Canadian Energy Research Institute

“Canada’s Competitive : Can Canadian Heavy Compete in the US Gulf?”

Dinara Millington Canadian Energy Research Institute

CCQTA-COQA Joint Meeting June 7-10, 2016

Relevant • Independent • Objective www.ceri.ca Canadian Energy Research Institute

Founded in 1975, the Canadian Energy Research Institute (CERI) is an independent, non-profit research institute specializing in the analysis of energy economics and related environmental policy issues in the energy production, transportation, and consumption sectors.

Our mission is to provide relevant, independent, and objective economic research of energy and environmental issues to benefit business, government, academia and the public.

Our core supporters include Natural Resources Canada, Alberta Energy, and CAPP, Chemistry Industry Association of Canada (CIAC), Alberta’s Industrial Heartland Association (AIHA), and the University of Calgary. In-kind support is also provided by the Alberta Energy Regulator (AER) and Services Association of Canada (PSAC).

All of CERI’s research is placed in the public domain and can be accessed via our website at www.ceri.ca .

Relevant • Independent • Objective 2 www.ceri.ca Agenda

• The “Why” • Canadian Exports to the US • Transportation Network • US Gulf Imports • Potential Netbacks for Canadian WCS

Relevant • Independent • Objective 3 www.ceri.ca The “Why”

In Service Proposed Project

Source: ARC Financial Corp. Canadian Heavy Crude Exports to the US (2014- 2015)

1,800

1,600 Conventional Heavy 1,400 Synthetic 1,200

1,000 Bitumen and Blended Bitumen

800

600

400

Thousand barrels per day 200

- PADD I PADD II PADD III PADD IV PADD V East Coast Midwest US Gulf Rocky West Coast Mountain Coast

Source: National Energy Board

Relevant • Independent • Objective 5 www.ceri.ca Pipeline Network

Existing and Future Western Canadian Pipeline Export 7,000 Capacity

6,000

5,000

4,000

Thousand barrels per day per barrels Thousand 3,000

2,000 2007 2010 2013 2016 2019 2022 2025 2028 2031 2034 Existing Export Capacity Enbridge Alberta Clipper Expansion Enbridge Line 3 Restored Kinder Morgan TMX Expansion Enbridge Northern Gateway

Source: Canadian Energy Pipeline Association Source: Canadian Association of Petroleum Producers

Relevant • Independent • Objective 6 www.ceri.ca Rail Network

Existing and Future Western Canadian Rail Export Capacity

1,000 900 800 700 600 500 400 300 200 100 Thousand barrels per day per barrels Thousand 0 2007 2010 2013 2016 2019 2022 2025 2028 2031 2034 Future Rail Capacity Existing Rail Capacity

Source: Canadian Association of Petroleum Producers

Relevant • Independent • Objective 7 www.ceri.ca US Gulf Coast Refining Capacity

Source: US Energy Information Agency

Relevant • Independent • Objective 8 www.ceri.ca Crude Prices

Source: Argus Media

Relevant • Independent • Objective 9 www.ceri.ca Crude Oil Quality

5.50%

5.00% Peace River Heavy

4.50%

4.00% Wabasca Heavy Cold Lake Blend > Sour) > - 3.50% Western Candian Select Mexico - Maya

3.00% Iraq - Basra Light Heavy Vs. Light

Kuwait - Kuwait Sweet Vs. Sour 2.50% Monterey Venezuela -Merey Venezuela - BCF-17 Albian Hvy. Syn. UAE - Dubai Canadian Crudes 2.00% Ecuador - Napo Mars Colombia - Castilla Blend West Texas Sour US Crudes Saudi Arabia - Arab Light Sulfur Content wt. % (Sweet % (Sweet wt. Content Sulfur 1.50% Colombia - Rubiales Kern River Brazil - Polvo 1.00% Alaska North Slope Forties Blend Brazil - Marlim Hibernia Blend 0.50% Brent Syncrude Synthertic Condensate Blend Sumatra - Duri West Texas Intermediate Suncor Synthetic A Nigeria - Bonny Light Malaysia - Tapis Algerian Condensate 0.00% 0 5 10 15 20 25 30 35 40 45 50 55 60 65 70 75 80 API Gravity (Heavy -> Light) Source: BP, EIA, Genesis Capital, Oil &Gas Journal, Pemex, Statoil

Relevant • Independent • Objective 10 www.ceri.ca US Gulf Coast Heavy Crude Imports

3,000 Canada Ecuador Brazil Colombia Venezuela Mexico 2,500

2,000

1,500

1,000 Thousand barrels per day

500

0 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

Source: US Energy Information Agency, 2015

Relevant • Independent • Objective 11 www.ceri.ca Canadian Net Available Heavy Crude Exports

SK Heavy Conventional Production (CERI, 2014)

5,000 AB Conventional Heavy (CAPP, 2015)

4,500 SCO Production (CERI, 2015)

4,000 Crude Bitumen Production (CERI, 2015) Net available heavy crude oil exports (CERI, 2015) 3,500

3,000

2,500

2,000

Thousand barrels per day 1,500

1,000

500

- 2007 2009 2011 2013 2015 2017 2019 2021 2023 2025 2027 2029 2031 2033 2035

Source: CERI, “Heavy barrel competition in the US Gulf Coast: Can Canadian producers compete?”, 2016

Relevant • Independent • Objective 12 www.ceri.ca Potential Heavy Crude Exports to the US Gulf Coast

1,600

1,400

1,200

1,000

800

600

400 Thousand barrels per day 200

- 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 2027 2028 2029 2030 2031 2032 2033 2034 2035

Pipeline Capacity to the Gulf Coast Rail Capacity to the US Gulf Coast Considering 50% capacity through EE & TMX Considering 75% capacity through EE & TMX Considering 50% capacity through EE,TMX & NG Considering 75% capacity through EE,TMX & NG No major coast export pipeline available

Source: CERI, “Heavy barrel competition in the US Gulf Coast: Can Canadian producers compete?”, 2016

Relevant • Independent • Objective 13 www.ceri.ca Potential Netbacks for Canadian Heavy Barrel Producers

$45.95 $50.00 $13.02 $4.23 $45.00 $0.99 $1.29 $0.52 $40.00 $30.43 $2.50 $15.50 $15.00 $12.03 $11.73 $12.50 $35.00 $8.79 $30.00 $25.00 $20.00 $15.00 $10.00 $5.00 $-

All values are 2015 average US$ Source: CERI, “Heavy barrel competition in the US Gulf Coast: Can Canadian producers compete?”, 2016

Relevant • Independent • Objective 14 www.ceri.ca Netbacks for WCS – Existing Pipeline

Netbacks for WCS Transported by Existing Pipeline Netbacks for WCS Transported by Existing Pipeline (Committed Tolls) from Hardisty, AB to the US Gulf (Uncommitted Tolls) from Hardisty, AB to the US Gulf Coast Coast

Pipeline toll Hardisty to Texas Gulf Coast (10-year $7.79 Pipeline fee Hardisty to Texas Gulf Coast $11.03 committed toll) US$/bbl (uncommitted toll) US$/bbl Pipeline load terminal fee US$/bbl $1.00 Pipeline load terminal fee US$/bbl $1.00 Total Pipeline Transportation Cost – Hardisty to $8.79 Total Pipeline Transportation Cost – Hardisty to $12.03 Houston / bbl Houston / bbl (uncommitted tolls)

Western Canadian Select @ Hardisty $30.43 @ Hardisty $30.43 Median USGC Heavy Sour Crude landed $45.95 Median USGC Heavy Sour Crude landed $45.95 USGC Heavy Sour Crude - Dilbit Quality Adjustment $2.5 USGC Heavy Sour Crude - Dilbit Quality Adjustment $2.5

Estimated WCS Price Uplift @USGC $13.02 Estimated WCS Price Uplift @USGC $13.02

Netback for Canadian producers at the USGC $4.23 Netback for Canadian producers at the USGC $0.99

All values are 2015 average US$ Source: CERI, 2016

Relevant • Independent • Objective 15 www.ceri.ca Netbacks for WCS – Existing Rail

Netbacks for WCS Transported by Rail from Hardisty, AB to the US Gulf Coast

Rail Tank Car (bbl) 600 Rail Freight Hardisty to Texas Gulf Coast (Heavy Crude) US$/bbl Unit $12.00 Train Rail Tank Car Lease / bbl ($600/month, 2 turns) $0.50 Rail Car Load and Unload Terminal Fee / bbl ($1.50 each) $3.00

Total Rail Transportation Cost – Hardisty to Houston / bbl $15.50

Western Canadian Select @ Hardisty $30.43 Median USGC Heavy Sour Crude landed $45.95 USGC Heavy Sour Crude - Dilbit Quality Adjustment $2.5

Estimated WCS Price Uplift @USGC $13.02

Netback for Canadian producers at the USGC $(-2.48)

All values are 2015 average US$ Source: CERI, 2016

Relevant • Independent • Objective 16 www.ceri.ca Conclusions

• Canadian heavy crude oil production is expected to grow from 2.6 MMbpd in 2015 to 4.7 MMbpd in 2035, more than a 2 MMbpd increase over the next twenty years. • Canadian domestic demand for heavy crude oil is expected to increase by approximately 50% and reach over 800,000 bpd by 2035. • Net heavy Canadian available exports are expected to grow to larger than 3.5 MMbpd over the next decade. • Heavy crude imports from Mexico and Venezuela have decreased by over 1 MMbpd over the 10 years. • If Canadian heavies could displace most of the Mexican and Venezuelan imports, the opportunity for bitumen blends and heavy oil would be about 1.5 MMbpd.

Relevant • Independent • Objective 17 www.ceri.ca Conclusions

• If exports are to increase to the Gulf to displace other exporters, additional pipeline capacity needs be developed. • Under current market conditions, rail access to the USGC prices Canadian producers out of the market. • By allocating heavy production to other markets such as Asia and Europe, Canadian producers are able to reduce their overland dependence on the US market, reduce their supply to that market, and overcome pipeline constraint issues on the US Gulf Coast. • As Western Canadian crude oil production continues to grow, the leverage of these resources for economic benefits to the nation will depend on the ability to connect this growing supply with demand.

Relevant • Independent • Objective 18 www.ceri.ca Thank you!

www.ceri.ca

Relevant • Independent • Objective 19 www.ceri.ca