CAPPESCMAR17

Fiscal Challenges of the Canadian Oil and Gas Industry: 

Fiscal Challenges of the Canadian Oil and Gas Industry Economics Society of Calgary Luncheon David Daly March 17, 2005

Canadian Association of Petroleum Producers: 

Canadian Association of Petroleum Producers We are the voice of Canada’s Upstream Oil and Gas Industry To enhance the well being and sustainability of the upstream Canadian oil and gas industry in a socially, environmentally and technically responsible and safe manner 150 producer member companies Explore for, develop and produce natural gas, natural gas liquids, crude oil, synthetic crude oil, bitumen and elemental sulphur throughout Canada CAPP members produce more than 98 per cent of Canada’s natural gas and crude oil 125 associate members provide a wide range of services that support the upstream crude oil and natural gas industry

Canada’s Oil and Gas Industryin the North American Energy Economy: 

Canada’s Oil and Gas Industry in the North American Energy Economy Canada is the world’s 3rd largest natural gas producer Canada is the world’s 9th largest crude oil producer and moving up the list quickly with oil sands production increasing Industry Overview 500,000 jobs $30 Billion capital investment in 12 provinces and territories $16 Billion in payments to federal and provincial governments #1 private sector investor in Canada Industry Priorities Responsible development of Canadian resources through: Efficient access to markets Timely access to resources Competitive fiscal and regulatory regimes

Major Components in CAPP’s Outlook: 

Major Components in CAPP’s Outlook World oil and North American natural gas prices Heavy oil discounts at record levels Oil Sands production growing quickly Where will this new production go ? Natural gas demand keeps growing Supply running hard to catch growing demand New sources of supply coming on stream Spending and drilling in the conventional basin continue to set new record highs

Crude Oil and Natural Gas prices: 

Crude Oil and Natural Gas prices Crude Oil Prices (WTI NYMEX) $US per barrel Natural Gas Prices (AECO Daily Spot Price) $Cdn/mcf

Canada/U.S. Foreign Exchange Rate: 

Canada/U.S. Foreign Exchange Rate 20¢ rise in the Canada/US Exchange rate equates to a $10/bbl drop in oil prices

WTI – Lloyd Blend Price Differential: 

WTI – Lloyd Blend Price Differential WTI NYMEX Lloyd Blend Differential Average Differential In 2003 = $8.54 Differential Dec 04 = $22.63

Upstream Oil and Natural Gas Capital Spending: 

Upstream Oil and Natural Gas Capital Spending

Industry Capital SpendingCdn $billions: 

Industry Capital Spending Cdn $billions Northern Canada ‘02 ’03 ’04F ’05F $0.3 $0.3 $0.5 $0.5 Oil Sands ‘02 ’03 ’04F ’05F $6.7 $5.0 $5.8 $8.5 WCSB ‘02 ‘03 ’04F ’05F $15.9 $21.4 $22.9 $24.6 International ‘02 ’03E ’04F ’05F $4.1 $7.1 $6.8 $5.9 East Coast Offshore ‘02 ’03 ’04F ’05F $1.9 $2.2 $1.5 $1.2 Note: excludes spending associated with mergers & acquisitions

Total Wells Drilled in Canada: 

Total Wells Drilled in Canada 1990’s Avg = 10,000 Wells 2000’s Avg = 19,700 Wells Forecast: 2004 2005 22,000 23,000

Canada’s Crude Oil and Oil SandsIn the Global Market: 

Canada’s Crude Oil and Oil Sands In the Global Market

Crude Oil Reserves: 

Crude Oil Reserves Source: Oil & Gas Journal Dec. 2004

Conventional Crude Oil in Western CanadaOpportunity for New Recovery Technology: 

Conventional Crude Oil in Western Canada Opportunity for New Recovery Technology Recoverable 58 billion bbls (27%) Undiscovered 29 billion bbls (13%) Produced 18 billion bbls (8%) Reserves 11 billion bbls (6%) Remaining In Place 158 billion bbls (73%) With current technology and economics, only 27% of Canada’s total conventional oil in place (216 billion barrels) is recoverable Source: NEB

Oil Sands Projects in Three Deposits: 

Oil Sands Projects in Three Deposits $29 billion built from 1996-2003 Oil sands production now exceeds one million barrels per day Close to $38 billion in new oil sands projects expected in 2004-2015 Peace River (In-situ) Shell BlackRock Peace River Athabasca Cold Lake Edmonton Calgary Ft. McMurray Cold Lake (In-situ) Imperial Oil Devon EnCana Murphy Canadian Natural Bonavista Husky BlackRock Baytex Athabasca (Mining) Syncrude Suncor Canadian Natural Albian ExxonMobil SynEnCo PetroCanada/UTS Athabasca (In-situ) Deer Creek/Enerplus Opti/Nexen PetroCanada Devon Japan Can. Oil Sands EnCana ConocoPhillips Husky Canadian Natural Suncor Note: Does not include all announced projects

Canadian Oil ProductionConventional, Oil Sands and Offshore: 

Canadian Oil Production Conventional, Oil Sands and Offshore Conventional Oil Oil Sands Offshore Source: CAPP Actual Forecast Oil Sands Outlook: 2004 = >1 million b/d 2015 = 2.6 million b/d

Slide16: 

Potential Tanker Markets for Canadian Oil Sands Production N . M i l e s 8 , 6 6 0 N . M i l e s 1 , 3 9 0 6 , 3 4 0 N . M i l e s China Persian Japan Taiwan 8,660 N Miles 3,840 N Miles Prince Rupert/Kitimat Jose/ La Cruz Los Angeles N . M i l e s 8 , 6 6 0 N . M i l e s 1 , 3 9 0 6 , 3 4 0 N . M i l e s Japan Taiwan Target Markets 6,340 N Miles 1,400 Far East U.S West Coast • • • • Japan Taiwan Korea Gulf • • SantaCruz • • 1,790 Competitive travel distances for Canadian supply to both markets Source: Enbridge Pipelines

Comparing Canadian Crude Oil Productionwith China’s Demand: 

Comparing Canadian Crude Oil Production with China’s Demand China’s demand increased by 1.4 mmb/d over 2 years

Slide18: 

Canada’s Natural Gas in the Integrated North American Market

Canadian Natural Gas Productive Capacity – CERI Alternate Case: 

Canadian Natural Gas Productive Capacity – CERI Alternate Case Source: Canadian Energy Research Institute

North American Natural Gas Demand: 

North American Natural Gas Demand Source: U.S. D.O.E./EIA. Long-Term Outlook - Jan. 2005. NEB Supply Demand Study Techno Vert Case July 2003 EIA Long Term Outlook

Canadian Natural GasCanadian Demand and Exports to US: 

Exports to U.S. Canadian Demand Canadian Natural Gas Canadian Demand and Exports to US Source: CAPP Statistical Handbook

Canadian Sedimentary Basins – ConventionalNatural Gas (tcf): 

Canadian Sedimentary Basins – Conventional Natural Gas (tcf) North of 60 123 British Columbia 51 Alberta 223 Saskatchewan 9 Grand Banks and Scotian Shelf 77 Remaining Produced Deepwater - Scotian Slopes 15 Source: EUB/NEB 2005-A Report West Coast 17 Ontario 2

Alberta Coal Zones with NGC Potential: 

Alberta Coal Zones with NGC Potential

Challenges – Finding and Development CostsNatural Gas in the WCSB – CDN $/mcf: 

Challenges – Finding and Development Costs Natural Gas in the WCSB – CDN $/mcf Source: CAPP 10 year rolling average Note: Includes natural gas liquids converted at 1 bbl: 6 Mcfe

Key Issues facing theCanadian Oil and Natural Gas Industry: 

Key Issues facing the Canadian Oil and Natural Gas Industry Global Competitiveness Maintaining cost competitiveness – focus on reducing costs Competitive fiscal and regulatory regimes Access to the Resource Timely access to the resource Developing new technological solutions to make new resources accessible and economic Oil sands, northern gas, natural gas from coal, etc. Access to Markets Ensuring sufficient pipeline capacity to markets Maintaining market based policies and open markets Environmental Stewardship

Fiscal Policy ChallengesRoyalties: 

Fiscal Policy Challenges Royalties Provincial Jurisdiction Conventional production - sensitive to price and volume Large scale production/projects – also sensitive to scale of investment risk – e.g. oil sands, offshore, Northern development

Conventional Oil Royalty Rates in AlbertaIncreases with Higher prices: 

Conventional Oil Royalty Rates in Alberta Increases with Higher prices 40% 35% 29% Oil Price Royalty rates also vary with production rate

Natural Gas Royalty Rates in AlbertaIncreases with Higher prices: 

Natural Gas Royalty Rates in Alberta Increases with Higher prices 35% 30% Natural Gas Price Royalty rates also vary with production rate

Oil Sands RoyaltyIncreases with Higher Prices: 

Oil Sands Royalty Increases with Higher Prices $ Millions Construction Pre-payout royalty 1% of Gross Revenue Post–Payout Royalty 25% of Net Revenue AND Higher Payments Earlier Payout

Fiscal Policy ChallengesRoyalties: 

Fiscal Policy Challenges Royalties Governments periodically reassess effectiveness of royalty regimes (given developments in basin maturity, F&D costs, technology, productivity, etc.) New regimes developed to encourage new resource potential – e.g. natural gas from coal, unconventional gas, Atlantic offshore gas, etc. Challenge to balance government need for revenue with industry need for cost consideration to encourage new development

Fiscal Policy ChallengesTaxes: 

Fiscal Policy Challenges Taxes Income tax CIT - Federal and provincial Surtax Royalty deductibility CCA rates Interest deductibility Capital tax LCT phase-out BC tax eliminated SK CCT and Surcharge Sales tax BC exemption for Machinery & Equipment SK PST increased in 2004 Property tax Other (fuel tax, etc.)

Fiscal Policy Challenges: 

Fiscal Policy Challenges Total Fiscal Take Royalties + Taxes Competitiveness International Between provinces Jurisdiction Priorities Royalties determined by Energy departments Tax policy set by Finance departments Property tax policy – Municipal affairs Different departments have different priorities (e.g. tax competitiveness across sectors, revenue generation objectives, municipal-provincial funding splits, etc.) CAPP Role Focus discussion on industry importance, competitiveness considerations, total government take, overall provincial or federal objectives