Optimizing the Value of Alberta s Natural Resources

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1 Optimizing the Value of Alberta s Natural Resources Royalty Review Position from Alberta s Industrial Heartland Association ~ Royalty Review 2015 ~

2 Executive Summary Alberta is blessed with a wealth of natural resources. Given our current abundant and cost-advantaged supply of oil and natural gas, expanding the province s energy value adding sector is ideal and realistic. New investment in petrochemicals, refining, and bitumen upgrading could total over $25 billion. This investment would create 24,000 construction jobs and 1,750 long-term operations jobs. Millions of dollars in increased gross domestic product and provincial income taxes would benefit both government and citizens. The Royalty Review is an opportunity to expand our midstream and downstream sectors and ensure that Albertans receive the optimal value for our resources. Adjustments to the current royalty system could be the catalyst for success. RECOMMENDATION Alberta s Industrial Heartland Association recommends to the Royalty Review Panel that the benefits of adding value to our natural resources be recognized and applied as an underlying principle in Alberta s royalty regime. Given this recommendation, policies should be incorporated into the royalty regime to increase valueadded investment in the energy sector. We recommend the following actions: 1. Modify the royalty rate so that it positively rewards processing of energy commodities like methane and propane within Alberta versus exporting in a raw capacity elsewhere 2. Use the royalty system to support improvements and investments in midstream infrastructure that is necessary to capture the full value of our ethane resources in Alberta 3. Utilize the Bitumen Royalty In Kind (BRIK) program to its full potential and, when necessary, expand the program for subsequent brownfield development of existing refineries 4. Use the royalty system to encourage commercialization of new and emerging technologies in natural gas processing and the use of bio-based production Alberta s government has made it a key priority to focus on diversifying the economy, expanding value-added investment in Alberta s energy sector, and enhancing our environmental stewardship. Alberta s Industrial Heartland Association s support for these initiatives is reflected in the above recommendations. Immediate action through the Royalty Review and additional policies will help capitalize on the energy sector s window of opportunity for investment (Examining the Expansion Potential of the Petrochemical Industry in Canada, August 2015). Ultimately, this investment benefits the entire province through energy sector growth, employment, and economic diversification. 2 P a g e

3 Table of Contents 1. Introduction to Alberta s Industrial Heartland Alberta s Industrial Heartland Region 1.2. Alberta s Industrial Heartland Association 1.3. Expertise in value added processing 2. Understanding value-added chain opportunities Petrochemicals 2.2. Upgrading 2.3. Refining 2.4. Innovation opportunities 3. Challenges to value-added investment in Alberta Competing region incentives 3.2. Accessing markets 3.3. Higher capital costs 4. The benefits of adding value to our resources Economic benefits New forms of government revenue Economic diversification and innovation Creating new markets for Alberta s energy production 4.2. Environmental benefits 5. Past Policy Successes Alberta Gas Transmission Line 5.2. Ethane Extraction Program 5.3. Generic Oil Sands Policy 6. Recommendations Specific objectives 6.2. Priority actions and timelines 7. Conclusion Glossary of Terms 21 3 P a g e

4 1.0 INTRODUCTION TO ALBERTA S INDUSTRIAL HEARTLAND 1.1 Alberta s Industrial Heartland Region Alberta s Industrial Heartland is Canada s largest hydrocarbon processing centre. Home to 15 world scale facilities and over 40 companies, an estimated 25,000 Albertans are employed in the Heartland (includes permanent, contract and temporary staff). The region currently has over $30 billion invested and an additional $13 billion worth of industrial projects under construction or planned. The Heartland is a major economic driver. Companies in the region spend over $1.5 billion annually on locally sourced goods and services. Approximately $80 million is paid in municipal taxes annually to Heartland municipalities, helping support local infrastructure, services, and community needs. Additionally, millions of dollars are contributed to community organizations and initiatives every year. Alberta s Industrial Heartland is a major hub for petroleum refining, petrochemical manufacturing, and bitumen upgrading. The Heartland is also a key strategic link in Alberta s energy logistics chain, with multiple oil and gas pipelines, fractionation facilities, and oil terminals. Alberta s Industrial Heartland is located in Alberta s Capital Region northeast of Edmonton 4 P a g e

5 1.2 Alberta s Industrial Heartland Association Alberta s Industrial Heartland Association (AIHA) is a cooperative effort of eight municipalities in the greater Edmonton region dedicated to sustainable industrial development in Alberta s Industrial Heartland. Vision: Alberta s Industrial Heartland is a global leader in hydrocarbon and energy processing Partner Members Associate Members The partnership was formally created in 1998, and currently represents a population of 1.3 million people. Together, the municipalities take a collaborative approach to industrial development, recognizing that coordinated promotion and planning is more effective than individual efforts. For nearly two decades, municipal collaboration has been a unique part of Alberta s Industrial Heartland and a significant reason for the region s success to date. The economic prosperity, innovative initiatives, and community commitment seen in the region has resulted from combined efforts of the municipal partnership and the region s various stakeholders. The Association remains committed to promoting coordinated, safe, and environmentally responsible development. This includes continued engagement with investors from around the globe, all levels of government, local communities, and existing industry. 1.3 Expertise in value-added processing The AIHA is actively engaged in promoting value-added processing in Alberta s energy sector. The organization is specialized in understanding economic and energy trends, both globally and locally, that impact investment decisions. These efforts include detailed analysis of business case models for petrochemical development in the region and maintaining a close working knowledge of investment trends. Through our outreach efforts, the AIHA has hosted over 25 international companies and delegations exploring investment opportunities in Alberta. This has allowed the AIHA to gain valuable insights into how investment decisions are made and the conditions and policies necessary to attract world-scale value-added developments. 5 P a g e

6 2.0 UNDERSTANDING VALUE-ADDED CHAIN OPPORTUNITIES Alberta has one of the largest refining and petrochemical industries in Canada and is home to 43 per cent of the country s basic chemical manufacturing. Compared to the total of Alberta manufacturing industries in 2014, the chemical sector ranked first in exports, average salary and value-added; second in shipments, and fifth in employment (Source: Examining the Expansion Potential of the Petrochemical Industry in Canada, August 2015 from the Canadian Energy Research Institute). Alberta currently has the opportunity to build upon our existing strengths in the petrochemical sector. The basis of value-added sector growth lies in our access to abundant and cost advantaged feedstocks. Alberta s oil sands are a world scale resource that has the potential to grow significantly in the future. This growth will provide a steady supply of bitumen for upgrading and refining. Upgrading bitumen also provides synergistic opportunities to capture the value of a by-product known as off-gas. These materials are a rich source of feedstock for the petrochemical industry. Another world scale resource is the shale gas potential of Alberta and Northeast British Columbia. This includes the prolific Montney and Duvernay shale gas plays. Compared to shale gas plays in the United States, these Canadian resources are still in their infancy of development; however, conservative estimates by the Alberta Energy Regulator show that these plays have the potential to be one of the greatest reserves in the world and can be developed more competitively than other current shale gas play operations. World scale shale gas plays in Alberta and British Columbia provide an unmatched opportunity for value added sector expansion 6 P a g e

7 The opportunities for Alberta to add more value to our resources can be examined in three main sectors: Petrochemicals Upgrading Refining Each of these sectors have unique characteristics and, similar to the way that the Royalty Review has divided Alberta s energy resources into three categories, should be examined separately. 2.1 Petrochemicals Oil and natural gas products are the basis of the petrochemical value chain. Many of the products we use on a daily basis, from textiles, plastics, resins and other materials, all begin as basic oil or natural gas. An example of the dozens of consumer products that are derived from natural gas resources The cost of feedstock is the major operating cost of producing the products shown here. With the advent of shale gas development in North America, the United States has seen nearly $150 billion in capital investment in the petrochemical industry. Despite the fact that Alberta has cost advantaged feedstock compared to major hubs in the United States, Alberta has seen relatively little investment in petrochemical production. To better understand the potential for petrochemical investments the AIHA retained international consulting firm, IHS, to undertake an evaluation of the product lines in which Alberta is most competitive. This report identified three main product lines where Alberta can attract new investment. 7 P a g e

8 Alberta Petrochemical Opportunity Analysis A detailed analysis concluded that the C1, C2, and C3 chains offer the best potential for petrochemical expansion in Alberta There are push-pull components to attracting additional petrochemical investments to Alberta. The push component is categorized as our abundant and cost advantaged feedstocks; the pull component is the growing global demand for petrochemical products. In fact, demand for petrochemical products has been outpacing the growth in world energy demand for the past decade. This demand growth is expected to continue as the world s middle class steadily increases in size. Demand for petrochemicals continues to increase through to 2020 (Source: IHS) Considering Alberta s cost advantaged resources, the opportunities for investment in C1, C2, and C3 chains, and continued world demand for petrochemicals, Alberta s petrochemical sector is currently facing ideal economic conditions for growth. 8 P a g e

9 2.2 Upgrading Even under current economic conditions production from Alberta s oil sands is expected to increase significantly over the next decade. While oil sands production has been steadily climbing, the number of projects to upgrade this resource has fallen dramatically. It is expected that the amount of bitumen upgraded in Alberta will fall from previous levels of approximately 66 per cent to less than 45 per cent if current trends continue. Therefore, the majority of Alberta s bitumen will be shipped to other jurisdictions in raw form for upgrading and refining, representing a loss in economic opportunity for Alberta. Examining some of the principles of bitumen upgrading is necessary to understand these trends and, as a result, what actions can realistically be taken. Alberta s bitumen is some of the heaviest oil produced in the world, with an API of approximately 9 or 10 (American Petroleum Institute s gravity measure of oil products). In its natural state, bitumen cannot be used at standard refineries. It must be upgraded to synthetic crude oil for use as a refinery feedstock. In the mid-2000s there were 8 major upgrading facilities proposed for construction in Alberta s Industrial Heartland region. Of these projects, only two have progressed. These projects include the Northwest Redwater Partnership s Sturgeon Refinery and Shell Canada s Scotford Upgrader. The remaining 6 projects have either been cancelled or put on permanent hold. This was caused by two key factors: 1. Rapid escalation to the capital cost of building in Alberta Major investments in the upstream portion of the oil sands industry drove construction costs up in Alberta. The rise in capital costs resulted in companies seeking alternative approaches to upgrading in Alberta. The option selected by most companies was to shift upgrading investment to the United States. Investments in the US were considered more economical due to lower construction costs as well as the ability to build upgraders on existing refineries in the United States Gulf Coast region. These brownfield developments were able to capture the cost savings of an addition to an existing facility versus the greenfield developments proposed for Alberta. 2. Increased production from shale oil development Another major factor that is currently negatively impacting the economics of traditional upgrading is the production increase of light oil from shale oil plays in the United States. Rapid development of these fields in areas like North Dakota has flooded the light oil market, which is the main product of traditional upgrading. The major opportunities for future bitumen upgrading in Alberta are now focused on new and alternative technologies known as partial upgrading. These new technologies convert heavy bitumen to a medium crude oil (API of approximately 20). 9 P a g e

10 This process has a number of economic advantages that can be captured including: Reducing the need for diluent, creating a significant cost advantage for producers Increasing the capacity of existing pipelines by 33 per cent to ship bitumen products Lowered capital costs lowers the risk of cost overruns Opening up new markets by increasing the number of refineries in North America that can accept this product A number of companies are currently exploring partial upgrading technologies for Alberta s oil sands production. A major initiative surrounding the commercialization of these technologies is being coordinated through Alberta Innovates Energy and Environmental Solutions. 2.3 Refining The refining process takes raw oil or bitumen products and converts them into consumer-ready fuels such as gasoline, diesel, jet fuel and a number of other products. This differs from upgrading and has different economics and marketing opportunities associated with it. The ability to take Alberta bitumen directly to consumer-ready products has been proven in the case of North West Redwater Partnership s Sturgeon Refinery project and past modifications to Suncor Energy s Edmonton Refinery. This process builds on the efficiencies of upgrading and refining products all at one site. Currently, the market for refined products in Western Canada is undersupplied, making our region a net importer of refined products. This tight supply situation in Western Canada has led to supply shortages and price escalations when there is any disruption to refineries in the region. Alberta Fuel Shortages History (Source: AEDA Transportation Committee, June 2011) 10 P a g e

11 This opens up opportunities for more refining capacity in Western Canada, especially in diesel supply. However, it should be noted that with a relatively small market in Western Canada, the addition of a new, world scale refinery (in the magnitude of 250,000 barrels per day capacity or larger) would require a shift to export markets for their output. 2.4 Innovation Opportunities New technologies are under development to coincide with the market demand for refined products and capitalize on Alberta s advantages. This new technology utilizes a gas-to-liquids (GTL) process that converts plentiful and cost advantaged natural gas into products such as gasoline, diesel and diluent (used in Alberta for the transportation of raw bitumen, with demand expected to double by 2020). The AIHA recently had discussions with a number of companies interested in investing in smaller scale GTL technologies (up to 2,000 bpd capacity) that would fit the niche capacity needs for the region and should be explored further. Technological advances are also occurring to take advantage of low cost natural gas, waste gases and underused byproducts by converting them to feedstocks for the petrochemical industry. This technology first converts these gases into methanol and then converts them to key feedstocks, such as ethylene and propylene, in a process known as Methanol to Olefins or MTO technology. This new approach is being commercialized in the United States and is being considered in other regions that have stranded natural gas resources. Natural Gas Utilization Opportunities 11 P a g e

12 3.0 CHALLENGES TO VALUE ADDED INVESTMENT IN ALBERTA Alberta is competing with other regions in the world who also recognize the economic opportunities of adding value to natural resources. Attracting world-scale value-added development and billions of dollars in capital investment requires addressing economic challenges and creating an enticing business climate, in part, through royalties and other programs. Specific challenges to attracting investment include: 1. Competing region incentives 2. Accessing markets 3. Higher capital costs While the opportunity for additional value-added investment in Alberta is significant, these challenges must be overcome to turn the potential into reality. 3.1 Competing Region Incentives Other regions in North America place a high emphasis on the economic benefits from adding value to natural resources. In recognition of this there are numerous incentive programs offered, especially in the United States, to encourage investments there. Some examples of these programs and the magnitude of their scale include: State of Pennsylvania: Offered $1.65 billion in tax credits to Shell to build a world-scale ethane cracker in their state State of Louisiana: Offered approximately $1 billion in incentives to Sasol for development of an ethane cracker and GTL facility Jabail City, Kingdom of Saudi Arabia: In a strategic move to increase value-added development Saudi Arabia built a specialized industrial city known as Jubail investing billions of dollars in establishing the supporting infrastructure needed for development These are several examples of the incentives that other jurisdictions are using to compete for investments. Furthermore, the AIHA was recently contacted by a potential investor that is seriously considering investing in Alberta. This company has indicated they have been offered significant incentives to shift their investment to the United States. 3.2 Accessing Markets Alberta is one of the few regions in the petrochemical sector that is not located on tide water and has no direct access to global markets. Therefore, part of the business case of building in Alberta is transportation costs (mainly rail or pipeline) of getting finished products to global markets. This adds significant additional costs to operating in Alberta. 12 P a g e

13 Additionally, delays in liquid natural gas (LNG) facilities, bitumen export pipeline delays, and other pressing factors have put further constraints on market access. This has resulted in significant discounting of pricing for Alberta s commodities. For example, natural gas pricing in Alberta is approximately 25 to 30 per cent less than trading hubs in the United States. 3.3 Higher Capital Costs As a result of very robust investments in the oil sands, the cost of building major projects in Alberta has soared in recent years. Labour shortages and limitations of the overall construction capacity resulted in the cost of building in Alberta being approximately 30 per cent higher than in other regions of the world. With the decrease in capital investments in our upstream sector, due to challenging economic conditions, some industry experts cite a reduction in these costs. However, it is still a factor that must be considered. 4.0 THE BENEFITS OF ADDING VALUE TO OUR RESOURCES The benefits of adding value to our energy resources within Alberta are considerable, and impact all parts of the economy. Given the objectives of the current Royalty Review Panel, there is an opportunity to take several actions that help to truly optimize these benefits for Albertans. The previous model of Alberta s royalty system considered the balance between the royalties collected and the maintenance of a competitive environment to attract investment in the upstream sector. However, the previous model did not consider the returns to Albertans from more value-added development. 4.1 Economic Benefits To assess the economic returns to Albertans consider the net benefits that come from value-added operations in the province. Each step in the hydrocarbon value chain the process of converting raw commodity energy products into consumer products adds economic value, GDP, and jobs. Hydrocarbon Value Chain The economic value of energy resources can be doubled or tripled as they are moved up the value chain, indicating that the full value of energy resources goes well beyond raw commodity pricing. 13 P a g e

14 At each step in the value chain the following economic returns can include: New Forms of Government Revenue and Employment When we add value to our resources, the companies involved in the process pay corporate taxes to the Government of Alberta. When we combine this with additional personal payroll taxes, as well as taxes arising from contractors, suppliers and other spin off economic activity, the net increase to government revenues is significant. A report commissioned by the AIHA in 2013 (Economic Impacts of Adding Value to Alberta s Hydrocarbon Resources, Schlenker Consulting Ltd., April 10, 2013) conservatively estimated that the annual net benefits to Alberta from adding value to only a portion of our resources were: GDP increases of $2.4 billion Payroll wage increases of $796 million Provincial corporate tax gains of $236 million Additional 8,491 person years of employment A second more detailed report commissioned by the AIHA (Adding Value to Alberta s Propane Resources, Stantec Engineering, June 2, 2015) on the net corporate tax benefits of just one new polypropylene facility estimated an annual increase of $65 million or $1.625 billion over the 25 year lifespan of the project. It can be concluded that adding value to Alberta s resources would provide new government revenue streams, independent of royalties or commodity price swings that is valued at hundreds of millions of dollars per year. On top of additional government revenues and direct employment, there is also a multiplier effect which creates 5 indirect jobs for every one job created directly by value-added developments Economic Diversification and Innovation A challenge to the Alberta economy has been the reliance on the upstream oil and gas industry. This has resulted in boom and bust cycles that follow the commodity pricing of these energy products. Adding value to our energy resources will help diversify the economy and level the effects that cyclical energy prices have on the province. The downstream portion of the energy sector is generally less affected by drops in oil or gas pricing. The economics of these facilities are determined by the margins or spreads between the input costs (oil or gas) and final consumer pricing (price of motor fuels and consumer products). In fact, the economic conditions for the downstream (value-added) sector typically run counter cyclical to commodity energy prices and can provide a more level and stable economic future for the province. Adding value can also help spur more innovation and technological developments that can lead to higher value manufacturing. The application of new small scale GTL technologies can utilize 14 P a g e

15 inputs such as methane, waste gases, landfill gases, and other materials that have little or no value. Encouraging this type of emerging technology would make the province a leader in technological development for applications around the world Creating New Markets for Alberta s Energy Production A major challenge for Alberta s energy sector has been gaining access to markets for our production. Opposition to new pipeline developments, concerns over oil export terminals on the west coast, and a variety of other factors outside of the control of our government has resulted in stranded resources that are not able to achieve competitive global prices. While the current approach to dealing with this problem has been to work with and lobby other jurisdictions to allow access for our resources, a new approach considers creating markets here at home. These opportunities for opening market access exist in two main categories: 1. Natural Gas and Natural Gas Liquids The shale gas revolution has created significant challenges for natural gas producers in Alberta. The traditional market for Alberta s natural gas producers has been the United States and Eastern Canada. With significant new production in US shale gas, we are losing our market in the United States as well as Eastern Canada (who is now receiving natural gas from the shale gas plays in North Eastern United States). Alternative markets must be found. One plan was to explore the export of Western Canadian natural gas to Asian markets via Liquefied Natural Gas (LNG) export terminals on the BC coast. Recent changes in energy dynamics are making the economics of LNG shipments more difficult and significant uncertainty exists as to when, or if, these projects will be built. An alternative is to create natural gas markets in Alberta. Natural gas (methane) is the feedstock for petrochemicals like methanol, ammonia, and urea. New technologies now being implemented include ways to convert methane into other basic petrochemicals (Methanol to Olefins or MTO) as well as manufacturing liquids (motor fuel and diluent). Major investments in these areas could create as much as 1.5 to 2.0 billion cubic feet of demand for natural gas, providing a significant internal market for our energy production. 2. Bitumen Bitumen production from Alberta s oil sands is very viscous and requires that it be mixed with a lighter hydrocarbon (diluent) so it can move throughout a pipeline. In this mixed form, it is known as diluted bitumen or dil-bit. For every one million barrels of dil-bit moving through pipelines, only 660,000 barrels of product is actually bitumen. The remaining 340,000 barrels of product is diluent. Over short distances, 15 P a g e

16 the diluent can be recovered and returned to the oil sands producer. For major export pipelines, diluent recovery lines are not constructed. The process of partial bitumen upgrading (previously mentioned in Section 2.2) eliminates the need for diluent as a viscosity reduction agent. Moving forward with more partial upgrading has the potential to free up 1/3 more space on our export pipelines. This is a significant opportunity to open up market access without requiring the building of new pipelines. 4.2 Environmental Benefits Processing more of our energy resources in Alberta can create environmental benefits as well as allowing us to have a say on the final effects of our resources. If the value-added opportunities are not realized in Alberta, further processing will take place in another jurisdiction where we have no say or influence on the environmental or economic impacts. This is especially true when considering climate change and greenhouse gas (GHG) emissions that is a global matter, not a regional one. If an energy product is exported in its raw commodity form to another country, processing it into consumer products will still result in GHG emissions and Alberta will lose its influence on this effect. By processing in Alberta we can encourage energy efficiencies and synergies with other industries. For example, Williams Energy and Aux Sable have facilities in the Heartland that capture byproducts from bitumen upgrading and convert them into feedstocks for the petrochemical industry that reduce GHG emissions by 425,000 tonnes annually. Another potential environmental benefit includes exploring district heating from low value waste heat. A recent study (Community Integrated Energy Mapping Feasibility Study), the first of its kind in Canada, concluded that certain portions of waste heat from industrial facilities can be repurposed and applied for productive uses. The Heartland Energy Mapping study concluded that waste energy at Edmontonarea industrial sites could heat 15,200 homes > WATCH VIDEO 16 P a g e

17 Another major advantage of processing in Alberta is the ability to tie into the system of Carbon Capture and Storage (CCS) projects underway. Projects like Enhance Energy s Alberta Carbon Trunk Line are being installed with excess capacity to accept the GHG emissions of new facilities built in the Heartland region. These strategic assets have the capacity to capture and store over 15 million tonnes of GHG annually. Decreasing the lifecycle carbon intensity of Alberta s energy resources is important considering nontariff trade barriers in potential markets in the United States and Europe. New standards in these nations could restrict the importation of Alberta s energy products. 5.0 PAST POLICY SUCCESSES There are a number of examples of past actions taken by the Government of Alberta that have acted as a catalyst for economic growth and prosperity in Alberta s energy sector. These activities were proactive measures taken by the government to fill the gaps in achieving our economic potential. 5.1 Alberta Gas Trunk Line System In the mid 1950s, development of Alberta s oil and gas resources uncovered the potential for the province to become a major natural gas producer. The main barrier to this development was the lack of a supporting natural gas collector pipeline system. Individually, companies were unwilling or unable to solve this challenge themselves. To solve this problem, the government at the time developed the Alberta Gas Trunk Line System (precursor to the NOVA gas company) as a means of ensuring the necessary infrastructure was in place to develop the resource. 5.2 Ethane Extraction Program When Alberta underwent a major expansion of its natural gas sector in the 1970s, discussions ensued about the best use of the valuable ethane component of the production. At the time, industry recommended that the government allow the export of ethane to other locations in North America where existing petrochemical operations could utilize the materials. Then Premier Peter Lougheed understood the potential of this feedstock in creating a new and diversified economic base in Alberta. His Ethane Extraction policy stated that given the importance of this material to the Alberta economy, the priority would be to make this material available to industry development and expansion in the province. This policy decision was the catalyst for the current petrochemical industry in Alberta. 5.3 Generic Oil Sands Policy In the 1990s, the potential to develop Alberta s oil sands were understood; however, relatively low oil prices combined with the unwillingness of many companies to venture in this new field of oil extraction led to little real development. To address this challenge, the government introduced the Generic Oil Sands Policy that provided a separate royalty system to investors. Through this system, a two tiered 17 P a g e

18 royalty system was put into place where companies would pay minimal royalties until the capital cost of their project was paid off. The rationale for this program: the government would accept a much smaller royalty take in recognition of other economic and spin off benefits from developing this resource. This innovative program was a major driver in the development of the current oil sands industry by proving investments would work. These, and other programs, are proof that direct government involvement in our energy resources has long-term positive benefits for the whole province. 6.0 RECOMMENDATIONS Given the multiple benefits from adding value to our natural resources, there is a compelling case for ensuring that the Royalty Review includes consideration of value-added development in the province. The information provided in this document shows how enhancements to value-added investment attraction will help achieve all four objectives of the Royalty Review. Historically, the royalty regime has focused on achieving a balance between government revenue and maintaining a competitive system that attracts the necessary capital investment to Alberta s upstream sector, the exploration and production sector. Conversely, the new objectives laid out by government seek to optimize the benefits that Albertans gain from our natural resources. Currently, whether an energy feedstock is processed in Alberta or exported as a raw commodity, the royalty rate is the same, therefore, it does not consider the net benefits to the economy. Therefore: Alberta s Industrial Heartland Association recommends to the Royalty Review Panel that the benefits of adding value to our natural resources be recognized and applied as an underlying principle in Alberta s updated royalty regime. If embedded into the royalty process this principle will play a key role in achieving the desired end goals for the province. It is important to note that the unique characteristics of each value-added sector warrants altering the approach for individual energy market segments. This follows the concepts of the royalty system that allows for adjustment to royalties to consider the conditions and economic factors associated with energy extraction. 6.1 Specific Objectives Given the above recommendation, policies should be incorporated into the royalty system to result in an increase in energy value adding. 18 P a g e

19 Specific recommended actions include: 1. Modify the royalty rate so that it positively rewards processing of energy commodities like methane and propane within Alberta versus exporting in a raw capacity elsewhere 2. Use the royalty system to support improvements and investments in midstream infrastructure that is necessary to capture the full value of our ethane resources in Alberta 3. Utilize the Bitumen Royalty In Kind (BRIK) program to its full potential and, when necessary, expand the program for subsequent brownfield development of existing refineries 4. Use the royalty system to encourage commercialization of new and emerging technologies in natural gas processing and the use of bio-based production Timely consultation with existing industry, new investors and other experts will help determine the specifics of each action. 6.2 Priority Actions and Timelines While the royalty regime can provide the basis for enhancing value-added processing and innovation, it should be recognized that additional policies or programs in support of the actions listed above are required for a successful and robust value-added strategy. Specifically, we recommend the following priorities: Near Term Propane Policy Extension of BRIK With the current glut in the propane markets in Alberta combined with major increased in demand for propane based petrochemicals (propylene), there are investors that are currently willing to commit to investments. With clear policies and programs, this can result in an almost immediate increase in economic activity for the engineering, construction and manufacturing sector. The Bitumen Royalty In Kind (BRIK) program should be extended to support future expansions of existing refineries to add new refining capacity to Alberta. Given the time required to prepare for this type of development (regulatory, engineering, critical parts ordering) a decision on this program should be undertaken to ensure the window of opportunity is captured Mid Term Ethane Policy With increased activity in shale gas development in western Canada it has been demonstrated that there is enough ethane in the system to build another ethane cracker complex. This is similar to the investments that have already taken place by companies 19 P a g e

20 Methane Policy Partial Upgrading like Dow Chemical (near Fort Saskatchewan) as well as Nova Chemicals (in the Joffre/Red Deer region). The challenge is ensuring the infrastructure in Alberta supports the removal of this important feedstock instead of it being exported with other market natural gas. Tapping into the stranded natural gas in western Canada can result in major new investments in petrochemical. Policies that support this type of development and act as a catalyst for investment could provide major benefits. Adjustment of the royalty rate for bitumen to recognize the value of this process would spur major developments. Long Term The long term vision for value added in Alberta should go beyond our current approach and look to the future for new opportunities. With a strong basis of value added and hydrocarbon processing capacity, we will have the foundation to build on it to higher level. Bio/Chemical Production Most of the petrochemicals produced today can also use biological feedstock including agricultural, forestry and municipal waste. The technologies and markets to achieve this are still in the development phase and can be achieved in Alberta. Initial support would include support for research and small scale Advanced products and materials commercialization of these technologies. Building on a robust primary petrochemical industry, Alberta has the opportunity to move into even higher value petrochemical products and materials. 7. CONCLUSION Alberta is poised to become a true global leader in energy production and processing. This vision will require us to look at the whole spectrum of the energy sector and look further down the value chain to consumer products. Growth in Alberta s petrochemical industry can be realized from increasing supply of oil sands bitumen and expanding supplies of natural gas and natural gas liquids from shale gas development in western Canada. With a comprehensive and balanced royalty system that recognizes and rewards value added processing, Alberta can meet its goals of diversification and environmental stewardship. This benefits residents and industry, and helps achieve the province s vision of becoming a true global leader in the energy sector. 20 P a g e

21 8. GLOSSARY OF TERMS B Bitumen A heavy oil that must be diluted to transport through pipelines and treated before it can be used by refineries to produce usable end products. Bitumen upgrading The process of converting bitumen into synthetic crude oil. Bpd Barrels per day or bpd is a unit of volume commonly used in North America to measure oil. There are 42 gallons in a barrel. Brownfield Term used when an industrial project expands upon capital developments that have already been built and/or established. D Downstream One of three major components of the petroleum industry; this sector commonly refers to the refining of petroleum crude oil and the processing and purifying of raw natural gas and natural gas liquids into finished products. F Feedstock Petroleum or bio-based material that is used as a raw material in an industrial process. G Gas play A group of oil fields or prospects in the same region that are controlled by the same set of geological circumstances. GDP Gross domestic product (GDP) is one of the primary indicators used to gauge the health of a country s economy; it is calculated by adding the total dollar value of all goods and services produced in a country over a specific time period. GHG emissions Greenhouse gas (GHG) emissions are gasses emitted into the atmosphere that is capable of absorbing and emitting radiation, thereby trapping and holding heat in the atmosphere. 21 P a g e

22 Greenfield Term used for a new industrial project when existing capital development and infrastructure does not yet exist. H Hydrocarbon processing The process of converting naturally occurring raw materials (gas or crude oil) into finished products like liquid natural gas or gasoline. M Midstream One of three major components of the petroleum industry; this sector involves the transportation, storage, and wholesale marketing of crude, refined petroleum products or natural gas and natural gas liquids. O Off-gases A gas that is given off as the by-product of a chemical process; off-gas is rich in alkanes and alkenes, which are potential feedstock for the petrochemical industry. P Petrochemicals Chemical products derived from petroleum/oil or natural gas. Polypropylene A very durable thermoplastic derived from the monomer propylene that is used to produce mainly plastic products. R Raw commodity Unprocessed material that is extracted from the ground including, bitumen, crude oil, natural gas and natural gas liquids U Upstream One of three major components of the petroleum industry; this sector is commonly known as the exploration and production sector. This includes the searching for potential underground or underwater crude oil and natural gas fields, drilling of exploratory wells, and subsequently drilling and operating the wells that recover and bring the crude oil and/or natural gas to the surface. 22 P a g e