Document released under the Access to Information Act - l*l 8222321? (?Finance des Finances Document divulgu? en vertu de la Secariychni?caion Classi?cation dew? 19 i SECRET T0 . Paul Rochon DMO ..Orlg.+3 Origin-airman? Amen/Nabokl?qm - Assoc. on (T8) ..1 Assoc.DM (MM) ..1 Edgar Cudmore EFP m: "mm Your?: Vm?e 52?? Jean-Francois Perrault 2015FIN427354 Date DEC 1 0 2015 sumecr - om Energy-East Pipeline and Carbon Price For Information Context and key ?ndings The key ?ndings from our assessment are: - North American (WTI) and World (Brent) oil prices are currently forecasted to remain practically the same once h'anSportation costs to tidewater are taken into account. This suggests that having the capacity to export Alberta?s oil to world markets no longer exploits the large discount between and the Brent that existed ?om 2012 to 2014. - Moreover, the low price environment has led to oil production forecasts being revised downward; meaning that suf?cient capacity (from both rail and pipelines) is projected to exist to transport oil until at least 2025. - However, because shipping oil by rail is more costly than by pipeline, buildin Ener East would reduce transportation costs, Director: Claude Lavoie 369-5647 ADM: Jean-Francois Perrault 369-4018 3.21 (1 000001 Document released under the Access to Information Act Document divulgue en vertu de la Loi sur l?acces 3 /?information Factors affecting Western Canada oil prices Building a new pipeline to Atlantic Canada will have an impact on the long-run price received for crude oil produced in Western Canada (WCS). However, in order to determine the price impact of the pipeline it is important to ?rst take a step back and review how the prices of different oils in different markets are connected. 1n the short- and medium?run, the prices received for different types of oil in different markets ?uctuate depending on market pressures created by re?nery demand and transportation bottlenecks. However, in the long-run, prices are determined by the quality of the oil and transportation costs to re?neries. Different types of oil have different characteristics (sweet/sour and light/heavy) which impact the costs that re?neries have to incur to re?ne them. Because re?neries have to incur additional costs to re?ne heavier oils like WCS compared to lighter oils like WTI or Brent, they generally demand a discount of around $9 per barrel (A similar discount applies to heavy crude oil?Maya?produced in Mexico?). Furthermore, because costs are incurred to transport oil from the ?eld to re?neries the price of oil in the ?eld will be discounted accordingly. The chart below shows this relationship between WCS and in November 2015Price of ?pupulmu transport cost by anude Vt llat 1mm 5mm) (ll pit dutus Cuslting: hum. Alberta and Ill [\llwc?g $5.40 $28.20 1 The price difference between Maya (heavy) and Brent (light) oil was on average $9 in November 2015. no transportation margin exists since they are both priced freight on board in the Gulf of Mexico. 000002 Bene?ts of Energy-East Pipeline Document released under the Access to Information Act Document divulgu? en vertu de la Loi sur I ?acces 3 [information In the above example, Westem Canada oil (WCS) is shipped to the US. and is sold at the same price as the However, WCS transported to the coast and then loaded onto ships would be sold at the World price (Brent). During periods when the price for WTI is signi?cantly lower than price for Brent it will be more pro?table to ship WCS to the coast rather than shipping it to the US. The National Energy Board (NEB) currently forecasts that WTI will trade at $77.54 and Brent at $81.62 in 2020. In that context, as shown below, the bene?ts of the Energy East pipeline would only be $1.48 per barrel compared to oil shipped by existing pipelines to the US. However, the bene?ts of Energy-East would be up to $6.00 per barrel if compared to shipping oil to the east by rail.2 (ti. upgrading: llum lit-.u} to light $0.00 l?llL'L' Ul? L'tithg 2021; S7754 Cle t?l' upgrading liom to $9.00 transport (mt lit-t can Alberta and (?shing: $5.40 Ritll transport cost lit-meet) Allu'rm and L?t?tlxl $14.00 l?IiL?c L'ttnatlmn producctx Harlin!) Alberta Still-l l?t'n recon ed unudmn \llu'tL: $58.02 2515191190 aunadid tseg-K?iaug ?4,106 {spirited at )?Qs?it?t?idgg?? - . ist'. ., ?Mitt-nit: ShitEconomics Special Report, December 2012 describes potential pipeline transportation costs for Energy- East of $8 per barrel. Oil and Gas investments Bulletin, April 2013 describes rail transportation costs to the east of $14 per barrel. 000003 Document released under the Access to Information Act Document divulgu? en vertu de la 4 Loi sur I?acce?s [information The bene?ts of building the pipeline would be greater if the price between and Brent would be as large as that observed in 2011 and 2012. Figure is a plot of Brent and since 2000 (top panel) as well as the difference (bottom panel). At several points in 2011-2012 the price received for oil shipped to the Atlantic would have been $20 er barrel hi er than oil shipped to the United States. Figure 1: Historical spread between and Brent with implied arbitrage opportunity 150 -- ??-?Brent 'g 100 . . ?50 0 Difference slits/barrel 2000 2001 2002 2003 2005 2006 2007 2009 2010 2011 2013 2014 2015 Factors responsible for the excessive price differentials over 2010-2014 were: strong global demand for oil (especially in China), production restrictions ?'om OPEC to maintain oil prices high, large increases in US. shale oil production and limited capacities to export lower prices North American oil (due to US. restrictions on oil exports and Canada missin the uired transport 000004 3.21 (1 Document released under the Access to Information Act 5 Document divulgu? en vertu de la Loi sur I?acces l?information Costs related to Carbon Pricing A price on carbon will have both a direct and an impact on oil producers. The direct impact is the embedded carbon price paid on fossil ?Jels used in the production and transport of crude oil. The indirect impact is lower demand due to increased consumer prices resulting ?om higher production costs and the carbon price on the re?ned fuel. 000005 Document released under the Access to Information Act . Document divulgu? en vertu de la Loi surjl?acces l?information Conclusions 5.21 (1 000006 Page 7 is withheld pursuant to section est retenue en vertu de l'article 21(1)(b) of the Access to Information Act de la Loi sur l?acces a l?information Document released under the Access to Information Act Document divulgu? en vertu de'la (FOLD HERE) Department of Finance des ?nances - Canada Canada for Signature by I lnt'onnation of A signer par/ Pour l?information dc Paul Rochon Prepared by (name/initials?division) Pr?pare' par (nom?initials?division) Edgar Cudmore in consultation with En consultation Patrick Perrier Approved by Approuve par Director - gamete?, Claude Lav01e General director . . 05mm,ng Nick A Assistant Deputy Minister . 7 I Sous.minim adjoim can-F rancms Perraulg?1 Associate Deputy Minister G7 Deputy for Canada Sous-ministre d?i?gu? et representanl du Canada au G7 Associate Deputy Minister Sous-ministre d?l?gu?c Deputy Minister Sous-minim Remarks Remarques: Timothy Sargent Marta Morgan Paul Rochon Energy-East Pipeline and Carbon ?Price File no. No dc dossier Date 2015FIN427354 DEC 1 2015 Associate Deputy Minister 8: G7 Deputy for Canada Sous-ministre d?l?gu? et repr?sentant (Sign on behalf of DM du Canada au G7 (Signer an nom du SM Associate Deputy Minister Sous-ministre d?l?gu?e (Sign on behalf of DM (Signer au nom du SM) Assistant Deputy Minister Sous-ministre adjoint(e) Sign on behalf of DM Signer au nom du SM 000008