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Enbridge – Line 9 Appendix A-7.1 NATIONAL ENERGY BOARD IN THE MATTER OF the National Energy Board Act and the Regulations made under it; and IN THE MATTER OF an Application by Enbridge Pipelines Inc. pursuant to Part IV of the National Energy Board Act for the approval of tolls and tariffs for westbound service on its Line 9. ENBRIDGE PIPELINES INC. APPENDIX A-7.1 TO LINE 9 APPLICATION Expert Evidence – Report of Muse, Stancil & Co. MMEDIUM-TTERM PPROSPECTS FOR LLINE 99 WWESTBOUND SSERVICE FOR December 2009 15455 Dallas Parkway Two Allen Center 48/54 Moorgate Level 58 Republic Plaza Suite 350 Suite 1600, 1200 Smith Street London EC2R 6EJ 9 Raffles Place Addison, TX 75001-4690 Houston, TX 77002 United Kingdom Singapore 048619 Phone: 214-954-4455 Phone: 713-890-1182 Phone: 44-0-207-374-8994 Phone: 65-6832-1341 Fax: 214-954-1521 Fax: 214-954-1521 Fax: 44-0-207- 374-8995 Fax: 65-6832-1491 TABLE OF CONTENTS Page INTRODUCTION................................................................................................. 1 EXECUTIVE SUMMARY .................................................................................... 2 ONTARIO REFINING OVERVIEW ..................................................................... 6 CANADIAN CRUDE PRODUCTION ..................................................................11 NORTH SEA CRUDE PRODUCTION OUTLOOK............................................ 13 ASSESSMENT OF LINE 9 THROUGHPUT RISK............................................ 17 APPENDIX..........................................................................................................29 Page ii INTRODUCTION Line 9 is wholly-owned by Enbridge Pipelines Inc. (Enbridge) and comprises 832 kilometers (517 miles) of 762 millimeter (mm) (NPS 30-inch) pipeline extending from the Montréal Terminal to the Sarnia Terminal. Crude oil and condensate transported on Line 9 can be delivered to the refineries in the Sarnia-Corunna corridor, as well as the Imperial refinery at Nanticoke. Prior to the closure in April 2005 of the Petro-Canada Oakville refinery, Line 9 also delivered crude to this location. A map of the Line 9 route is provided in the Appendix. The capacity of Line 9 is approximately 38,000 cubic meters per day (m3/d) or 240 thousand barrels per day (kb/d). Line 9 currently accommodates the shipment of four crude baskets: conventional light sweet; conventional light sour; condensate; and lube [for the production of lubricants]. To be shipped on Line 9, a crude must satisfy the quality requirements of one of the four crude baskets. At Montréal, Line 9 receives crude only from the Montréal Pipe Line. This pipeline originates at Portland, Maine, where ocean-going tankers are discharged.1 Consequently, all crudes transported on Line 9 must first be discharged at Portland. Line 9 shippers thus have access to all of the waterborne crudes traded globally that satisfy the specifications of one of the four Line 9 crude baskets, although almost all of the crudes received at Portland can be expected to originate from countries bordering the Atlantic Ocean and its associated seas. The crudes available to Line 9 shippers include those produced offshore Atlantic Canada, which are also delivered to Portland via tanker. The Montréal Pipe Line also supplies the Shell and Suncor refineries in Montréal with their crude requirements. This report provides an assessment of the medium-term throughput prospects for Line 9 in westbound crude transportation service, and the key market, and market participant variables that will most influence Line 9 throughput. To this end, Muse, Stancil & Co. (Muse) evaluates the probability that the two key shippers on Line 9 will continue to ship, and considers the implications of one of the shippers discontinuing their usage. In support of this analysis, the future production profiles of the Eastern Canadian and foreign crude grades that are currently transported on Line 9 are contrasted to the production outlook for Western Canadian crude. 1 Within the United States, all of the assets are held in the Portland Pipe Line Corporation, a wholly- owned subsidiary. Page 1 EXECUTIVE SUMMARY Ontario currently receives about 11,500 m3/d (72 kb/d) of crude via Line 9, comprising approximately 22 percent of the total crude runs in the province. The crude received via Line 9 is mostly production from offshore Atlantic Canada, the North Sea, and Algeria. The preponderance of the crude receipts is conventional light crude grades. The historical throughput of Line 9 is provided in Figure 1. Figure 1 Estimated Enbridge Line 9 Ontario Deliveries 40 252 30 189 20 126 10 63 Thousand Barrels per Day per Barrels Thousand Day Meters per Cubic Thousand 0 0 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 May YTD United Kingdom Norway Algeria Venezuela Other Foreign East Coast Source: Statistics Canada Information became public in 2007, 2008, and 2009 in connection with two National Energy Board (NEB) proceedings that identified the Imperial Nanticoke refinery and the NOVA Chemicals Corunna Olefins facility as the primary recipients of Line 9 shipments. The source of the Line 9 shipments and the Ontario refinery configurations have not changed significantly since then and, therefore, it is Muse’s judgment that these two facilities remain the primary Line 9 recipients today. Accordingly, the future throughput of Line 9 will principally depend upon two factors: 1) the duration of time that Imperial supplies crude to its Nanticoke refinery via Line 9, in its current configuration, versus supplying crude from the west; and, 2) the ongoing need Page 2 by NOVA Chemicals for light crude and condensate at its Corunna Olefins facility. In the case of Imperial, the decision is mostly a matter of alternative crude supply economics, influenced in the short-term by the physical capability of the pipeline systems to supply the desired crude volumes from the west. For NOVA Chemicals, it is a different situation. NOVA Chemicals’ public filings indicate that the cumulative pre-tax free cash flow of the Corunna Olefins facility over the last five years has been negative. Accordingly, it is Muse’s view that closure of some, or all, of the Corunna Olefins facility is a possibility. The future crude supply source for the Imperial Nanticoke refinery is crucial to Line 9 in westbound service, because this refinery is the largest recipient of Line 9 shipments. An analysis of the Nanticoke refinery supply economics indicates that Western Canadian crude supply has been generally attractively priced, relative to Line 9 crude supply, for the last several years. The refinery’s preferred crude slate can also shift away from the crude types delivered by Line 9 via a refinery upgrading project to process more Western Canadian heavy sour, by a substitution of Western Canadian synthetic for conventional light crude, by increased runs of Western Canadian heavy sour for asphalt production, or from some combination of all three. Moreover, the incentive for Imperial to shift to a Western Canadian supply source for both of its Ontario refineries steadily grows as the total Western Canadian crude supply increases, which makes the Western Canadian crudes more price competitive relative to supply from Line 9. This is particularly the case as Imperial’s own equity crude production in Western Canada rises. In May, Imperial announced that it is proceeding with the first phase of the Kearl Oil Sands project that has a cost of CA$8 billion. Imperial chairman and chief executive Bruce March has indicated that “We will look first to run Kearl at our own refining assets. We can’t get Kearl to Dartmouth so it’s limited to Strathcona and our two Ontario refineries. Kearl is a heavy, low API gravity crude and I think you’ll see us concentrate most of that upgrading at our two Ontario sites…”2 By about 2016, Imperial is expected by Muse to have commissioned the second phase of its massive Kearl Oil Sands project, and also will have further expanded its existing Cold Lake bitumen project. Both of these projects will significantly increase Imperial’s Western Canadian production. In summary, Western Canadian crude supply for Nanticoke is currently attractive versus Line 9 supply, and is likely to become more attractive as Western Canadian crude production increases. Consequently, it is Muse’s assessment that by 2016, when the second phase of the Kearl Oil Sands project is commissioned, there is a very low probability that Imperial will be a westbound shipper on Line 9. Indeed, it is 2 Imperial Oil Limited Investor Day Q&A transcript, May 26, 2009. Page 3 entirely possible that in the next several years Imperial will shift solely to crudes from Western Canada, perhaps supplemented by crudes delivered via the U.S. Gulf Coast. NOVA Chemicals provides some information regarding the economic performance of its individual facilities and business units. The estimated pre-tax free cash flow of the Corunna Olefins facility has been negative for two out of the last five years (plus the first half of 2009) and, moreover, the cumulative pre-tax free cash flow for the last 5.5 years has been negative. NOVA Chemicals has not indicated that it is contemplating the closure of the Corunna Olefins facility, but the recent economic performance of the facility suggests that this possibility cannot be absolutely ruled out. Moreover, it is possible that NOVA Chemicals may elect to just discontinue the use of light crude and condensate as a feedstock, by either closing the portion of the plant that consumes light crude and condensate or by switching to other feedstocks. Consequently, NOVA Chemicals’ long-term use of Line 9 cannot be taken as a certainty. The decisions by Imperial and NOVA Chemicals to continue to use Line 9 are also interdependent. Absent Imperial, the Line 9 toll would more than double for NOVA Chemicals because the entire operating cost of the line would be distributed across NOVA Chemicals’ smaller volumes. In this circumstance, an analysis of NOVA Chemicals’ alternative supply options for the Corunna Olefins facility indicates that shipping light crude and condensate via pipelines that originate at the U.S.