Study No. 133 May 2013 CANADIAN CANADIAN OIL SANDS SUPPLY ENERGY RESEARCH COSTS AND DEVELOPMENT INSTITUTE ROJECTS P (2012-2046) Canadian Energy Research Institute | Relevant • Independent • Objective CANADIAN OIL SANDS SUPPLY COSTS AND DEVELOPMENT PROJECTS (2012-2046) Canadian Oil Sands Supply Costs and Development Projects (2012-2046) Copyright © Canadian Energy Research Institute, 2013 Sections of this study may be reproduced in magazines and newspapers with acknowledgement to the Canadian Energy Research Institute ISBN 1-927037-12-6 Authors: Dinara Millington Carlos A. Murillo Acknowledgements: The authors of this report would like to extend their thanks and sincere gratitude to Paul Kralovic of Kralovic Economics Inc., all CERI staff that provided insightful comments and essential data inputs required for the completion of this report, as well as those involved in the production, reviewing, and editing of the material, including but not limited to Peter Howard and Megan Murphy CANADIAN ENERGY RESEARCH INSTITUTE 150, 3512 – 33 Street NW Calgary, Alberta T2L 2A6 Canada www.ceri.ca May 2013 Printed in Canada Front Cover Photo Courtesy of Cenovus Energy Canadian Oil Sands Supply Costs and Development Projects (2012-2046) iii Table of Contents LIST OF FIGURES ................................................................................................... vii LIST OF TABLES .................................................................................................... xi EXECUTIVE SUMMARY ......................................................................................... xiii Supply Cost Results ................................................................................................ xiii Supply Cost Sensitivities ........................................................................................ xiv Projection Results – Three Scenarios ..................................................................... xvii Oil Sands Production ......................................................................................... xvii Oil Sands Capital Investment ............................................................................. xix Natural Gas Requirements ................................................................................ xxi Oil Sands Emissions ........................................................................................... xxii Oil Sands Royalties ............................................................................................ xxiii Pipeline Transportation ......................................................................................... xxv Markets .................................................................................................................. xxv CHAPTER 1 INTRODUCTION ............................................................................. 1 Background ............................................................................................................ 1 Approach .............................................................................................................. 2 Organization of the Report .................................................................................... 3 CHAPTER 2 OIL SANDS OVERVIEW ................................................................... 5 Oil Sands, Background ........................................................................................... 5 Oil Sands Development Scenarios ......................................................................... 8 CHAPTER 3 OIL SANDS SUPPLY COSTS .............................................................. 15 Introduction ........................................................................................................... 15 Methodology and Assumptions ............................................................................. 15 Design Assumptions .......................................................................................... 16 Light-Heavy Differential..................................................................................... 21 Crude Oil Transportation Costs ......................................................................... 26 Economic and Taxation Assumptions................................................................ 26 Royalty Assumptions ......................................................................................... 29 Canadian-US Exchange Rate .............................................................................. 30 Supply Cost Results ................................................................................................ 31 Supply Cost Sensitivities ........................................................................................ 34 CHAPTER 4 OIL SANDS PROJECTIONS ............................................................... 39 Methodology and Assumptions ............................................................................. 39 Delay Assumptions ............................................................................................ 40 Estimating Inflation ........................................................................................... 41 Estimating Royalty Revenues and Blending Requirements .............................. 42 Oil Sands Projections – Three Scenarios ................................................................ 43 Oil Sands Capacity ............................................................................................. 43 May 2013 iv Canadian Energy Research Institute Oil Sands Production ......................................................................................... 45 Oil Sands Capital Investment ............................................................................. 47 Natural Gas Requirements ................................................................................ 50 Oil Sands Emissions ........................................................................................... 52 Oil Sands Royalties ............................................................................................ 55 Oil Sands Projections – Reference Case Scenario .................................................. 56 Oil Sands Production – Historic and Forecast ................................................... 56 Diluent Demand, Supply and Transportation.................................................... 59 Capital Investment and Operating Costs ........................................................... 67 Alberta Oil Sands Royalty Revenues .................................................................. 69 CHAPTER 5 TRANSPORTATION ......................................................................... 73 West Coast and the Gulf Coast .............................................................................. 73 Bottlenecks in the System ...................................................................................... 74 Enbridge Lakehead System South of Clearbrook/Superior ............................... 75 TransCanada Keystone XL ................................................................................. 76 Kinder Morgan Express-Platte ........................................................................... 76 Continental Inland Expansions, Extensions, and Conversions............................... 76 Rail, Rail and More Rail .......................................................................................... 79 CHAPTER 6 MARKET DIVERSIFICATION ............................................................. 83 Potential Netbacks for Oil Sands Crudes and Pricing Dynamics ............................ 83 APPENDIX A METHODOLOGY AND ASSUMPTIONS ............................................. 93 Canadian-US Exchange Rate .................................................................................. 93 Cost Inflation .......................................................................................................... 95 Oil Sands Construction Cost Inflation ................................................................ 95 Oil Sands Operating Cost Inflation .................................................................... 97 Cash Flow Methodology ........................................................................................ 99 APPENDIX B EXISTING CRUDE OIL PIPELINES IN WESTERN CANADA ................... 103 Export Pipelines ..................................................................................................... 104 Keystone Pipeline – TransCanada Pipelines ...................................................... 104 Trans Mountain Pipeline (TMX) – Kinder Morgan Canada ............................... 105 Express-Platte Pipeline – Spectra Energy .......................................................... 107 Enbridge Canadian Mainline – Enbridge ........................................................... 108 Alberta Clipper and Southern Lights Pipelines – Enbridge ................................ 112 Rangeland Pipeline – Plains Midstream ............................................................ 115 Bow River Pipeline – Inter Pipeline Fund .......................................................... 116 Cochin Pipeline – Kinder Morgan Canada ......................................................... 117 Regional Pipelines .................................................................................................. 119 Pembina Oilsands Pipelines – Pembina Pipeline Corporation .......................... 119 Inter Pipeline Oilsands – Inter