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Home > Speeches and Presentations > Speeches and Presentations 2005 > Canadian Oil - Opportunities in the U.S. Market

Canadian Oil - Opportunities in the U.S. Market

Presented by
Gaétan Caron
Vice-Chairman
National Energy Board

Association of Oil Pipelines
2005 Annual Business Conference
New Orleans, Louisiana

25 - 27 May 2005

NEB's Responsibilities

The National Energy Board (the NEB or the Board) is an independent federal regulatory agency that was established in 1959 and regulates specific aspects of the energy industry:

• the construction and operation of inter-provincial and international pipelines; pipeline traffic, tolls and tariffs;
• the construction and operation of international power lines;
• the export of oil and electricity;
• the export and import of natural gas; and
• Frontier oil and gas activities.

In addition to its regulatory responsibilities concerning facilities, frontier oil and gas activity, and international trade of energy, the Board also has an important role in monitoring energy markets and reporting on the functioning of markets to Canadians. In its advisory capacity, the Board may at its own initiative, or at the request of the Minister, provide energy advice to the Minister of Natural Resources in areas where the Board has expertise derived from its regulatory functions; and carry out studies and prepare reports into specific energy matters; and monitor current and future supplies of Canada's major energy commodities.

The focus of my presentation today is on Canadian oil and its opportunities in the U.S. oil market with respect to supply, pipelines, markets, incentive tolls and oil pipeline capacity allocation. I will also touch on the NEB's relationship with the FERC.

We currently have 8 Board Members

The National Energy Board is a federal independent tribunal located in Calgary, Alberta.

There are 8 permanent members.

The term is for a period of 7 years.

There are approximately 300 staff.

The Canadian Regulator's Role

The purpose of the NEB is to promote safety, environmental protection and economic efficiency in the Canadian public interest within the mandate set by Parliament in the regulation of pipelines, energy development and trade.

(So for our American friends you will notice that the NEB mandate is roughly comparable to that of FERC and the Office of Pipeline Safety).

The Board deals with approximately 750 applications annually. For major applications, the Board holds public hearings which can be either written or oral proceedings. They are usually held at locations across Canada where there is a particular interest in the application and which will be most affected by the Board's decision. Normally, a panel consisting of three Board Members is assigned to hear applications.

Outline

The topics I will touch on today include the following:

• Reserves
• Canadian crude oil supply including western Canada, Offshore East Coast and imports of crude oil into Canada and;
• The oil sands

Crude produced in Canada is used domestically and exported to the U.S. Canada imports almost 1 million b/d of crude oil. However Canada is a net exporter of about 600,000 b/d.

There are many publicly announced pipeline Projects to handle growing oil sands production in Alberta. These include TransMountain, the Enbridge Gateway project and the TransCanada Keystone Pipeline project which I will discuss later.

Opportunities exist to build on the strong relationship we have with the U.S. in energy trade, these include the Memorandum-of-Understanding (MOU) that was signed between the FERC and the NEB last year and joint tariffs that streamline the regulatory process in both countries.

Canada's Oil Reserves

In early 2003, for the first time, the Oil and Gas Journal and the Cambridge Energy Research Associates recognized the Alberta Energy and Utilities Board's (or the AEUB) estimates for the established reserves of crude bitumen in their listing of world oil reserves.

Canada's oil reserves are second only to Saudi Arabia.

Note: Bitumen or crude bitumen is a highly viscous mixture that is extracted from the oil sands using mining or in situ recovery methods.

Canadian Oil Production Outlook

Canadian oil production is projected to grow from about 2.5 million barrels per day in 2004 to 3.5 million barrels per day in 2015.

As you can see, this growth comes almost entirely as a result of oil sands production - both upgraded to synthetic crude and non-upgraded bitumen.

We'll now take a separate look at the production outlook for Western Canada conventional, Canada's East Coast, and the oil sands.

WCSB Conventional Production Outlook

Conventional oil production in Western Canada is maturing.

Western Canada's Conventional light and heavy production is projected to continue its modest decline of 3-5 percent per year, which will see production fall from current levels of just over 1 million b/d to about 800,000 b/d in 2015.

Pentanes plus production is mainly a function of natural gas production and is expected to decline at a rate of 2 - 3 percent per year.

Newfoundland Offshore Areas

The Newfoundland Offshore is an area of active exploration and development.

The Jeanne d'Arc Basin has been the major focus of exploration and development since oil was discovered at Hibernia in 1979. There are two fields in production now, Hibernia and Terra Nova, and a third project, White Rose is expected to start production late in 2005. A potential fourth project, Hebron/Ben Nevis, is currently being evaluated.

Exploration for new fields is also on-going. In 2005, Chevron plans to conduct a seismic program in the Orphan Basin with drilling to follow in 2006 or 2007. Husky is drilling an exploratory well in the South Whale Basin and at least one delineation well at White Rose, and plans to shoot seismic in the Jeanne D'Arc Sub-basin. ConocoPhillips is planning to shoot seismic in the Laurentian Basin, although that could be gas-directed. Finally, there are plans for two non-exclusive seismic programs offshore Labrador, which could also be considered as gas directed although there is a potential deep water oil play.

East Coast Oil Production Outlook

As I mentioned, there are currently two projects operating off of the East Coast: Hibernia (1997) and Terra Nova (2002) in the first three months of this year average production has been approximately 310,000 b/d - both of these projects are now setting into decline.

A third project - Husky Energy's White Rose - is expected to be producing in late 2005 or early 2006 - this project has a predicted initial peak of about 100,000 b/d.

A fourth project - Hebron/Ben Nevis - is currently being contemplated by Chevron Canada Resources, ExxonMobil Canada Properties, Petro-Canada and Norsk Hydro Canada Oil & Gas Inc. First oil from this project can be expected in 2011 at about 50,000 b/d.

On the exploration front, there is considerable optimism surrounding seismic that has been collected in the deep water Orphan Basin as evidenced in the record NF 2003 Call for Bids which resulted in eight successful bids totaling $673 million. Large seismic programs are expected in the Orphan Basin over the next couple of years in preparation for drilling. In addition, Laurentian sub-basin between Newfoundland and Nova Scotia the South Whale Basin is active as well.

In summary, two proven offshore projects and encouraging exploration prospects provide reason to be optimistic about the future of East Coast oil.

Oil Sands Areas

Canada's oil sands resources are contained in three distinct areas: first, the Athabasca area which is the largest, and, to date, has seen the most intense development. This area is also the only area amenable to surface mining. Second is the Cold Lake area which has been responsible for the majority of in situ production. Lastly, the Peace River area is the smallest of the three and has seen more modest development.

Canada's Oil Sands

Commercialization of the oil sands resource began with the Great Canadian Oil Sands Company in 1967. That project, now operated by Suncor, used surface mining to extract crude bitumen from oil sands

Much has changed since 1967 and operators have become far more efficient. Today's mining operations use giant electric shovels to load trucks capable of hauling up to 360 tonnes. Mined oil sand is taken to a crusher which sizes the ore so that it can be transported to the extraction plant as a slurry. During extraction, the bitumen is separated from water, sands and other materials in preparation for upgrading. Upgrading is the final stage of the process whereby tar-like bitumen is converted into refinery-ready synthetic crude oil and, in some cases, petroleum products.

Oil Sands In Situ: SAGD

Steam-Assisted Gravity Drainage (SAGD) is the dominant technology being used today to access oil sands deposits that are too deep to be surface mined.

The SAGD process uses a pair of closely spaced horizontal wells in which the producer well is positioned near the bottom of the reservoir and the steam injection well is positioned directly above. Steam is continuously injected into the upper well to melt the bitumen and allow it to drain into the production well where it is pumped to the surface.

In 2005, in situ production is estimated to be 440,000 b/d in comparison to mined production of about 520,000 b/d.

Unlike in surface mining, in situ operations have not traditionally included upgrading facilities to convert bitumen to synthetic crude oil, instead bitumen is marketed as a lower-value diluent-bitumen blend. This could change if Nexen builds an upgrader at its oil sands facility in 2007.

A major cost of in situ operations is the natural gas component which is about one-third of the production cost.

Oil Sands Outlook

As mentioned previously, Canada's oil sands resource is expected to grow substantially over the next 10 years and well beyond. The resource base is well defined and substantial and strides will continue to be made through technological advancement. Based on publicly available development plans, over C$60 billion (almost US$50 billion) in projects could proceed over the next decade.

The Board's oil sands forecast shows production roughly doubling from one million barrels per day in 2005 to over two million b/d in 2015. If all oil sands projects are included, production could be as high as 3.3 million barrels per day in 2015, but this is unlikely.

This impressive growth, however, is not guaranteed. Oil sands producers face several challenges including higher natural gas costs, costs relating to meeting evolving environmental standards, and substantial capital cost overruns. Instead of using natural gas, producers are looking at gasifying bitumen, burning diesel fuel and in the longer-term gasifying petroleum coke or coal.

In order to avoid future cost overruns, industry is adopting several strategies to improve project management. It is clear also that, in order to facilitate this production growth, new markets must be found and additional pipeline capacity will be required.

Canadian Crude Oil Supply and Disposition - 2004

This map illustrates where Canadian crude oil is produced and where it is consumed. In 2004, Canada produced roughly 2.5 million b/d of which 2.2 million b/d or almost 90 percent of that came from western Canada. Our domestic consumption was almost 1 million barrels per day (970,200).

Sixty-five percent of all crude oil (or 1.6 million bbl/d) produced in Canada is exported to the U.S. Slightly over 50 percent of that is destined for markets in the U.S. Midwest (PADD II), particularly Chicago, Twin Cities and Toledo.

While Canada is a net exporter, we also import 50 percent (1 million b/d) of our crude oil requirements. These supplies are destined for refineries in eastern Canada, including Ontario.

Exports of Canadian Crude to the U.S.

According to the Energy Information Administration (EIA), in 2004 Canada was the number one foreign supplier of crude oil to the U.S. This is the first time in several years that Canada has been the number one supplier of crude oil to the United States.

However, Canada has been the number one supplier of both crude oil and petroleum products to the U.S. for many years.

In addition, Canada is the largest supplier of natural gas and electricity to the U.S.

NEB Regulated Energy Exports

In 2004, in terms of revenue - crude oil, NGL & product exports generated more revenue for Canada than any other energy source. Revenue from these exceeded $31 billion.

Natural gas revenue for 2004 was $26 billion. 2004 electricity export revenues were about $1.8 billion.

By comparison, according to Statistics Canada:

• Total value of all Canadian exports in 2003 was about $400 billion (about $330 billion of that with the United States)
• Total value of all Canadian imports in 2003 was about $342 billion (about $240 billion of that with the United States)
• The overall balance of trade was $58 billion revenue to Canada
• Balance of all trade with the United States was almost $91 billion.

From this we can see that energy exports are a very significant component of Canadian trade.

Oil Sands Market Outlets

Oil sands producers have been creative when finding market outlets for rising output.

This slide illustrates a schematic of the different grades of bitumen products and their expected market outlets. Let's start at the top of this chart.

• DilBit is a blend of condensate and in situ bitumen and is primarily used in heavy crude refineries.
• DilSynBit is a blend of condensate, synthetic crude oil and in situ bitumen and would be attractive to the medium crude refineries.
• SynBit is a blend of synthetic crude oil and in situ bitumen and would also be primarily used in medium crude refineries.
• Synthetic crude oil is upgraded mined or in situ bitumen. It would be a suitable replacement for conventional light crude oil in a predominately light crude refinery.

Markets

When the Board released its Oil Sands Energy Market Assessment entitled "Canada's Oil Sands Opportunities and Challenges to 2015" in May 2004, it was clear that oil sands expansions would not occur if there were no market outlets.

Industry has been creative in finding outlets for the rising output, by doing such things as purchasing refineries and entering into long-term supply agreements.

For many years expansions in traditional markets have occurred. During this time, Canadian producers have gained a solid understanding of these markets. This will continue.

It is clear however, in the longer term, that development of new markets would be required to keep pace with rising oil sands production.

Markets (cont'd)

Based on consultations with industry during the course of the Energy Market Assessment, and our own assessment, the following four steps outline a potential scenario for market expansion.

The first step would involve filling up existing markets including Washington State, PADD IV, northern PADD II and, perhaps, some small incremental volumes in the domestic market.

The second step would see penetration of southern and eastern PADD II, and perhaps build new cokers in PADDs I, II and IV. In addition, increased usage of oil sands crude in the two refineries in Edmonton (Imperial and Petro-Canada).

The third step involves penetrating PADD III. With the approval of the Mobil Pipeline 20-inch reversal, about 50,000 b/d will move into the U.S. Gulf Coast likely in the 4th quarter of 2005.

The above three steps could absorb, 400 mb/d to 500 mb/d of oil sands production through to 2008. At that time, industry would have to branch out to find new markets, as discussed in Step 4 below.

In step 4 penetrating PADD V and possibly Asia would occur. Our market analysis indicates that the economics favor California first and that the Far East has potential on a longer term basis.

North American Crude Oil Pipelines

This map illustrates the major crude oil pipelines in North America.

I would like to draw your attention to the three major export pipelines that transport crude from western Canada to the United States. They are Enbridge, Terasen TransMountain Pipeline and Express Pipeline.

The bulk of Canadian exports are transported on the Enbridge system. It originates in Edmonton and crosses the Canada/U.S. border near Gretna, Manitoba where it connects to the Lakehead Pipeline. The Lakehead Pipeline (owned by Enbridge Energy Limited Partnership) originates at the international border and extends to Chicago, Illinois and back up into Canada at Sarnia, Ontario.

Terasen TransMountain also originates in Edmonton and extends west into British Columbia. This pipeline allows for shipments of crude oil into Washington and also enables tanker shipments off the west coast of Canada for destinations such as California and even Asia.

Express pipelines originates in Hardisty, Alberta and transports crude oil to PADD IV and connects to the Platte system at Casper, Wyoming allowing for deliveries into Wood River, Illinois.

Expansions and New Pipeline Proposals

The dotted blue lines indicate publicly announced pipeline expansions.

Let's first begin with two reversal projects that we know with certainty will proceed. The Board recently released a decision approving a non-routine adjustment or equivalent mechanism to enable Enbridge to contribute financial support to a market access initiative to provide access for Canadian crude to the Cushing, Oklahoma area and the U.S. Gulf Coast.

The details are:

Spearhead (owned by Enbridge)
It will provide transportation from Chicago, Illinois to Cushing, Oklahoma - initial capacity of 120 mb/d - could expand to 160mb/d
Startup in January 2006

Mobil 20 inch Reversal (owned by Mobil)
Will provide transportation from Patoka, Illinois to the US Gulf Coast. Estimated startup is October 2005. Initial capacity of 50 mb/d.

The others are:

Southern Access (proposed by Enbridge)
Superior, Wisconsin to Wood River, Illinois; Start up in 07 - (this is questionable), with a capacity of 250 mb/d; would interconnect with Spearhead

Potential Enbridge Mainline (proposed by industry to support oil sands growth)
Hardisty, Alberta to Superior, Wisconsin; Startup post Southern Access (2008 or 09); new capacity of 150 mb/d

Terasen(TMPL) - The system has a current capacity of 225 mb/d
Terasen is proposing a phased approach to its expansion of the TransMountain Pipeline called TMX1 through 3

Enbridge Gateway
Edmonton to Prince Rupert or Kitimat. Capacity would be 400 mb/d; filing second quarter 2006; in service 2010

Keystone (proposed by TransCanada)
Hardisty, Alberta to Patoka, Illinois

In Canada, construction of approximately 100 miles of new pipeline and the conversion of an existing natural gas line to crude oil transmission. In the US, a new pipeline would be constructed, crossing portions of five states; capacity of 400 mb/d; expected filing late 2005 and startup in 2008 or 2009.

Canadian Pipelines - Capacity Allocation

Canadian gas pipelines are contract carriers and, therefore, are obligated to ship gas for those shippers who have a transportation contract. The contract includes a demand charge or take-or-pay clause.

The majority of oil pipelines are common carriers and receive nominations from shippers on a monthly basis. On some oil pipelines such as the Enbridge mainline and TransMountain a penalty of $2.70 per barrel is applied if the shipper does not ship its nominated volume. The purpose of this penalty is to eliminate over-nominations.

Two oil pipelines in Canada, Express and Enbridge's Line 9 which extends from Montreal to Sarnia have 85 percent and 80 percent respectively, contracted on the pipelines with the remainder available in monthly nominations. Both of these pipelines received NEB approval in the mid-to-late nineties to allow contracts, given that some capacity remained available for monthly nominations. The Board found that they were still operating as common carriers.

Guidelines for Negotiated Settlements

The Board has published guidelines for negotiated settlements. These negotiated settlements provide flexibility to the industry and represent a means of solving business issues outside the hearing room.

It is important to note that the Board would not pick and choose among the elements of a settlement. Rather, it would either accept or reject a settlement in its entirety.

If these guidelines are followed for uncontested settlements, in most cases, the Board would be able to determine that the resultant tolls were just and reasonable without a public hearing.

This illustrates the fact that the Board is flexible in implementing tolls and tariff regulation and in the setting of just and reasonable tolls.

My understanding is that these guidelines are generally consistent with the practices of the Federal Energy Regulatory Commission.

Incentive Toll Settlement Objectives

Incentive settlements are the norm in the Canadian oil pipeline industry. The objectives of this particular form of settlement are outlined in the slide shown here.

Pipelines should be able to operate their systems more efficiently, with less regulatory burden and they will be able to improve the relations with their customers and increase their profitability

We are ready and able to arbitrate when the parties cannot reach a settlement.

Express Pipeline International Joint Tariff

In 2004 the Express Joint International Tariff went into effect for:

• Express Pipeline Ltd - the NEB regulated pipeline that provides service from Hardisty, Alberta to the International Border;
• The Express Pipeline Limited Partnership - which operates the portion of the Express Pipeline system in the United States from the International Border to Casper, Wyoming and,
• The Platte Pipeline Company - the operator of the Platte system from Casper, Wyoming to Wood River, Illinois.

The Joint Tariff provides discounted rates for transportation from Hardisty, Alberta to points of delivery in the United States. Under the FERC's policy for the justification of joint rates, a proposed rate can be found to be just and reasonable if it is less than or equal to the sum of the local interstate rates on file. The NEB oversees Canadian oil pipeline rates in a similar manner and requires that rates be "just and reasonable" and free of "unjust discrimination".

Shippers benefit directly from one-stop shopping and discounted rates stemming from joint rates. The international joint rates provide streamlined nomination, billing and pipeline communications and, in general, serve to enhance the efficiency of trade between Canada and the U.S.

NEB/FERC MOU

The Memorandum-of-Understanding with the FERC signed by Pat Woods and Ken Vollman in Halifax last year is now fully operational. Information on regulatory matters flows regularly between our two agencies now. The object of course is to maintain a no surprise environment and to exchange knowledge and best practices. The same can be said of our regular trilateral meetings with the Mexican CRE and the FERC.

Opportunities

Contact Us!

I want to close my remarks by thanking you for your attention and providing you with the Board's contact information. I would encourage you to contact us if you would like more information on this or other energy related topics or to access energy market reports and export statistics.

I am providing on this slide my email address as well as the address of the two persons at the NEB who put together the information contained in my presentation, they are Colette Craig and Barry Lynch. They would be pleased to answer any specific questions you may have.

As well, this illustrates how you may access a list of our staff and responsibilities.

I would be more than happy to answer any questions you may have on today's discussion.

 

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Date Modified:

2011-10-28