Deloitte Energy East Economic Benefits

Energy East The economic benefits of TransCanadas Canadian Mainline conversion project

August, 2013

Deloitte & Touche LLP and affiliated entities. Energy East: The economic benefits of TransCanadas Canadian Mainline conversion project i

Table of contents

Disclaimer...................................................................................................................................................... 1

Executive summary ....................................................................................................................................... 2

Introduction.................................................................................................................................................... 4

Energy East project description .................................................................................................................... 6

Industry context ............................................................................................................................................. 8

Economic benefits ....................................................................................................................................... 11

Appendix A: Glossary of terms.................................................................................................................... 19

Appendix B: I/O Model methodology .......................................................................................................... 22

Appendix C: I/O Model inputs ..................................................................................................................... 23

Appendix D: Detailed I/O Model output tables and charts .......................................................................... 24

Appendix E: Pipeline capacity ..................................................................................................................... 31

Appendix F: Refinery capacity and supply .................................................................................................. 33

Appendix G: Calculation of refinery benefits ............................................................................................... 35

Appendix H: About the authors ................................................................................................................... 37

Deloitte & Touche LLP and affiliated entities. Energy East The economic benefits of TransCanadas Canadian Mainline conversion project 1

Disclaimer

This report is solely for use in connection with the purposes of the study, as described in the Introduction section. We do not assume any responsibility or liability for losses incurred by any parties as a result of the circulation, publication, reproduction or use of this report. We reserve the right to review all calculations or findings included or referred to in our report and, if we consider it necessary, to revise them in the light of any new information identified.

We have relied upon the completeness, accuracy and fair presentation of all the financial and other information, data, advice, opinions or representations obtained from management of TransCanada (Management) and/or their agents and advisors (collectively, the Information). The report is conditional upon the completeness, accuracy and fair presentation of such Information.

This report is rendered on the basis of economic, financial and general business conditions prevailing as at the date of publication and the conditions, financial and otherwise, of TransCanada as they were reflected in the Information. In the analyses and in preparing the report, we have made numerous assumptions with respect to industry performance, general business, economic conditions and other matters, which are beyond our control.

The computed economic impact of Energy East on incremental Canadian Gross Domestic Product, jobs, and tax revenue (the three principal items comprising economic impact) throughout this report arise from the use of Statistics Canadas Input/Output Model. This independent, Government of Canada developed economic model is constructed and used by Statistics Canada to measure any given input shock to an economy, such as a major infrastructure project like Energy East, and is designed to model direct, indirect and induced economic effects of such projects. The estimated economic impacts of Energy East were produced by Statistics Canada using their Input/Output Model. It is important to observe that the overall outputs must be considered estimates by their nature, as they are dependent upon estimated capital construction and operating cost inputs which are estimated values, and due to the application of statistical modeling and the significant estimates inherent within such modeling.

The study must be considered as a whole and selecting portions of the analyses or the factors considered by it, without considering all factors and analyses together, could create a misleading view of the process underlying the study. The preparation of this study was a complex process and is not necessarily susceptible to partial analysis or summary description. Any attempt to do so could lead to undue emphasis on any particular factor or analysis.

Deloitte is Canadas largest professional services firm; Deloitte provides Audit, Financial Advisory, Consulting, Enterprise Risk and Tax services to corporations, families, government, not-for-profit, non-governmental organizations and other enterprises across Canada. Deloitte has significant experience providing such services to Canadas most prominent entities and industries, including many entities in the oil and gas industry. Deloittes ability to provide industry-specific, high-quality and relevant professional services is dependent upon this experience; Deloittes ability to remain a trusted and neutral service provider is also essential to deliver reports on complex projects such as the proposed Energy East conversion project.

Accordingly, Deloitte has brought that same objectivity and independence of thought to the work we have performed on our assessment of the net economic benefit of Energy East, and we have prepared this report from that perspective. Our continued ability to serve Canadas most prominent entities is dependent upon our reputation for objectivity and credibility, and no single assignment or report is more important than our professional reputation.

Our fees were based on the amount of professional time required and are not contingent on an action or event resulting from the use of the report.


Executive summary

The Oil & Gas sector is a major driver of Canadas economy, representing almost a quarter of Canadian exports1 and employing more than 500,000 people across the country2. However, Canada may not realize the full value of its crude oil and natural gas resources due to a lack of infrastructure to transport the extracted resources to refineries in North America and beyond. This infrastructure challenge results in eastern Canadian refineries relying primarily on imported foreign sources of crude oil rather than accessing crude oil from western Canada.

TransCanada Pipelines Limiteds (TransCanadas) proposed conversion of a portion of its Canadian Mainline pipeline is expected to deliver significant economic benefit to Canada, equating to a total of $35.3B in additional3 GDP4 over the next 40 years. The proposed Energy East project will convert portions of the existing Canadian Mainline natural gas pipeline to transport crude oil from western Canada, including the Bakken oil formation in Saskatchewan, to eastern Canada. To understand the economic implications of the project, TransCanada commissioned Deloitte to perform a study to estimate the projects economic impacts on the Canadian economy. This study was performed using a combination of independent Deloitte analysis and Statistics Canadas economic impact forecasting Input-Output (I/O) Model5. As shown below, the potential benefits derived from this modelling are significant:

$10.0B and $25.3B in additional GDP for the Canadian economy during the six-year development and construction phase and the 40-year operations phase, respectively (note: while 40 years was used as the time horizon for the purpose of this economic analysis, regular maintenance is expected to extend the life of the pipeline significantly beyond 40 years). This economic activity will occur within Ontario (37% of total), Alberta (22%), Quebec (18%), New Brunswick (8%), Saskatchewan (7%), and Manitoba (5%)

2,341 additional annual direct6 full-time equivalent (FTE)7 jobs during the 2013-2015 development period (7,118 annual FTE jobs total for three years including direct, indirect and induced impacts) and 7,728 additional annual direct FTE jobs during the 2016-2018 construction period (23,498 annual FTE jobs total for three years including direct, indirect and induced impacts), or a total of 91,849 one-year FTE jobs for all years, primarily within the construction and engineering industries8 in Quebec (31%), Ontario (26%), Alberta (16%), New Brunswick (12%), Saskatchewan (6%), and Manitoba (4%)

1,087 additional annual direct FTE jobs would be sustained during operations for 40 years (4,252 annual FTE jobs total including direct, indirect and induced impacts), primarily within the pipeline operation & management and power industries9 in Ontario (42%), Alberta (21%), Quebec (13%), New Brunswick (9%), Manitoba (6%) and Saskatchewan (6%)

$3.01B and $7.2B in total additional tax revenue10 for federal, provincial and municipal governments during the six year development and construction and 40 year operations phases respectively.

1 Trade Data Online. Industry Canada. Web. Nov. 2011. 2 Collyer, Dave. Canadian Oil and Gas Industry Outlook Opportunities and Challenges. CAPP. 19 Apr. 2012. 3 Benefits stated are incremental to operating the Canadian Mainline with natural gas. 4 Gross Domestic Product, the market value of all officially recognized goods and services produced within a country within a period. 5 The study analyzed the economic impacts of the project on refineries, oil and gas producers, consumers and the eastern Canadian shipping industry from a qualitative and strategic perspective; these impacts were not modelled quantitatively with the I/O Model. 6 Direct impact = impact resulting from additional output in directly affected industry (e.g., industry under study). Indirect impact = impact resulting from additional output in inter-related industries. Induced impact = impact from changes in production of good and services resulting from increased household income (e.g., wages) generated by the additional direct and indirect output 7 FTE is a unit that represents the workload of an employed person in such a way that makes workloads comparable. An FTE of 1.0 is equivalent to one worker working full time, whereas an FTE of 0.5 is equivalent to a worker working half-time. FTE can be calculated by dividing total hours worked by total hours worked annually by a full-time worker. 8 Statistics Canada industry names are Oil & Gas Engineering Construction and Architectural, Engineering and Related Services 9 Statistics Canada industry names are Crude Oil and Other Pipeline Transportation, Electrical Power Generation, Transmission

and Distribution and Pipeline Transportation of Natural Gas 10 Excludes corporate taxes, which are not explicitly estimated by the I/O Model, but are included in GDP figures.


Considering both phases, this revenue is primarily generated in Ontario (36%), Alberta (21%), Quebec (20%), Saskatchewan (8%), New Brunswick (7%) and Manitoba (6%)

An increase in crude oil takeaway capacity from western Canada of approximately 1 million barrels per day, leading to an anticipated reduction of the discount to Brent and WTI-based crude oil on Albertas crude oil for volumes travelling through the pipeline. This is expected to contribute to an overall reduction on the Alberta crude oil price discount to Brent11

A supply of domestic crude oil sources for eastern refineries, which is expected to result in an annual feedstock cost savings of between $1.55 and $11.49 per barrel based on current refining configurations and the refinery location12

As shown in Figure 1, the Energy East project is expected to have significant implications for provincial economies across Canada and New Brunswick, Quebec, Ontario, Manitoba, Saskatchewan and Alberta in particular.

Figure 1: Summary of economic impacts of the Energy East project13

The conversion of the Canadian Mainline would provide a much sought after outlet for western Canadas increasingly productive oil regions. If implemented, the project would demonstrate Canadas strength in engineering and would contribute to sustaining the high standard of living that Canadians have come to expect.

11 The discount has not been precisely estimated as doing so would require making a large number of assumptions (e.g., outcomes of other projects beyond the scope of this report, global supply / demand forecasts, etc.) 12 Based on replacing currently sourced Brent-based crude oils with light western Canadian crude oil. 13 Canadian totals may not directly add up to sum of provinces due to rounding.


Introduction

TransCanada proposes to convert a portion of its existing, underutilized Canadian Mainline (Mainline) pipeline from natural gas to crude oil transportation. TransCanada commissioned Deloitte to estimate the magnitude of the economic impacts of the Energy East project on the Canadian economy. This study was performed using a combination of independent Deloitte analysis and Statistics Canadas economic impact forecasting I/O Model.

Energy East project background The Mainline is a 14,101 km natural gas pipeline system extending from the Alberta/Saskatchewan border in the west to the Quebec/Vermont border in the east. Through connections with a number of other natural gas pipelines in Canada and the U.S., the Mainline provides natural gas to many markets within North America. The Mainline is regulated by Canadas National Energy Board (NEB), which regulates tolls on the pipeline to allow TransCanada to recover the costs of transporting the natural gas as well as to achieve a financial return on the investment.

Utilization has decreased from historical levels in the Prairies and Northern Ontario sections in recent times14. Rapid growth of natural gas shale production from the Marcellus deposit in the northeast U.S. has made it the most productive natural gas field in the region and has dramatically increased the volume of natural gas available in eastern North America. From the end of 2010 to the end of 2012, Marcellus natural gas production increased from approximately 2 billion cubic feet of natural gas per day (Bcf/d) to at least 7 Bcf/d15,16 and is forecasted to grow to between 10-12 Bcf/d by 202017,18,19,20. This has reduced demand for western Canadian natural gas in eastern markets. At 141 trillion cf of natural gas reserves21 the Marcellus deposit has the potential to provide high production rates into the distant future.

Decreased utilization has led to increased tolls in recent years (approximately doubling from 2002 to 2012), which has raised the relative cost of western Canadian natural gas versus lower cost Marcellus natural gas and is therefore limiting the viability and competitiveness of the Mainline in its current form.

There is increasing demand for North American and specifically western Canadian crude oil in eastern Canadian refineries as it is a lower cost feedstock, more stable and longer-term source of crude oil than the currently sourced foreign crude oil supply. As the level of utilization provides available capacity on the Mainline, an economic opportunity exists to connect the increasing volumes of western Canadian crude oil to new markets.

The proposed project will convert 3,000 km of existing natural gas pipeline to crude oil service and will also include a total of 1,460 km of new pipeline for total pipeline length of 4,460 km. This total includes new pipeline segments within Manitoba and Saskatchewan to connect the Mainline to crude oil produced from the Bakken crude oil formation. The project would link western Canadian crude oil production to eastern Canadian refineries and international markets via the east coast.

14 Internal capacity utilization documents. TransCanada. Aug. 2012. 15 Zeits, Richard. Marcellus Shale: 10 Bcf Per Day in 2013. Seeking Alpha. Web. 11 Mar. 2013. 16 Manning, Melissa. Marcellus Shale Transformational for Some Companies, Others Still Yet to Realize Full Potential, Says IHS.

Web. 18 Mar. 2013 17 Deloitte internal estimates. 18 NEXT Project Northern Expansion Transmission. Spectra Energy. Web. 15 Aug. 2012. 19 Malik, Naureen. Marcellus gas cuts price premiums to decade lows. Bloomberg News. 21 Jun. 2012. 20 Zeits, Richard. Marcellus Shale: 10 Bcf Per Day in 2013. Seeking Alpha. Web. 11 Mar. 2013. 21 Buurma, Christine. U.S. Cuts Estimate for Marcellus Shale Gas Reserves by 66%. Bloomberg. 23 Jan. 2012.


Study objectives, scope and approach TransCanada commissioned Deloitte to estimate the economic impacts of the Energy East project on the Canadian economy. TransCanada provided information on the proposed timelines and budget associated with the project as well as the commercial rationale. TransCanada has not finalized specific decisions regarding the execution of the Energy East project. Particular contracting, employment, material sourcing, and other decisions will influence impacts of the project on GDP, taxation, and employment. Such decisions are dependent upon matters such as project timing, regulatory issues, final design, pipeline routing, availability of human capital and equipment, materials, and other related variables. This study includes anticipated economic impacts determined through the use of the I/O Model, which incorporates historical information gathered by Statistics Canada from past oil pipeline projects. As such, specific project decisions can affect the actual impacts realized upon the development of the project.

Deloitte worked with Statistics Canada to determine the economic impacts of the project in terms of GDP, job creation and tax revenues using its I/O Model. The I/O Model calculates the economic effects nationally and by province for a given change in the economy (e.g., a change in output of an industry or additional demand for a good or service). Deloitte also performed further qualitative and quantitative analysis to evaluate the broader potential benefits of the project on the Canadian public and industry stakeholders.

The scope of the economic impacts analysed in this study are based on a full capacity of approximately 1 million barrels per day (bpd) for the Mainline. Estimated capital and operating expenditures are based on this capacity.

The scope of this study does not include an assessment of the technical, environmental or commercial aspects of the project. Furthermore, the findings in this report are based on preliminary estimates of capital and operating costs and are therefore subject to revision as the project progresses to detailed planning stages.


Energy East project description

The proposed conversion of a section of TransCanadas Mainline pipeline system from natural gas to crude oil service would provide eastern Canadian refineries and potentially international markets with western Canadian crude oil. Deliveries to Quebec are targeted to be in service by late 2017 with deliveries to New Brunswick being targeted for 2018. The 4,460 km pipeline includes:

The conversion of 3,000 km of existing Mainline natural gas pipeline in Saskatchewan, Manitoba, and Ontario with a total capacity of approximately 1 million bpd. The conversion represents an approximate 25% reduction in overall combined gas capacity through TransCanadas facilities into Ontario22

The construction of 1,460 km of new pipelines:

New segments on both ends of the converted section within Alberta, Ontario, Quebec and New Brunswick (capacity same as above)

New pipeline segments within Manitoba and Saskatchewan to connect the Mainline to crude oil produced from the Bakken crude oil formation

The construction of 68 new pumping stations

The construction of crude oil storage tank terminals23 in:

Hardisty, Alberta: 4.2 million barrels

The Quebec City, Quebec area: 4.95 million barrels

The Saint John, New Brunswick area: 7.65 million barrels

Manitoba and Saskatchewan Bakken area: 0.75 million barrels

The construction of new marine shipping terminals in the Quebec City area and in the Saint John, New Brunswick area

As effective24 crude oil takeaway pipeline capacity from the western Canadian region is currently 3.0 million bpd, the Energy East project represents a potential 33% increase in takeaway capacity from the western Canadian region based on the full approximately 1 million bpd capacity. The projects route is shown below in Figure 2. Figure 2: Energy East project map

22 Transportation of crude oil on the Mainline will occur via one pipe. There are currently five, three, and two Mainline pipes running across the country in the Prairies, Northern Ontario, and North Bay Shortcut sections respectively. 23 Capacities refer to tank shell capacity for the ultimate pipeline capacity of approximately 1 million bpd. 24 Effective capacity is the capacity available to ship crude oil once. See Appendix E for detail on effective capacity.


Design details After conversion, the Mainline will handle a variety of crude oil types including light, synthetic and heavy crudes. For the Hardisty interconnection point, existing or planned terminal interconnections will be used to provide crude oil producers with connectivity to existing feeder pipelines or terminals at the Hardisty complex. Downstream interconnections will include the Suncor Montreal and Ultramar/Valero Quebec City refineries, and a new interconnection to the Irving Refinery in Saint John. New interconnections will be established to connect the Bakken feeder pipeline segments to the Mainline.

To minimize the impact on land and its effect on the environment, TransCanada will utilize existing rights of way to the greatest extent possible. Of the 4,460 km pipeline, 70% of the pipeline is already in the ground and more than half of the new build portion will follow existing rights of way and infrastructure. For the new Alberta pipeline segment, TransCanada will parallel the rights of way of existing crude oil pipelines. For the new eastern Ontario, Quebec and New Brunswick pipeline segments, TransCanada will parallel existing crude oil or natural gas pipeline systems or other utility rights of way along different portions of the route. To the extent possible, new pump stations will utilize land where existing pump/compressor stations or receipt terminals are located.

Project costs Project costs were estimated based on TransCanadas experience with crude oil and natural gas pipeline development, construction and operation across Canada and the U.S. The below expected project development and construction costs of $11.3 B are approximately 54% lower than would be expected for a new pipeline, as converting existing pipelines is less expensive than constructing new ones 25. These costs include but are not limited to integrity programs (testing, inspection, replacement and repair of converted equipment), new pipeline and facility construction (pumping stations, connection and receipt points, terminals), conversion of existing facilities, power equipment, engineering and other professional services, and land and land rights. Figures shown in Table 1 are in 2013 Canadian dollars unless otherwise stated.

Table 1: Project capital expenditures

Segment Scope Cost ($M)

Alberta & Saskatchewan New Build

Pipeline: Hardisty, AB to Burstall, SK Facilities/pump stations

$598 $561

Bakken Segments in Saskatchewan & Manitoba

Pipeline: Segments within SK and MB and connections to Mainline Facilities/pump stations

$63 $142

Conversion Pipeline: Burstall, SK to Stn. 1401 in ON Facilities/pump stations

$596 $2,0970

Ontario New Build Pipeline: Stn. 1401 to ON/QC border Facilities/pump stations

$214 $165

Quebec New Build Pipeline: ON/QC border to QC/NB border Facilities/pump stations

$1,959 $1,262

New Brunswick New Build Pipeline: QC/NB border to St. John Facilities/pump stations

$1,259 $897

Contingency $1,472

Total estimated project cost $11,285

Project operating expenditures are estimated to have an annual cost of $729M per year and include expenditures for power, operating and maintenance, property taxes, insurance, leases and other taxes26.

25 New build cost was estimated using per km costs forecasted by TransCanada for the new build sections of the pipeline required for this project as well as per km costs for in-development crude oil pipelines of other companies. 26 The incremental cost of operating the portion of the Mainline impacted by this project with crude oil versus natural gas is $665M and was used in the Statistics Canada I/O Model analysis to calculate the net impact of the project. The cost of operation, and resultant economic impact, is significantly greater due to the additional pumping stations and energy costs required to transport crude oil compared to natural gas.


Industry context

Canadas Oil & Gas industry is, and will continue to be, a major driver for Canadas economy and high standard of living. Pipeline capacity for transporting crude oil from western Canada is forecasted to be constrained over the coming years, potentially reducing the oil industrys ability to meet expected production growth and reducing potential economic growth in Canada. The Energy East project would help alleviate this constrained situation by providing additional takeaway capacity and supplying eastern Canadian refineries and export markets. As such, TransCanadas proposed Energy East project supports the long-term strategic and economic interests of Canada as it unites the abundant crude oil resources of the western Canadian producing regions with eastern Canadas refining capabilities.

Canadas Oil & Gas industry Canadas Oil & Gas industry plays a critical role in Canadas economy as it generates more than $52B of GDP annually or 4.2% of the nations total GDP27. Taxes and royalties from the Oil & Gas industry contributed more than $20B to governments in 2011 and the industry employs an estimated 550,000 Canadians (direct and indirectly)28. Canadas Oil & Gas industry is also a significant exporter, with almost one quarter of all Canadian exports deriving from the industry29.

While already a major contributor to Canadian exports, Canadas volume of crude oil available for export is expected to be 5.0M bpd, or 2.5 times what it is today, by 203530. This is a result of two major factors. First, western Canadas crude oil supply is expected to more than double by 2030, with light crude oil supply growing until 2025 as a result of increased activity in the Bakken region and in Alberta and heavy oil supply increasing as a result of ongoing activity in the Alberta oil sands [see Figure 3]. Second, Canadian domestic demand for oil is expected to remain flat or decline in the coming years as a result of increased fuel efficiency and demand for products with lower petroleum product inputs31.

Canada could play a significant role in meeting the global demand for oil, supporting the development and industrialization of emerging markets such as India and China.

27 Table 379-0027. Statistics Canada. Web. May 2013. 28 Collyer, Dave. Canadian Oil and Gas Industry Outlook Opportunities and Challenges, CAPP. 19 Apr. 2012. 29 Trade Data Online. Industry Canada. Web. May 2013.. 30 Canadas Energy Future: Energy Supply and Demand Projections to 2035 Energy Market Assessment. NEB. Nov. 2011. 31 Statistical Review of World Energy. BP. Jun 2011; International Energy Outlook, EIA. Sep 2011.

Source: CAPP Canadian Crude Oil Supply Forecast 2012-2030

Figure 3: Western Canadian forecasted light and heavy crude oil supply


Crude oil transportation The main transportation method for crude oil on land is via pipelines, though limited volumes of crude oil are transported by rail. For example, Irving Oil is transporting small volumes of crude oil via rail to provide feedstock to its Saint John refinery in the absence of a pipeline from western to eastern Canada.

Transportation of crude oil by pipeline has a sizeable cost advantage over rail, as well as some benefits over other transportation methods from a safety and energy-intensity perspective32,33,34.

A large network of pipelines provides takeaway capacity from western Canada to refineries in the mid-west U.S., U.S. Gulf Coast and the west coast of North America [see Figure 4 and Appendix E]. However, an oil pipeline that directly links western Canada to the refineries in eastern Canada or the eastern seaboard does not currently exist.

Pipeline capacity out of the western Canadian region is currently insufficient to handle local production levels. At the same time, insufficient pipeline capacity to transport crude oil from the Cushing oil hub [see Figure 4] results in a growing inventory of crude oil at this location [see Figure 5].

This oversupply in the region has depressed the price of crude oil in North America, a price derived from the Chicago Mercantile Exchange crude oil futures benchmark contract known as West Texas Intermediate (WTI). Historically, WTI has traded slightly above Brent, the global benchmark for crude oil that is derived from the IntercontinentalExchange crude oil futures benchmark35, but this situation has generally been reversed since the mid-2000s. Western Canadian Select (WCS), the primary benchmark for western Canadian crude oil, has traded at a further discount to WTI as it is a heavier grade of crude than that on which WTI is based and so has higher processing costs. In 2012, WTI crude oil sold at an average of $18.72 or 17% below Brent while WCS traded at an average discount of $40.97 or 36% below Brent [see Figure 6].

This double discount on WCS versus Brent crude oil contributes to lower profitability and poorer project economics for crude oil producers in western Canada. This is likely to result in reduced capital investment, tax revenue, royalty income and economic development for the Canadian economy. This double discount was estimated to have resulted in a $25 billion drop in annual government

32 Statistical Summary, Pipeline Occurrences 2011. Transportation Safety Board. Web. 9 Oct. 2012. 33 Energy Efficiency Trends Analysis Tables Canada. Office of Energy Efficiency, Natural Resources Canada. Web. 9 Oct. 2009. 34 Van Essen, H., Croezen, H.J., Nielsen, J.B. Emissions of pipeline transport compared with those of competing modes: Environmental analysis of ethylene and propylene transport within the EU. CE Solutions for environment, economy and technology. 2003. 35 Brent is also traded on the New York Mercantile Exchange

Figure 4: North American pipelines Source: CAPP Crude Oil Pipeline & Refinery Map (Aug 2013). See Appendix E for more detail.

Figure 5: Cushing inventory, Apr. 2004-Jun. 2013 Source: EIA, Petroleum and Other Liquids data charts

Figure 6: Historical Brent, WTI and WCS prices Source: Bloomberg


revenue from taxes and royalties in 201236, while ongoing revenue losses are estimated to between $15 billion and $27 billion annually if the infrastructure challenge is not addressed37,38.

The only present export market for western Canadian crude oil is the United States. Dependency upon the U.S. market results in the bottleneck of oil in Cushing. To prevent the continued discounting of WCS crude oil, unconstrained access to markets via the west coast, U.S. Gulf Coast and/or east coast of Canada and the U.S is required. If this access is not provided in the future, the bottleneck at Cushing could further shift to western Canada as production levels in the region increase more quickly than takeaway capacity is added. As shown in Figure 7, production is estimated to exceed takeaway capacity by as early as 2017 if proposed pipeline projects are delayed.

Figure 7: Effective takeaway capacity from western Canada39

Source: CAPP Crude Oil Forecast, Markets and Transportation (2013), 2012 NEB Energy Futures Backgrounder: Addendum to Canadas Energy Future: Energy Supply and Demand Projections to 2035(2012)

The Energy East project would help alleviate this takeaway capacity challenge by providing necessary pipeline capacity from western Canada while providing crude oil producers with access to high potential target markets accessible from the eastern Canadian refineries. The Energy East project is a particularly attractive option for providing the required additional takeaway capacity as it is only a partial new build and therefore has relatively lower environmental impact, requirements for new rights of way, and lower costs.

36 Beltrame, J. Canada to lose $15-billion a year on Keystone, lack of oil pipeline capacity: CIBC. The Financial Post. 03 Apr 2013. 37 Ibid. 38 Vanderklippe, N. Oil differential darkens Albertas budget. The Globe and Mail. 22 Jan. 2013. 39 Effective capacity is the capacity available to ship crude oil once. See Appendix E for additional detail on the pipeline capacities plotted above.


Economic benefits

Approach The quantifiable impacts of the Energy East project were assessed using Statistics Canadas I/O Model, which measures the detailed economic impacts nationally and by province for a given change or shock to the economy. Industry shocks were generated based on TransCanadas estimated project costs and are shown in Appendix C. Only incremental investments were included (e.g., only the additional operating costs of using the pipeline for crude oil transport versus natural gas transport). The quantifiable impacts measured by the I/O Model include:

Gross domestic product (GDP) the market value of all officially recognized goods and services produced within a country in a given period

Full-time equivalent (FTE) job creation

Government tax revenue

The less quantifiable impacts were assessed using primary and secondary market research-based analysis, as they could not be directly measured using the Statistics Canada I/O Model. These include impacts on:

Eastern Canadian refineries

Canadian crude oil producers

Canadian natural gas producers

Canadian consumers

Canadas shipping industry

Benefits to Canada The Energy East project is estimated to drive significant economic activity for the provinces of Alberta, Saskatchewan, Manitoba, Ontario, Quebec and New Brunswick during the development, construction and ongoing operation of the project. Approximately $11.3B in new capital expenditures will be directed toward Canada and will generate spending on equipment pipes, valves, fittings, and pumping equipment as well as on services engineering, design and construction management firms, trades, and professional services.

This value represents a large investment in the Canadian economy. The project is also estimated to have ongoing incremental operating expenses of approximately $665M per year for power, property taxes, insurance, leases and operations and maintenance above and beyond the cost of operating the Mainline as a natural gas pipeline 40, or a net present value of $23.3B during the next 40 years. These expenditures will likely drive long-term demand for Canadian-generated energy and a highly-skilled workforce in operations and maintenance trades and professions.

The increase in employment from the project during development, construction and ongoing operations is expected to have additional follow-on economic benefits for local economies. Incremental wages and salaries earned as a result of the project would drive demand for goods and services, or induced

40 The total annual operating costs for the converted pipeline are $729M, but the incremental cost of running the pipeline with crude oil is $665M.


benefits, as employees spend their earnings at local retail stores, restaurants and service-providers. This spending on goods and services will also generate additional taxes for governments.

While not quantified in this report, the project is also expected to increase government revenues via its expected positive impact of the price of western Canadian crude oil (reducing the discount versus Brent)41.

GDP, job creation and tax revenue expected to result from the project via the model are presented in detail below.

Gross domestic product As observed in Table 2, the project is expected to have a significant impact on Canadas GDP over its operating life. In total, the project is expected to create $35.3B in additional GDP as a result of direct, indirect and induced economic impacts. The six-year development and construction phase is expected to generate $10.0B in additional GDP. The operations phase is expected to generate $25.3B in additional GDP over the course of operations, or $632M per year for 40 years. The majority of the GDP benefit occurs in Ontario (37%), Alberta (22%), Quebec (18%), New Brunswick (8%), Saskatchewan (7%) and Manitoba (5%) based on Combined Total figures. Additional detail on GDP impacts is included in Appendix D.

Table 2: GDP Impact of project by province (2013 $M)42

Prov.

Development & Construction Phase (6 years) Operations phase (40 years) Combined

Direct Indirect Induced Total Direct Indirect Induced Total Direct Indirect Induced Total

NB 478 524 168 1,170 838 575 216 1,629 1,316 1,099 384 2,799

QC 1,391 1,074 649 3,114 745 1,867 624 3,236 2,136 2,941 1,273 6,350

ON 923 1,063 708 2,694 1,409 6,738 2,188 10,335 2,332 7,801 2,896 13,029

MN 177 115 69 361 419 760 267 1,446 596 875 336 1,807

SK 204 251 122 577 477 1,250 253 1,980 681 1,501 375 2,557

AB 499 809 434 1,742 2,890 1,904 1,334 6,128 3,389 2,713 1,768 7,870

BC 0 134 110 244 0 189 207 396 0 323 317 640

Oth. 0 98 46 144 0 87 60 147 0 185 106 291

Total 3,672 4,068 2,306 10,046 6,778 13,370 5,149 25,297 10,450 17,438 7,455 35,343

Eastern Canadian refineries may also invest in their operations (e.g., cokers, other enhancements to increase flexibility for processing various crude oil types and/or capacity upgrades) as a result of the Energy East project. In other locations where heavy crude oil refinery capacity exists such as the U.S. Midwest or U.S. Gulf Coast investments in refinery upgrades for processing heavy crude oil were made once increased access to heavy crude oil was provided. A similar outcome may occur in eastern Canada if heavy western Canadian crude oil is more readily accessible.

As the exact amount of investment in eastern Canadian refineries is unknown and would require too vast a range of assumptions to estimate, a nominal investment value of $100M in Quebec was provided to the I/O Model to illustrate potential impacts. For the purposes of analysis, Quebec was selected because it is in the approximate geographic centre of Ontario, Quebec, New Brunswick, Nova Scotia and Newfoundland the five eastern provinces with refineries and is therefore expected to nominally

41 The discount has not been precisely estimated as doing so would require making a large number of assumptions (e.g., outcomes of other projects beyond the scope of this report, global supply / demand forecasts, etc.). 42 Some sums may not add up to the component parts due to rounding. Source: Statistics Canada Interprovincial I/O Model, Table 1.4


represent a refinery investment in eastern Canada.43 The outcome of the $100M shock was then scaled up to determine a range of potential impacts on GDP, job creation and taxes based on hypothetical refinery investments of $2.2B and $7.0B. These values were used in this analysis to represent a potential low- and high cost for refinery upgrades and is based on recent estimates of project costs for upgrades and new builds of refineries within North America44.

GDP was found to increase by a total of $95.4M in Canada for every $100M of investment in refineries in Quebec, or $2.1B and $6.7B for hypothetical investments of $2.2B and $7.0B. Please refer to Appendix D for more details.

Job creation The project is estimated to have a significant impact on job creation in the Canadian economy as a result of direct, indirect, and induced45 impacts. As shown in Table 3, approximately 7,118 additional FTE jobs per year are created during the three-year development period, while approximately 23,498 additional FTE jobs per year are created during the three- year construction period 46. In combination, the development and construction phase is expected to generate an additional 91,849 one-year FTE jobs for the six years. As shown in Table 4, 4,252 FTE jobs per year are created during ongoing operations (i.e., 4,252 additional FTE jobs would be sustained over the 40 year operations phase of the Energy East project).

43 To validate that the economic impacts of a refinery investment in Quebec accurately represented eastern Canada on the whole, the I/O Model was also performed using a $100M investment in Ontario. Results were consistent with the Quebec model run. 44 Marathons Detroit refinery upgrade is estimated to cost $2.2B (Projects. Downstream Today. Web. Oct. 2012). Cenovus/ConocoPhillips Wood River coker and refinery expansion was completed for $3.8B US (Cenovus website); BPs Whiting refinery expansion is estimated to cost $3.8B US (Projects. Downstream Today. Web. Oct. 2012); Irving/BPs cancelled new refinery in New Brunswick was estimated to cost $7B CDN (Irving Oil scraps plan for N.B. refinery. The Globe and Mail. Aug. 23, 2012. 45 Direct impact = impact resulting from additional output in directly affected industry (e.g., industry under study). Indirect impact = impact resulting from additional output in inter-related industries. Induced impact = impact from changes in production of good and services resulting from increased household income (e.g., wages) generated by the additional direct and indirect output. 46 For simplicity, it has been assumed that FTE jobs are created evenly within both the three year development and three year construction periods. In actuality, some years within each phase may involve more spending than others, so more jobs may be created in certain years than others. The share of jobs generated in the development vs. construction periods are based on the TransCanadas estimated capital expenditure spend profiles for each year.


Table 3: FTE job creation per year, development and construction phase47

Prov.

Development Period (3 years, 2013-2015)

Construction Period (3 years, 2016-2018)

Overall (6 years)

Direct Indirect Induced Total Direct Indirect Induced Total %

NB 332 407 129 868 1,095 1,344 427 2,866 12%

QC 837 878 502 2,217 2,764 2,899 1,656 7,319 31%

ON 528 854 500 1,882 1,743 2,819 1,652 6,214 26%

MB 104 97 52 253 343 320 171 834 4%

SK 159 215 76 450 524 711 250 1,485 6%

AB 382 510 241 1,133 1,260 1,684 796 3,740 16%

BC 0 116 88 204 0 383 290 673 3%

Other 0 75 37 112 0 247 121 368 2%

Total 2,342 3,152 1,625 7,119 7,729 10,407 5,363 23,499 100% Source: Statistics Canada Interprovincial I/O Model, Table 1.4

Table 4: FTE job creation per year, operations phase

Prov.

Operations Phase (40 years)

Direct Indirect Induced Total %

NB 121 205 59 385 9%

QC 203 162 172 537 13%

ON 181 1,086 539 1,806 42%

MB 70 126 69 265 6%

SK 94 97 56 247 6%

AB 418 200 261 879 21%

BC 0 37 63 100 2%

Other 0 15 18 33 1%

Total 1,087 1,928 1,237 4,252 100% Source: Statistics Canada Interprovincial I/O Model, Table 1.4

During the development and construction phase, three industries are responsible for 48% of job creation: Oil & Gas Engineering Construction (33%), Architectural, Engineering and Related Services (10%) and Support Activities for Oil and Gas Extraction (5%). During the operations phase, three industries are responsible for 53% of job creation and include Crude Oil and Other Pipeline Transportation48 (28%), Electric Power Generation, Transmission and Distribution (21%) and Repair Construction (4%). Additional information is provided in Appendix D.

On a provincial level, in New Brunswick, the top industries during development and construction are Oil & Gas Engineering Construction (38%), Architectural, Engineering and Related Services (14%) and Machinery, Equipment and Supplies Wholesaler-Distributors (3%); during operations, they are Crude Oil and Other Pipeline Transportation (62%), Electric Power Generation, Transmission and Distribution (12%) and Food Services and Drinking Places (1%).

In Quebec, the top industries during development and construction are Oil & Gas Engineering Construction (38%), Architectural, Engineering and Related Services (12%) and Food Services and Drinking Places (2%); during operations, they are are Crude Oil and Other Pipeline Transportation

47 FTE values shown in the table are rounded and so may not directly reconcile with the sums and percentages shown. 48 As a crude oil pipeline does not currently exist in New Brunswick, the I/O Model does not currently include historical data points on which to estimate economic impacts resulting from the projects operating expenditures in the province. As such, NAICS-based code 486200, Natural Gas Pipeline Transportation was shocked for New Brunswick operating expenses as the direct, indirect, and induced impacts resulting from running a natural gas pipeline are expected to be similar to that of running a crude oil pipeline.


(38%), Electric Power Generation, Transmission and Distribution (12%) and Food Services and Drinking Places (3%).

In Ontario, the top industries during development and construction are Oil & Gas Engineering Construction (28%), Architectural, Engineering and Related Services (9%) and Building Material and Supplies Wholesaler-Distributors (2%); during operations, they are are Electric Power Generation, Transmission and Distribution (33%), Crude Oil and Other Pipeline Transportation (10%) and Repair Construction (5%).

In Alberta, the top industries during development and construction are Oil & Gas Engineering Construction (34%), Support Activities for Oil and Gas Extraction (18%) and Architectural, Engineering and Related Services (7%); during operations, they are Crude Oil and Other Pipeline Transportation (48%), Electric Power Generation, Transmission and Distribution (6%) and Food Services and Drinking Places (3%).

In the case of refinery investments, 968 FTE jobs are estimated to be created for every $100M of investment in refineries. As such, investments of $2.2B and $7.0B are estimated to generate 4,261 and 13,558 jobs per year respectively, assuming five-year construction phases49.

Benefits to government The table below summarizes the estimated additional annual government tax revenue50 that is attributable to the project on a direct and indirect51, as well as induced, basis. The project is expected to generate a total of $3.0B of tax revenue during the development and construction phase from all sources. During the operations phase, a total of $7.2B in tax revenue is estimated to be generated from all sources, an annual amount of $180M.

Table 5: Total government tax revenue, (2013 $M)52

Source: Statistics Canada Interprovincial I/O Model, Table 1.2

In the case of refinery investments, $29M in total government tax revenue for Canada is expected to be generated for every $100M of investment in refineries, resulting in $634M and $2.0B in tax revenue for hypothetical investments of $2.2B and $7.0B.

49 Or 21,306 and 67,719 total direct, indirect, and induced FTE positions, respectively. 50 Includes taxes on products (HST, GST, PST, federal excise taxes, import duties, and fuel taxes, etc.), production (capital taxes, Canadian Deposit Insurance Corporation premiums, land transfer taxes, property taxes, etc.), and personal income tax. Corporate income taxes were not included as they cannot be modelled accurately by the I/O Model (Corporate income taxes are included within the Other Operating Surplus category in I/O Model output Table 1.2, along with depreciation and extraordinary gains and losses). 51 The I/O Model does not provide a breakdown of direct and indirect taxes or share of taxes to federal, provincial, and municipal governments for all tax categories (Product, Production, and Income Tax). 52 Dollar values shown in the table are rounded and so may not directly reconcile with sums and percentages shown.

Prov.

Development & Construction Phase (6 Years) Operations Phase (40 years)

Direct & Indirect Induced Total %

Direct & Indirect Induced Total %

NB 192 74 266 9% 334 94 428 6%

QC 805 284 1,089 36% 690 245 936 13%

ON 567 231 798 26% 2,109 755 2,864 40%

MB 86 25 111 4% 402 103 505 7%

SK 148 46 194 6% 534 92 627 9%

AB 332 131 463 15% 1,327 407 1,734 24%

BC 30 29 59 2% 30 52 82 1%

Other 19 14 33 1% 13 16 29 0%

Total 2,179 834 3,013 99% 5,439 1,765 7,204 100%


Impacts on Canadian refineries Eastern Canadian refineries could benefit from the Energy East project due to access to lower cost feedstock, a stable and long-term supply of crude oil and increased negotiating power for long-term crude oil supply contracts.

Canadas eastern refineries are currently heavily reliant on foreign crude oil based on Brent prices for their feedstock [see Figure 8] as local sources from Atlantic Canada meet only 17%53 of input requirements. As a pipeline linking eastern and western Canada does not exist today, western Canadian crude oil is only accessible to eastern refineries via rail or truck. For example, Irving Oil is receiving some test shipments of western crude oil at its Saint John, New Brunswick refinery via rail and plans to upgrade its East Saint John terminal to receive future rail deliveries, although volumes are limited54.

Figure 8: Sources of crude oil for Canadian refineries

Source: The Supply and Disposition of Refined Petroleum Products in Canada, Tables 2-1 to 7-1. Statistics Canada (March 2013: 2012 Data). Deloitte Analysis

As a result, Canadas eastern refineries are economically disadvantaged compared to their U.S. counterparts on the U.S. Gulf Coast and Midwest that are able to access discounted WTI-based crude oil. Assuming that eastern Canadian refineries continue to use light crude oil as their feedstock, it is estimated that Quebec-based refiners would save between approximately $2.80 and $10.24 per barrel as a result of this project and that New Brunswick-based refiners would save between approximately $1.55 and $11.49 per barrel, depending on whether the pipeline is partially or fully utilized55. As such, a source of western Canadian crude oil would improve the long-term economic viability of eastern refineries. The extent of the benefit to refiners is dependent on many factors, including but not limited to the type of input crude, potential volume discounts if fixed supply arrangements are agreed with producers and the degree of utilization of the supply pipeline. The combination of these factors will determine the extent of the benefit within the ranges described.

53 The Supply and Disposition of Refined Petroleum Products in Canada tables. Statistics Canada. Web. 2012. 54 Irving Oil's western crude rail plan deemed innovative. CBC News. Web. 8 June 2012. 55 See Appendix G for calculations and more detail.


Based on the above per-barrel savings resulting from this project, on a 100,000 bpd basis, the savings to a Quebec-based refiner would range from $92M to $336M per year. Similarly, New Brunswick-based refiners would see annual savings between $51M and $377M, per 100,000 bpd56 .

These light crude oil benefits may be enhanced if eastern refiners invest in coking capacity or crude oil processing type flexibility enhancements to enable them to use heavier crude oils for feedstock, as the long-term supply of WCS-based crude oil could be processed. Suncor has previously considered investing in coking facilities at its Montreal refinery to allow it to process heavier crude oils57. Upgrade costs would be significant, however; for example, if coking capacity to handle 100,000 bpd, or 11% of the current 899,000 bpd capacity of Atlantic Canada and Quebec refiners was added, an investment of $2B-$8B would be required based on a capital expenditure cost of $20k-$80k/barrel58.

An increasing and long-term supply of crude oil from western Canada estimated at over 100 years based on current production rates could also incent refineries to invest in capacity additions. Any additional crude oil refined would likely be supplied to external markets, such as Ontario or the northeast U.S. as refineries in Atlantic Canada and Quebec currently produce equal to, or more, petroleum products than are sold domestically [see Figure 9].

Impacts on Canadian crude oil producers While the distance to the east coast from the western Canadian crude oil producing regions is 3-4 times longer than to the west coast, TransCanada estimates that tolls will be competitive with west coast access pipelines. As such, the pipeline will give crude oil producers an attractive alternative route for accessing eastern Canadian, U.S. and other international markets at competitive rates.

Producers could benefit from the Energy East project due to increased takeaway capacity, market diversity and reductions in the Alberta discount regardless of where crude oil is shipped, whether it be to eastern Canadian, U.S., or global refiners. A reduced Alberta discount would increase profitability for producers giving them the ability to invest in their operations as well as increase the viability of oil sands projects by lowering the economically viable oil production break-even price.

Impacts on natural gas producers The projects impact on Canadian natural gas producers is expected to be neutral to marginally positive on the whole. The Energy East project involves converting an underutilized section of the Mainline pipeline. This conversion of underutilized portions will raise overall pipeline utilization, which may reasonably be expected to decrease tolls on the pipeline, decreasing natural gas producers shipping costs.

56 These savings are calculated using the per barrel savings annualized with a 90% refinery availability, assuming the feedstock is being supplied by western Canadian producers via a pipeline. 57 Suncor scraps plan for Montreal refinery expansion. Reuters. Web. 9 Sep. 2009. 58 $/barrel range experienced for refinery upgrades and new builds based on recent projects.

Figure 9: Canadian refinery export capacity, 2012 Source: The Supply and Disposition of Refined Petroleum Products in Canada, Table 2-1. Statistics Canada.


Impacts on consumers Canadian consumers would benefit from the economic activity of additional spending, job creation, labour-income and taxes estimated to result from the Energy East project as outlined in the outputs of the Statistics Canada I/O Model. In addition, eastern Canadian consumers would experience increased energy security as crude oil will be supplied from reliable domestic sources of feedstock. Consumers may experience a decrease in natural gas prices as removing capital in the rate base of the natural gas Mainline may decrease Mainline tolls.

Impacts on Canadas shipping industry The Energy East project is not likely to have an overall significant impact on Canadas shipping industry as decreases in some shipping activities will be offset by increases in others. The building of a pipeline link would likely decrease current shipping volume along the St. Lawrence River. However, this decrease may be partially offset by increased shipping activity from St. John to other Atlantic refiners and export markets. If additional capacity were added to eastern refineries in the future, the Canadian shipping industry would likely experience additional exporting activity to foreign locations as domestic demand is forecasted to be flat.


Appendix A: Glossary of terms59

API gravity: A measure of how heavy or light a petroleum liquid is compared to water. If API gravity is greater than 10, the liquid is lighter than water and floats on water. If API gravity is less than 10, the liquid is heavier than water and sinks in water.

Barrel (bbl): One barrel is equal to approximately 0.159 cubic metres, 159 litres or 35 imperial gallons.

Barrels per day (bpd): A common metric for describing the daily capacity of a process within the oil value chain (e.g., a production facility, transportation method, refinery, etc.) in terms of volume of oil.

Billions of cubic feet per day (Bcf/d): A common metric, along with millions of cubic feet per day (Mcf/d), for describing the daily capacity of a process within the natural gas value chain (e.g., a production facility, transportation method, processing plant, etc.) in terms of volume of natural gas.

Brent: Brent is the leading global crude oil price benchmark for Atlantic Basin crude oils and is based on a blend of light, sweet crude oils (though not as light or sweet as WTI) produced from North Sea crude oil fields. Brent is primarily traded on the IntercontinentalExchange.

Canadian Association of Petroleum Producers (CAPP): CAPP is an advocacy group that provides a public voice for many of the corporations involved in the upstream Canadian crude oil and natural gas industry. CAPPs members produce 90% of Canadas natural gas and crude oil. CAPPs mission is to enhance the economic sustainability of the Canadian upstream petroleum industry in a safe and environmentally and socially responsible manner, through constructive engagement and communication with governments, the public and stakeholders in the communities60 in which it operates.

Canadian Energy Research Institute (CERI): CERI is an independent, not-for-profit research establishment created through a partnership of industry, academia, and government. Its mission is to provide relevant, independent, objective economic research in energy and related environmental issues 61.

Crude oil: A mix of hydrocarbons of different molecular weights that exists in the liquid phase in underground reservoirs and remains liquid at atmospheric pressure and temperature. Crude oil may contain small amounts of sulphur and other non-hydrocarbons, but does not include liquids obtained from the processing of natural gas.

Diluent: Any lighter hydrocarbon, usually pentanes plus, added to heavy crude oil or bitumen in order to facilitate its transport in crude oil pipelines.

Direct impact: Measures the initial requirements for an extra dollar's worth of output of a given industry (impact resulting from additional output in directly affected industry (e.g., industry under study). The direct impact on the output of an industry is a one dollar change in output to meet the change of one dollar in final demand. Associated with this change, there will also be direct impacts on GDP, jobs, and imports.

Double discount: The price discount that WCS-based Canadian produced crude oil sells at in relation to Brent-based foreign produced crude oil. The price discount is the sum of the discount that WCS-based crude oil sells at in relation to WTI-based U.S. produced crude oil (discount #1) and the discount WTI-

59 Some definitions are from Canadas Energy Future: Energy Supply and Demand Projections to 2035 Energy Market Assessment, NEB. Nov 2011. 60 CAPPs Mission. CAPP. Web. Nov. 2011 61 About CERI. CERI. Web. Nov. 2011


based crude oil sells at in relation to Brent-based crude oil (discount #2). Discount #1 is a result of the higher cost for processing WCS-based crude oil, which is typically heavier and sourer than sweet, light WTI-based crude oil. Discount #2 is a result of the growing inventory of WTI-based crude oil in Cushing, Oklahoma, which is resulting in an oversupply of this crude oil in the region, and subsequently depressing its price in relation to Brent-based crude oil.

U.S. Energy Information Administration (EIA): The EIA is a U.S. federal government administration that collects, analyzes, and disseminates independent and impartial energy information to promote sound policymaking, efficient markets, and public understanding of energy and its interaction with the economy and the environment62.

Foreign crude oil: Crude oil supplied to refineries via tanker from foreign locations such as the North Sea, Africa, the Middle East, or South America.

Full-time equivalent (FTE): FTE is a unit that represents the workload of an employed person in such a way that makes workloads comparable. An FTE of 1.0 is equivalent to one worker working full time, whereas an FTE of 0.5 is equivalent to a worker working half-time (e.g., 20 hours in a 40 hour week). FTE can be calculated by dividing total hours worked by total hours worked annually by a full-time worker.

Gross Domestic Product (GDP): GDP is a measure of economic activity within a country. It is the market value of all goods and services in a year within Canadas borders.

Heavy crude oil: Crude oil that has an API gravity less than 28. Heavy crude oil is denser than light crude oil and so requires the addition of diluent to flow freely in pipelines.

Indirect impact: Measures the changes due to inter-industry purchases as they respond to the new demands of the directly affected industries (impact resulting from additional output in inter-related industries). This includes all the chain reaction of output up the production stream since each of the products purchased will require, in turn, the production of various inputs.

Induced impact: Measures the changes in the production of goods and services in response to consumer expenditures induced by households' incomes (i.e., wages) generated by the production of the direct and indirect requirements (impact from changes in production of good and services resulting from increased household income (e.g., wages) generated by the additional direct and indirect output.

Input / Output (I/O) Model: An I/O model is an economical model that measures the detailed economic impacts (outputs) to a region based on a given input shock to the economy. Shocks are commonly provided as either changes in output to an industry or changes in expenditure on a given basket of goods and services. An I/O economic model commonly estimates GDP, jobs, labour income, and taxes, among other metrics due to direct, indirect, and induced effects.

Light crude oil: Crude oil with an API gravity greater than 28 API. Also a collective term used to refer to conventional light crude oil, upgraded heavy crude oil and pentanes plus.

National Energy Board (NEB): The NEB is an independent federal agency established in 1959 by the Parliament of Canada to regulate international and interprovincial aspects of the oil, natural gas, and electric utility industries. The NEB regulates pipelines, energy development, and trade for the public interest of Canadians.

Net available for export: Total production of a commodity less domestic demand for that commodity. The remainder equals the net (gross exports less gross imports) of the commodity available for export.

Pentanes plus: A low density mixture mainly of pentanes and heavier hydrocarbons obtained from the processing of raw gas, condensate or crude oil.

62 About EIA. EIA. Web. Nov 2011.


Pipeline takeaway capacity: Pipeline capacity available to transport crude oil or natural gas from a specific region.

Reserves: Reserves are the estimated remaining marketable quantities of oil and natural gas and related substances anticipated to be recoverable from known accumulations, as of a given date, based on: analysis of drilling, geological, geophysical and engineering data; the use of established technology; and specified economic conditions.

Shock: A shock is the input provided to an I/O model for the purposes of economic impact analysis. Shocks represent a change to an industry or commodity, such as a $100M investment in construction project in the Oil & Gas sector or the purchase of $100M of automobiles. An I/O model will measure the economic impacts of this shock to the region under study and any other regions impacted by the shock (that are included in the model).

Tolls: The rate a crude oil & gas producer must pay to ship a specific unit of product (in the case of crude oil, usually a barrel) over a given distance. Tolls are set by dividing costs by contract volumes plus a return for operating the asset.

Western Canadian Select (WCS): WCS is a Hardisty, Alberta based benchmark for a blend of conventional and oil sands production and is heavier and more difficult to process than WTI and Brent-based crude oils. It is the most prevalent Canadian crude oil benchmark.

West Texas Intermediate (WTI): WTI is a Chicago Mercantile Exchange benchmark based on light sweet crude oil, produced in the United States and is used for North American price quotations.


Appendix B: I/O Model methodology

I/O Model overview The Industry Accounts division of Statistics Canada maintains an I/O Model that measures the detailed economic impacts nationally or by province for a given shock to the economy. Shocks are commonly provided as either changes in output to an industry or changes in expenditure on a given basket of goods and services (a demand shock). An industry output shock, which has been used for this study, can be used to provide an indication of the economic impacts of building a new factory, constructing a new pipeline, or closing an existing facility, for example, based on an estimation of the additional spend within that industry. A demand shock could be used to determine the economic impact of a policy change, such as implementing a new subsidy on a product, based on an estimated change in demand for the product.

Using the shocks provided, the I/O Model provides a detailed breakdown of economic activities among industries, industry outputs and inputs, GDP components, jobs, labour income and estimates of taxes and subsidies generated using ratios and multipliers based on historical data contained within the Statistics Canada Input-Output tables. The model also provides supply requirements from other sources such as interprovincial or international imports as well as impacts on energy use and pollutants associated with domestic production. As the I/O Model represents a simplified macroeconomic structure, it has some limitations such as:

It does not include some variables of interest for macroeconomic analysis such as price levels, interest rates, employment rates, or labour force measures

When calculating economic impacts such as supply requirements and additional jobs, the model calculates impacts on supplies or resources required without considering if they are readily available or if they will need to be diverted away from other uses. The jobs created can be considered incremental as jobs vacated by individuals switching to the created positions may be filled by the unemployed

Indirect and induced values could be slightly overstated as the production function generating these values does not factor in economies of scale and is based off of a static multiplier. For example, if 1 FTE is currently required to generate 10 watts of power and now 20 watts are required as a result of the project; two FTEs are estimated by the I/O Model to be required. In reality, the power plant may be able to increase output without a 2nd employee or the 2nd employee may not be required until 25 watts are required

While input shocks can be provided based on several hundred North American Industry Classification System (NAICS) or commodity codes, the codes may not be completely representative of the shock in question. For example, for this study, Energy East project construction costs were modeled as a shock to the Oil & Gas Construction industry. This code represents construction projects related to oil and gas production, pipelines and refining, among others, and applies identical ratios and multipliers to calculate economic impacts regardless of the type of Oil & Gas project being considered

Corporate income taxes cannot be accurately estimated as they are not modelled discretely by the I/O Model. Rather, corporate income taxes are included within the Other Operating Surplus category in I/O Model output Table 1.2, along with depreciation and extraordinary gains and losses. As such, corporate income taxes cannot be disaggregated without making a number of assumptions

While this approach has limitations, the ratios and multipliers used have been generated using thousands of data points accumulated over years and have been found to generate estimated outputs for sub-industries within an industry code that are indicative of realized economic impacts. In consideration of the above limitations, the output economic impacts of this studys I/O Model runs should be considered directionally correct rather than scientifically precise.


Appendix C: I/O Model inputs

Three industry shocks were independently input into the I/O Model for analysis: project capital expenditures, project operating expenditures and refinery capital expenditures. Project capital and operating expenditures were provided by TransCanada. Net new refinery operating expenditures were not estimated as they are expected to be marginal in comparison with project costs. The operating expenditures provided are incremental expenditures in that they are the difference between operating the Mainline as a crude oil pipeline and operating the Mainline as a natural gas pipeline.

A nominal value of $100M was provided for refinery capital expenditures. Since the extent to which eastern Canadian refineries will invest in their operations based on this project is unknown, assuming a specific investment value would be misleading. As such, running the model using a nominal value allows for scaling to represent a possible range of investment in eastern refineries. For the purposes of analysis, Quebec was selected as it sits in the approximate geographic centre of Ontario, Quebec, New Brunswick, Nova Scotia and Newfoundland the five eastern provinces with refineries and so is expected to nominally represent a refinery investment in eastern Canada63.

The below values represent the net present value in 2013 Canadian dollars of the project. The timing of capital expenditures for the project was based on a spend profile provided by TransCanada. Operating expenditures are expected to be incurred on a recurring basis over 40 years from 2019 to 2058, although the pipeline will likely last for a longer period assuming regular investments in sustaining capital are made and maintenance is performed. 2013 dollars were projected into the future using the Bank of Canadas forecasted inflation rates64. A discount rate of 2.46% - the average Government of Canada benchmark bond yield for a long term bond from July 2, 2012 to July 1, 2013 - was used to calculate the net present value of the expenditures65,66. The long term Government of Canada benchmark bond yield rate was used as opposed to TransCanadas cost of capital as it represents the social discount rate, which is appropriate for valuing the economic impacts to the wider economy.

Table 6: I/O Model inputs67

Industry Shock NAICS-based description (Code)

Investment ($M)

NB QC ON MB SK AB

Project capital expenditures

Oil and Gas Engineering Construction (2300D) $2,418 $3,613 $2,172 $596 $913 $1,296

Project operating expenditures

Crude Oil and Other Pipeline Transportation (486A00) $1,889 $2,312 $10,637 $1,361 $2,202 $4,862

Refinery capital expenditures

Oil and Gas Engineering Construction (2300D) - $100 - - - -

Note: to determine FTE job creation outputs, the project capital expenditure values above were adjusted from 2013 to 2009 dollars (not shown above). This was required as the I/O Model estimates jobs created by multiplying a 2009 multiplier by each $1M spent (2009 is the latest year for which multipliers have been produced). Due to inflation, using 2013 dollars would overestimate the number of jobs created.

63 This was confirmed by performing a model run using a $100M investment in Ontario refineries, which yielded similar results. 64 Monetary Policy Report Summary. Bank of Canada. Jul 2012. 65 Canadian bond yields. Bank of Canada. Web. July 2013. 66 As a crude oil pipeline does not currently exist in New Brunswick, the I/O Model does not currently include historical data points on which to estimate economic impacts resulting from the projects operating expenditures in the province. As such, NAICS-based code 486200, Natural Gas Pipeline Transportation was shocked for New Brunswick operating expenses as the direct, indirect, and induced impacts resulting from running a natural gas pipeline are expected to be similar to that of running a crude oil pipeline. 67 Values included in this chart do not exactly match those included in the Project costs section as they represent values that have been projected into the future based on when costs are expected to be incurred and discounted to present dollars.


Appendix D: Detailed I/O Model output tables and charts

Project GDP impacts The chart below summarizes the projects impact on GDP over the course of the project (e.g., a six year development and construction phase and 40 year operations phase). On the whole, the project is estimated to have a $35.3B impact on Canadas GDP with the majority of GDP benefit occurring in Ontario (37%), Alberta (22%), Quebec (18%), New Brunswick (8%), Saskatchewan (7%), and Manitoba (5%). As can be seen below, while development and construction impacts are high, the ongoing GDP benefits from operations are expected to be greater.

Figure 10: Project impact on GDP, combined total ($M)

Source: Statistics Canada Interprovincial I-O Model, Table 1.4


Project Full-Time-Equivalent (FTE) job impacts

The below chart illustrates the estimated total (direct + indirect + induced impacts) FTE job creation by province for the development and construction and operations phase. Like GDP, this job creation mainly occurs in the provinces of Ontario (30%), Quebec (27%), Alberta (17%), New Brunswick (12%) and Saskatchewan (6%) where the majority of the project investment occurs.

Figure 11: FTE job creation by province, combined total



Table 7: Development and construction phase total FTE job creation by industry

Industry

Province

NB QC ON MB SK AB BC Other Total %

Oil and gas engineering construction

4,279 10,803 6,813 1,339 2,049 4,925 - - 30,208 33%

Architectural, engineering and related services

1,533 3,476 2,154 155 196 959 454 136 9,063 10%

Support activities for oil and gas extraction

28 24 341 219 1,654 2,605 3 2 4,876 5%

Food services and drinking places

217 694 549 62 102 358 117 57 2,156 2%

Building material and supplies wholesaler-distributors

110 606 601 65 64 220 92 82 1,840 2%

Machinery, equipment and supplies wholesaler-distributors

289 379 511 39 75 208 35 47 1,583 2%

Food and beverage stores 163 540 293 46 74 266 88 35 1,505 2%

Truck transportation 214 405 361 93 75 232 58 37 1,475 2%

Specialized design services 109 543 456 25 11 35 44 17 1,240 1%

Services to buildings and dwellings

98 298 371 25 43 112 64 14 1,025 1%

Banking and other depository credit intermediation

19 267 515 13 14 62 21 14 925 1%

Computer systems design and related services

69 206 391 23 12 80 84 18 883 1%

Rental and leasing services (except automotive equipment)

276 225 188 15 30 122 10 4 870 1%

Repair construction 91 247 261 37 49 124 30 13 852 1%

General merchandise stores 116 214 245 24 56 130 32 19 836 1%

Accounting, tax preparation, bookkeeping and payroll services

64 267 247 55 21 94 39 14 801 1%

Steel product manufacturing from purchased steel

0 272 381 7 39 44 6 26 775 1%

Motor vehicle and parts dealers 112 244 171 22 43 125 30 17 764 1%

Architectural and structural metals manufacturing

54 197 253 37 14 56 36 71 718 1%

Management, scientific and technical consulting services

125 147 204 11 22 90 55 50 704 1%

Other 3,237 8,558 8,984 943 1,160 3,768 1,337 759 28,746 31%

Total 11,203 28,612 24,290 3,255 5,803 14,615 2,635 1,432 91,845 100% Source: Statistics Canada Interprovincial I/O Model, Table 4.9


Table 8: Operations phase FTE job creation by industry, total per year

Industry

Province

NB QC ON MB SK AB BC Other Total % Crude oil and other pipeline transportation

9,583 8,136 7,223 2,810 3,751 16,733 1 0 48,237 28%

Electric power generation, transmission and distribution

1,887 2,663 23,969 3,233 1,447 2,262 65 139 35,664 21%

Repair construction 182 318 3,935 276 961 678 89 18 6,457 4%

Food services and drinking places

221 563 2,006 236 206 1,079 248 81 4,640 3%

Food and beverage stores 196 454 1,072 210 159 876 169 41 3,178 2%

Services to buildings and dwellings

129 358 1,246 217 188 574 205 14 2,931 2%

Computer systems design and related services

76 276 1,550 139 18 145 167 37 2,407 1%

General merchandise stores 146 182 778 113 126 462 60 21 1,888 1%

Banking and other depository credit intermediation

16 207 1,381 34 25 156 39 20 1,879 1%

Motor vehicle and parts dealers 134 216 539 108 109 527 58 15 1,705 1%

Financial investment services, funds and other financial vehicles

77 143 805 121 35 201 44 11 1,438 1%

Personal care services and other personal services

86 176 619 88 65 328 52 11 1,425 1%

Clothing and clothing accessories stores

61 207 613 56 46 284 43 8 1,317 1%

Truck transportation 73 254 435 98 72 282 75 27 1,316 1%

Employment services 21 152 885 12 9 169 30 9 1,289 1%

Building material and supplies wholesaler-distributors

22 161 630 40 33 253 80 25 1,244 1%

Management, scientific and technical consulting services

16 100 889 17 16 131 48 17 1,234 1%

Machinery, equipment and supplies wholesaler-distributors

42 121 521 45 64 379 40 12 1,224 1%

Holding companies 105 175 542 46 73 187 42 17 1,185 1%

Repair and maintenance (except automotive)

80 158 270 64 81 474 46 5 1,179 1%

Other 2,267 6,496 22,309 2,652 2,378 9,005 2,399 756 48,262 28%

Total 15,419 21,516 72,217 10,615 9,863 35,185 4,000 1,284 170,100 100% Source: Statistics Canada Interprovincial I/O Model, Table 4.9


Project tax revenue impacts Figure 12 illustrates the expected total tax revenue distribution by province in absolute terms and share of total. During the development and construction phase, Quebec (36%), Ontario (27%), Alberta (15%), New Brunswick (9%), Saskatchewan (6%), and Manitoba (4%) receive the majority of tax revenue. During the operations phase, Ontario (40%), Alberta (24%), Quebec (13%), Saskatchewan (9%), Manitoba (7%) and New Brunswick (6%) are expected to receive the majority of tax revenue.

Figure 12: Total government tax revenue by province, $M CDN



Project major imports during development and construction The table below lists the expected major imports to Canada during the six year development and construction phase. Iron and steel pipes and tubes, metal valves and pipe fittings, measuring and controlling devices, crude oils and architect, engineering and related services are responsible for the largest shares.

Table 9: Major imports during development and construction

Category Amount ($M) Share

Iron and steel pipes and tubes (except castings) 641 17.3%

Metal valves and pipe fittings 501 13.5%

Measuring, medical and controlling devices 324 8.8%

Conventional and synthetic crude oil 194 5.2%

Architectural, engineering and related services 178 4.8%

Iron and steel basic shapes and ferro-alloy products 96 2.6%

Logging, mining and construction machinery and equipment 82 2.2%

Other miscellaneous general-purpose machinery 57 1.5%

Support services for oil and gas extraction (except exploration) 46 1.2%

Light-duty trucks, vans and sport utility vehicles 43 1.2%

Turbines and turbine generator set units 42 1.1%

Passenger cars 42 1.1%

Office administrative services 38 1.0%

Rights to non-financial intangible assets 36 1.0%

Boiler, tanks and heavy gauge metal containers 35 1.0%

Chemical products not elsewhere classified 34 0.9%

Men's and women's clothing 32 0.9%

Natural gas liquids and related products 32 0.9%

Pharmaceutical and medicinal products 31 0.8%

Rolled and drawn steel products including wire 27 0.7%

Other 1,188 32.1%

Total 3,699 100.0%



Refinery impacts

The $100M nominal value for refinery capital expenditure produced the following multipliers, which can be used to estimate the economic impact of refinery upgrades in Quebec and, implicitly, eastern Canada.

Table 10: Refinery economic impact multipliers

Multiplier Quebec Canada

GDP Total (Direct, Ind

Deloitte Energy East Economic Benefits

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