COMPETITIVENESS

OF CANADA'S

REGULATORY

FRAMEWORK FOR

THE OIL AND GAS

SECTOR

STUDY NO. 185 MARCH 2020

3512 - 33 Street NW, #150, Calgary, AB T2L 2A6350 Sparks Street, #805, Ottawa, ON K1R 7S8 403.282.1231 | www.ceri.ca | info@ceri.ca

@ceri_canada Canadian Energy Research Institute

March 2020

Competitiveness of Canada’s Regulatory Framework for the Oil and Gas Sector xiii

Executive Summary Much debate has occurred in Canada about the effectiveness of the various regulatory reviews of energy projects, large and small. The debate illustrates a tension between those stakeholders wanting a concerted stewardship of our natural environment with those that seek to create private and public benefits from energy project investments.

The purpose of this study was to provide facts and evidence impartially so that stakeholders can consider these observations as they move forward with individual oil and gas project reviews and conversations regarding improvements in the process. This study was conducted to assess the competitiveness of Canada’s regulatory frameworks at the federal and provincial levels compared to the United States. It was also intended to show how regulatory matters compare with other investment factors such as market conditions and project economics.

The Canadian Energy Research Institute (CERI) found that for typical day-to-day approvals of routine small-scale onshore oil and gas wells, Canada and the US have similar requirements and similar processes. For those projects, there is no significant difference in the competitiveness of Canadian and US project approvals demonstrated in our assessments.

CERI found that Canada has a competitive disadvantage of oil and gas investments compared to the US when it comes to liquified natural gas (LNG) projects and interprovincial oil and natural gas pipelines. Canada’s increased approvals period, on the order of, on average, 13 to 19 months, adds to the cost of projects in Canada. Moreover, the increased uncertainty of the decision-making process in Canada adds to the cost. Risk-based assessments of cost, if higher, add to the profitability hurdle rate for investors. In such a situation, when increased costs are combined with risk, competitiveness is challenged. Overall, CERI’s analysis found that:

• LNG projects take approximately 19 additional months for approval in Canada than the US providing a competitive advantage to US investments.

• Major oil and natural gas pipeline projects take approximately 13 additional months for approval in Canada than the US providing a competitive advantage to US investments. Pipeline projects that are legally challenged take considerably more time in Canada.

• Canadian timelines are comparable to US timelines for routine projects such as onshore oil and gas well and routine pipeline approvals.

A cost of delay analysis was conducted to identify the economic impact of regulatory delays for each of the six case studies in this report. Those case studies include LNG projects, oil pipelines, natural gas pipelines, oil wells, gas wells and offshore gravity-based structures oil wells. The cost of delay estimation consists of two main parts: 1) The estimation of capital expenditures (CapEx) increases during the delay period; and, 2) Supply cost analysis using discounted cash flow (DCF) models after incorporating the delay period and incorporating new CapEx values.

The cost of a delay to a project can be as high as 15 percent of the overall capital cost in the first year and results in negatively affecting the competitiveness of major Canadian oil and gas projects. While regulatory certainty and efficiency are investment factors, market supply and demand, as well as project

March 2020

xiv Canadian Energy Research Institute

economics, are equally important. Figure E.1 presents the results of a survey with key stakeholders and illustrates the major factors affecting oil and gas investments in Canada.

Figure E.1 Major Factors Affecting Oil and Gas Investments in Canada

Source: CERI

These influencing factors are a ranking of risk related to project investment and decision making. The survey conducted by CERI as part of this study also highlighted the top of mind issues for industry and government to consider. Uncertainty was the most discussed concern. Figure E.2 depicts a “word cloud”, the most frequently mentioned keywords in the Canadian survey respondents’ comments.

March 2020

Competitiveness of Canada’s Regulatory Framework for the Oil and Gas Sector xv

Figure E.2: Word Cloud of Key Observations by Stakeholders (Canada)

Source: CERI Survey Results, 2019