea.org/currentissues/full.pdf

32 Source: IEA, World Energy Outlook 2011, November 2011, page 107, Table 3.2 Primary Oil Demand by Region in the New Policies Scenario. “New Policies” is described at page 54 as “the central scenario of this Outlook”.

Reply Evidence of Roland Priddle Page 25 Attachment 3 to Northern Gateway Reply Evidence

33 Source: U.S. Energy Information Administration. Country Analysis Brief, China, November 2010, page 3 of 21. http://www.eia.gov/cabs/China/pdf.pdf

34 The IEA Oil Market Report, June 2012, Table 1 WORLD OIL SUPPLY AND DEMAND, for the five years 2008-2012 (forecast) puts China’s indigenous oil supply in millions of barrels daily at, respectively, 3.8, 3.9, 4.1, 4.1, 4.2. The corresponding demand numbers are 7.7, 8.1, 9.1, 9.4, 9.7. Demand is estimated to increase by 2.0 million barrels per day over four years while domestic supply has risen by one-fifth of the demand increment. http://omrpublic.iea.org/currentissues/full.pdf

35 Berrah, Feng, Priddle and Wang. Sustainable Energy in China: The Closing Window of Opportunity. Washington D.C.: World Bank, 2007. Chapter 5 “Securing Energy Supply”, pages 87-125. The IEA has long recognized China’s policy interest in security of energy supply. See China’s Worldwide Quest for Energy Security. Paris, France: IEA, 2000. This report is available for download at: http://www.oecdchina.org/OECDpdf/china2000.pdf

36 Expectably, there is much information on the web about diversification and security of oil supply for China. See for example: Wu Zhong. China aims to diversify oil sources. Asia Times Online. February 28, 2007 at: http://www.atimes.com/atimes/China_Business/IB28Cb02.html

37 In 2009/10 imports from Angola, Iran, Iraq, Kazakhstan, Kuwait, Libya, Oman, Russia, Saudi Arabia, Sudan and Venezuela accounted for more than 80% of the total. The largest single supplier--in some months Angola, in others Saudi Arabia—accounted for +/- 20% of China’s imports. Source: Facts Global Energy and U.S. Energy Information Administration, China (endnote 33), page 7 of 21. http://www.eia.gov/cabs/China/pdf.pdf

38 Source: EIA Country Analysis Brief. Japan. March 2011. http://205.254.135.7/countries/cab.cfm?fips=JA

39 Source: EIA Country Analysis Brief. Korea. October 2011. http://205.254.135.7/countries/cab.cfm?fips=KS

40 Source: EIA Overview Data. Taiwan. Updated June 2010. http://205.254.135.7/countries/country- data.cfm?fips=TW&trk=p1#pet

41 Canadian gross crude oil exports, which were almost extinguished by long-abandoned interventionist policies of the 1970’s, exhibit an almost unbroken rise from a modest 15,000 cubic metres per day in 1980 to more than 300,000 in 2010. Source: NEB Annual Reports. Spreadsheet available.

42 Canadian Association of Petroleum Producers (CAPP). Crude Oil: Forecast, Markets and Pipelines. June 2012. Page 20, 3.3 Asia and 3.5 Markets Summary. http://www.capp.ca/getdoc.asp/x?DocId=209546&DT=NTV

43 Canadian Energy Research Institute. Study Number 128, March 2012. Canadian Oil Sands Supply Costs and Development Projects (2011-2045), Chapter 6, Transportation, refer particularly to pages 95-96.

44 Ibid, page 98.

45 CAPP, op. cit., page 32.

46 Ibid, Figure 4.4.

Reply Evidence of Roland Priddle Page 26 Attachment 3 to Northern Gateway Reply Evidence

47 Ibid, page 2.

48 Also see ibid, page 22.

49 The evidence in the Alliance pipeline certificate proceeding, GH-3-97, was that the industry had been foregoing between $3.5 and $6.0 billion a year because of low gas prices (Reasons for Decision, page 31, Views of the Applicant) and that this was connected with a shortfall in pipeline capacity of about 14.2 10 6m3/d or 500 MMcf/d (Reasons, page 33, Views of Intervenors). This evidence led to the Board expressing the view that in the long term, the Alliance Pipeline will help ensure that there is adequate transportation capacity from the WCSB to the major market centres and that the pipeline will have a positive impact on producer netbacks (Reasons, page 35, Views of the Board).

50 The observations that follow do not address the Condensate Import Pipeline which is part of the ENGP application pursuant to section 52 of the NEB Act.

51 The beginnings of Trans Mountain present an instructive contrast to ENGP which will draw its shipments from a Canadian crude oil industry producing more than three million barrels daily and serve refinery markets also in the several million daily barrels range. The Board of Transport Commissioners (a predecessor of the NEB) issued an Order for the construction of Trans Mountain on December 13, 1951. The capacity of the 24-inch mainline would initially be 75,000 and ultimately 200,000 barrels per day (b/d) Source: Wilson, Neil C. and Taylor, Frank J., The Building of Trans Mountain. Vancouver: Trans Mountain Oil Pipeline Company, 1954, pages 29-30. At that time (1951-52) the refining capacity in the target markets was some 28,000 b/d in the Vancouver region and 12,000 in the U.S. Pacific Northwest while production of Alberta crude oil had reached 126,000 b/d in the spring of 1951. That production was of course the source of supply for refineries in Alberta, elsewhere on the Prairies and at Sarnia, where Interprovincial had started deliveries in April 1951. Source: Royal Commission on Energy, Second Report, July 1959, Chapter 2: Production and Marketing of Canadian Oil, pages 14-16. Chapter 3: Export of Canadian Oil, page 27.

52 Royal Commission on Energy op. cit. The Commission’s Second Report dealt with oil matters. The Commission’s first report had addressed questions of natural gas and the establishment of a national energy board.

53 Source: Canadian Petroleum Association (CPA). Submission to the Royal Commission on Energy, Section E, Athabasca Bituminous Sands, page 9, 7th February 1958. The CPA stated “All these conditions make an estimate of the total content of bitumen very difficult and in consequence, not too precise. It is thus not surprising that the most reliable estimates place the bitumen content in the order of 100 to 300 billion barrels, with perhaps 250 billion barrels the preferable figure. The amount of bitumen in this deposit, therefore, may exceed the free world’s proven oil reserves which, as of January 1, 1957, were considered to be 207.5 billion barrels.” These numbers put forward more than half a century ago by the industry association are strikingly similar in order-of-magnitude terms to the current number of 170 billion barrels published by the Province of Alberta.

54 The words “and gas” at the end of this sentence do not fit the context. Section E of the CPA submission cited in the previous endnote deals exclusively with Athabasca Bituminous Sands.

55 Royal Commission on Energy, op.cit., Chapter 6, Conclusions and Recommendations, pages 128-129.

56 Alberta Federation of Labour, Written Evidence, page 4, lines 14-18.

Reply Evidence of Roland Priddle Page 27 Attachment 3 to Northern Gateway Reply Evidence

57 Communications Energy and Paperworkers Union of Canada, Written Evidence, pages 4-9, The Vulnerability of Eastern Energy Markets.

58 Oral statements by persons including: Mr. Eric Anderson (tr 1877), Ms. Allison Candela (tr 32499), Mr. David Duddy (tr 3258), Mr. N. Dyck (tr 483), Mr. Walter Fricke (tr 3356/7), Ms. Greer Kaiser (tr 3102/3), Mr. Dave Livesey (tr 275), Mr. Dan Mesec (tr 32747), Mr. Roy Mills (tr 26057/8/9), Mr. Randall Rodger (tr 3077), Ms. Darrell Tomkins (tr 26620) and Mr. John Zaikow (tr 26291/2).

59 Alberta Federation of Labour, op.cit., page 3 and pages 6-11.

60 Source: http://www.valero.com/OurBusiness/OurLocations/Refineries/Pages/QuebecCity.aspx

61 Source: http://irvingoil.com/operations_and_partners/operations/refining/

62 Source: http://www.imperialoil.ca/Canada-English/operations_refineries_dartmouth.aspx

63 Halifax Chronicle Herald, May 17, 2012, Imperial Oil to sell refinery. Source: www.http://thechronicleherald.ca/metro/97307-imperial-oil-to-sell-refinery

64 In June 2012, the media reported that rail shipments of Bakken light crude oil are being received at Irving Oil Limited’s St John refinery http://www.canada.com/business/Despite+shipping+costs+eastern+refiners+save+western+crude/67531 62/story.html

65 CFN, op.cit., Gunton and Broadbent, page 12, Conclusions.

66Western Accord, page 1, heading ENERGY PRICING AND TAXATION UNDERSTANDING

67 Ibid, pages 2-3, heading I DEREGULATION OF CRUDE OIL PRICES

68 The “seven administrations” refers to the second Mulroney administration, the three Chrétien governments, the Martin administration and the two Harper governments. The significance is that these 25 years spanned periods of peaking and collapsing oil and gas prices, economic growth, recession and recovery and political uncertainty reflected in the election of three minority governments.

69 See Natural Resources Canada. Overview of Canada’s Energy Policy at http://nrcan.gc.ca/eneene/polpol/owevue-eng.php

70 The Executive Summary of the International Energy Agency’s 2010 Review of Canada reads in part as follows:

“Three key underlying principles of Canadian energy policy are: market orientation; respect for jurisdictional authority and the role of the provinces; and, where necessary, intervention in markets to achieve specific policy objectives.

“Canadian energy policy relies on competitive markets to determine supply, demand, prices, and trade, and is guided by a drive for cleaner production and use of energy. The government of Canada seeks to achieve a balance between the environmentally responsible production and use of energy, the growth and competitiveness of the economy, and secure and competitively priced energy and infrastructure.” (pages 9 and 10) http://www.iea.org/Textbase/npsum/canada2009SUM.pdf

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71 NEB, Reasons for Decision, OH-1-95, Views of the Board, page 25.

72 Application, Exhibit B1-3, Volume 1, heading 5.1.2 Contractual Arrangements, page 5-1.

73 Ibid, Exhibit B1-4, Volume 2, heading 2.1.2 The Need for Firm, Long Term Shipping Commitments, page 2-1.

74 Ibid, 2.4 Conclusions on Commercial Considerations, page 2-4.

75 After receiving the Royal Commission on Energy’s second report (1959) and after further intensive study of changing oil market conditions by the newly-created NEB, the Government of Canada in February 1961 announced a National Oil Policy which was effectively a response to the pressures of Alberta oil producers for action to provide access for Canadian crude oil to the Montreal market. The policy involved attainment of certain target levels for Canadian crude oil production. The announcement stated that these targets were to be reached by increased use of Canadian oil in domestic markets, west of the Ottawa Valley and by some expansion of export sales largely in existing markets which can be reached through established pipelines. The growth in domestic use was predicated in particular on substituting in Ontario markets west of the Ottawa Valley, products refined from Canadian crude for those now supplied from foreign crude. This was to require in Ontario the displacement of small imports of crude, and a progressive reduction in imports of foreign products and transfers of products refined from foreign crudes in Montreal. Source: NEB—A Review of National Oil Policy, February 1969, Appendix 2.

76 The origin of the Sarnia-Montreal crude oil pipeline was summarized in the NEB Reasons for Decision in OH-2-97 at page 2 under the heading 2.1 Line 9 History in the following terms: “As a result of the [1973 Arab oil] embargo, the vulnerability of the refineries in Atlantic Canada and Quebec became of greater concern to the Government of Canada. IPL [Interprovincial Oil Pipeline] was therefore asked to consider an extension of its system to serve Montreal refineries and to permit Quebec City and Atlantic refiners, if circumstances warranted, to use existing dock facilities in Montreal to load vessels with Canadian crude oil for delivery further east. To enhance security of supply for consumers in eastern Canada, the Government of Canada entered into an agreement with IPL to support the construction of a Sarnia to Montreal pipeline ("Montreal Extension") by guaranteeing to meet any financial loss which might result from low throughputs.

77 Competitive proceedings before the NEB under Part III of its act are rare. The 1976-77 Mackenzie Valley Pipeline Hearing GH-1-76 was possibly the only one the Board has held. The hearing order stated that the applications of Canadian Arctic Gas Pipeline, the Foothills Group and the Alberta Natural gas application “shall be heard together”.

78 Alberta Federation of Labour, Written Evidence, page 4, item 6), lines 14-18.

79 Alberta Federation of Labour, Attachment 46, Robyn Allan, op.cit., page 27.

80 Communications, Energy and Paperworkers Union of Canada, Written Evidence, page 4, caption The Vulnerability of Eastern Canadian Markets.

81 Mr. Glenn Parkinson (tr 25941)

82 In round numbers, the 2011 refinery crude oil supply balance in thousands of cubic metres per day was: refinery receipts of domestic crude oil 157, of imported crude oil 108. However, there were net products exports of about 19 mostly derived from imported crude oil which, deducted from the import total brings net imports of crude and products down to 87 or about 36% of total net supply of 244. Note that Statistics

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Canada records refinery feedstock use of 22 thousand cubic metres daily of materials other than conventional and synthetic crude oil, bitumen and condensate without indicating its origin and refinery volume gain of about 15. Source: derived from Statistics Canada, The Supply and Disposition of Refined Petroleum Products in Canada, December 2011, Table 2-1. Catalogue no 45-004-X, electronic version available at http://www.statcan.gc.ca/pub/45-004-x/45-004-x2011012-eng.pdf

83 The Council of Canadians’ energy position is taken as exemplifying the “security concern”. See http://www.canadians.org/energy/issues/energy_strategy/Canadian_oil.html where the Council offers a PDF for download dealing with energy security.

84 IEA. The First Thirty Years. Volume 4, Appendix III, The Agreement on an International Energy Program, especially pages 123-135 dealing with emergency demand restraint, allocation etc. http://www.iea.org/Textbase/nppdf/free/4_ieahistory.pdf

85 IEA. IEA Response System for Oil Supply Emergencies, 2011. http://www.iea.org/textbase/nppdf/free/rs/response_system.pdf

86 Berrah, Feng, Priddle and Wang, op.cit., page 110, Global Multilateralism: The International Energy Agency.

87 Peter Reynolds, Volume 55, Tr 5409.

88 Mark Beedle, Volume 50, Tr 2209

89 Sophie Harrison, Vol 55, Tr 5558

90 Wright Mansell Research Ltd., Public Interest Benefits of the Enbridge Northern Gateway Pipeline Project: Update and Reply Evidence, July 2012.

91 For more than 50 years, literally billions of barrels of crude oil have transited the Strait of Juan de Fuca to refineries in Washington State without significant incident. For 70 years, more than four billion barrels have passed through Casco Bay, Maine, one of the richest inshore fishing grounds in New England and a renowned centre for pleasure boating, to discharge at the South Portland terminal of the Portland- Montreal crude oil pipeline. Virtually all the oil products used by Canadians—motor gasoline, diesel, aviation fuel, home heating oil, industrial fuel oils, asphalt and lubricants—are derived from crude oils that have either been transported by tanker or by pipelines that cross major rivers or both.

92 Comprehensive data on world-wide oil spills since 1970 are maintained by the International Tanker Owners Pollution Federation Limited (“ITOPF”). Essentially, the data show dramatic declines per decade in the number of spills, the number of large spills and the volumes of oil spilled. http://www.itopf.com/information-services/data-and-statistics/

93 The NEB provides an annual report on pipeline performance in respect of safety and the environment. The most recent publication, reporting through 2009 is available at http://www.neb-one.gc.ca/clf- nsi/rsftyndthnvrnmnt/sfty/sftyprfrmncndctr/fcsnsfty/2011/fcsnsfty2000_2009-eng.pdf See Chapter Three Pipeline Environmental Performance.

94 The volumes of crude oil and oil products loaded and unloaded at Canadian ports are surprisingly large. They comprise domestic and foreign crude oil delivered by tanker to four refineries east of Montreal which have an aggregate nameplate capacity of about 770,000 b/d; loading of crude oil from producing platforms offshore Newfoundland which in the first four months of 2012 averaged 260,000 b/d; the transshipment of most of that crude oil through onshore terminals; the export of modest volumes of

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western Canadian crude oil from Vancouver; and the transshipment of large quantities of foreign oil through a terminal in Nova Scotia. In 2010, the most recent year for which data are publicly available, the aggregate crude oil quantities loaded and unloaded in this trade approximated 700 million barrels which is 3.5 times the maximum annual throughput of the ENGP pipeline and port project. Two of the terminals involved in this trade are the only ones on the east coast of North America capable of receiving Ultra Large Crude Oil Carriers (ULCCs). The Nova Scotia transshipment terminal has a crude oil storage capacity of 7.7 million barrels which is about 40% larger than that of the ENGP at Kitimat. In addition to these crude oil movements, some 277 million barrels of oil products were loaded and unloaded in 2010 at major Canadian ports from Vancouver BC to Come by Chance in Newfoundland. The numbers may appear, intuitively, large in relation to what is commonly understood to be Canada’s oil imports for domestic use. Note, however, that they include volumes that are subject to multiple loading and unloading. For example, the crude oil produced in Canada offshore Newfoundland is typically loaded onto a shuttle tanker, unloaded at a transhipment facility, loaded again onto a tanker which, if destined for the domestic market, will be again unloaded in Canada, making a total of four across-the-dock movements. Principal sources:

List of oil refineries http://en.wikipedia.org/wiki/List_of_oil_refineries#Quebec

Statistics Canada, Shipping in Canada, Catalogue 54-205X http://www.statcan.gc.ca/pub/54-205-x/54-205-x2010000-eng.pdf;

Canada-Newfoundland Offshore Petroleum Board http://www.cnlopb.nl.ca/pdfs/2012mpro.pdf

Newfoundland Transshipment Limited http://www.ntl.net/default.asp?action=home

North Atlantic Refining http://www.northatlantic.ca/about.asp

NuStar Terminals http://www.nustarenergy.com/Terminal%20Data%20Sheets/POINTTUPPER_1_26_06.pdf

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