National Energy Board Canadian Environemental Assessment Agency
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Enbridge Northern Gateway Project Joint Review Panel

gatewaypanel.review-examen.gc.ca

10 Need for the project and economic feasibility

Contents

10 Need for the project and economic feasibility

10.1 Need for the project and economic feasibility

10.1.1 Economic setting

10.1.2 Supply

10.1.2.1 Crude oil

10.1.2.2 Condensate

10.1.3 Transportation

10.1.3.1 Oil export capacity

10.1.3.2 Transportation contracts

10.1.3.3 Western Canada Sedimentary Basin transportation system

10.1.3.4 Canadian crude oil export pipeline utilization

10.1.4 Markets

10.1.4.1 Crude oil

10.1.4.1.1 Northeast Asia

10.1.4.1.2 United States west coast

10.1.4.2 Imported condensate

10.1.5 Project financing

10.2 Potential impact on western Canada crude oil prices

10.3 Potential impact on the Alberta upgrading and Canadian refining industries

10 Need for the project and economic feasibility

The Panel has considered the justification for, and economic feasibility of, the proposed Enbridge Northern Gateway Project. This involved assessing whether the facilities are needed and would be used at a reasonable level over their expected economic life.

For pipeline proposals, applicants must generally provide evidence on:

  • the supply of commodities that would be shipped on the pipeline;
  • the markets that would receive the products transported by the pipeline;
  • transportation matters, including the appropriateness of the capacity of the applied-for facilities and the capability of existing transportation infrastructure to meet the need identified by the applicant;
  • the financial arrangements for the construction and ongoing operations of the proposed project; and
  • whether there is a reasonable likelihood that tolls on the pipeline would be paid.

 

10.1 Need for the project and economic feasibility

Views of Northern Gateway

10.1.1 Economic setting

Northern Gateway said that Canada's petroleum industry has been, and remains, a major driver of economic growth and prosperity in this country. It said that this industry directly or indirectly accounts for about 8 per cent of national Gross Domestic Product (GDP). It said that the petroleum industry represents the largest single private sector investor in the country, is the largest net contributor to Canada's positive trade balance, and is a major component of Canada's total wealth. Northern Gateway said that the potential remains for the oil and gas sector to continue to be a key driver of the economy for many years into the future. It said that sustaining Canadian living standards requires developing and expanding basic or propulsive industries, of which the petroleum industry in Canada fits the classic definition.

Northern Gateway said that there are significant changes affecting the supply and demand dynamics of global oil markets. With respect to global supply, conventional oil reserves are unlikely to meet still-growing global demand. This is partly because most existing conventional reserves, and several of the best prospects to increase them, are concentrated in countries that do not allow international companies to take part in upstream petroleum activities. In its view, the prospective development of oil supply from these areas is likely to fall short of market needs. In addition, certain countries with substantial production and favourable resource endowments are characterized by potential political instability. Northern Gateway said that this creates a concern among consuming nations about the long-term security of supply from these areas.

Regarding global demand, Northern Gateway said that a historic shift is taking place between the fully-developed, post-industrial economies of North America and Western Europe and the developing countries in East Asia. Northern Gateway said that demand for oil in the developed world appears to have peaked, mainly as a result of relatively slow economic growth, de-industrialization, and measures related to climate change policy. Northern Gateway said that countries in the developing world, seeking to increase the standard of living for their growing populations, are now driving global growth in demand for oil and are concerned about the availability of secure supplies to meet this growth. Northern Gateway said that Canadian oil sands attract interest for several reasons:

  • the resource is open to and attracts significant investment from national and international sources;
  • reserves are known;
  • production has been growing; and
  • Canada has a record of political stability.

Northern Gateway said that, in the past, the United States has provided Canadian oil producers with a steadily growing and secure market. As a result, Canada has been in the unique position among the world's major crude oil exporters of delivering virtually all of its exports to one foreign jurisdiction. Northern Gateway said that demand is now declining in the United States and trade-related actions are occurring that may limit Canada's access to that market. Northern Gateway said that the most significant change affecting United States import requirements has been the resurgence of oil and gas production attributable to breakthroughs in technology in developing unconventional resources.

Northern Gateway said that India and China are leading oil demand growth in the developing world. It said that, when this demand growth is contrasted with the declining demand for oil in the United States, the need for Canada to access international markets is clear. Northern Gateway said that western Canadian crude oil pricing is under extreme stress because of a lack of pipeline capacity to serve new markets and, consequently, oversupply in existing markets. It said that this situation results in a massive transfer of wealth from Canadian crude oil producers and governments to the refining sector, the vast majority of which is located in the United States.

Taking into account these factors, Northern Gateway said that it is important for Canada to gain access to growing Pacific markets if it is to receive full value for western Canadian oil production.

10.1.2 Supply

10.1.2.1 Crude oil

In support of its application, Northern Gateway submitted evidence on crude oil supply in western Canada. In its 2010 application, Northern Gateway presented several forecasts demonstrating that crude oil supply is anticipated to grow significantly through to 2025. In response to the Panel's request, Northern Gateway provided an updated supply forecast. This was based on the Canadian Association of Petroleum Producers' Crude Oil Forecast, Markets & Pipelines, June 2011 forecast. This forecast data ended in 2025. Northern Gateway extrapolated it to 2035 by using the rate of change for the period from 2020 to 2025.

Northern Gateway's western Canada forecast projects supply growth from 447,900 cubic metres (2.8 million barrels) per day in 2010 to 990,800 cubic metres (6.2 million barrels) per day by 2035. Its comparison to the 2011 National Energy Board Energy Futures forecast and the Canadian Association of Petroleum Producers' 2012 forecast is provided in Figure 10.1. Northern Gateway said that forecast conventional light and heavy crude oil supply volume is projected to decline for the period from 2026 to 2035. It said that advances in drilling and production technologies could result in reduced decline rates, flat production, or even increased production.

Figure 10.1 Western Canada crude oil supply

Figure 10.1 Western Canada crude oil supply

Based on Northern Gateway evidence summarizing forecasts from the National Energy Board, the Canadian Association of Petroleum Producers, and Enbridge Inc.

Table 10.1 Remaining Established Reserves of Oil and Bitumen (Estimate at the end of 2007)

Reserves Volume (thousand cubic metres) Volume (thousand barrels)
Total conventional crude oil 614,400 3,871,000
Total bitumen 27,448,000 172,922,000
Total remaining reserves 28,062,400 176,793,000

Northern Gateway said that western Canadian oil supply growth is being driven by the development of Canada's oil sands reserves (Table 10.1). It said that forecast supply is subject to continuous assessment and revision based on projected conditions, which include oil prices, financial markets, and capital cost projections to develop oil sands projects. Northern Gateway said that, although supply growth may vary between forecasts, there is a consistent trend that growth will continue in the Canadian oil sands. Northern Gateway noted the Alberta Energy and Resources Conservation Board estimate that only 3.3 per cent of oil sands reserves had been produced between 1967 and 2009.

Northern Gateway said that it intends to secure long-term, unconditional shipping commitments for the oil export pipeline, which would minimize the risk related to oil supply availability.

10.1.2.2 Condensate

Northern Gateway submitted evidence concerning global condensate markets, prepared by the consultants Poten & Partners. The study explored the growth in condensate supply sources that could be available to markets in western Canada. It concluded that there was more than sufficient global supply available to the project when taking into consideration a combination of field condensates, ultra-light oil, plant condensates, return condensates, and light virgin naphtha supplies.

Northern Gateway said that forecast gross condensate supply from the Asia Pacific and Middle East is an indication of the total quantity available to the export market. Based on the current market structure, it said that some volumes would likely be consumed for petrochemical, refinery, and splitter (a refinery that processes only condensate) use and, therefore, may not be available for export to Canada (Table 10.2). The Poten & Partners study estimated that net supplies of 6,500 cubic metres (41,000 barrels) per day in 2015 and 52,700 cubic metres (332,000 barrels) per day in 2020 could be available to Canada. The study indicated that, by 2035, condensate availability could reach 81,300 cubic metres (512,000 barrels) per day.

Northern Gateway said that the assessment of available condensate supply is conservative in two respects. First, as condensate trades in an open market and is available to the highest bidder, subtracting volumes for petrochemical, refinery, and splitter use may understate available supply. Second, by only looking at the Asia Pacific and the Middle East, the available supply was restricted. Northern Gateway said that South American supply sources are relatively close and would also likely be available.

Northern Gateway identified several factors that could affect the availability of global supply:

  • global natural gas production;
  • petrochemical demand;
  • refinery and condensate splitter demand;
  • disruptions in producing countries; and
  • heavy oil producers' demand for diluent.

Northern Gateway said that, like crude oil, condensate prices are an interaction between supply and demand. The choice by western Canadian producers to purchase an imported condensate would depend on the cost and availability of alternative blending agents and condensate supply sources. Northern Gateway said that the existence of signed precedent agreements (PAs) is currently the best indication of the underlying demand for condensate, and that shippers are confident that they could access sufficient condensate supply to satisfy their contractual obligations.

Table 10.2 international condensate supplies (All quantities in thousand barrels per day)

  2010 2011 2012 2013 2014 2015 2020 2025 2030 2035
Exports
Asia / Pacific Condensate Exports 180 172 181 191 195 199 300 378 449 489
Middle East Condensate Exports 1,418 1,476 1,532 1,413 1,499 1,484 1,874 1,848 1,961 2,065
Total Available for Export 1,598 1,648 1,713 1,604 1,694 1,683 2,174 2,226 2,410 2,554
By Use
Refining / Petrochemical 756 806 871 762 800 800 1,000 1,050 1,150 1,200
Merchant and Petrochemical Splitting 842 842 842 842 842 842 842 842 842 842
Total by Use 1,598 1,648 1,713 1,604 1,642 1,642 1,842 1,892 1,992 2,042
Diluent Potential 0 0 0 0 52 41 332 334 418 512

10.1.3 Transportation

10.1.3.1 Oil export capacity

The oil pipeline is designed for an average thro ughput capacity of 83,500 cubic metres (525,000 barrels) per day, while the condensate import pipeline is designed for an average throughput capacity of 30,700 cubic metres (193,000 barrels) per day.

Northern Gateway said that the proposed marine terminal would include two tanker berths capable of loading crude oil and unloading condensate. The tanker berths would be sized to accommodate a vessel of up to 320,000 deadweight tons, enabling the terminal to accept Very Large Crude Carriers (VLCCs). Northern Gateway said that the berths would also be able to accommodate smaller vessels, such as the Suezmax (130,000 deadweight tons) and Aframax (80,000 deadweight tons) classes, which may be more suitable for certain markets in the Pacific.

10.1.3.2 Transportation contracts

Northern Gateway said that, in order for the project to be financeable and to proceed to construction, long-term firm shipping commitments would need to be in place. Northern Gateway said that, before entering into unconditional transportation service agreements (TSAs), prospective shippers would need to be satisfied that:

  • the project has been approved by the regulator, and subject to acceptable terms and conditions;
  • the costs to construct the project are reasonable and can be satisfactorily managed; and
  • the project's in-service date would meet shippers' commercial requirements.

Northern Gateway said in its application that, with prospective shippers, it was developing precedent agreements and the form of firm transportation service agreements that would be entered into. Northern Gateway expected that these would be negotiated and finalized in advance of the regulatory decision. In August 2011, Northern Gateway advised that both the oil export and the condensate import pipelines had been fully subscribed for long-term transportation service through shipper-executed precedent agreements. Northern Gateway filed copies of the pro-forma precedent agreement and transportation service agreement for both pipelines.

Northern Gateway confirmed that the precedent agreements are non-binding in that they do not require any shipper to execute a transportation service agreement that would commit them to ship or pay for oil or condensate transportation unless, among other things, the shipper has received, at its sole discretion, the necessary approval of its senior management or board of directors.

Northern Gateway said that final contracted volumes for each of the pipelines would be determined when transportation service agreements are executed. It did not indicate what minimum level of contracted capacity would be required in order to make the project commercially viable. Northern Gateway said that it expects that, when transportation service agreements are executed, there would be 10 shippers on the project with firm volume commitments comprising the full contractible capacity of both the oil (79,400 cubic metres [500,000 barrels] per day) and condensate pipelines (27,800 cubic metres [175,000 barrels] per day) for a term of at least 15 years.

Northern Gateway said that, if there were insufficient commercial support for either the oil or the condensate pipeline, one (most likely the oil pipeline) could potentially proceed without the other. Northern Gateway said that it would conduct a Class III capital cost estimate for the scenario where both the oil and condensate pipelines are built together, and another estimate with only the oil pipeline being built. It said that it would likely not conduct a separate Class III capital cost estimate for the condensate pipeline proceeding alone.

Northern Gateway said that the basic process to finalize firm transportation service agreements includes three steps:

  1. The terms and conditions of regulatory approval would be reviewed to confirm their commercial acceptability.
  2. More definitive costs to construct the project would be estimated based on prevailing labour and materials costs, and on imposed regulatory conditions. This process is expected to involve expenditures in the range of $150 to $180 million, depending on the degree of cost certainty required.
  3. Construction financing would be arranged.

Northern Gateway said that, when the first two steps have been completed, the prospective shipper would be in a position to finalize the amount of capacity and execute the transportation service agreement attached to its precedent agreement. Northern Gateway said that, following successful allocation of capacity (including, if necessary, an open season to offer remaining capacity to third parties), it would proceed with project financing and construction. The transportation service agreements would be filed with the National Energy Board before beginning construction.

Northern Gateway said that transportation service agreements would need to be in place in the 2014 timeframe to meet the target in-service date of 2018.

Table 10.3 capacities of existing systems exiting Western Canada

Name Destination Current Capacity (thousand cubic metres/day) Current Capacity (thousand barrels / day)
To PADD V/West Coast Offshore
Kinder Morgan (Trans Mountain) British Columbia US West Coast Offshore 47.7 300
To Other Markets
Enbridge Pipelines Eastern Canada US Midwest 398.3 2,505
Kinder Morgan (Express) US Rocky Mountains US Midwest 44.9 282
Milk River Pipeline US Rocky Mountains 18.8 118
Rangeland PIpeline US Rocky Mountains 13.5 85
TCPL (Keystone) US Midwest 69.2 435

SOURCE: Energy Resources Conservation Board 2009 and company websites.

10.1.3.3 Western Canada Sedimentary Basin transportation system

Northern Gateway said that nearly all western Canadian oil production moves via pipeline to refining centres in the United States and Canada. The two primary distribution centres in Alberta are located near Edmonton and Hardisty. Oil flows into these centres on a large network of feeder pipelines. Northern Gateway said that the feeder system has grown in recent years by adding the Access, Horizon, and Waupisoo pipelines, and by expanding the Cold Lake System and the Corridor Pipeline.

From Edmonton and Hardisty, crude oil is transported by pipeline to domestic and export markets. At Edmonton, crude oil is transported east on the Enbridge Mainline system, west on Kinder Morgan's Trans Mountain Pipeline, and south through Pacific Energy Partners' Rangeland Pipeline system. At Hardisty, crude oil can travel to the United States Petroleum Administration for Defense Districts (PADD) II and IV on the Enbridge Mainline system, Kinder Morgan's Express Pipeline, TransCanada's Keystone Pipeline, or through the combination of Inter Pipeline Fund's Bow River and Plains Marketing's Milk River pipelines.

The Enbridge Mainline system, Keystone, and Express Pipeline provide export capacity to North American mid-continent markets, while the Trans Mountain Pipeline system is the only pipeline that can currently access markets on the west coast. Northern Gateway said that the existing Trans Mountain Pipeline system operates at or near full capacity. Table 10.3 shows the capacities of these existing systems.

Northern Gateway said that TransCanada had expanded the Keystone Pipeline to a capacity of 93,800 cubic metres (590,000 barrels) per day from Hardisty, Alberta to Wood River, Illinois and Cushing, Oklahoma and has received National Energy Board approval to expand the Keystone system by a further 111,100 cubic metres (700,000 barrels) per day to access the United States Gulf Coast market (Keystone XL).

In 2010, the 29,600 cubic metres (186,000 barrels) per day Enbridge Southern Lights condensate line began operation, importing condensate from Illinois to Edmonton.

10.1.3.4 Canadian crude oil export pipeline utilization

To address the requirement for additional export pipeline capacity from western Canada, Northern Gateway submitted an assessment by Muse Stancil and Co. (Muse). Muse said that the utilization of all export pipelines is influenced by the total volume of western Canadian crude oil supply and the composition of western Canadian crude oil supply. The utilization of a specific pipeline is influenced by its tolls, volume commitments, and the crude supply-demand balance at the terminus of the export pipeline.

Muse said that the crude supply-demand balance at the end point of any pipeline can be very important in determining utilization. Irrespective of total western Canadian crude oil supply, an export pipeline must connect the western Canadian crude oil supply with a market. Absent demand at the terminus, Muse said that the export pipeline has no utility.

The analysis examined outbound rail and export pipeline utilization for the period from 2018 to 2035 absent the Enbridge Northern Gateway Project (Base Case), and with the Enbridge Northern Gateway Project (the Northern Gateway Case).

Key conclusions of the Base Case included:

  • Rail shipments from western Canada to the United States Gulf Coast and Asia via British Columbia were forecast to commence by 2019, and to rise to 264,700 cubic metres (1,665,000 barrels) per day by 2035. If rail were not available, the alternative would be to shut-in production in western Canada, or to build a high capacity export pipeline.
  • The Trans Mountain Pipeline is full throughout the forecast period.
  • The Enbridge Mainline is close to its expanded capacity at Cromer, Manitoba and Superior, Wisconsin.
  • Hardisty receipts on the Keystone XL pipeline tend to be constrained by the available downstream capacity at Baker, Montana and Cushing, Oklahoma.
  • The Keystone pipeline is projected to have capacity available throughout the forecast period. This is primarily due to the finite crude demand at the WRB Wood River, Illinois refinery and the limited market alternatives at Patoka, Illinois.
  • Excess pipeline capacity to the United States Rockies region is projected throughout the forecast period. This is due to the fairly small size of the Rockies refining capacity, combined with rising volumes of Rockies crude production and limited outbound (from the Rockies) pipeline capacity.

Key conclusions of the Northern Gateway case included:

  • The start-up of Northern Gateway is projected to eliminate rail shipments from Canada until about 2023, after which rail deliveries begin to the British Columbia ports, followed by increasing deliveries to the United States Gulf Coast in subsequent years.
  • The Trans Mountain Pipeline remains at capacity, except perhaps in 2018.
  • The utilization of the Keystone XL and Keystone pipelines is comparatively unaffected by the commissioning of the Enbridge Northern Gateway Project.
  • The combined utilization of the pipelines to the Rockies decreases due to a higher volume of Bakken crude being transported on the Platte pipeline, which acts to displace Canadian crude transshipments through the Rockies to the Midwest via the Platte pipeline.
  • The Enbridge Mainline experiences the largest change in utilization. In 2019, excess capacity at Cromer is approximately 21 per cent or 89,000 cubic metres (560,000 barrels) per day. The amount of excess capacity on the Mainline rapidly decreases and drops to 3 per cent by 2023.

Muse did not include the potential expansion of Trans Mountain in its assessment of western Canadian export pipeline utilization.

Northern Gateway said that there is not currently excess capacity to the markets that the project is designed to serve. It said that efficient infrastructure is often of large scale, requiring a period of transition wherein other infrastructure may be underutilized. Northern Gateway said that, under the terms of the Enbridge Mainline Competitive Tolling Settlement (CTS), Enbridge, not its shippers, would absorb the revenue impact of lower volume on the Mainline.

Northern Gateway said that the value of the project is not that it creates incremental pipeline capacity for western Canadian crude oil supply, rather that it would enable western Canadian crude oil to reach new markets, maximizing pricing benefits to western Canadian oil producers.

With respect to utilizing condensate import facilities, Northern Gateway said that the Southern Lights pipeline can be expanded to 47,600 cubic metres (300,000 barrels) per day, which it said would not be sufficient to meet condensate import demand forecast by the National Energy Board by the year 2020.

10.1.4 Markets

10.1.4.1 Crude oil

In support of its application, Northern Gateway submitted a market potential and benefits analysis prepared by Muse. In recognition of the significant changes in the market environment that had occurred since the report dated January 2010, it prepared an updated report dated July 2012. The following discussion refers to the updated report.

Muse said that the project would act to expand the market area for western Canadian crude to the entire Asia-Pacific region, thereby approximately doubling the absolute size of the potential market for western Canadian crude oil. It said that the key markets would be Northeast Asia and possibly the United States west coast. Sales outside of these regions would be highly probable, though they would likely be somewhat intermittent.

10.1.4.1.1 Northeast Asia

Northern Gateway said that the Northeast Asia market is regarded as the most prospective for Canadian crude producers due to its size, the installed capability of the regional refineries, and its physical proximity to the west coast of Canada. Northern Gateway said that China and Japan are the second and third largest oil markets in the world, following the United States.

Muse said that, in 2008, crude imports into China, Japan, South Korea, and Taiwan totaled 1,756,000 cubic metres (11 million barrels) per day. At the regional level, crude imports are sourced predominantly from the Middle East, with an increasing proportion in recent years obtained from West Africa.

Muse said that the distance from Kitimat, British Columbia to Northeast Asia is about 80 per cent of that from the region's supply sources in the Middle East, and less than half the distance from West Africa. It said that the relative proximity of Kitimat to the Northeast Asia market is an important competitive advantage for western Canadian crude producers. Table 10.4 provides the voyage distances to three key Northeast Asia markets from the Middle East, West Africa, and Kitimat.

Muse estimated that Northeast Asia total potential demand for western Canadian crude oil is approximately 350,000 cubic metres (2.2 million barrels) per day. Table 10.5 provides an overview of the estimated potential demand in Northeast Asia for western Canadian crude oil.

Table 10.4 Waterborne voyage distances (nautical miles, round trip)

Destination Load Port
Kitimat Arabian Gulf Nigeria
China (Shanghai) 9,729 11,994 20,649
Japan (Yokohama) 8,082 13,277 21,931
South Korea (Ulsan) 8,725 12,546 21,201

Table 10.5 total northeast asia potential demand

Country Cubic Metres per Day Thousands of Barrels per Day
Japan 100,200 630
Northern China 129,800 820
Sourthern China 38,400 240
South Korea 56,200 350
Taiwan 28,100 180
Total 352,700 2,220

JAPAN

Muse said that Japan is currently the second largest importer of crude oil in Northeast Asia, following only China. Japan is also advantageously located to receive crude shipments from Kitimat, as it is the closest major Asian market to the west coast of Canada. Total crude imports in 2008 totaled 664,000 cubic metres (4.2 million barrels) per day with almost 90 per cent sourced from the Middle East. Muse said that Japanese refiners are concerned about this degree of reliance upon the Middle East, and have been seeking to diversify their crude sources in recent years.

Muse said that the average sulphur content and gravity of Japanese crude oil imports is reflective of a medium sour grade. It said that, although the proportion of the Japanese refining sector capable of processing heavy crudes is not particularly high, the refining capacity that is in the high and medium category is material, totaling some 380,000 cubic metres (2.4 million barrels) per day. Muse said that the Japanese industry is a strong potential customer for Canadian synthetic crude oils, particularly the premium synthetic crude grades that have better distillate properties.

Muse estimated the overall potential market for western Canadian crude in Japan to be about 100,000 cubic metres (630,000 barrels) per day.

CHINA

Muse said that Chinese refiners have been adding more capacity than refiners anywhere else in the world, and this is expected to remain the case for the medium term. Moreover, China has been increasing its capacity to process heavier and higher sulphur content crude oil.

Muse said that China has perhaps the most diversified array of crude sources in all of the Asia-Pacific. It said that imports have been growing at an annualized rate of 14 per cent since 2003, totaling 570,000 cubic metres (3.6 million barrels) per day in 2008.

Muse said that Chinese imports are likely a blend of predominantly medium sour crude oil and various sweet crude oil grades. Muse limited its market potential analysis to coastal refineries since it is unlikely that the inland refineries would import significant volumes of waterborne crudes. It further disaggregated total coastal refining capacity between that in northern China and southern China, since Canadian supply to the southern China refineries is somewhat hampered by the greater distance from Kitimat, and the lessened distance from competing sources of crude oil supply. Muse said that over 60 per cent of the northern China refining industry is assessed to have a high or medium capability to process heavy, high sulphur crude oil. The total size of the northern China coastal refinery market is approximately 408,000 cubic metres (2.6 million barrels) per day.

Overall, the potential market size for western Canadian crude oil in Northern and Southern China was estimated to be about 129,800 cubic metres (820,000 barrels) per day and 38,400 cubic metres (240,000 barrels) per day, respectively.

SOUTH KOREA

Muse said that refining capacity in South Korea has been relatively static over the last several years. South Korean refiners have been steadily investing in their existing refineries to improve their ability to process heavier and higher sulphur content crude oil. Muse said that the South Korean refining industry is characterized by a few extremely large refineries.

Muse said that South Korea imported 376,000 cubic metres (2.4 million barrels) per day of crude oil in 2008 with roughly 60 per cent sourced from the Middle East. Although many of the South Korean refineries are very large, they are not specifically designed to process heavy sour crude oil. Muse said that South Korean refining capacity totals 418,000 cubic metres (2.6 million barrels) per day and, accordingly, there is a strong potential for Canadian crude sales to South Korea.

The overall potential market size for western Canadian crude oil was estimated to be approximately 56,200 cubic metres (350,000 barrels) per day.

TAIWAN

Muse said that the Taiwanese refining sector shares many of the characteristics of the South Korean refining sector, in that its few refineries are quite large. Refining capacity has been static for a number of years and totals 197,000 cubic metres (1.2 million barrels) per day.

According to Muse, total Taiwanese crude imports were 146,000 cubic metres (920,000 barrels) per day in 2008, with 83 per cent of imports sourced from the Middle East. Muse estimated that Taiwanese refineries process a mix of predominantly light sweet and medium sour crude oils and are not specifically designed to process heavy sour crude oils.

The overall potential market size for western Canadian crude oil was estimated to be approximately 28,100 cubic metres (180,000 barrels) per day.

10.1.4.1.2 United States west coast

Muse said that the United States west coast has three refining areas accessible by tanker. These centres are the Puget Sound area of Washington, the San Francisco area, and Los Angeles. Puget Sound refiners process Canadian crude oil delivered by the Trans Mountain Pipeline and by tanker from Kinder Morgan's Westridge dock at Burnaby, British Columbia. Some spot shipments to California from the Westridge dock have also been made over the last several years.

PUGET SOUND

Muse said that the refining capacity in Puget Sound is approximately 99,000 cubic metres (623,000 barrels) per day. Imports represent about 40 per cent of total refining capacity, with remaining refinery needs satisfied by domestic Alaskan North Slope production delivered via tanker. Muse said that Alaskan North Slope production has been in decline for several years and production forecasts indicate that this trend is likely to continue. It said that, unless refineries in this region make substantial conversion capacity investments, the most likely replacement for Alaskan North Slope will be a light crude oil such as Canadian light synthetic.

CALIFORNIA

Muse said that California is the third largest consumer of transportation fuels in the world. It has 21 refineries that process over 318,000 cubic metres (2 million barrels) per day of crude oil. The two main refining areas in California are the San Francisco area and Los Angeles. Both have access to waterborne supply, as well as pipeline connections to state production. In 2008, California state production accounted for 38 per cent of its total refinery supply. Muse said that California's domestic crude oil is predominantly heavy in quality, and in many aspects is similar in character to Canadian heavy crude oil. As in Puget Sound, refineries in California also process Alaskan North Slope crude. Muse said that, over the coming decade, both these traditional supply sources are forecast to decline, resulting in an increased reliance on foreign imports.

Muse said that the United States west coast market provides a significant growth opportunity for western Canadian producers. In California alone, it estimated the market potential at up to 71,500 cubic metres (450,000 barrels) per day, although this could be reduced by proposed low carbon fuel requirements in the state.

10.1.4.2 Imported condensate

Northern Gateway said that supplies of western Canadian field condensates have remained relatively flat and are expected to decline throughout the forecast period due to lower volumes available from produced natural gas. Growth in bitumen production will require significant increases in diluent supply for blending. Northern Gateway said that, in the past, condensate supply for blending has been supplemented with light oil, synthetic crude oil, and imported volumes of natural gasoline. It said that, although light oil and synthetic crude oil may continue to be used for blending, additional sources of condensate will be required to sustain the forecast growth in bitumen production.

Northern Gateway said that in the National Energy Board 2009 Energy Futures Reference Case Scenario, Western Canada Sedimentary Basin condensate supply is forecast to decline from 23,900 cubic metres (150,000 barrels) per day in 2008 to 14,600 cubic metres (92,000 barrels) per day by 2020. Northern Gateway said that the National Energy Board projects that condensate imports, mainly as a result of bitumen blending, could grow from 12,400 cubic metres (78,000 barrels) per day in 2008 to 55,000 cubic metres (346,000 barrels) per day by 2020. Northern Gateway said that, based on the National Energy Board's demand projections, and taking into account other means of delivering condensate to the Athabasca region, there is an apparent market shortfall approximating the delivery capacity of the project's condensate pipeline.

10.1.5 Project financing

Northern Gateway's financial plan is in a preliminary state and would not be finalized until other key steps in the project are completed following the release of the Panel's report. These steps include completing a Class III capital cost estimate to give a higher level of certainty on indicative tolls and finalizing commercial support by executing unconditional transportation service agreements.

Northern Gateway expects the project to be financeable because of the following project attributes: supply and market support, a cost of service toll, credit worthy shippers, and long-term transportation service agreements that must be in place before construction. Some of these project attributes are still being developed. Project financing is further discussed in Section 11.2.

To finance the project, Northern Gateway is taking a project financing approach with 30 per cent equity and 70 per cent non-recourse debt that would be secured by the project's property and cash flow. If non-recourse debt cannot be arranged, Enbridge and the other equity investors would provide both the debt and equity for the project. The capital structure would be modified to include 40 per cent equity and 60 per cent debt in this financing scenario.

Views of parties

Funding Participants – Cenovus Energy Inc. (Cenovus), INPEX Canada Ltd. (INPEX), Nexen Inc. (Nexen), Suncor Energy Marketing Inc. (SEMI), and TOTAL E&P Canada Inc. (TOTAL)

Cenovus, INPEX, Nexen, SEMI, and TOTAL (the Funding Participants) said that they have directly, or through affiliates, executed funding support agreements and precedent agreements with Northern Gateway for transportation on the applied-for oil and condensate pipelines and related infrastructure. The Funding Participants said that there is a clear need for the project to be developed in a timely manner.

Cenovus said that its operations include extensive in-situ oil sands and conventional oil developments in Alberta and Saskatchewan. It currently produces about 20,600 cubic metres (130,000 barrels) per day and has a 10-year plan to increase its oil production in western Canada to about 79,400 cubic metres (500,000 barrels) per day.

Cenovus said that it is interested in becoming a shipper on Northern Gateway to enable firm access to transportation capacity that will support its market diversification efforts and to provide an additional source of diluents. Cenovus said that it has been importing diluent into the Kitimat area and transporting it by rail to Edmonton since 2006, and that Northern Gateway would likely replace these volumes.

Nexen said that it is a large oil and gas producer, with Nexen Marketing as its marketing arm. It said that Nexen Marketing markets in excess of 47,600 cubic metres (300,000 barrels) per day of oil produced in western Canada on behalf of Nexen and more than 300 producers and customers.

Nexen said that it is interested in becoming a shipper on the Enbridge Northern Gateway Project to access new markets for its production and diluent requirements. Nexen said that tidewater access from the west coast of Canada will allow producers to build long-term, commercial relationships with more partners thereby gaining access to new markets. Nexen said that broader access to global markets and pricing would allow it to have greater choice in addressing economic risk.

SEMI said that it is the marketing entity of Suncor Energy Inc., currently marketing more than 55,500 cubic metres (350,000 barrels) per day of oil sands production from Alberta. It said that Suncor Energy Inc. has plans to produce in excess of 111,000 cubic metres (700,000 barrels) per day from Alberta by 2020.

SEMI said that tidewater access to the west coast would allow it to sell some of its growing crude oil production to new markets in the Pacific Basin, enabling market diversification. SEMI was of the view that current forecast production volumes will require the capacity associated with the proposed expansion of the Trans Mountain pipeline system, Keystone XL, and the Enbridge Line 9 reversal, as well as the Enbridge Northern Gateway Project. SEMI said that, assuming that all of the referenced pipeline projects are completed, the projected use of the Enbridge Northern Gateway Project would not be diminished.

TOTAL said that it currently produces about 4,000 cubic metres (25,000 barrels) per day of crude oil in Alberta, with plans to increase production to about 31,700 cubic metres (200,000 barrels) per day over the next decade.

TOTAL said that the project would provide Alberta oil producers with access to the world market and the condensate pipeline will be required to supply diluent volumes to support growing bitumen production. TOTAL was of the view that current forecast production volumes will require the capacity associated with the proposed expansion of the Trans Mountain pipeline system, Keystone XL and the Line 9 reversal as well as the Enbridge Northern Gateway Project. TOTAL said that, assuming the completion of all the referenced pipeline projects, the projected use of the Enbridge Northern Gateway Project would not be diminished.

The Funding Participants said that substantial Western Canada Sedimentary Basin crude oil reserves and the supply forecasts published by third parties such as the Canadian Association of Petroleum Producers and the National Energy Board, combined with their supply expansion plans, demonstrate that there will be adequate supply available for the oil pipeline. They said that the project would diversify available sources of diluent needed to ensure that bitumen can be transported by pipeline. The Funding Participants said that the increasing demand for diluent in western Canada is supported by the National Energy Board market assessment issued in November 2011 which shows forecast condensate import requirements into Canada of 106,400 cubic metres (670,000 barrels per day) by year 2035. The Funding Participants said that there are many sources of diluent available in the international market and they are confident that adequate supplies will be available to ship on the condensate pipeline.

The Funding Participants said that the commitments made through the Funding Support Agreements (approximately $140 million) and the precedent agreements demonstrate strong support for the project. Cenovus, Nexen, SEMI and TOTAL said that if the project proceeds as contemplated and is economic, it would be their intent to enter into firm transportation service agreements.

MEG Energy Corp. (MEG)

MEG said that it is currently producing approximately 4,100 cubic metres (26,000 barrels) per day and has plans to increase production to 41,000 cubic metres (260,000 barrels) per day by 2020.

MEG said that it is a Funding Participant, has executed precedent agreements, and is interested in becoming a shipper on the Enbridge Northern Gateway Project because it would provide access to new and growing markets for the sale of crude oil and purchase of condensate. It said that the Enbridge Northern Gateway Project would create an alternative outlet for Canadian crude oil, thereby reducing exposure to capacity constraints on existing pipeline systems.

MEG said that significant volumes of crude oil supply would be available for shipment on the oil pipeline. In its view, this position is supported by the Funding Participants' expansion plans, the National Energy Board and Canadian Association of Petroleum Producers forecasts, and by western Canadian oil reserves, which are among the largest in the world. MEG said that Northern Gateway's evidence regarding condensate supply demonstrates that condensate available to the project from international sources would exceed the capacity of the import pipeline. MEG said that it sources diluent from the United States Gulf Coast. It said that waterborne condensate imports via the Enbridge Northern Gateway Project are very likely to be attractive from a cost perspective compared with the United States Gulf Coast, due to the shorter transportation distance.

MEG supported the conclusions of the Muse market analysis. It said that the market potential in Northeast Asia alone of 349,200 cubic metres (2.2 million barrels) per day represents over 4 times the capacity of the oil export pipeline. It said that the United States west coast also holds strong potential for shippers. MEG said that there is no credible evidence that calls into question the position that the project would open new markets for Canadian crude oil. In its view, the commitments made by the Funding Participants support the existence of the market opportunity. MEG said that the Kinder Morgan Trans Mountain pipeline system is currently the only pipeline system exiting western Canada that is able to access these markets, and it is operating at or beyond full capacity.

MEG said that each Funding Participant would be making a commitment of about $1 billion in executing a 15-year transportation service agreement for each 7,900 cubic metres (50,000 barrels) per day of capacity. MEG said that it was looking for the opportunity to sign a transportation service agreement. It said that, given the significance of the investment, it and the other Funding Participants first need to fully understand the economics of the project, including project timing and the terms and conditions of regulatory approval. It said that this reflects a prudent approach to managing the risks of a large scale, market-opening, and greenfield project.

Canadian Association of Petroleum Producers

The Canadian Association of Petroleum Producers said that it represents large and small companies which collectively account for more than 90 per cent of Canada's natural gas and crude oil production. It said that the need for the Enbridge Northern Gateway Project is clear, as there has been tremendous crude oil supply growth in the Western Canada Sedimentary Basin and significant further growth is forecast. It said that as a result of this supply growth, western Canadian producers require access to new and growing markets, and there is clear commercial support for the project.

The Canadian Association of Petroleum Producers said that the United States has long been the primary export market for Canadian production, and it has and continues to be an extremely good market. It said it expects growing United States crude oil production to increase competition for western Canadian crude oil in various United States markets. It said that the Enbridge Northern Gateway Project would provide increased access to new and growing Pacific Rim markets, creating a significant new option and outlet for Canadian producers. The Canadian Association of Petroleum Producers said that no party has seriously questioned the availability of supply or the existence of markets for the project.

The Canadian Association of Petroleum Producers said that growth in pipeline capacity is not keeping up with the supply growth in the Western Canada Sedimentary Basin. It said that apportionment on multiple export pipelines has been a problem for several years and that, without new pipeline facilities, supply could become trapped. It said that trapped supply is a very significant concern to the Canadian petroleum producing industry and to governments that would experience lost revenue from lower taxes and royalties. The Canadian Association of Petroleum Producers said that insufficient pipeline capacity has also contributed to significant crude oil price discounting. It said that these outcomes are not in the public interest, and that it is not an option to wait for some other pipeline to proceed or for some other means to connect supply and markets.

The Canadian Association of Petroleum Producers said that it is the clear policy of the Canadian government that, subject to meeting all applicable regulatory and legal requirements, the operation of market forces should determine when energy developments and infrastructure should proceed and how supply and markets are connected. It its view, the Enbridge Northern Gateway Project is an example of the market working to put necessary infrastructure in place to accommodate Canadian crude oil supply growth.

Edmonton Chamber of Commerce

The Edmonton Chamber of Commerce, in final argument, said that it is Canada's largest chamber of commerce by membership, representing nearly 3,000 businesses with tens of thousands of employees in a variety of different industries and sectors. It said that it supports the approval of the Enbridge Northern Gateway Project. In its view, the project would contribute to a strong and viable energy and resource sector for the benefit of the whole country. It said that diversified market options for oil and gas are critical to sustaining Canada's prosperity and living standards.

Strathcona County

Strathcona County said that it is home to the majority of refining in western Canada, and is Canada's largest hydrocarbon processing centre. Strathcona County said that it supports the Enbridge Northern Gateway Project. It said that the petroleum industry forms the base of Canadian economic growth, development, and prosperity, and is essential to sustaining the national standard of living. In its view, the project is needed to diversify and stabilize Canadian crude oil exports, to access growing Northeast Asia markets, and to provide the necessary infrastructure for future growth.

World Trade Centre Edmonton

The World Trade Centre Edmonton said that its members include 21 chambers of commerce located in northern Alberta, northern British Columbia, northern Saskatchewan, Yukon, the Northwest Territories, and Nunavut. It said that the combined membership of these chambers is more than 10,000 businesses that employ more than 100,000 Canadians in a wide variety of industries.

The World Trade Centre Edmonton said that it supports approval of the Enbridge Northern Gateway Project. It said that the project would create market options for Canadian oil and gas products and generate revenues enabling diversification in the economy. The World Trade Centre Edmonton said that, if the project is not approved, the viability of Canada's oil and gas sector would be threatened.

The World Trade Centre Edmonton said that the project would have the important effect of reducing vulnerability to United States energy policy and current terms of trade. It said that Canada's economy is less stable, resilient, and productive as a result of the overdependence on the large United States market. It said that United States crude oil demand is decreasing while, in Asia and other places in the world, expected future demand is on the rise. It said that the Enbridge Northern Gateway Project is the clear and most efficient solution to effectively and responsibly manage these critical issues.

The World Trade Centre of Edmonton said that Canada's economy relies on commodities, and that the oil and gas industry is a primary engine of economic contribution to the commodity sector. It said that environmental considerations can be expected to lead to a less carbon-based economy and that future oil demand may decrease. It said that the Enbridge Northern Gateway Project would maximize the value of current oil production. It said that the investment capital generated through the project and the expertise developed through leading-edge risk management could diversify the Canadian economy over the longer term.

Alberta Federation of Labour

The Alberta Federation of Labour said that it is the largest labour organization in Alberta, representing more than 145,000 unionized workers in all sectors of the Alberta economy. As part of its evidence, the Alberta Federation of Labour filed a report titled An Economic Assessment of Northern Gateway, authored by Robyn Allan. The report critiqued many aspects of the economic case presented by Northern Gateway and concluded that the project is not needed and is not in the public interest. With respect to economic feasibility, the report took the position that the supply forecast presented by Northern Gateway could be optimistic because a portion of the forecast related to projects and supply that had not yet been sanctioned by regulators or industry. It also identified the potential risk that lower realized supply could lead to excess pipeline capacity and an associated increase in costs for all operators.

The Alberta Federation of Labour said that there was insufficient evidence to conclude that the condensate pipeline is needed and in the public interest. It said that the analysis regarding condensate availability prepared for Northern Gateway by consultants Poten & Partners was not provided as evidence and that, because Northern Gateway did not provide a witness to speak to it, it had not been tested. The Alberta Federation of Labour said that the supply identified by Poten & Partners, and relied upon by Northern Gateway, was available for Canada and other global markets and, therefore, Canada must compete for this supply.

Coastal First Nations

The Coastal First Nations commissioned a report by Dr. Thomas Gunton and Sean Broadbent of Simon Fraser University to assess the need for the project. The report titled A Public Interest assessment of the Northern Gateway Project concluded that the evidence provided by Northern Gateway is deficient and the application is incomplete. It said that the application does not demonstrate that the pipeline meets the need and public interest criteria required for National Energy Board approval.

With respect to need, supply, transportation matters, and markets, the Coastal First Nations said that Northern Gateway did not provide evidence of firm shipping contracts and, therefore, fails to meet one of the National Energy Board's key tests for demonstrating project need. It said that Northern Gateway did not adequately assess the supply and demand for incremental pipeline capacity and, therefore, did not demonstrate that the oil pipeline is required.

The Coalition – ForestEthics Advocacy, Living Oceans Society, and Raincoast Conservation Foundation

The Coalition submitted two reports in respect of the need for the pipeline: Pipeline to Nowhere? and The Northern Gateway Pipeline: An Affront to the Public Interest and Long Term Energy Security of Canadians.

The reports reached the following conclusions:

  • The application did not provide adequate evidence of market demand as there are no long-term commitments from shippers or refinery-specific demand analysis, as has conventionally been provided in past export pipeline applications before the National Energy Board. Unlike legally-binding transportation service agreements, the Enbridge Northern Gateway Project precedent agreements do not provide as robust an economic case for market demand.
  • The provided supply forecast would require a tripling of oil sands production by 2035. This is unreasonable and likely not achievable given the capital, infrastructure, and other inputs that would be required.
  • If no additional export pipelines are constructed in western Canada, there would not be a risk of supply shut-in until at least 2020. If Keystone XL and the Enbridge Northern Gateway Project are constructed, there would not be a risk of Western Canada Sedimentary Basin shut-in until 2026.

The Coalition said that Northern Gateway has not secured binding commercial support for the project and, therefore, the need for the project has not been demonstrated by the Canadian oil industry.

Haisla Nation

The Haisla Nation said that Northern Gateway has not established that the project is needed.

The Haisla Nation said that Northern Gateway has not met the majority of the National Energy Board Act's threshold requirements with respect to its application for the condensate import pipeline. Specifically, it said that Northern Gateway did not establish a likely long-term supply of condensate, understated existing or potential infrastructure to import condensates into Canada, and failed to analyze the demand for imported condensates. The Haisla Nation said that Northern Gateway failed to provide evidence on the financial viability of the condensate import pipeline and did not demonstrate that it would be economically viable, independent of the oil export pipeline.

The Haisla Nation said that, without a guarantee that long-term shipping agreements will be executed, it is not possible to determine whether either of the proposed pipelines is economically viable. It said that the Northern Gateway precedent agreements should not be construed as evidence of market demand because shippers have not analyzed potential sources of condensate or production requirements. It said that shippers would only make a decision to execute transportation service agreements after regulatory approval is obtained and after undertaking an extensive analysis on sourcing options and production needs.

Swan River First Nation

The Swan River First Nation said that the supply and demand evidence presented by Northern Gateway fails to prove that there is a need for the project, and carries the risk of creating surplus pipeline capacity. It said: "the needs of the oil sands industry do not represent the needs of Canadians, nor are they an appropriate proxy for public convenience and necessity. The needs of the oil sands industry are irrelevant to the question of what Crown actions are required to uphold Treaty No. 8 in relation to the project. In fact, the "need" for this Project has been explicitly established from the perspective of Northern Gateway."

Government of Alberta

Alberta said that the timing of tidewater access through projects like the Enbridge Northern Gateway Project is critical to Canada's energy producers competing in global markets and to Albertans and Canadians receiving full economic value for the development of their non-renewable resources. Alberta said that it agreed with Northern Gateway's view that, though not quantifiable, the project would offer significant and important benefits for the Canadian petroleum industry through market expansion and diversification.

Alberta said that there is clear and compelling evidence of a significant economic benefit associated with approving and constructing the project. It clarified that it has not taken a position in direct support of the application. In its view, the joint review process is well suited to determine whether the project is in the public interest.

Views of the Panel

Northern Gateway is seeking certificates of public convenience and necessity for the oil export pipeline and for the condensate import pipeline, which, together with the associated terminal facilities, constitute the project. The Panel must examine the justification for each pipeline. The Panel notes that the commercial underpinning for the project, as contemplated, would involve shippers (the Funding Participants) executing firm transportation agreements on both pipelines. For this reason, the views of the Panel on transportation contracts, commercial support, and project need are considered for both pipelines together.

Supply, markets, and transportation matters for the oil export pipeline

The Panel finds that there would be adequate supply available to the Northern Gateway oil export pipeline. Northern Gateway said that forecast western Canadian crude oil supply is expected to increase from 447,900 cubic metres (2.8 million barrels) per day in 2010, to 990,800 cubic metres (6.2 million barrels) per day by 2035. The Panel notes that this forecast is supported by nearly 28 billion cubic metres (177 billion barrels) of crude oil and bitumen reserves. The Panel notes that this forecast is similar to forecasts prepared by Canadian Association of Petroleum Producers and the National Energy Board. The Funding Participants said that they have plans to significantly expand production. The Panel notes that Northern Gateway intends to secure long-term, firm transportation agreements that would minimize supply risk to the pipeline. The Panel had no convincing evidence before it to demonstrate that there would not be adequate oil supply available to the pipeline. Though the Alberta Federation of Labour and the Coalition questioned whether the projected rate of supply growth was achievable, no party disputed that the oil sands are capable of delivering significant supply growth over the long term.

The Panel finds that there would be adequate markets available for the Northern Gateway oil export pipeline. Northern Gateway identified Northeast Asia to be the target market for the pipeline, assessing the market potential for western Canadian crude oil in this area to be about 350,000 cubic metres (2.2 million barrels) per day, representing about 4 times the capacity of the oil export pipeline. Northern Gateway said that the United States west coast is also a highly prospective market. The Funding Participants have indicated that they are seeking high-growth market alternatives for their production. The Panel notes that no party took the position that there would not be adequate markets available to absorb the volumes expected to be delivered off the oil export pipeline. In the Panel's view, it is in the public interest that growing western Canadian crude oil supply be able to access growing Pacific Basin markets.

Several parties, including the Alberta Federation of Labour, the Coalition and the Coastal First Nations said that the Enbridge Northern Gateway Project could result in excess western Canadian oil export pipeline capacity. The Panel is of the view that determining the need for additional pipeline capacity is a complex undertaking involving the forecasting of multiple uncertain variables, including supply, markets, and the evolution of transportation systems. It is crude oil shippers that most directly bear the costs of pipeline infrastructure in the form of tolls on new or expanded pipeline systems, and potentially higher tolls on cost of service based pipeline systems if throughput volumes are reduced. It is also shippers that most directly benefit from the pricing impacts afforded by the market access enabled by new or expanded pipeline infrastructure. Government revenues and royalties are, in a similar way, also impacted by these costs and benefits. In this connection, the Panel notes that no shipper or commercial third party, or government took the position that the pipeline would create excess pipeline capacity or any associated economic burdens. The evidence of Northern Gateway, the Funding Participants, the Canadian Association of Petroleum Producers, and the Government of Alberta was that pipeline capacity is not keeping pace with growing supply and additional pipeline capacity is required. The Panel agrees with Northern Gateway's assessment that there is currently no excess capacity between western Canada and the west coast of Canada enabling access to growing Pacific Basin markets. Currently, western Canadian producers can only access these markets via the Kinder Morgan Trans Mountain pipeline, which is operating at capacity, and is often in apportionment.

Supply, markets, and transportation matters for the condensate import pipeline

The main justification for the condensate import pipeline is the growing requirement for diluent for heavy oil blending in order to facilitate pipeline transportation to market. The Panel agrees with Northern Gateway's broad assessment that there is strong evidence to support expected significant growth in heavy oil production from western Canada and, as a result, that there will likely be significant growth in the requirement for diluent imports.

The Panel notes the position of the Alberta Federation of Labour and the Haisla Nation that there was insufficient evidence to establish the need for the condensate import pipeline. Specifically, they said that the international condensate supply forecast relied upon by Northern Gateway should be given no weight because the source analysis of the forecast prepared by a consultant was not filed as evidence and, therefore, could not be tested. The Panel notes that no party filed evidence which demonstrated that there would not be adequate supply available to the condensate pipeline. The Funding Participants said that they are confident that there would be sufficient supplies available on the international market to ship on the pipeline. The Haisla Nation said that Northern Gateway's western Canadian condensate demand analysis, and the consideration of alternative transportation options to meet this demand, were inadequate. The Panel notes that no shipper or commercial third party took the position that the condensate import pipeline would create excess pipeline capacity or any associated economic burdens.

Northern Gateway said that, in its dealings with potential shippers, it became apparent that there could be sufficient market demand for a condensate import pipeline to be placed into operation concurrently with the oil pipeline. The evidence of the Funding Participants is that they have plans to significantly increase heavy oil production and they are seeking to diversify available sources of diluent. The Panel notes Northern Gateway's position that the condensate import pipeline would only proceed if there is adequate shipper support in the form of long-term firm transportation service agreements. The Panel is of the view that these agreements would minimize the supply risk to the pipeline and confirm market demand in western Canada for the imported condensate. In this context, the Panel finds that there was sufficient evidence regarding condensate supply availability and the market potential for imported condensate in western Canada.

Northern Gateway said that if adequate shipper support is not obtained for the condensate import pipeline, the oil pipeline could proceed independently. The Panel notes that Northern Gateway did not contemplate conducting a Class III capital cost estimate for a scenario whereby the condensate pipeline would proceed on a stand-alone basis independent of the oil pipeline. Accordingly, the Panel finds that there is no expectation that the condensate pipeline would be built on a stand-alone basis, without the oil pipeline.

Transportation contracts, commercial support, and project need

The Panel is of the view that the market will determine the pipeline projects which are required to ensure the proper functioning of the petroleum market and those which can provide competitive transportation service.

The Panel is of the view that the financial commitments made by Northern Gateway and the Funding Participants to advance the project through the regulatory process are supportive of the market opportunity to be provided by the project. The Panel notes Northern Gateway's evidence that both the oil export pipeline and condensate import pipeline have been fully subscribed for long-term service under shipper-executed precedent agreements. In the Panel's view, these agreements are an indicator of market interest in the project. The Panel accepts that the process undertaken to develop the Enbridge Northern Gateway Project reflects the operation of the market.

Northern Gateway said that the project would only proceed to construction with long-term, firm transportation agreements in place, and that final contracted volumes would only be known when these agreements are executed, following regulatory approval. In this connection, Northern Gateway said that it expects that both pipelines would be fully contracted by credit-worthy shippers for a term of not less than 15 years. The Funding Participants that were active in the hearing indicated that, if the project proceeds as expected, it would be their intention to enter into firm transportation service agreements.

When shippers make long-term take-or-pay commitments, they are demonstrating that the commitment represents the best use of their capital resources relative to other transportation options. The Panel notes the position of several intervenors including the Haisla Nation, the Coalition and Coastal First Nations, that, in the absence of firm transportation agreements with shippers, Northern Gateway has not demonstrated that the facilities are needed. The Panel recognizes that shipper commitments are central to the Enbridge Northern Gateway Project application and, accordingly, has set out a condition that would require Northern Gateway to file with the National Energy Board, prior to construction, the long-term, firm transportation agreements demonstrating that sufficient commercial support has been secured for both the oil and condensate pipelines.

To obtain regulatory approval, there must be a strong likelihood that the facilities would be used at a reasonable level. There will always be a degree of uncertainty in projecting the long-term utilization of transportation facilities, because utilization is influenced by many uncertain variables including supply, market development and the evolution of transportation infrastructure overall. It is in this context that the National Energy Board has in the past placed significant weight on the existence of long-term firm transportation agreements with shippers in determining whether facilities are needed and likely to be sufficiently well utilized over their economic life.

The Enbridge Northern Gateway Project would have broad economic, social and environmental implications for local, regional and national communities. In balancing the benefits and burdens of the project, the Panel finds that, in this case, it is prudent and necessary to set an initial minimum volume level requirement for each pipeline. Using the careful and precautionary manner of reviewing this project, the Panel finds that, in order to proceed, Northern Gateway must secure long-term, firm transportation service agreements for not less than 60 per cent of the capacity of each pipeline prior to construction.

In making this determination, the Panel considered that transportation providers and shippers should have broad flexibility to arrive at efficient market outcomes, without undue influence by the regulator. In this regard, the Panel notes that imposing an initial minimum contracted capacity requirement on the project could potentially have implications for the commercial arrangements for the project, which are yet to be finalized. The Panel also considered that pipeline infrastructure benefits from economies of scale and that the potential for some degree of underutilization during the early period of operation is inherent in large scale greenfield projects. Balancing these factors is the Panel's overarching need to be satisfied that the facilities are likely to be well utilized and, in this connection, that the benefits expected to flow from the project are likely to be realized. The Panel is of the view that the consideration of commercial support in the justification for at-risk infrastructure is a matter of judgement which will depend on the particular circumstances of each case. In making its determination on the appropriate level of initial contracted capacity required for the Enbridge Northern Gateway Project, the Panel is not defining the appropriate level of commercial underpinning for future cases.

Western Canadian crude oil supply and the demand for imported condensate are forecast to grow significantly over the life of the project. Tidewater access to the Pacific Basin would provide access to diverse crude oil markets and sources of condensate supply. Given these fundamental factors, with the required initial volumes in place, the Panel is satisfied that each pipeline would be well utilized and the benefits of the project would likely be significant and robust. The Panel is of the view that conditioning this initial minimum volume requirement would not place an unreasonable burden on the project, given Northern Gateway's expectation that it would be fully contracted.

The Panel accepts Northern Gateway's preliminary financing plan. The Panel recognizes that Northern Gateway's financing plan would remain in a preliminary state until after the Panel makes its recommendations to the Governor in Council. In the subsequent Part IV application, which Northern Gateway would be directed to file after finalizing commercial support for the project, the National Energy Board would examine, at that time, the tolls that would incorporate the annual costs of the finalized financing plan.

Economic feasibility

Given the Panel's views on crude oil supply, markets, and contracts, if the necessary transportation service agreements are executed, the Panel is satisfied that the oil export pipeline would likely be used at a reasonable rate over its economic life and that the tolls would be paid.

Given the Panel's views on condensate supply, markets, and contracts, if the necessary transportation service agreements are executed, the Panel is satisfied that the condensate import pipeline would likely be used at a reasonable rate over its economic life and that the tolls would be paid.

With the necessary transportation service agreements in place, the Panel believes that Northern Gateway would be able to finance the project.

10.2 Potential impact on western Canada crude oil prices

The netback price of a barrel of crude oil is calculated by taking the revenue that producers receive for that oil and subtracting all the costs associated with getting that crude oil to the market.

Views of Northern Gateway

The Enbridge Northern Gateway Project application included a netback benefits analysis prepared by Muse. In its assessment, Muse used its proprietary model to quantify the expected pricing benefit of the project to the Canadian oil industry. The assessment focused on the Northeast Asia market, though Muse noted that crude oil would likely also be sold to more distant markets. Muse prepared an updated report, dated July 2012, in recognition of the significant changes in the market environment which had occurred since the application was filed. The following discussion refers to the updated report.

In preparing its assessment, Muse established a set of analytical assumptions relating to supply, transportation, and markets. For each year from 2018 to 2035, the model was run using this set of assumptions, once without the Enbridge Northern Gateway Project in operation (Base Case), and again with the project in operation. Muse determined the project's pricing benefit to the Canadian oil industry by comparing computed output prices for various grades of Canadian crude oil for each case in each year.

Muse found that the Enbridge Northern Gateway Project start-up would increase the price of crude at Edmonton versus the Base Case as the Canadian crude market expands to include Northeast Asia, as well as possibly the United States west coast.

Muse explained that, in the early years of the forecast period, the Enbridge Northern Gateway Project start-up is expected to result in substantial crude oil shipments on the northbound pipelines between the United States Gulf Coast and the Midwest. This would shift the price-setting location for Canadian light crudes from the United States Gulf Coast northward to the Midwest, which would increase the price at Edmonton for Canadian light synthetic and conventional light crude oil. Muse said that, by enabling Canadian heavy crude producers to access the Asia-Pacific market with meaningful volumes, the Enbridge Northern Gateway Project would allow Canadian crude producers to avoid price discounting and reduce the need to ship heavy crude via comparatively expensive rail transport.

Muse said that higher crude oil prices increase Canadian crude producers' revenues, and increase the feedstock cost for Canadian refiners by the same amount (to the extent the refiners are processing western Canadian crude oil). Consequently, it adjusted the gross Canadian oil industry benefit for the effect of the higher crude prices on Canadian refiners. It also adjusted for expected Enbridge Northern Gateway Project tolls (Table 10.6).

Muse said that the expansion of Trans Mountain could not be used in a base case for the purposes of assessing benefits associated with the project because it was not possible to develop either an in-service date or terms and conditions upon which service on Trans Mountain might be offered.

Muse estimated the present value of the net benefits to the Canadian oil industry at approximately $29 billion through 2035. On an undiscounted basis, the value of the Canadian oil industry benefits was estimated to be about $45 billion through 2035.

Table 10.6 Summary of Northern Gateway benefit calculation (Real millions of 2009$ per year, unless noted)

2018 2019 2020 2021 2022 2023 2024 2025 2026 2027 2028 2029 2030 2031 2032 2033 2034 2035
Gross Canadian Producer Benefit 2,281.6 4,997.2 4,932.9 3,734.3 2,533.9 2,437.5 3,835.0 3,905.0 3,851.1 4,284.4 3,701.9 3,709.6 3,796.1 3,321.4 3,527.4 4,161.9 3,742.4 4,327.6
Less Canadian Refinery Impact (424.7) (948.9) (884.7) (691.1) (442.5) (382.7) (596.7) (566.4) (532.2) (522.7) (445.7) (423.2) (417.9) (359.1) (314.3) (296.1) (241.0) (280.7)
Less Northern Gateway Committed Toll (685.4) (687.5) (689.7) (689.4) (756.2) (758.0) (759.8) (759.5) (763.4) (765.3) (767.9) (768.4) (772.6) (774.7) (776.8) (563.9) (561.1) (547.4)
Net Canadian Benefit 1,171.5 3,360.8 3,358.5 2,353.7 1,335.1 1,296.8 2,478.6 2,579.2 2,555.6 2,996.4 2,488.3 2,518.0 2,605.6 2,187.7 2,436.4 3,302.0 2,940.3 3,499.5

Views of parties

Government of Alberta

Alberta submitted a report prepared by Wood Mackenzie Inc. (Wood Mackenzie), which estimated the impact on crude oil prices received by western Canadian producers from increasing west coast crude oil export capacity. Alberta submitted the report, dated December 2011, as its evidence in the proceeding. In recognition of changes in the North American crude oil market, Wood Mackenzie prepared an update to its report, dated July 2012. The following discussion refers to the updated report.

The Wood Mackenzie report said that new technologies and the oil price environment were encouraging companies to invest capital in western Canada. Its analysis projected that Western Canada Sedimentary Basin supply would reach 920,000 cubic metres (5.8 million barrels) per day by 2025, with oil sands volumes accounting for about 762,000 cubic metres (4.8 million barrels) per day.

The Wood Mackenzie analysis concluded in the following substantive findings:

  • Canadian crude oil producers will require additional pipeline capacity to transport incremental supply volumes to key demand centres by 2017.
  • Asia is an attractive market on a netback basis.
  • Tidewater access is an important link to the fast growing Asian markets.
  • Insufficient access to premium heavy crude refining markets could cause Canadian producers to lose approximately 8 dollars per barrel for every Canadian heavy crude barrel produced, potentially resulting in foregone revenue in the area of $8-12 billion per year for the period from 2017 to 2025.

Alberta said that the conclusions of the Wood MacKenzie analysis broadly align with the Muse analysis prepared on behalf of Northern Gateway.

Funding Participants – Cenovus Energy Inc. (Cenovus), INPEX Canada Ltd. (INPEX), Nexen Inc. (Nexen), Suncor Energy Marketing Inc. (SEMI), and TOTAL E&P Canada Inc. (TOTAL)

The Funding Participants said that the ability to reach broader international markets would create a more efficient market and, in turn, allow Canadian producers to realize higher netback prices by mitigating the discounted pricing that exists today.

MEG Energy Corp. (MEG)

MEG said that the level of apportionment experienced on Canadian crude oil pipelines, and the price discounting on oil shipped to the United States, makes additional pipeline capacity and market diversification imperative for the Canadian industry.

Canadian Association of Petroleum Producers

The Canadian Association of Petroleum Producers agreed with MEG's submission that insufficient pipeline capacity has contributed to significant crude oil price discounting and that additional pipeline capacity and market diversification are required. It said that the Enbridge Northern Gateway Project is a way for producers to get full market value for their production.

Alberta Federation of Labour

The Alberta Federation of Labour said that the netback benefits forecast by Muse were not reliable; therefore, the benefits to the Canadian oil industry and to Canadians, which were based on the netback benefits, were not reliable.

Specifically, the Alberta Federation of Labour said that the Muse and Wood Mackenzie reports showed that, once the oil export pipeline is full, it would no longer be a price-setting mechanism in the oil market. In its view, once full, the oil export pipeline would cease to provide benefits to the Canadian economy. It said that this pipeline would provide the economic benefits predicted by Northern Gateway and its experts in the first year or two of its operation, while it fills to capacity and as it begins operations.

Coastal First Nations

The Coastal First Nations said that Northern Gateway did not demonstrate the reliability of its netback benefit analysis and resulting revenue benefit.

The Coalition – ForestEthics Advocacy, Living Oceans Society, and Raincoast Conservation Foundation

The Coalition said that the estimated financial impacts of the project as presented in the Muse report and the subsequent use of those estimates in the Wright Mansell public interest benefit evaluation were subject to errors and were not reliable. Specifically, the Coalition said that Northern Gateway inappropriately relied on the economic benefits of increased oil and gas production induced by the project, since the environmental costs associated with oil sands production were outside the scope of the proceeding.

Haisla Nation

The Haisla Nation said that, with regard to the oil export pipeline, methodological deficiencies or inconsistencies in the Muse and Wright Mansell's analyses indicate that the purported net benefits to producers and predicted public benefits were overstated and were not reliable.

United Fisherman and Allied Workers' Union – Canadian Auto Workers

The United Fisherman and Allied Workers' Union – Canadian Auto Workers said that it was not proven that the project would increase benefits to oil producers. It said that, if this was the purpose of the project, then the need for the project had not been established.

Ms. Josette Wier

Ms. Wier said that the economic analysis presented by Muse was not reliable. She said that Northern Gateway had not adequately considered the full impact of the project on the Canadian economy and Canadian energy security.

Views of the Panel

Nearly all western Canadian crude oil exports are currently delivered to markets in the United States. The Panel notes that the United States is experiencing flat-to-declining demand for oil and significant growth in domestic crude oil production. Against this backdrop, western Canadian crude oil supply is growing and significant further growth is expected. The Panel notes the perspective of Northern Gateway and the commercial intervenors that the current state of reliance on the United States market has contributed to significant price discounting for western Canadian crude oil. These parties said that market diversification is required to manage this risk in the future. The Panel accepts this assessment.

The Panel agrees with Northern Gateway's evidence that the petroleum industry is a significant driver of the Canadian economy and an important contributor to the Canadian standard of living. The Panel is of the view that it is in the public interest to maximize the prices received for western Canadian crude oil, a non-renewable resource. To accomplish this objective, adequate pipeline capacity must be in place to transport growing supply to the markets that require that supply. The Enbridge Northern Gateway Project would connect growing western Canadian supplies with growing markets in the Pacific Basin. The Panel does not agree with the position advanced by the Alberta Federation of Labour that, once the Enbridge Northern Gateway Project is operating at full capacity, it would cease to provide economic benefits because it would no longer be the price-setting mechanism for western Canadian crude oil. If the Enbridge Northern Gateway Project is operating at full capacity, it would be because shippers have determined that supplying the markets served by the pipeline provides an economic benefit. This economic benefit would continue to exist even if the pipeline was no longer acting as the price setting mechanism for western Canadian crude oil.

The Panel notes that the crude oil netback analyses prepared by Muse and Wood Mackenzie generated a great deal of questioning by intervenors and, in final argument, several parties took the position that the results of these studies were unreliable. The Panel is of the view that new pipelines connecting producing regions with consuming regions change market dynamics in ways that cannot easily be predicted. As a result, it is difficult to determine the exact impact that a major project such as the Enbridge Northern Gateway Project may have on netback prices once it is placed into service. The Panel finds that, if constructed, the project would significantly expand and diversify the market options for western Canadian crude oil supply which would contribute to the realization of full market value pricing over the long term.

The Panel notes the argument advanced by the Coalition to the effect that, since evidence of the environmental effects of upstream oil and gas development induced by the project were not considered, the upstream benefits of oil and gas development induced by the project must be excluded from the Panel's consideration. In the Panel's view, there was not a sufficiently direct connection between the project and any particular existing or proposed oil sands development or other oil production activities to warrant consideration of the effects of these activities. During its deliberations, the Panel did not assign weight to any specific estimates of potential induced upstream benefits. As set out in the foregoing discussion, the Panel is of the view that the project, if constructed, would likely deliver economic benefits by expanding and diversifying the markets available for western Canadian crude oil exports.

10.3 Potential impact on the Alberta upgrading and Canadian refining industries

Views of the parties

Alberta Federation of Labour

The Alberta Federation of Labour took the position that the Enbridge Northern Gateway Project is counter to the public interest and should not be approved because it would enable the export of raw unprocessed bitumen, resulting in the loss of tens of thousands of potential jobs in Canada's refining, upgrading, and petro-chemical sectors. The Alberta Federation of Labour said that the Enbridge Northern Gateway Project would result in a reduced price differential between bitumen and conventional oil, thereby removing a major competitive advantage enjoyed by Canadian refiners. It also said that the project would make it difficult, and perhaps impossible, for Canadian elected leaders to achieve the policy goal of upgrading more bitumen in Canada and creating more value-added jobs for Canadians. It said that significantly greater economic benefits would be enjoyed for longer periods of time if bitumen were upgraded and refined in Canada rather than sold in raw form to Asia.

The Alberta Federation of Labour said that Northern Gateway's economics benefits case failed to take into account that increasing the price of bitumen to Canadian refineries would likely lead to increases in the price of fuel to Canadian business and individual consumers.

Communications Energy and Paperworkers Union of Canada

The Communication Energy and Paperworkers Union of Canada said that it is Canada's largest union of energy industry workers, with some 35,000 members employed in oil and gas extraction, transportation, refining, and conversion in the petrochemical and plastics sectors. It said that it agrees with the submissions of the Alberta Federation of Labour.

The Communications Energy and Paperworkers Union of Canada said that it is concerned about industry plans to substantially increase the relative volumes of bitumen exports, resulting in considerable foregone economic and employment benefits of adding value to Canadian resources in Canada. It filed a letter, authored by economics consulting firm Infometrica Inc., which estimated the potential loss of 26,000 jobs that would otherwise be created in the Canadian economy if the bitumen contemplated to be shipped on the Enbridge Northern Gateway Project was upgraded in Canada. The estimate was based upon a report originally prepared by Infometrica Inc. for the National Energy Board's MH-1-2006 proceeding, which considered the transfer of certain TransCanada PipeLines Ltd. facilities from natural gas service to oil service in connection with the TransCanada Keystone Pipeline Project.

The Communications Energy and Paperworkers Union of Canada said that it supports the responsible development of the oil sands and understands the importance of foreign markets and the export pipelines needed to serve them. It said that the Enbridge Northern Gateway Project must be assessed in the broader context of Canadian needs, including eastern Canada's energy security and refining needs. In its view, with uncertain and declining access to western Canadian crude oil, eastern Canada has already suffered a loss of refining capacity, a loss of jobs, and gasoline supply problems.

United Fisherman and Allied Workers' Union – Canadian Auto Workers

The United Fisherman and Allied Workers' Union – Canadian Auto Workers said that, if the project were to increase the value of raw bitumen, it would negatively impact domestic consumers and impede the future development of secondary oil processing, which is not in the interest of Canadians.

Northern Gateway

Northern Gateway said that the oil export pipeline could accept many grades of oil, including synthetic crude oil upgraded from oil sands raw material. It said that decisions to invest in further upgrading in Canada, whether in Alberta or in eastern Canada, will be determined by a variety of market factors. It said that the creation of a new outlet for western Canadian crude oil accessing large, high-value markets neither fosters nor inhibits upgrading in Canada.

Northern Gateway said that the fundamentals of the Canadian refining industry are strong and will remain so, and the project would not jeopardize the Canadian refining industry. Northern Gateway said that there is unlikely to be any domestic need for increased production of refined products in Canada, and higher labour and transportation costs are significant challenges that would face Canada's ability to profitably construct and operate export-oriented refineries. Northern Gateway said that the project could potentially support the upgrading sector through higher prices for synthetic crude oil. It said that one of the reasons for locating the pipeline origin in the Edmonton area was to facilitate deliveries of light crude oils, including synthetic crude oil.

Northern Gateway said that the three refineries east of Montreal are geographically dispersed. It said that the provision of western Canadian crude oil by pipeline would be costly and those costs would have to be reflected in higher prices for locally-used oil products or lower prices for producers of the oil. Northern Gateway said that, if western Canadian producers or eastern buyers identify a market opportunity, then investors in transportation infrastructure can be expected to respond with projects. It said that the Canadian public interest is best served by allowing market forces to work.

Northern Gateway said that increased prices of western Canadian crude oil brought about by the project would be distributed to Canadian refiners and Canadian consumers. It said that the price increase would very likely be borne solely by Canadian refiners. It said that, even if refiners were able to pass-through the additional crude oil feedstock costs in their retail gasoline prices, doing so would yield only a one-time 1.5 cent per litre increase, which would be "virtually immeasurable" in the consumer price index.

Canadian Association of Petroleum Producers

The Canadian Association of Petroleum Producers said that they did not agree with the positions of the Alberta Federation of Labour and the Communications Energy and Paperworkers Union of Canada. It said that it is not the case that the export of crude or bitumen will leave domestic refineries or upgraders wanting for supply. It said that there is no evidence to suggest that a denial of the Enbridge Northern Gateway Project application would lead to more refineries and upgraders being built in Canada. In its view, the decision to build refineries and upgraders should be made by the market, and it is not the subject of the project application.

Funding Participants – Cenovus Energy Inc. (Cenovus), INPEX Canada Ltd. (INPEX), Nexen Inc. (Nexen), Suncor Energy Marketing Inc. (SEMI) and TOTAL E&P Canada Inc. (TOTAL)

The Funding Participants said that they did not agree with the position of the Alberta Federation of Labour that the project is not in the public interest because of the detrimental impact that it would have on investment and jobs in the refining and upgrading sector. The Funding Participants said that there is no evidence of a direct relationship between the Enbridge Northern Gateway Project and whether upgraders and refineries are built in Alberta, or that the project would result in domestic upgraders and refiners being without adequate supply. They said that, given the evidence, the Panel should not interfere with the market-based decisions made by the Funding Participants and existing government policy.

MEG Energy Corp. (MEG)

MEG said that it did not agree with the position of the Alberta Federation of Labour that the project is not in the public interest because of the detrimental impact that it would have on investment and jobs in the refining and upgrading sector. It said that the position should be rejected.

Government of Alberta

Alberta said that it did not agree with the positions advanced by the Alberta Federation of Labour and the Communication Energy and Paperworkers Union that projects like the Enbridge Northern Gateway Project discourage additional value-added processing in Alberta, and are detrimental to the Canadian economy. It said that pipeline expansions are consistent with the development of future value-added opportunities, and are an essential component of properly functioning petroleum markets.

Alberta said that it agrees with the National Energy Board's historical position that well-functioning markets tend to produce outcomes that are in the public interest, and that proper functioning markets require adequate transportation capacity to connect supply to markets. Alberta said that pipelines can be reconfigured to transport a range of products, including petroleum products, should additional domestic refining and upgrading materialize in the future. Alberta said that no refiner or market participant has raised concerns that the project may have a negative impact on their ability to access feedstock. Alberta said that there is no evidence that would warrant an intervention by the Panel in the market. It said that the positions of the Alberta Federation of Labour and Communication Energy and Paperworkers Union should be dismissed.

Views of the Panel

The Alberta Federation of Labour and the Communication Energy and Paperworkers Union of Canada expressed concern that exporting raw bitumen by pipeline has a detrimental impact on domestic investment in upgraders and refineries in Alberta and Canada. The Panel considered these perspectives and finds that they are valid public interest considerations. Based on the evidence before it, the Panel has not been convinced that developing export pipeline infrastructure deters investment in upgraders and refineries in Canada. The Panel finds that it is significant that no commercial party in the refining or upgrading sector expressed opposition to the application on the basis that it would undermine their operations in Canada. The Panel is of the view that properly functioning petroleum markets require adequate transportation capacity to be in place and, further, that the type of commodity to be transported on a pipeline is a decision properly made by the market. The Panel is of the view that well-functioning markets tend to produce outcomes that are in the public interest.

The Panel had no compelling evidence before it to support the proposition that the project would result in existing refineries experiencing feedstock shortages. The Panel notes that western Canadian supply is forecast to increase significantly through 2035. Many people and parties commented on the need to provide eastern Canadian markets with future access to western Canadian crude oil. The Panel is of the view that producers will continue to seek new markets, including those in Canada.

The Panel accepts the evidence of Northern Gateway that the project is unlikely to result in an increase in the price of retail gasoline in Canada. The Panel is of the view that if there were a one-time increase in retail gasoline prices on the order of 1.5 cents per litre, this would not represent a significant economic burden relative to the economic benefits of the project.

The Panel notes the Alberta Federation of Labour position that project approval would undermine the policy goals of Alberta and Canada in regards to the desire to realize more value-added crude oil processing. While the Panel is informed by current economic and energy policy, it does not set policy. The Panel notes that the Government of Alberta did not agree with the positions advanced by the Alberta Federation of Labour and the Communication Energy and Paperworkers Union of Canada. It said that pipeline expansions are consistent with the development of future value-added opportunities and are an essential component of properly functioning petroleum markets. Alberta said that pipelines can be reconfigured to transport a range of products, including refined petroleum products, should additional domestic refining and upgrading materialize in the future.

The Panel finds that no evidence was presented that lead it to conclude that the development of new infrastructure to significantly increase access to growing crude oil markets will hinder the functioning of the Canadian refining and upgrading sector. The Panel agrees with the view of the Government of Alberta that, should additional domestic refining and upgrading capacity materialize, pipelines can be reconfigured to transport a range of hydrocarbons, including refined petroleum products.

Summary views of the Panel

Many people and parties commented on the economic benefits and burdens that could be brought about by the Enbridge Northern Gateway Project. It is the Panel's view that opening Pacific Basin markets is important to the Canadian economy and society. Though difficult to measure, the Panel finds that the economic benefits of the project would likely outweigh any economic burdens.

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Date Modified:
2013-12-19