[PPT] - PRESENTATION COMPETITIVENESS OF THE CANADIAN REGULATORY TITLE PowerPoint Presentation

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PRESENTATION TITLE

CERI Breakfast Overview Allan Fogwill, President & CEO Bow Valley College - Calgary October 23, 2019

www.ceri.ca

COMPETITIVENESS OF THE CANADIAN REGULATORY FRAMEWORK FOR THE OIL AND GAS SECTOR

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CANADIAN ENERGY RESEARCH INSTITUTE

Overview

Founded in 1975, the Canadian Energy Research Institute (CERI) is an independent, registered charitable organization specializing in the analysis of energy economics and related environmental policy issues in the energy production, transportation, and consumption sectors. Our mission is to provide relevant, independent, and objective economic research of energy and environmental issues to benefit business, government, academia and the public. CERI publications include:

Market specific studies
Geopolitical analyses
Monthly commodity reports (crude oil, electricity and natural gas)

In addition, CERI hosts a series of study overview events and an annual Petrochemicals Conference.

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CORE FUNDERS

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DONORS

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Ivey Foundation

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AGENDA

Introduction and Background
Scope and Methodology
Evaluation of Regulatory Characteristics
Cost and Time Impacts of Regulatory Frameworks
Conclusions

Why this Study? Regulatory competitiveness studies have not reviewed the subject from the investors’ perspective. This study considers individual and cumulative costs

f the regulatory regime for the oil and gas sector with the purpose to

understand how does Canada stands in comparison to the United States.

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REGULATORY CHALLENGES IN THE CANADIAN OIL AND GAS INDUSTRY

Lack or restrictions of market access to US and international

markets

Increased volume of regulations, regulatory process inefficiencies,

lengthy approval timelines, increasing regulatory costs

Increasing number of taxes on O&G industry resulting in

competitiveness impacts

Changes in regulatory processes (EIA process, redesign of

NEB/CER and CEEA/IAAC)

Regulatory overlap and interprovincial regulatory differences
Ongoing judicial / regulatory hurdles for Trans Mountain, Keystone

XL, Coastal Gas Link, Line 3

Evolving and uncertain Indigenous legal landscape

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SCOPE

The study considers environmental and economic regulations of the oil and gas sector in Canada in comparison to the US with an aim to understand how the regulatory regime affects the competitiveness of Canada as an exporting jurisdiction.

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Areas in focus:

Environmental regulations
Economic regulations
Indigenous and other (social,

health) – high-level assessment

Cases examined:

Onshore oil/gas well
Offshore Gravity Based Structure
LNG plant
Interprovincial/interstate pipeline

Jurisdictions considered:

Federal (Canada)
Federal (US and GoM offshore)
Provincial (BC, AB, SK and NL
ffshore)
State (TX, ND, PA)

Regulatory characteristics:

Predictability
Transparency
Stringency
Compliance
Timelines
Cost
Regulatory improvement

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NUMBER OF KEY REGULATIONS APPLICABLE TO THE OIL AND GAS SECTOR, BY JURISDICTION

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Jurisdiction/ Regulatory Area Environmental Economic Indigenous Other (Social, Health) Canada (Federal) 14 4 3 3 British Columbia 16 4 5 2 Alberta 24 3 2 2 Saskatchewan 11 3 1 1 Newfoundland (offshore) 14 2 2 2 USA (Federal and Gulf

f Mexico offshore)

16 5 3 2 Texas 5 2 N/A N/A Pennsylvania 8 2 N/A 1 North Dakota 12 3 3 2

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STAKEHOLDER VIEWS REGARDING ISSUES IMPACTING BUSINESS SUCCESS

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SURVEY RESPONSES – OVERALL (CANADA)

Stakeholders Perceptions – Overall (Canada):

Predictability: Federal approval timelines are not predictable (uncertainty);

jurisdictional overlap exists, especially for pipelines; the IAA could cause delays in the assessment process and impede projects development.

Transparency: Information is kept current on regulators website, but not always clear

and concise; more uncertainties with federal regulators/processes.

Stringency: Many examples of increased stringency over the last five years; there is

still room for removing redundancies and duplications.

Compliance: No comments provided.
Regulatory Improvement: Some regulatory improvement programs are in place, with

stakeholders involved in certain parts of regulatory development; performance of the regulatory regime has improved slightly.

Regulatory Characteristics Predictability Transparency Stringency Compliance Regulatory Improvement Responses Somewhat Disagree Somewhat Agree Somewhat Agree Somewhat Agree Somewhat Agree Improvements over the last 5 years

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STAKEHOLDER COMMENTS WORD CLOUD - CANADA

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Note: the most mentioned keywords in the respondents’ comments

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TIMELINES ANALYSIS

Analysis is based on:

‒ Data from major project databases in the US and Canada ‒ Survey data

Project Timelines were analyzed for:

‒ Pipeline projects ‒ LNG projects ‒ Oil and gas wells

Timelines were moderated based on actual details, survey data

and other literature

The presented timelines are averages based on CERI’s research

and do not necessarily reflect what would be for a given specific case

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TIMELINES – PIPELINE AND LNG PROJECTS

13 Initiation Application FID Approval Construction

5 10 15 20 25 30 35 40 45 50 55 60 65 70

Months

PIPELINES CANADA

Initiation Application Approval Construction

5 10 15 20 25 30 35 40

Months

PIPELINES US

Source: FERC, USEPA, NEB, CERI, BLM Initiation Application FID Approval Construction

5 10 15 20 25 30 35 40 45 50 55 60 65 70 75

Months

LNG CANADA

Initiation Application Approval Construction

5 10 15 20 25 30 35 40 45

Months

LNG US

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TIMELINES – OIL AND GAS WELLS

14 Initiation FID Application Approval Drilling

25 50 75 100 125 150 175 200 225 250 275

Days

OIL AND GAS WELLS US

Source: CAPP, FERC, USEPA, NEB, BLM

US Canada LNG 22 41 Months Pipelines 24 48 Months Oil and Gas 102 110 Days

Regulatory Approval Time : Application to Approval

Initiation FID Application Approval Drilling

25 50 75 100 125 150 175 200 225 250 275 300

Days

OIL AND GAS WELLS CANADA

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SURVEY RESULTS BY CASE AND JURISDICTION – SUMMARY

Strongly Disagree Disagree Somewhat Disagree Somewhat Agree Agree Strongly Agree

Case Jurisdiction Predictability Transparency Stringency Compliance Regulatory Improvement Federal (Canada) BC AB Federal (USA) Oil Wells (Offshore) NL Federal (Canada) AB Federal (Canada) BC Oil & Gas Pipelines LNG Plant Oil & Gas Wells (Onshore)

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COST ANALYSIS METHODOLOGY

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COST ANALYSIS

Using discounted cash flow

models to compare US states and Canadian provinces

Estimating relative effective

tax for each case study COST OF DELAY ANALYSIS

One-year delay models

after FID

Increase in CapEx due to

delay is estimated and incorporated in the model

Tax loss is estimated as an

indication of direct cost to public

Profit loss is estimated as

an indication of direct cost to company RISK ANALYSIS

A simplified CAPM (Capital

Asset Pricing Model) to quantify risk was used

Risk was analysed under 3

scenarios, low risk, high risk and based on survey responses

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ONSHORE OIL WELL – SUPPLY COST COMPARISON

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$23.00 $23.00 $23.00 $23.00 $28.09 $23.00 $28.09 $23.00 $28.09 $9.52 $9.52 $9.52 $9.52 $9.71 $9.52 $9.71 $9.52 $9.71 $2.96 $5.46 $2.41 $2.96 $3.03 $1.75 $1.79 $4.90 $5.16 $2.54 $4.19 $3.70 $2.53 $1.79 $2.90 $2.12 $2.74 $2.41 $0.54 $0.66 $0.28 $0.35 $0.24 $- $5 $10 $15 $20 $25 $30 $35 $40 $45 TX ND PA BC BC - 1 Year Delay SK SK - 1 Year Delay AB AB - 1 Year Delay

2019 C$/bbl

CapEx OpEx Royalties Severance Tax Corporate tax Carbon tax

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ONSHORE OIL WELL – TAX AND PROFIT

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4.6% 3.4% 7.4% 12.5% 6.3% 7.7% 4.7% 12.1% 11.0% 13.1% 9.6% 6.6% 7.7% 6.8% 1.4% 0.8% 0.6% 0% 5% 10% 15% 20% 25% 30% 35% TX ND PA BC SK AB

% of revenue

Tax %

Severance Tax Royalties Corporate tax Carbon tax $2.455 $2.361 $2.604 $2.509 $2.309 $2.160 $0.712 $0.589 $0.583 $0.458 $0.933 $0.846 $- $0.5 $1.0 $1.5 $2.0 $2.5 $3.0 BC BC - 1 Year Delay SK SK - 1 Year Delay AB AB - 1 Year Delay

2019 C$ millions

Tax and Profit

Discounted profit Royalties Corporate Tax Carbon Tax

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ONSHORE GAS WELL – SUPPLY COST COMPARISON

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$1.379 $1.379 $1.379 $1.379 $1.491 $1.379 $1.491 $1.379 $1.491 $0.364 $0.364 $0.364 $0.364 $0.371 $0.364 $0.371 $0.364 $0.371 $0.137 $0.137 $0.136 $0.121 $0.123 $0.125 $0.126 $0.098 $0.100 $0.15 $0.02 $0.092 $0.092 $0.108 $0.120 $0.093 $0.110 $0.085 $0.108 $0.081 $0.032 $0.039 $0.017 $0.020 $0.014 $0.017 $- $0.5 $1.0 $1.5 $2.0 $2.5 TX ND PA BC BC - 1 Year Delay SK SK - 1 Year Delay AB AB - 1 Year Delay

2019 C$/mcf

CapEx OpEx Royalties Severance Tax Corporate tax Carbon tax

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ONSHORE GAS WELL – TAX AND PROFIT

“Expectation vs. Reality”

Estimated Survey

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COST OF 1 YEAR DELAY – SUMMARY

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0.00 0.05 0.10 0.15 0.20 0.25 0.30 0.35 LNG Project BC Natural Gas Pipeline AB- BC Crude Pipeline AB-BC Gas well BC Gas well AB Gas well SK Oil well BC Oil well AB Oil well SK Offshore GBS Project NL

$/mmbtu

Tax loss Profit loss 0.00 0.02 0.04 0.06 0.08 0.10 0.12 0.14 0.16 0.18 LNG Project BC Natural Gas Pipeline AB- BC Crude Pipeline AB-BC Gas well BC Gas well AB Gas well SK Oil well BC Oil well AB Oil well SK Offshore GBS Project NL

2019 C$/mmbtu

Tax loss Profit loss 0% 10% 20% 30% 40% 50% 60% LNG Project BC Natural Gas Pipeline AB- BC Crude Pipeline AB-BC Gas well BC Gas well AB Gas well SK Oil well BC Oil well AB Oil well SK Offshore GBS Project NL

% of Revenue

Tax Loss Profit Loss

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UNCERTAINTY – RISK CATEGORIES RANKED

Survey Results

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Regulatory approvals 1 Market factors 2 Energy policies 3 Project economics 4 Environmental polices 5 Project financing 6 Carbon management policies 7 Social acceptance 8

High risk Low Risk

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INVESTMENT RISK USING CAPM MODEL

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0% 2% 4% 6% 8% 10% 12% 0.00 0.50 1.00 1.50 2.00 2.50 3.00 3.50 4.00 Low High Survey

Interest on Debt (%) Estimated Risk Factor

Project Risk Sovereign Risk Institutional Risk Interest on Debt

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CONCLUDING REMARKS

Access to demand markets and regulatory uncertainty were ranked as

the top hurdles that impact business success.

Regulatory cost competitiveness was of high concern for LNG and
ffshore wells cases, and of lower concern for onshore wells and

pipelines.

Survey responses show different perceptions of the three stakeholder

groups (Canada) regarding the five regulatory characteristics analyzed, with the largest disagreement on predictability and transparency of the regulatory frameworks.

When compared between Canadian jurisdictions and the four cases

studied, stringency of the regulatory regimes received the highest ranking, while predictability had the lowest ranking.

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CONCLUDING REMARKS (Continued)

The comparison between US and Canada economic regulations does not

show a distinct advantage to either economy. TX and ND have higher taxation regimes compared to Canadian provinces for onshore oil and gas wells; for other three case studies Canadian provinces have higher taxes.

The delay in Canadian regulatory approvals gives a significant economic

advantage to US jurisdictions.

Survey respondents categorized regulatory approvals as the highest risk

category for Canadian investments.

The Sovereign risk for Canadian jurisdictions is higher according to the

survey results, suggesting higher uncertainty in Canadian regulatory regimes.

For pipeline and LNG project approvals, there is a significant difference

between the regulatory approval periods of the US and Canada, and for oil and gas well approvals, the timelines are comparable between the US and Canada.

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REMAINING QUESTION FOR CERI TO ASSESS

Is the increased time for assessing major projects leading to increased social outcomes (e.g. environmental protection, community participation, economic development, recognition of indigenous concerns)? If yes – the question is one of a cost benefit analysis If no – it is a regulatory efficiency matter

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