PRESENTATION COMPETITIVENESS OF THE CANADIAN REGULATORY TITLE FRAMEWORK FOR THE OIL AND GAS SECTOR CERI Breakfast Overview Allan Fogwill, President & CEO Bow Valley College - Calgary October 23, 2019 www.ceri.ca
CANADIAN ENERGY RESEARCH INSTITUTE Overview Founded in 1975, the Canadian Energy Research Institute (CERI) is an independent, registered charitable organization specializing in the analysis of energy economics and related environmental policy issues in the energy production, transportation, and consumption sectors. Our mission is to provide relevant, independent, and objective economic research of energy and environmental issues to benefit business, government, academia and the public. CERI publications include: • Market specific studies • Geopolitical analyses • Monthly commodity reports (crude oil, electricity and natural gas) In addition, CERI hosts a series of study overview events and an annual Petrochemicals Conference. 2
CORE FUNDERS 3
DONORS Ivey Foundation 4
AGENDA • Introduction and Background • Scope and Methodology • Evaluation of Regulatory Characteristics • Cost and Time Impacts of Regulatory Frameworks • Conclusions Why this Study? Regulatory competitiveness studies have not reviewed the subject from the investors’ perspective. This study considers individual and cumulative costs of the regulatory regime for the oil and gas sector with the purpose to understand how does Canada stands in comparison to the United States. 5
REGULATORY CHALLENGES IN THE CANADIAN OIL AND GAS INDUSTRY • Lack or restrictions of market access to US and international markets • Increased volume of regulations, regulatory process inefficiencies, lengthy approval timelines, increasing regulatory costs • Increasing number of taxes on O&G industry resulting in competitiveness impacts • Changes in regulatory processes (EIA process, redesign of NEB/CER and CEEA/IAAC) • Regulatory overlap and interprovincial regulatory differences • Ongoing judicial / regulatory hurdles for Trans Mountain, Keystone XL, Coastal Gas Link, Line 3 • Evolving and uncertain Indigenous legal landscape 6
SCOPE The study considers environmental and economic regulations of the oil and gas sector in Canada in comparison to the US with an aim to understand how the regulatory regime affects the competitiveness of Canada as an exporting jurisdiction. Areas in focus: Cases examined: • • Environmental regulations Onshore oil/gas well • • Economic regulations Offshore Gravity Based Structure • • Indigenous and other (social, LNG plant health) – high-level assessment • Interprovincial/interstate pipeline Jurisdictions considered: Regulatory characteristics: • • Federal (Canada) Predictability • • Federal (US and GoM offshore) Transparency • • Provincial (BC, AB, SK and NL Stringency • offshore) Compliance • • State (TX, ND, PA) Timelines • Cost • Regulatory improvement 7
NUMBER OF KEY REGULATIONS APPLICABLE TO THE OIL AND GAS SECTOR, BY JURISDICTION Jurisdiction/ Environmental Economic Indigenous Other (Social, Regulatory Area Health) Canada (Federal) 14 4 3 3 British Columbia 16 4 5 2 Alberta 24 3 2 2 Saskatchewan 11 3 1 1 Newfoundland 14 2 2 2 (offshore) USA (Federal and Gulf 16 5 3 2 of Mexico offshore) Texas 5 2 N/A N/A Pennsylvania 8 2 N/A 1 North Dakota 12 3 3 2 8
STAKEHOLDER VIEWS REGARDING ISSUES IMPACTING BUSINESS SUCCESS 9
SURVEY RESPONSES – OVERALL (CANADA) Regulatory Regulatory Predictability Transparency Stringency Compliance Improvement Characteristics Somewhat Somewhat Somewhat Somewhat Somewhat Responses Disagree Agree Agree Agree Agree Improvements over the last 5 years Stakeholders Perceptions – Overall (Canada) : • Predictability : Federal approval timelines are not predictable (uncertainty); jurisdictional overlap exists, especially for pipelines; the IAA could cause delays in the assessment process and impede projects development. • Transparency : Information is kept current on regulators website, but not always clear and concise; more uncertainties with federal regulators/processes. • Stringency : Many examples of increased stringency over the last five years; there is still room for removing redundancies and duplications. • Compliance : No comments provided. • Regulatory Improvement : Some regulatory improvement programs are in place, with stakeholders involved in certain parts of regulatory development; performance of the 10 regulatory regime has improved slightly.
STAKEHOLDER COMMENTS WORD CLOUD - CANADA Note: the most mentioned keywords in the respondents’ comments 11
TIMELINES ANALYSIS • Analysis is based on: ‒ Data from major project databases in the US and Canada ‒ Survey data • Project Timelines were analyzed for: ‒ Pipeline projects ‒ LNG projects ‒ Oil and gas wells • Timelines were moderated based on actual details, survey data and other literature • The presented timelines are averages based on CERI’s research and do not necessarily reflect what would be for a given specific case 12
TIMELINES – PIPELINE AND LNG PROJECTS PIPELINES CANADA Approval Initiation Application Construction 0 5 10 15 20 25 30 35 40 45 50 55 60 65 70 Months FID PIPELINES US Approval Application Construction Initiation 0 5 10 15 20 25 30 35 40 Months LNG CANADA Approval Application Construction Initiation 0 5 10 15 20 25 30 35 40 45 50 55 60 65 70 75 FID Months LNG US Approval Application Construction Initiation 0 5 10 15 20 25 30 35 40 45 Months Source: FERC, USEPA, NEB, CERI, BLM 13
TIMELINES – OIL AND GAS WELLS OIL AND GAS WELLS CANADA Application Approval Drilling Initiation 0 25 50 75 100 125 150 175 200 225 250 275 300 Days FID OIL AND GAS WELLS US Approval Application Drilling Initiation 0 25 50 75 100 125 150 175 200 225 250 275 FID Days Regulatory Approval Time : Application to Approval US Canada LNG 22 41 Months 24 48 Months Pipelines Oil and Gas 102 110 Days Source: CAPP, FERC, USEPA, NEB, BLM 14
SURVEY RESULTS BY CASE AND JURISDICTION – SUMMARY Regulatory Case Jurisdiction Predictability Transparency Stringency Compliance Improvement Federal (Canada) BC Strongly Disagree Oil & Gas Wells (Onshore) AB Disagree Federal (USA) Somewhat Disagree Oil Wells NL (Offshore) Somewhat Agree Federal (Canada) Oil & Gas Pipelines Agree AB Federal Strongly Agree (Canada) LNG Plant BC 15 15
COST ANALYSIS METHODOLOGY COST OF DELAY ANALYSIS RISK ANALYSIS COST ANALYSIS • Using discounted cash flow • One -year delay models • A simplified CAPM (Capital models to compare US states after FID Asset Pricing Model) to and Canadian provinces quantify risk was used • Increase in CapEx due to • Estimating relative effective • Risk was analysed under 3 delay is estimated and tax for each case study incorporated in the model scenarios, low risk, high risk and based on survey • Tax loss is estimated as an responses indication of direct cost to public • Profit loss is estimated as an indication of direct cost to company 16
ONSHORE OIL WELL – SUPPLY COST COMPARISON $45 $2.41 $0.66 $0.35 $4.19 $1.79 $2.12 $5.16 $0.24 $40 $3.03 $2.74 $2.54 $1.79 $0.54 $0.28 $3.70 $2.53 $2.90 $5.46 $35 $4.90 $2.96 $2.96 $2.41 $1.75 $9.71 $9.71 $9.71 $30 2019 C$/bbl $9.52 $9.52 $9.52 $9.52 $9.52 $9.52 $25 $20 $15 $28.09 $28.09 $28.09 $23.00 $23.00 $23.00 $23.00 $23.00 $23.00 $10 $5 $- TX ND PA BC BC - 1 Year SK SK - 1 Year AB AB - 1 Year Delay Delay Delay CapEx OpEx Royalties Severance Tax Corporate tax Carbon tax 17
ONSHORE OIL WELL – TAX AND PROFIT Tax % 35% 30% % of revenue 25% 13.1% 20% 0.6% 11.0% 6.8% 15% 1.4% 0.8% 9.6% 6.6% 10% 12.5% 7.7% 7.4% 12.1% 5% 7.7% 6.3% 4.6% 4.7% 3.4% 0% TX ND PA BC SK AB Severance Tax Royalties Corporate tax Carbon tax Tax and Profit $3.0 $2.604 $2.509 $2.455 $2.361 $2.5 $2.309 $2.160 2019 C$ millions $2.0 $1.5 $0.933 $0.846 $1.0 $0.712 $0.589 $0.583 $0.458 $0.5 $- BC BC - 1 Year Delay SK SK - 1 Year Delay AB AB - 1 Year Delay Discounted profit Royalties Corporate Tax Carbon Tax 18
ONSHORE GAS WELL – SUPPLY COST COMPARISON $2.5 $0.039 $0.020 $0.092 $0.017 $0.093 $0.085 $2.0 $0.032 $0.081 $0.017 $0.15 $0.014 $0.092 $0.108 $0.120 $0.123 $0.110 $0.126 $0.100 $0.108 $0.02 $0.137 $0.137 $0.136 $0.125 $0.121 $0.098 $0.371 $0.371 $0.371 $0.364 $0.364 $0.364 $0.364 $0.364 $0.364 $1.5 2019 C$/mcf $1.0 $1.491 $1.491 $1.491 $1.379 $1.379 $1.379 $1.379 $1.379 $1.379 $0.5 $- TX ND PA BC BC - 1 Year SK SK - 1 Year AB AB - 1 Year Delay Delay Delay CapEx OpEx Royalties Severance Tax Corporate tax Carbon tax 19
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