Hearing Order MH-1-2006 NATIONAL ENERGY BOARD IN THE MATTER OF the National Energy Board Act (“NEB Act”), being Chapter N-7 of the Revised Statutes of Canada, 1985, as amended, and the regulations made thereunder; AND IN THE MATTER OF an Application by TransCanada Pipelines Limited (“TCPL”) and TransCanada Keystone Pipeline GP Ltd. (“Keystone”) for orders pursuant to Parts I, III, IV and V of the NEB Act; AND IN THE MATTER OF National Energy Board Hearing Order MH-1-2006 dated June 21, 2006. WRITTEN EVIDENCE OF CONOCOPHILLIPS CANADA LIMITED CALGARY:909507.3 INTRODUCTION Q. Please summarize and describe the purpose of this evidence. A. The purpose of this evidence is to describe why ConocoPhillips Canada Limited 5 (“ConocoPhillips”) supports development of the Keystone Pipeline Project. ConocoPhillips is a significant oil and gas producer in Canada. Much of its Western Canadian crude supply, and in particular, incremental supply to be produced from its Surmont Project, is intended to be processed in refinery facilities owned and operated by ConocoPhillips’ parent ConocoPhillips Company and which are located in markets accessed by the Keystone Pipeline Project. The 10 Keystone Pipeline Project will provide ConocoPhillips and others with an important long-term source of reliable, cost efficient transportation capacity at a time when crude oil pipeline capacity to U.S. Midwest markets is strained. As a significant natural gas producer in Canada, ConocoPhillips also provides comments on any negative impacts it sees arising from the proposed transfer and conversion of TCPL’s Line 100-1 15 facilities between Burstall, Saskatchewan and Carman, Manitoba. BACKGROUND Q. Please briefly describe the business of ConocoPhillips. A. ConocoPhillips is a wholly owned subsidiary of ConocoPhillips Company. 20 ConocoPhillips Company operates in more than 40 countries, employs approximately 38,000 people and has assets of approximately US$160 billion. ConocoPhillips Company is the third- largest U.S.-based integrated energy company, based on market capitalization and on oil and gas proved reserves and production. It is the second-largest refiner in the U.S. Worldwide, excluding government controlled companies, ConocoPhillips Company has the fifth-largest total 25 oil and gas proved reserves and, based on crude oil capacity, is the fourth largest refiner In 2006 ConocoPhillips’ parent, ConocoPhillips Company acquired Burlington Resources Inc. As a result of this transaction, ConocoPhillips is now the second-largest gas producer in Canada. The company’s natural gas operations are primarily located in Alberta and British Columbia, with some production in Saskatchewan CALGARY:909507.3 2 - 30 ConocoPhillips is the third largest oil and natural gas production and exploration company in Canada with an average production of 363,000 barrels of oil equivalent per day. ConocoPhillips’ Canadian crude oil production arises from both conventional and oilsands resources. ConocoPhillips has interests in two major oilsands projects located near Fort McMurray, Alberta. Specifically, it owns a 50 percent interest and is the operator of the Surmont Oilsands Project and 35 it also owns a 9 percent interest in the joint venture operation operated by Syncrude Canada Ltd. SURMONT PRODUCTION Q. Please describe ConocoPhillips’ operations and production plans associated with the Surmont Project. 40 A. The Surmont Project is a major steam assisted gravity drainage (“SAGD”) project located near Fort McMurray, Alberta. In May 2003 ConocoPhillips received all necessary regulatory approvals to develop the Project. Construction of the facilities and development drilling began in 2004. Commercial production is expected to begin late 2006, with peak production expected in 2013. To date, ConocoPhillips has invested more than $100 million in the Project 45 Project development is occurring in a phased manner. Production from the first phase is expected to commence in late 2006 and reach 27,000 barrels per day of bitumen. Phase 2, which would involve the expansion of production to 100,000 barrels per day of bitumen and is planned to come on stream in 2012. The lifespan of the Phase 1 and 2 reserves is estimated to be 40 years. Further phases are targeted to take production to a significantly higher level, depending 50 on the results of the ongoing appraisal of the leases. Q. Please describe any special features associated with the type of crude produced from the Surmont Project? A. The Surmont Project produces a bitumen crude of 8 degrees API. Following the recovery 55 of the bitumen using SAGD technology, the bitumen is treated and blended with synthetic crude oil. The resultant crude is a 21 degree API bitumen blend, high in sulphur and TAN (total acid number). These crude quality features are significantly different as compared to conventional crude oil. From a refining perspective, these differences have required significant capital investments to allow this crude type to be used as an appropriate feedstock. CALGARY:909507.3 3 - 60 WOOD RIVER REFINERY Q. Please describe ConocoPhillips’ Wood River Refinery. A. The Wood River Refinery is situated in Roxana, Illinois, approximately 15 miles north of St. Louis, Missouri. The Wood River Refinery currently has the capacity to process 306,000 65 barrels of crude oil (and 315,000 barrels of all feedstocks) per day, and to produce 165,000 barrels of gasoline and 80,000 barrels of distillates (including diesel and jet fuel) per day. Q. Where does the Wood River Refinery receive its petroleum supply? A. At present, the Wood River Refinery receives crude supply from a wide variety of 70 sources including the Gulf of Mexico, Canada and U.S. domestic crude oils via pipeline. Q. Please describe the pipelines that currently deliver crude oil to the Wood River Refinery from Western Canada. A. The Wood River Refinery can receive crude oil produced in Western Canada from three 75 pipeline systems. The Express/Platte system comprises a combination of 24 and 20-inch diameter lines connecting Western Canadian and U.S. Rockies production regions to refining markets in the U.S. Rockies and in the U.S. Midwest, including the Wood River Refinery. The second system is a combination of lines connecting Western Canada to Superior, Wisconsin (Enbridge Pipeline), Superior to Chicago (Lakehead Pipeline), Chicago to Patoka, Illinois 80 (Mustang Pipeline), and eventually Patoka to the Wood River Refinery (Capwood Pipeline). The third system is a combination of lines connecting Western Canada to Superior, Wisconsin (Enbridge Pipeline), Superior to Chicago (Lakehead Pipeline), Chicago to Cushing, Oklahoma (Spearhead Pipeline), and finally, from Cushing to Wood River (Ozark Pipeline). While the third system exists, ConocoPhillips finds it to be more costly than other alternatives, and, 85 consequently, the least preferred. All three systems currently suffer from some form of bottleneck, limiting ConocoPhillips’ ability to transport Canadian crude to the Wood River Refinery. These pipeline systems are shown in the map found as Attachment 1 to this Evidence. CALGARY:909507.3 4 - Q. Are shippers on those pipelines currently experiencing apportionment? 90 A. Space on the Platte, Mustang and Ozark systems is currently being apportioned and thus limiting the volume of Canadian crude that can be delivered to Wood River. This situation has existed since late in 2005 and ConocoPhillips expects this to continue until additional pipeline capacity to Wood River is constructed. Q. Is the Wood River Refinery Operation “supply constrained”? 95 A. Yes. The Wood River Refinery is designed to process a certain amount of heavy crude oil of the type produced in Canada, and there is, at present, insufficient pipeline space on pipelines from Canada to the Wood River Refinery to supply its demand for this type of crude. As a result, the Wood River Refinery is forced to process other, more costly crudes. 100 Q. Could the Wood River Refinery produce more refined products if it were able to access more Canadian supply via additional pipeline capacity? A. Yes. ConocoPhillips plans to make several major capital projects at the Wood River Refinery. With additional supply of Canadian heavy crude, ConocoPhillips intends to invest 105 more than US$1 billion in its Wood River Refinery. These investments include necessary coking capacity, hydrogen production facilities, hydrotreater processes (for the removal of sulphur to meet clean fuel requirements), and associated tankage. The additional capital investment will increase ConocoPhillips coking capacity from about 20,000 barrels per day to about 75,000 barrels per day. The coking process would enable the Wood River Refinery to 110 process additional volumes of heavy, high sulphur crude, to increase the yield of products such as motor gasoline and diesel fuel (including ultra low sulphur diesel fuel), and to reduce production of asphalt. With the additional coking capacity, the Wood River Refinery will be able to process approximately 190,000 barrels per day of heavy Canadian crude. Without securing reliable firm incremental pipeline capacity, the Wood River Refinery will not be able to 115 take full advantage of its increased coking capacity. CALGARY:909507.3 5 - Q. What other benefits would likely result from additional pipeline infrastructure being constructed from Western Canada to Wood River Illinois? A. From a crude oil producer perspective, the increase of incremental take-away capacity, 120 particularly when it is offered on a long-term and reliable basis, is likely to facilitate investment decisions in future developments. From a U.S. mid-west refiner perspective, new pipeline capacity from Canada to the mid-west would improve supply security or reliability by providing mid-west refiners practical alternatives in the event of supply disruptions. During the hurricane- related supply disruptions of the summer of 2005, offshore Gulf of Mexico production (some of 125 which has historically been transported to inland refineries in the U.S.) was disrupted, as were port activities at Gulf Coast ports where foreign crudes are landed, as were pipeline transportation facilities themselves.