Western Canada Products Markets & Refining Background

Prepared For:

Imperial Oil Limited & Suncor Energy Products Partnership

April 2014

Prepared by: Steven J. Kelly

IHS Global Canada Limited Suite 200, 1331 Macleod Trail S.E. Calgary, AB T2G 0K3 CANADA

IHS PROJECT NUMBER: 1011120

The accompanying materials were prepared by IHS. Content distributed or reprinted must display IHS’ legal notices and attributions of authorship. IHS provides the materials “as is” and does not guarantee or warrant the correctness, completeness or correctness, merchantability, or fitness for a particular purpose. All warranties of which are hereby expressly disclaimed and negated. To the extent permissible under the governing law, in no event will IHS be liable for any direct, indirect, special, incidental, lost profit, lost royalties, lost data, punitive, and/or consequential damages, even if advised of the possibility of same. ©2014 IHS.

WESTERN CANADA PRODUCTS MARKET & REFINING BACKGROUND

Table of Contents Introduction ...... 1 Summary of Conclusions ...... 2 Western Canada Refined Petroleum Products Market Description ...... 3 Prairies refined products markets are small and isolated ...... 3 The refined product supply/demand balance in Western Canada is tight ...... 7 Prairies refined products market supply is mainly from the Prairies refineries ...... 10 Refined products supply on the Prairies depends upon pipeline logistics ...... 14 Exchange agreements are used by fuel suppliers to address product imbalances ...... 15 Unplanned shutdowns have led to product shortages on the Prairies ...... 16 Appendix A: Background and Overview of Refined Petroleum Products Markets ...... 19 Appendix B: Western Canada Downstream Petroleum Industry Description ...... 21

Figures 1 Prairies Light Refined Product Domestic Sales ...... 3 2 Light Refined Product Demand Comparison ...... 5 3 Western Canada Gasoline Supply Balance ...... 8 4 Western Canada Jet Fuel Supply Balance ...... 8 5 Western Canada Diesel Supply Balance ...... 8 6 Western Canada Net Products Trade ...... 9 7 Western Canada Refined Product Inventory Coverage ...... 10 8 Refinery Capacity by Province ...... 11 9 Prairies Refinery Production as Percentage of Demand ...... 12 10 Refinery Utilization – Western Canada ...... 13 11 Regional Refinery Utilization Comparison ...... 13

Tables 1 Road Transportation Distances in Western Canada ...... 6 2 Western Canada Refinery Shutdowns (Planned/Unplanned) ...... 17 3 Western Canada Refinery Capacity and Configuration ...... 22 4 Refined Product Pipeline Summary...... 23

1 Introduction

2 On behalf of Imperial Oil Limited (“Imperial Oil”) and Suncor Energy Products Partnership 3 (“Suncor”), IHS was engaged to provide analysis related to Western Canada refined products 4 markets. The purpose of our analysis is to provide background for Imperial Oil and Suncor, relating 5 to an application by Trans Mountain Pipeline (“Trans Mountain”) before the National Energy Board 6 (“NEB”), referred to as “Trans Mountain Application for Tariff Amendments Regarding Verification 7 Procedures”. The application is proceeding number RHW-001-2013 before the NEB.

8 In this testimony, IHS will address the following matters related to Western Canada refined product 9 markets:

10 • Demand trends 11 • Market balancing mechanisms 12 • The role of pipelines, including Trans Mountain 13 • The impact of refinery shutdowns 14 In preparing its evidence, IHS relied on public information pertaining to refined products markets in 15 Canada and the United States. A number of sources were utilized, including regulatory filings, 16 public reports, corporate investor presentations, media reports and other documentation. Public 17 information from several statistical agencies was utilized. IHS’ proprietary models and databases 18 were applied to the preparation of this evidence.

19 The focus of this evidence is primarily on the historical period from 2008 to 2013. Where necessary 20 to illustrate points raised in the evidence, longer term historical information has been cited. The 21 geographical region of interest is Western Canada, comprised of the Prairie provinces (Manitoba, 22 Saskatchewan and Alberta), British Columbia, and the territories (Nunavut, Northwest Territories 23 and Yukon Territory). The evidence addresses the differences in refined products market supply for 24 the Prairie provinces and for British Columbia, and the role of Trans Mountain in managing supply.

1 Summary of Conclusions

2 The IHS conclusions from this review of Western Canada refined products markets and the refining 3 industry are summarized below:

4 1. Prairies refined products markets are small and isolated from other North American 5 markets. Market demand trends for refined products in the Prairies exhibit seasonal 6 behaviour, and follow underlying economic activity. Distances between major demand 7 centres on the Prairies are long, as are the distances from the nearest potential sources of 8 product supply. In most cases, distances from supply sources are longer than the economic 9 limit of road transportation. 10 11 2. The supply/demand balance for refined products in Western Canada is tight. Refinery 12 rationalization and growing products demand have resulted in high average utilization of the 13 Prairies refineries, and a gradual reduction in inventory coverage ratios for gasoline and 14 diesel. Product markets typically balance to imports, the requirements for which vary 15 depending on seasonal demand trends and the operating status of the Prairies refineries. 16 17 3. Refined products supply on the Prairies is mainly sourced from Prairies refineries. 18 Given the long distances involved, external supply is a limited option on the Prairies. As a 19 result, balances for gasoline and diesel on the Prairies are met mainly by regional refinery 20 production. Surplus production is typically transferred to British Columbia, which is an 21 integral part of the refined products markets for the Edmonton refiners. This balance 22 mechanism between the Prairies and British Columbia can be accommodated because 23 product imports are available on the West Coast if needed. 24 25 4. Refined products supply on the Prairies depends upon pipeline logistics. Gasoline 26 and diesel produced in the Edmonton area is shipped to major terminals on the Prairies and 27 in British Columbia. Pipelines are the major mode of transportation for these deliveries. 28 Trans Mountain, which delivers product from Edmonton to British Columbia, is considered a 29 key component of the balancing mechanism for the Prairies refineries. 30 31 5. Product exchange agreements are used by fuel suppliers to address time and 32 location imbalances of products. Refineries on the Prairies rely on exchange agreements 33 to secure wholesale product for their market requirements, either in locations where they do 34 not have refining or terminal facilities, or at times when their own production is unavailable 35 due to a refinery shutdown. 36 37 6. Unplanned refinery shutdowns have led to product shortages on the Prairies. Several 38 incidents in recent years have demonstrated the sensitivity of the Prairies markets to 39 unplanned refinery shutdowns. If unplanned shutdowns occur at Prairies refineries, product 40 shortages on the Prairies may result. Alternative sources of supply in these situations may 41 be limited.

1 Western Canada Refined Petroleum Products Market Description

2 Prairies refined products markets are small and isolated

3 Demand for gasoline and diesel is increasing

4 Figure 1, Prairie Provinces Light Refined Product Domestic Sales, presents historical refined 5 product demand from 2008 to 2013, in thousand barrels per day (“B/D”).1 The major light refined 6 products are motor gasoline, diesel fuel oil and aviation turbine fuel (referred to throughout this 7 report as gasoline, diesel and jet fuel, respectively).2

FIGURE 1 PRAIRIES LIGHT REFINED PRODUCT DOMESTIC SALES (Thousand Barrels per Day)

300 50 Motor Gasoline Diesel Fuel Oil Aviation Turbine Fuel (Right Scale) 250 40 200 30 150 20 100 10 50 Source: Statistics Canada, statistical series 45-004 0 0 Jan-08 Jul-08 Jan-09 Jul-09 Jan-10 Jul-10 Jan-11 Jul-11 Jan-12 Jul-12 Jan-13 8 9 1 Prairies Light Refined Product Domestic Sales 10 Demand for gasoline and diesel in the Prairie provinces is increasing. For gasoline, average 11 demand increased from 159,600 B/D in 2008 to 182,500 B/D in 20123 (the last full year of 12 data), a compound annual growth rate (“CAGR”) of 3.4 percent. For diesel, average demand 13 decreased from 177,400 B/D in 2008 to 164,800 B/D in 2009 due to the recession, but 14 rebounded strongly to reach 183,100 B/D in 2012. The observed increase is attributed to the 15 underlying growth in the economy, which increases the demand for transportation of goods, 16 commercial and industrial activity, as well as miles travelled by private vehicle owners. Demand 17 for jet fuel has been comparatively steady since 2008, and averaged 21,800 B/D in 2012.

18 To put the Prairies demand in context, IHS has compared the Prairies refined product demand 19 to the overall Western Canada demand. For gasoline, total Western Canada demand in 2012 20 was 264,100 B/D. The Prairies gasoline demand accounts for approximately 69 percent of total 21 Western Canada demand. For diesel, total Western Canada demand in 2012 was 247,900 B/D. 22 The Prairies diesel demand is approximately 74 percent of total Western Canada demand.

1 For this report, Western Canada is defined to include the provinces of Manitoba, Saskatchewan, Alberta and British Columbia, and the northern territories (Nunavut, Northwest Territories and the Yukon Territory). 2 Refer to Appendix A, Background and Overview of Refined Petroleum Products Markets, which summarizes the types of refined products, their end uses, and the basic infrastructure of the refining industry. 3 Source for all demand data is Statistics Canada, statistical series 45-004.

1 Demand for light products is seasonal

2 Light product demand in Western Canada is observed to have certain seasonal characteristics, as 3 described below:

4 • The most pronounced seasonal trend is a peak in gasoline demand during the middle 5 quarters of the year. This peak is associated with higher driving activity during the late 6 spring and early summer in North America. 7 • Diesel demand is subject to a number of seasonal influences. Agricultural activity in the 8 Prairie provinces creates an increase in demand during the spring and fall, for seeding and 9 harvesting activity, respectively. Strong demand for diesel in the winter months can be 10 attributed to resource extraction activity, since many facilities can only be accessed during 11 the winter. Demand may also be higher in the winter for heating in certain industrial sectors. 12 Another source of seasonal demand for diesel arises from the re-supply of product to 13 markets in the Canadian north, which typically occurs during the summer months. 14 • Jet fuel demand has seasonality that arises from changing patterns of travel activity 15 throughout the year. Demand for jet fuel in Western Canada is observed to have several 16 peaks during a typical year, including late winter, summer, and late fall.

17 Western Canada refined products markets in a North American context

18 In the North American context, Western Canada refined product markets are comparatively small. 19 Total refined products market demand in Western Canada accounted for less than 4 percent of 20 total North American refined products consumption in 2012, based on information provided by 21 Statistics Canada and the United States Energy Information Administration (“EIA”).4

22 To put Western Canada refined products market in perspective, it is informative to compare 23 demand in the region to adjacent regions of the United States, such as the Pacific North West 24 region of Petroleum Administration for Defense Districts (“PADD”) V, the northern portion of 25 PADD IV, and the Upper Midwest region of PADD II. Figure 2, Light Refined Product Demand 26 Comparison, compares light refined products demand in these regions. Light refined products 27 demand in Western Canada is slightly less than the demand in the Upper Midwest portion of 28 PADD II (comprising the four states of Minnesota, Wisconsin, North Dakota and South Dakota), 29 and slightly greater than the demand in the Pacific North West portion of PADD V (comprising the 30 two states of Washington and Oregon). The other adjacent region of interest in the United States is 31 the northern portion of PADD IV (comprising the two states of Idaho and Montana). Demand for 32 light refined products in Western Canada is significantly higher than demand in this region.

4 Total 2012 refined product demand in Western Canada and the territories was 41,028.0 thousand m3, or 705.1 thousand B/D (Statistics Canada 45-004, April 2013). From the same source, total demand in Canada was 105,289.1 thousand m3, or 1,809.5 thousand B/D. Total US refined product demand in 2012 was 16,161.0 thousand B/D (http://www.eia.gov/dnav/pet/pet_cons_psup_dc_nus_mbblpd_a.htm, accessed on February 14, 2014). In 2012, refined product demand in Western Canada and the territories therefore accounted for 3.9 percent of total North American refined product demand.

FIGURE 2 LIGHT REFINED PRODUCT DEMAND COMPARISON (Thousand Barrels per Day) Gasoline Diesel Jet Fuel 800 Upper Midwest Sources: Statistics Canada, statistical series 45-004 700 U.S. Energy Information Administration Western Canada (PADD II) 600 Pacific North West 500 (PADD V) 400 300 Northern PADD IV 200 100 0 1 2008 2009 2010 2011 2012 2008 2009 2010 2011 2012 2008 2009 2010 2011 2012 2008 2009 2010 2011 2012 2 2 Light Refined Product Demand Comparison 3 Western Canada is a very large geographical area. The previous demand comparison may be 4 extended, by taking into account the land area of each region. The resulting measure of demand 5 has been expressed in terms of annual consumption (in barrels) per square kilometre, or 6 barrels/km2. Based on 2012 domestic sales5 and land area6 statistics, Western Canada light 7 products consumption (including the northern territories) is approximately 29.5 barrels/km2. 8 Excluding the large and very lightly populated northern territories, consumption increases to 9 approximately 68.5 barrels/km2. This is much lower than either the Upper Midwest region of 10 PADD II (170.7 barrels/km2) or the Pacific North West region of PADD V (227.8 barrels/km2).7,8 11 Western Canada products consumption (excluding the territories) is most comparable to the 12 northern PADD IV region, at 55 barrels/km2.

13 The sparse nature of refined products markets in Western Canada is confirmed through a 14 comparison of distances between selected population centres. Table 1, Road Transportation 15 Distances, summarizes road transportation distances between several refining centres in the 16 northwest region of North America (Edmonton, Minneapolis, Billings and Anacortes) and selected 17 large Western Canada markets, including Winnipeg, Regina, Calgary and Vancouver. Edmonton is 18 the main refining centre in Western Canada, and it is pipeline connected to the major product 19 markets in the region. Other potential supply sources for cities in Western Canada are not pipeline 20 connected.

5 Statistics Canada, statistical series 45-004. 6 http://www.statcan.gc.ca/pub/11-402-x/2012000/chap/geo/tbl/tbl06-eng.htm, accessed on February 2, 2014. 7 http://www.eia.gov/dnav/pet/pet_cons_prim_dcu_SOR_a.htm, accessed on February 2, 2014. 8 http://nationalatlas.gov/articles/mapping/a_general.html#one, accessed on February 2, 2014.

TABLE 1 ROAD TRANSPORTATION DISTANCES (1) Road Distance Pipeline Source Destination (km) Connected? Edmonton, AB Winnipeg 1,315 Yes Regina 780 Yes Vancouver 1,160 Yes Calgary 300 Yes Minneapolis, MN Winnipeg 715 No Regina 1,200 No Calgary 1,915 No Billings, MT Regina 765 No Calgary 870 No Vancouver (2) 1,530 No Anacortes, WA Vancouver (2) 150 No Calgary 1,010 No Note: (1) Source: Mapquest. Distance rounded to nearest 5 km. Note: (2) Illustrative, since Vancouver has access to waterborne supplies of product. 1 2 1 Road Transportation Distances in Western Canada 3 For this comparison, it is relevant to consider the distances between locations which include 4 refining facilities or have access to alternative sources of refined product. Distance from alternative 5 supply sources is an indicator of potential supply constraints in the situation that refineries in 6 Western Canada are unable to meet regional demand, and are required to seek alternative 7 supplies from other markets.

8 The transportation of refined products by different modes is subject to economic constraints. The 9 practical limit for road transportation of refined products is typically between 200-300 kilometres, 10 and is certainly less than the practical limit for rail transportation. It will generally be uneconomic for 11 fuel suppliers in the Prairies to rely on external trade to source product supplies. However, if 12 external product supply is required to serve Prairies markets, it is likely to be transported into the 13 region by rail rather than by truck.

1 The refined product supply/demand balance in Western Canada is tight

2 Western Canada refined product markets (comprising the Prairies, British Columbia and the 3 territories) are generally tightly balanced, as indicated by the requirements for trade between 4 regions in Canada and internationally. The Western Canada balances for gasoline, jet fuel and 5 diesel for the period 2008 through 2013 are presented in Figures 3, 4 and 5, respectively, and 6 briefly summarized below.9

7 Gasoline, jet fuel and diesel supply/demand balances

8 Figure 3, Western Canada Gasoline Supply Balance, demonstrates that Western Canada gasoline 9 demand is met mainly by regional refinery production. For much of the time since 2008, a small 10 volume of imports has been required, at least on a seasonal basis. Imports have been minimal 11 since 2011. There are limited transfers between Western Canada and other regions in Canada, 12 although a small amount of transfers out of the region has been observed since early 2012. This is 13 assumed to be a result of the expansion of the Federated Co-operatives Limited (“FCL”) refinery in 14 Regina. Other components of the balance, including net receipts from non-reporting companies, 15 have increased since 2011. This is assumed to be ethanol, which is blended into gasoline to meet 16 oxygenate mandates.

17 Figure 4, Western Canada Jet Fuel Supply Balance, shows that Western Canada jet fuel demand 18 is balanced by regional refinery production and imports. The average volume of imports has 19 remained relatively stable since 2008, at about 20,000 B/D. IHS notes that imports of jet fuel are 20 received into British Columbia, rather than the Prairie provinces. Interregional transfers of jet fuel to 21 other regions of Canada are small and infrequent.

22 Diesel demand in Western Canada, presented in Figure 5, Western Canada Diesel Supply 23 Balance, is closely matched by regional production, which comes from refineries and upgraders. 24 Trade of diesel generally balances to small net exports, although there have been several periods 25 when imports were significant (2008 and 2011). A small volume of diesel is transferred to other 26 regions, and this is believed to be supply of diesel from Manitoba into northern Ontario. These 27 volumes have increased since 2012, but remain relatively small. Other components of the balance, 28 which include receipts from other reporting companies, have generally been around 20,000 B/D.

9 Source for all product balance data is Statistics Canada, statistical series 45-004.

FIGURE 3 WESTERN CANADA GASOLINE SUPPLY BALANCE (Thousand Barrels per Day) 400 Domestic Sales Source: Statistics Canada, statistical series 45-004 300

200

100

0 Production Net Imports/(Exports) Net Transfers In/(Out) Other -155 -100 Jan-08 Jul-08 Jan-09 Jul-09 Jan-10 Jul-10 Jan-11 Jul-11 Jan-12 Jul-12 Jan-13 1 2 3 Western Canada Gasoline Supply Balance FIGURE 4 WESTERN CANADA JET FUEL SUPPLY BALANCE (Thousand Barrels per Day) 400 Source: Statistics Canada, statistical series 45-004 300

200 Domestic Sales 100

0 Production Net Imports/(Exports) Net Transfers In/(Out) Other -100 Jan-08 Jul-08 Jan-09 Jul-09 Jan-10 Jul-10 Jan-11 Jul-11 Jan-12 Jul-12 Jan-13 3 4 4 Western Canada Jet Fuel Supply Balance FIGURE 5 WESTERN CANADA DIESEL SUPPLY BALANCE (Thousand Barrels per Day) 400 Domestic Sales Source: Statistics Canada, statistical series 45-004 300

200

100

0 Production Net Imports/(Exports) Net Transfers In/(Out) Other -100 Jan-08 Jul-08 Jan-09 Jul-09 Jan-10 Jul-10 Jan-11 Jul-11 Jan-12 Jul-12 Jan-13 5 6 5 Western Canada Diesel Supply Balance 7

1 Figure 6, Western Canada Net Products Trade, summarizes net products trade for Western 2 Canada. As noted above, gasoline markets have generally balanced to imports, which occur mainly 3 during periods of high seasonal demand. Jet fuel imports have historically been required to balance 4 the market, and the volume of imports has been relatively stable. Diesel markets have generally 5 balanced to exports, but imports were required in 2008 and again in 2011.

FIGURE 6 WESTERN CANADA NET PRODUCTS TRADE (Thousand Barrels per Day) 175 150 125 Gasoline Jet Fuel Diesel 100 Imports 75 50 25 0 -25 -50 Source: Statistics Canada, statistical series 45-004 Exports -75 Jan-08 Jul-08 Jan-09 Jul-09 Jan-10 Jul-10 Jan-11 Jul-11 Jan-12 Jul-12 Jan-13 6 7 6 Western Canada Net Products Trade

8 Inventory management for refined products

9 Fuel suppliers seek to optimize their use of refined product inventory, which is typically held at 10 refineries and primary terminals. Fuel inventory must be high enough to adequately meet the needs 11 of supplying the market, but not be so high as to result in excessive holding costs. Inventory 12 holding costs include terminal fixed and variable operating costs, as well as working capital costs 13 for product storage. Commodity price risk in a higher priced and volatile market is also an issue, 14 which can result in hedging costs being incurred to protect against price swings.

15 Refining and terminal facilities have been rationalized across Western Canada over the last several 16 decades. As a result, the total inventory of products has decreased. Over the same period, demand 17 for the major refined products has increased, as the regional economy has expanded. These 18 coincident trends have resulted in lower inventory coverage ratios for the forward month’s 19 demand.10 Figure 7, Western Canada Refined Product Inventory Coverage, presents the days of 20 gasoline and diesel inventory coverage in Western Canada since 1990. The trend of declining 21 inventory coverage will be apparent for both products. Based on information from Statistics 22 Canada,11 inventory coverage for gasoline has dropped from about 44 days in 1990 to 24 days in 23 2012. For diesel, the trend in inventory coverage has been similar. The inventory coverage for 24 diesel has dropped from about 43 days in 1990 to 24 days in 2012.

10 Coverage ratios for inventory are typically expressed by days of inventory, estimated by the opening product inventory in a given period, divided by the product demand for that period. 11 Statistics Canada, statistical series 45-004.

FIGURE 7 WESTERN CANADA REFINED PRODUCT INVENTORY COVERAGE (Days)

60 Motor Gasoline 50 Diesel Fuel Oil 40 30 20 Average Days: 1990 2012 Motor Gasoline 44 24 10 Source: Statisctics Canada, statistical series 45-004 Diesel Fuel Oil 43 24 0 Jan-90 Jan-92 Jan-94 Jan-96 Jan-98 Jan-00 Jan-02 Jan-04 Jan-06 Jan-08 Jan-10 Jan-12 1 2 7 Western Canada Refined Product Inventory Coverage 3 The Alberta Economic Development Authority (“AEDA”) recommended in 2011 that the Alberta 4 Government work with oil industry bulk fuel suppliers to increase target operating inventories of 5 transportation fuels to 30 days for gasoline and diesel.12 Regional product inventories, while below 6 the level recommended by AEDA, appear to have not significantly changed since 2006.

7 Prairies refined products market supply is mainly from the Prairies refineries

8 The Canadian downstream petroleum industry may be segregated into three distinct regions: 9 Western Canada, Ontario and Quebec/Atlantic Canada. Each of these regions relies to a different 10 extent on production within the region. The balances in the previous section show relatively small 11 transfers of product between Western Canada and other regions. This is due to geographical and 12 logistical constraints, which limit the amount of product that can economically be exchanged 13 between Manitoba (Western Canada) and northern Ontario. It has also created a high dependence 14 on refinery production from within the Western Canada region.

15 Refining capacity in Western Canada is concentrated on the Prairies

16 The downstream petroleum industry in Western Canada has undergone significant rationalization 17 of capacity over the last several decades. IHS estimates that between 1990 to 2014, approximately 18 146,100 B/D of refining capacity in seven Western Canadian refineries has been rationalized.13 19 Much of this capacity was located on the West Coast of British Columbia. The last refinery to close 20 in Western Canada was the Parkland Refinery in Bowden, AB, which ceased operation in 2001.

21 The rationalized refineries in Western Canada over the last several decades include a number of 22 small, moderate conversion facilities. In general, low utilization and more stringent product 23 specifications contributed to the decisions by these refiners to close their facilities. This trend is 24 consistent with what has been observed by IHS in other markets.

12 Alberta Economic Development Authority, “Fuel shortages in Alberta and how to fix them”, June 2011. 13 This figure is based on Oil & Gas Journal annual refining surveys for the indicated period.

1 Over the last several decades, while capacity in British Columbia has been reduced, refineries in 2 Alberta and Saskatchewan have undergone capacity expansions and conversion projects. 3 Following is a summary of major refinery projects in the region:

4 • The Suncor Edmonton refinery was modified in 2008 (to process proportionately more 5 crude from its oil sands operations), and simultaneously expanded to its current capacity of 6 142,000 B/D 7 • The FCL refinery in Regina was expanded in 2003 to 100,000 B/D, and again in 2012 to its 8 current capacity of 130,000 B/D 9 The overall result of capacity rationalization and addition in Western Canada has been small net 10 additions to capacity on an annual basis since the mid-1990’s, after a period of rationalization in the 11 early 1990’s. This is summarized in Figure 8, Refinery Capacity by Province.14 The figure confirms 12 the concentration of refining capacity on the Prairies, accounting for approximately 90 percent of 13 the total Western Canada refining capacity in 2014. Note that there are no refineries currently 14 operating in Manitoba or the territories. Refer to Appendix B, Western Canada Downstream 15 Petroleum Industry Description, which summarizes the regional refining industry participants, and 16 the capacity of individual refineries.

FIGURE 8 REFINERY CAPACITY BY PROVINCE (Thousand Barrels per Day)

700 Alberta British Columbia Saskatchewan/NWT 600

500

400

300

200

100 Sources: Oil & Gas Journal annual refining surveys and company reports

0 17 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 18 8 Refinery Capacity by Province

19 Prairies products demand is met by Prairies refineries

20 Much of the refined product demand in Western Canada is in landlocked markets. Infrastructure is 21 oriented to deliver crude oil outward from points of production in Alberta and Saskatchewan. 22 Refineries in Western Canada are situated to take advantage of favourable access to crude 23 supplies.

24 The concentration of refining capacity in the Edmonton area and the orientation of pipeline 25 infrastructure from Alberta to eastbound and westbound markets create unique challenges to 26 manage refined products supply. The downstream petroleum industry in the Prairie provinces has

14 Source: Oil & Gas Journal, annual refining surveys and company reports.

1 limited access to supplies originating in other regions of North America, and there are no pipelines 2 that transport refined products into the Prairie provinces. As a result, the Prairies refineries have an 3 essential role in the overall products balance for Western Canada.

4 As shown in Figure 9, Prairies Refinery Production as Percentage of Demand, product demand on 5 the Prairies is mainly met by production from Prairies refineries. IHS estimates that for the period 6 2008 to 2012, gasoline and diesel production from Prairies refineries exceeded the demand on the 7 Prairies. Jet fuel production on the Prairies has tended to match the Prairies demand for this 8 product fairly closely.

FIGURE 9 PRAIRIES REFINERY PRODUCTION AS PERCENTAGE OF DEMAND (Percent) Gasoline Diesel Jet Fuel 130% Source: Statistics Canada, statistical series 45-004, IHS Estimates 120% 110% 100% 90% 80% 70% 60% 50% 2008 2009 2010 2011 2012 9 10 9 Prairies Refinery Production as Percentage of Demand 11 In contrast to the Prairies, British Columbia has coastal access to imported product, in addition to 12 product supplied from refineries in the province and from the Prairies by pipeline via Trans 13 Mountain. As a practical matter, product supply issues on the Prairies are managed by adjusting 14 pipeline transfers from Alberta to British Columbia. Imported supplies on the West Coast allow the 15 British Columbia market to be balanced.

16 Refinery rationalization has left a small capacity margin

17 The trend of facility rationalization in Western Canada has led to a much tighter refined product 18 market. Production capacity in the region has generally been highly utilized, which exacerbates the 19 potential for refinery shutdowns to impact supply in end-use markets. As refined product demand 20 has increased in the region, there has been a steady increase in refinery utilization. Figure 10, 21 Refinery Utilization – Western Canada, illustrates the trend of increasing regional refinery runs 22 (crude intake) and utilization on a monthly basis since 2008. Significant monthly variations are 23 observed due to refinery shutdowns, both planned and unplanned.

FIGURE 10 REFINERY UTILIZATION - WESTERN CANADA

Crude Runs and Spare Capacity, MB/D Utilization, Percent 800 110% Crude Runs Spare Capacity % Utilization StatsCan NEB 700 100% 600 90% 500 400 80% 300 70% 200 60% 100 Sources: Oil & Gas Journal annual refining surveys and company reports; Statistics Canada statistical series 45-004 and NEB Crude Run Report 0 50% 1 Jan-08 Jul-08 Jan-09 Jul-09 Jan-10 Jul-10 Jan-11 Jul-11 Jan-12 Jul-12 Jan-13 Jul-13 2 10 Refinery Utilization – Western Canada 3 Figure 11, Regional Refinery Utilization Comparison, presents crude runs, spare capacity and 4 refinery utilization for Western Canada and Ontario, for the period from 2008 to 2013. Crude runs in 5 Western Canada rebounded in 2010, after the recession of 2008-09. Runs decreased slightly in 6 2011, but have moved higher in each of the last two years. In 2013, crude runs were approximately 7 609,000 B/D, spare capacity was approximately 26,000 B/D, and refinery utilization was close to 96 8 percent. In practical terms, the Western Canada refining industry is operating close to its capacity. 9 In IHS’ view, 95 percent utilization is the maximum sustainable utilization rate for refineries. By 10 contrast, the Ontario refining industry is operating with more spare capacity, and lower overall 11 utilization. In 2013, crude runs in Ontario were approximately 374,000 B/D, spare capacity was 12 approximately 94,000 B/D, and refinery utilization was close to 80 percent.

FIGURE 11 REGIONAL REFINERY UTILIZATION COMPARISON Crude Runs and Spare Capacity, MB/D Utilization, Percent 1,000 100% Crude Runs 800 Spare Capacity 90% Western Canada % Utilization 600 Ontario 80%

400 70%

200 60%

0 50% 2008 2009 2010 2011 2012 2013 2008 2009 2010 2011 2012 2013 (April YTD) (April YTD) 13 Sources: Oil & Gas Journal annual refining surveys, company reports and Statistics Canada statistical series 45-004 14 11 Regional Refinery Utilization Comparison

15 Refineries have unique configurations owing to oil sands integration

16 Several refineries in the Prairies, including the larger refineries in Alberta and Saskatchewan, have 17 been designed or modified to allow processing of a high concentration of oil sands crude in the 18 refinery feed slate. These facilities have unique configurations, which are consistent with the

1 requirements of processing specific qualities of oil sands crudes, whether bitumen blend, partially 2 upgraded bitumen or synthetic crude oil (“SCO”). In comparison to a refinery which can process a 3 wide range of conventional crudes, the options for crude substitution are more limited if the sole 4 source of crude supply is an upgrader producing SCO of a specific quality.

5 In addition, much of the refining capacity in the Prairies processes equity crude oil, and much of the 6 equity production is of unique quality originating from oil sands operations. It may not be 7 economically feasible (or even possible) to substitute other crudes (conventional or synthetic) in 8 these facilities. Taken together, these facts suggest that products market supply may be 9 particularly vulnerable to unplanned shutdowns of upgraders or refineries in the Prairies.

10 Oil sands integration may pose specific constraints which limit the operating flexibility of a refinery, 11 particularly if the refinery is designed for a particular grade of crude oil. If alternative sources of 12 bitumen blend or SCO can be sourced and processed, there may be an impact on the refinery yield 13 profile, which could ultimately affect the blend of products available for the market. Depending on 14 the seasonal demand situation, and the operating status of other refineries in the region, the ability 15 to transfer or trade products with other suppliers may also be limited.

16 Refined products supply on the Prairies depends upon pipeline logistics

17 Western Canada is uniquely dependent on refined products pipeline infrastructure. Refined 18 products supply on the Prairies depends upon pipeline logistics originating in Edmonton. Table 4 in 19 Appendix B summarizes the refined products pipelines in Western Canada, which include Enbridge 20 Line 1 (Edmonton, AB to Superior, WI), Trans Mountain (Edmonton to Kamloops and Vancouver) 21 and the Alberta Products Pipeline, or APPL (Edmonton to Calgary, AB).

22 Products pipelines are operating at high utilization

23 The ability of Western Canada industry players to respond to changes in product supply or 24 demand may be made more challenging by their dependence on pipeline transfers to balance 25 the market and by high overall utilization of products pipelines. Batched pipelines generally have 26 a coordinated batching sequence, fixed batch sizes and more or less fixed transit times. These 27 operating constraints may limit the ability of fuel suppliers to respond to short term product 28 balance disruptions, which may occur due to weather or other unforeseen market events.

29 While short term supply disruptions are managed by coordinated scheduling efforts between 30 shippers and pipeline companies, longer term production problems at the Edmonton refineries 31 have the potential to affect supply across the whole region, given the limited alternatives which 32 exist for product supply and the time required to implement such arrangements. Issues may 33 arise due to unplanned shutdowns or unforeseen delays in refineries returning from planned 34 maintenance.

35 It is understood that the major products pipelines originating in Edmonton are operating at high 36 utilization. In practical terms, this means that alternative (higher cost) transportation modes may be 37 used to provide the marginal product supply. For example, product may be trucked from Edmonton 38 to Calgary, given the capacity limitations on the APPL system.

1 Trans Mountain deliveries are essential in balancing Prairies demand

2 In the event of a supply shortage in the Prairie provinces, Alberta refineries attempt to first balance 3 market demand by holding product on the Prairies rather than shipping it to Vancouver. The West 4 Coast is the only practical import location for refined products in Western Canada. By importing 5 product into Vancouver, Edmonton production can be retained on the Prairies and made available 6 for consumption in the Prairie provinces.

7 British Columbia is an integral part of the products market for the Edmonton refiners. Between 8 2008 and 2012, IHS estimates that Edmonton refineries have provided about 40 percent of 9 gasoline requirements and about 55 percent of diesel requirements in the British Columbia market. 10 The rest of the British Columbia market is supplied either by the refineries in the province or by 11 imported product.

12 Trans Mountain deliveries are essential in balancing Prairies demand. When refined products are 13 needed on the Prairies, they stay on the Prairies. When product is not needed on the Prairies, it is 14 shipped on Trans Mountain. There are many situations that could arise on the Prairies that result in 15 changes to Trans Mountain product deliveries. Refining shutdowns are most likely to result in 16 reductions to Trans Mountain deliveries of refined products to British Columbia. If shutdowns are 17 unplanned, changes in refined products deliveries cannot be predicted accurately in advance.

18 Exchange agreements are used by fuel suppliers to address product imbalances

19 Refineries on the Prairies rely on exchange agreements with other suppliers to secure wholesale 20 product for their market requirements, either in locations where they do not have refining or 21 terminal facilities, or at times when their own production is unavailable due to a refinery shutdown. 22 Such agreements are routinely employed to reduce the logistical costs that would be required for a 23 refiner to supply product from its own refinery to its end use markets, if those markets are 24 geographically distant. This type of commercial arrangement is beneficial in reducing logistical 25 costs for the companies involved. Natural Resources Canada notes that, “[product exchange] 26 agreements have not only allowed the industry to consolidate their operations at the refinery level 27 but have also led to a consolidation of local product terminals.”15

28 Through prior industry experience gained in an operational planning role for one of the Prairies 29 refineries, the author is aware that the Prairies refining companies extend mutual support to each 30 other at the wholesale network level. This support takes the form of time or location exchanges for 31 unbranded products. In practice, this support acts as an essential part of the market balancing 32 mechanism on the Prairies, given the relative isolation of this region from other supply sources. 33 These exchanges provide a viable mechanism for fuel suppliers to manage inventory issues arising 34 from planned or unplanned shutdowns, minimizing the overall cost of supplies on the Prairies. 35 Exchange agreements are also used by fuel suppliers in other parts of Canada and throughout the 36 United States, to provide efficient and cost effective product supply.

15 https://www.nrcan.gc.ca/energy/infrastructure/5897, Natural Resources Canada, “Petroleum Products Distribution Networks”, accessed April 2, 2014.

1 Unplanned shutdowns have led to product shortages on the Prairies

2 Refineries and upgraders are highly complex facilities, which require correspondingly complex 3 maintenance programs. In IHS’ opinion, the owners of the refineries and upgraders in Western 4 Canada follow good industry practice in maintenance management and equipment reliability 5 processes. This is demonstrated by their sustained high utilization, which is shown in Figure 11. 6 Maintenance programs require significant effort that must balance many competing considerations, 7 including seasonal product demand trends, mandated equipment inspections and availability of 8 skilled labour. In the Prairie provinces, climate is also an important factor that influences decisions 9 relating to scheduling of maintenance activity.

10 Relatively narrow windows exist in the spring and autumn where planned shutdowns can be 11 efficiently executed. Shutdowns are not normally planned for the high demand period during the 12 summer months. In an article discussing the September 2013 shutdown at the Shell Scotford 13 refinery in Fort Saskatchewan, AB, it was noted that, “while the three refineries in the region could 14 never all do a turnaround at once, they are also not allowed to discuss the dates with each other. 15 But since all three will buy from each other to supply their customers during a turnaround, the 16 advance orders are a pretty good indicator of timing”.16

17 Table 2, Western Canada Refinery Shutdowns, summarizes available information about planned 18 and unplanned shutdown for refineries and upgraders between 2008 and 2013. It is noted that not 19 all shutdowns will have material impact on refinery production. Nevertheless, it should be clear that 20 management of shutdown activity is of crucial importance for individual facilities and for the industry 21 as a whole.

16 http://www2.canada.com/edmontonjournal/news/business/story.html?id=e4962b1f-15e7-415e-99ac- 0fe169dd4c03&p=2, “Turnaround will keep Shell refinery purring”, accessed February 5, 2014.

TABLE 2 WESTERN CANADA REFINERY SHUTDOWNS (PLANNED/UNPLANNED) (1) 2008 2009 2010 Province Company Location J F M A M J J A S O N D J F M A M J J A S O N D J F M A M J J A S O N D

SK Consumers' Co-op Refineries Ltd. (CCRL) Regina Moose Jaw Refinery Moose Jaw

AB Suncor Oil Sands Group Ft. McMurray Syncrude Canada Ltd. Ft. McMurray Canadian Natural Resources Ltd. (CNRL) Ft. McMurray Shell Canada Ltd. Scotford Imperial Oil Ltd. Strathcona Suncor Energy Inc./ Petro-Canada Edmonton Husky Energy Lloydminster

BC Chevron Canada Ltd. North Burnaby Husky Energy Prince George 2011 2012 2013 J F M A M J J A S O N D J F M A M J J A S O N D J F M A M J J A S O N D

SK Consumers' Co-op Refineries Ltd. (CCRL) Regina Moose Jaw Refinery Moose Jaw

BC Chevron Canada Ltd. North Burnaby Husky Energy Prince George

Note: (1) Colour indicates type of shutdown: Planned Unplanned 1 Note: (2) Source: CAPP Crude Oil Reports, Company reports 2 2 Western Canada Refinery Shutdowns (Planned/Unplanned) 3 Planned shutdowns are scheduled to comply with the constraints noted above. Of course, 4 unplanned shutdowns can occur at any time, or planned shutdowns can be extended for a number 5 of reasons. Either of these situations can exacerbate the challenges associated with managing 6 maintenance resources and product supplies.

7 Following are several examples from the 2008 to 2014 period, highlighting specific refinery and 8 upgrader shutdowns, as well as the response by product suppliers to mitigate supply shortages:

9 • A fire and explosion at the FCL refinery in Regina in December 2013 reduced the 10 processing capacity of the refinery. The company secured alternative supplies, and as a 11 result: “FCL does not expect any shortages or restrictions to gasoline or diesel sales at 12 retail co-operatives across Western Canada”.17 13 • In May 2013, a maintenance issue at the Suncor Edmonton refinery affected supply to 14 certain Petro-Canada stations across the Prairies. Suncor noted that while it was 15 performing planned refinery maintenance, “during routine inspections of equipment 16 additional work was identified that was not in the original scope.”18 Suncor responded to the

17 http://www.leaderpost.com/Refinery+Complex+increases+production/9400185/story.html \, “Co-op Refinery Complex increases production by 50%”, accessed February 13, 2014. 18 http://www.pumptalk.ca/2013/05/additional-work-identified-during-edmontons-turnaround-impacts-gasoline- supply.html , “Additional Work Identified During Edmonton’s Turnaround Impacts Gasoline Supply”, accessed February 3, 2014.

1 supply disruption by “bringing in extra fuel by train and trucks and is also sourcing gasoline 2 through third parties.” 19 3 • In the spring of 2013, refinery shutdown activity at several refineries affected the supply of 4 diesel fuel. Suncor Edmonton, Imperial Oil Strathcona and FCL Regina were all undergoing 5 planned maintenance activities within a short period of time. A spokesman for FCL noted, 6 “We've done what we can to ensure the flow of diesel is there when our customers need it.” 7 Refinery and bulk plant tanks across Saskatchewan were filled ahead of scheduled refinery 8 maintenance.20 9 • A series of unplanned shutdowns at the Suncor Edmonton refinery in the summer of 2009 10 affected product supplies. A company spokeswoman noted, “Suncor has been bringing in 11 supplies by rail from Montreal and by truck from other distribution centres since the July 18 12 shutdown and will continue to do so”.21 13 • When a Shell Scotford refinery maintenance shutdown took longer than expected in 14 October 2009, some of the company’s retail stations ran out of gasoline. The company 15 implemented a rationing program for its stations until the refinery was restarted. At the time, 16 a Shell spokesman noted, “the company assures customers it is working "feverishly" to get 17 the refinery back online.” 22 18 • In October 2008, a scheduled turnaround at the Petro-Canada Edmonton refinery and an 19 unscheduled maintenance shutdown at the Imperial Oil Strathcona refinery impacted supply 20 of diesel on the Prairies. Alternative supplies were arranged from outside the region, 21 involving use of truck and rail transportation. UFA, a large farm co-operative, took action to 22 arrange alternative supplies: “In order to combat shortages at the pump UFA has been 23 importing diesel from the mid western United States via railcars.”23

24 While it is common for fuel suppliers on the Prairies to arrange for alternative supply of product 25 from other suppliers during planned shutdowns, unplanned shutdowns can and do occur. When 26 they occur, the geographic isolation of Prairies markets complicates the process of balancing 27 supply to demand. If the supply balance requires alternative supplies to be brought in by truck or 28 rail, such arrangements can be difficult and uneconomic, given the distances involved.

19 http://edmonton.ctvnews.ca/petro-canada-stations-running-out-of-gas-as-repairs-underway-at-edmonton- refinery-1.1264209 , “Petro-Canada stations running out of gas as repairs underway at Edmonton refinery”, accessed February 3, 2014. 20 http://www.cbc.ca/news/canada/saskatoon/diesel-shortage-looms-sask-retailers-say-1.1377065, “Diesel shortage looms, Sask. retailers say”, accessed February 4, 2014. 21 http://www2.canada.com/edmontonjournal/news/business/story.html?id=1adffd7d-2978-46c3-90aa- b78268ae1232, “Refinery back up within ‘days’”, accessed Feb 6, 2013. 22 http://www.edmontonsun.com/news/edmonton/2009/10/21/11471126-sun.html, “Shell running out of gas”, accessed February 3, 2014. 23 http://www.draytonvalleywesternreview.com/2008/10/14/refinery-shutdowns-limit-diesel-supply , “Refinery shutdowns limit diesel supply”, accessed February 3, 2014.

1 Appendix A: Background and Overview of Refined Petroleum 2 Products Markets

3 The following background and definitions are provided in support of the IHS evidence:

4 Refined petroleum products

5 Refined petroleum products are a group of liquid hydrocarbons that are consumed in a wide variety 6 of end-use activities and across many economic sectors. The light refined petroleum products, and 7 the focus of this report, are transportation fuels (gasoline, jet fuel and diesel fuels), and heating oils 8 (kerosene and diesel fuels). Other refined products include heavy fuel oils (“HFO”), lubricants, 9 asphalt, and other non-energy products. All of these products are produced from the refining 10 process, which generically describes the technological steps associated with the conversion of 11 unprocessed crude oil into useful end products.

12 End uses for refined petroleum products

13 Refined petroleum products have a wide range of end uses, and are consumed in a many activities 14 where the energy content of the fuels is converted into useful work. The main consuming activities 15 include transportation, industrial, residential/commercial and energy transformation.

16 Supply sources for refined petroleum products

17 One of the characteristics of the major refined petroleum products is that they are readily 18 transportable as liquids. This desirable characteristic allows market participants to readily ship 19 refined petroleum products from their point of production to other facilities where they may be 20 stored, exchanged or sold. In a similar manner, market participants may obtain refined petroleum 21 products from different sources at various points in the supply chain to meet their market 22 obligations. Although the traditional source of refined petroleum products in end-use markets are 23 petroleum crude oils, it is also possible to substitute other hydrocarbons, including renewable 24 hydrocarbons such as ethanol or biodiesel.

25 Infrastructure

26 The logistical infrastructure that comprises the downstream petroleum industry consists of refining 27 and distribution facilities. The petroleum supply chain, which includes manufacturing, 28 transportation, storage and sale of refined petroleum products, is generally summarized in terms of 29 the following key elements:

30 Refineries

31 Refineries are an essential component of the petroleum value chain that manufactures refined 32 products for end-use consumers. Refineries are industrial complexes that convert crude oil into 33 refined petroleum products. All refineries are unique in terms of their size, configuration and 34 processing capabilities. Regardless of configuration, refineries are likely to have some similarities 35 in basic functionality. However, some refineries are more technologically complex than others.

1 All refineries are unique in terms of their configuration and processing capabilities. Regardless of 2 configuration, distillation is an essential unit operation in petroleum refining. Distillation is a process 3 of fractionation of a crude oil into constituent fractions, or cuts, which may be further processed in 4 subsequent unit operations or blended to produce finished products.

5 Several refinery configurations are defined as follows:

6 • Cracking refineries may process a range of different conventional or synthetic crude oil 7 (“SCO”) or other feedstocks. The mix of crude oil and feedstocks will depend upon 8 conversion capacity relative to crude distillation capacity, market demand, crude oil 9 availability, and other factors. 10 • Coking refineries are more complex than cracking refineries, since the heaviest crude oil 11 fraction (vacuum residue) is processed in a coker to produce light product blending 12 components and byproduct coke. 13 • Hydroskimming and topping refineries are less complex than cracking refineries. These 14 facilities do not have vacuum gas oil (“VGO”) conversion capacity.

15 Terminals

16 Terminals act as storage and distribution facilities for refined petroleum products. Often, terminals 17 receive petroleum products from a refinery by either pipeline or ship. Storage tanks serve as break- 18 bulk facilities, in that they hold products in inventory, prior to further distribution directly to end-use 19 customers or onto trucks, ships, or rail cars for subsequent delivery to other consumers. Two types 20 of facilities are normally defined for this purpose:

21 • Primary terminals, which handle larger volumes, and are typically the first point of inventory 22 after the refinery; and 23 • Bulk plants, which handle smaller volumes, and normally receive products by way of a 24 primary terminal, rather than a refinery

25 Pipelines

26 Pipelines are an efficient means of transporting large quantities of refined petroleum products over 27 a long distance. Pipelines range in size (diameter), capacity and length, and may transport a range 28 of products. Pipelines are often used as the principal logistical links between refineries and major 29 distribution terminals that receive and store products prior to onward distribution to consumers.

30 Other Transportation Modes

31 Marine transportation is often used in areas which are not served by pipeline due to geographical 32 constraints, volumes of transport, or other factors.

33 Other transportation modes (rail, truck) are commonly used to transport refined products, with the 34 specific mode that is used being an economic decision based on distance, scheduling 35 considerations and other factors.

1 Appendix B: Western Canada Downstream Petroleum Industry 2 Description

3 The Western Canadian downstream petroleum industry includes refineries and associated 4 distribution facilities between the refineries and end-use markets. Each segment of the industry is 5 described further, below.

6 Industry Participants

7 The downstream petroleum industry in Western Canada is dominated by integrated companies, 8 which have upstream operations (production) and downstream operations (refining, distribution, 9 marketing). Integration may also refer to the extent of participation across the breadth of 10 downstream operations. The major integrated companies operating in Western Canada include 11 Imperial Oil, Suncor, Shell, Husky and Chevron.

12 Regional companies with refining operations in Western Canada include Gibson Energy and 13 Federated Co-operatives Limited (“FCL”). These companies are active in the refining sector, and 14 each has wholesale marketing businesses. They do not have upstream production operations.

15 The downstream industry sector also includes a number of companies that participate as marketers 16 of refined products. In this capacity, they rely on refineries or imports for supply. Marketers may be 17 branded (meaning that they are aligned with a refiner through a commercial arrangement, but 18 operate as independent businesses) or unbranded (meaning that they purchase products from one 19 or more suppliers).

20 Refineries

21 Western Canada refineries are summarized in Table 3, by province. There are eight refineries 22 operating in British Columbia, Alberta and Saskatchewan. There are no refineries currently 23 operating in Manitoba or the northern Territories. The main refining centre in Western Canada is in 24 the vicinity of Edmonton, where there are three large refineries, owned and operated by Imperial 25 Oil, Suncor and Shell Canada.

TABLE 3 WESTERN CANADA REFINERY CAPACITY AND CONFIGURATION (1) Crude Capacity Facility Configuration (2) (B/D) Alberta Shell Canada Scotford Cracking 100,000 Imperial Oil Strathcona Cracking 189,000 Suncor Edmonton Coking 142,000 Husky Lloydminster Topping 25,000 Total Alberta 456,000 British Columbia Chevron Burnaby Coking 55,000 Husky Energy Prince George Cracking 10,250 Total British Columbia 65,250 Saskatchewan Federated Co-op Regina Coking 145,000 Gibson Energy Moose Jaw (3) Topping 17,000 Total Saskatchewan 162,000 Total Western Canada 683,250 Note: (1) Source: Oil & Gas Journal, "2014 Worldwide Refining Survey", Note: (2) December 2, 2013, unless noted. Note: (2) Source: IHS analysis. 1 Note: (3) Capacity is from company reports. 2 3 Western Canada Refinery Capacity and Configuration 3 Total refining capacity in Western Canada, based on atmospheric distillation capacity, is 4 683,250 B/D. This capacity is based on the 2013 Oil & Gas Journal Refining Survey24 and 5 company information (where the Oil & Gas Journal Refining Survey provides no information for the 6 refinery in question). The refining capacity is highest in Alberta, at 456,000 B/D, due to the 7 concentration of facilities around Edmonton.

8 Two refineries in Western Canada have residue conversion (coking) capacity, the 142,000 B/D 9 Suncor Edmonton refinery and the 145,000 B/D FCL refinery in Regina, SK.25 These refineries 10 therefore have greater capability to process heavy crude and bitumen blends, which contain a 11 higher proportion of heavy residue. There are also two simpler refineries in Western Canada: the 12 17,000 B/D Gibson Moose Jaw refinery, and the 25,000 B/D Husky Lloydminster refinery. Both of 13 these refineries are oriented to asphalt manufacturing.

14 Terminals

15 Western Canada refining companies operate primary distribution terminals, which are capable of 16 handling large volumes of production received directly from the refinery. These facilities are 17 typically located close to the refinery, and are pipeline connected to it.

18 Distribution terminals are located across Western Canada. An inventory of downstream logistics 19 facilities prepared in 2007 by MJ Ervin identified 32 primary distribution terminals in Western 20 Canada.26 These terminals have pipeline or marine connections to provide inventory capacity at 21 appropriate points in the distribution network. For example, distribution terminals are located in 22 Winnipeg (to take product delivery from the Enbridge mainline system at Gretna, MB) and in

24 Oil & Gas Journal, “2013 Worldwide Refining Survey”, December 2, 2013. 25 The capacity of the FCL refinery is reported as 130,000 B/D by the company. 26 MJ Ervin & Associates, “Canada’s Downstream Logistical Infrastructure: Refining, Pipelines, Terminals, Bulk Plants & Cardlocks”, December 2007, p.9.

1 Calgary (to take product delivery from the Alberta Products Pipeline). There are several distribution 2 terminals in coastal regions of British Columbia.

3 Logistics & Distribution

4 Pipelines

5 In general, pipelines represent the most efficient means of transporting large volumes of refined 6 products in Western Canada. Pipeline movements are the main method of transferring product 7 from refineries to primary terminals. Table 4 summarizes the size, length and approximate capacity 8 of the major refined products pipelines in Western Canada.

TABLE 4 REFINED PRODUCT PIPELINE SUMMARY Products Capacity Pipeline/Line Source(s) Destination(s) Shipped Length (km) (B/D) Enbridge/Line 1 Edmonton, AB Regina, SK Gasoline 1,766 ~ 100,000 Regina, SK Gretna, MB Diesel Jet fuel Alberta Products Pipeline Edmonton, AB Calgary, AB Gasoline 320 48,400 Diesel Jet fuel Trans Mountain Pipeline Edmonton, AB Kamloops, BC Gasoline 1,150 ~ 50,000 Burnaby, BC Diesel Jet fuel Source: Company reports and IHS estimates 9 10 4 Refined Product Pipeline Summary 11 Enbridge Line 1 is a liquids pipeline that runs from Edmonton, AB to Superior, WI. It ships refined 12 products and natural gas liquids (“NGL”) in addition to synthetic crude oils. There are no product 13 processing facilities between Edmonton and the end-use markets in the Prairies, so all refined 14 products must meet finished product quality specifications. At Gretna, MB, the Enbridge system 15 transfers refined products to the Winnipeg Pipeline, for delivery to finished products tankage in 16 Winnipeg.

17 The Alberta Products Pipeline transports refined products from Edmonton area refineries to 18 distribution terminals in Calgary, AB. It is a main source of delivery for refined petroleum products 19 in southern Alberta.

20 Trans Mountain runs from Edmonton to Kamloops, BC and Vancouver, as well as Puget Sound in 21 Washington State. It ships refined products, semi-finished products and a range of crude oils in the 22 same pipeline. Commodities are shipped in batches, using a specific protocol that minimizes cross- 23 contamination from one product to another.

24 Other (rail, barge, truck)

25 Other modes of transportation are regularly used to ship refined products in Western Canada. 26 Movement of refined product by rail is utilized to supply northern markets, interior regions of British

1 Columbia, and to Thunder Bay in northern Ontario. Trucking is used for delivery of products from 2 primary terminals or bulk terminals to end-use fuel sites, which include retail gasoline stations and 3 various commercial operations. To some extent, rail and truck transportation may be direct 4 substitutes, although it is generally true that rail transportation is more cost effective for delivery of 5 refined products over long distances.

6 Barges are used to deliver product from Vancouver to terminals on Vancouver Island and along the 7 coast, and from terminals in the Northwest Territories to more northern locations along the 8 Mackenzie River.