Canada's Shale Gas Resources

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"Game Changer" or "Bridge too Far"?

"Game Changer" or "Bridge too Far"?

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  • 1. CANADA’S SHALE GAS RESOURCES “Game Changer” or “Bridge Too Far”? Management of Multinational Corporation - MGT 4880 – December 2012 Prepared for Professor Mark HunterYafees Sarwar | Dimitrios Kapelonis | Nel Mejia | Malika Tiliaeva | Min Hee Chun
  • 2. 1 Canada’s Shale Gas Resources: “Game Changer” or “Bridge too Far?” 2012 Table of Contents Section I. CANADA 1. Background…………………………………………………………………….. 3 2. Electoral geography in Canada………………………………………............ 4 3. Climate………………………………………………………………………… 5 4. Language………………………………………………………………………. 5 5. Ethnic groups…………………………………………………………………. 5 6. Cultural Holidays……………………………………………………………… 6 7. Values System…………………………………………………………………. 8 8. Negotiating……………………………………………………………………. 9 9. Tips for doing business in Canada…………………………………………... 10 10.Economy…………………………………………………………………….... 11 11. Forecast…………………………………………………………………….… 12 12. Tax System……………………………………………………………….….. 17 13. Environment Legislation……………………………………………….…... 22 14. Employment Legislation……………………………………………….….... 30 15. Technological Environment…………………………………………….….. 31 II. SHALE GAS 1. Overview…………………………………………………………………….. 49 2. Shale Gas in North America……………………………………………….. 49 3. Shale Gas in Canada………………………………………………………... 49 a. Key facts………………………………………………………………. 51 b. Canada shale gas market overview………………………………..... 52 c. Canada’s unconventional potential in shale gas……………………. 54 d. Infrastructure………………………………………………………… 56 e. Competitive landscape………………………………………………..57
  • 3. 2 Canada’s Shale Gas Resources: “Game Changer” or “Bridge too Far?” 2012 e. Competitive Landscape……………………………………………… 57 4. Regulation and Licensing………………………………………………….. 58 a. Canada Oil and Gas Operations Act……………………………….. 58 b. Canada Oil and Gas Operations Regulations……………………... 59 c. Regulations in Alberta……………………………………………….. 61 d. Regulations in British Columbia……………………………………. 61 e. Regulations in Quebec………………………………………………. 62 f. Regulations in the Arctic Offshore………………………………….. 62 5. Environmental conditions…………………………………………………. 63 a. Greenhouse gas emissions from shale gas………………………….. 63 6. Water used in Hydraulic Fracturing…………………………………….... 64 a. How is drinking water protected?................................................ 65 7. Government Environmental Policy……………………………………….. 65 8. Social Concerns……………………………………………………………. 70 9. Potential Issues on the way toward Shale Gas Production in Canada…. 75 10. Development of Unconventional Gas Resources……………………........ 77 11. Opportunities and Benefits arising from growth of Shale Gas…………. 79 III. FUTURE PREDICTIONS WORLDWIDE……………………………………… 90 1. Europe……………………………………………………………………….. 90 2. Asia…………………………………………………………………………… 92 IV. EXECUTIVE SUMMARY………………………………………………………... 93
  • 4. 3 Canada’s Shale Gas Resources: “Game Changer” or “Bridge too Far?” 2012 Meet the Researchers I. NelMejia YAFEES SARWAR Dimitiros Kapelonis Min Heen Chun Malika Tiliaeva
  • 5. 4 Canada’s Shale Gas Resources: “Game Changer” or “Bridge too Far?” 2012 I CANADA 1. Background: ENVIRONMENT: Canada is the second largest country in the world in land area, divided into five natural regions. The Maritime Provinces along the Atlantic coast are a mixture of rich agricultural land and forests. The Canadian Shield is a rocky region which is covered with woods and is rich in minerals. To the south, along the shores of the Great Lakes and the St. Lawrence River, there is a large plain with fertile farmlands, where over 60% of the population is concentrated, and the major urban centers are located. Farming (wheat, oats and rye), is the mainstay of the Central Prairie Provinces. The Pacific Coast is a mountainous region with vast forests. The ―Great North‖ is almost uninhabited, with very cold climate and tundra. There are ten provinces, and two territories; the Yukon and Northwest. These are working towards provincial status, but this is complicated by Native Land claims. Canada has immense mineral resources; it is the world‘s largest producer of asbestos, nickel, zinc and silver and the second largest of uranium. There are also major lead, copper, gold, iron ore, gas and oil deposits. Its industry is highly developed. Industrial emissions from Canadian and US plan-ts contribute to the ―acid rain‖ which has affected thousands of lakes. The construction of a number of hydroelectric plants in Quebec is threatening to destroy the lands and livelihood of the indigenous population. SOCIETY: Peoples: There are about 800,000 Native Americans, ―Metis‖ (mixed race) and Inuit ("Eskimos") ranging from highly acculturated city-dwellers to traditional hunters and trappers living in isolated northern communities. There are six distinct culture areas and ten language families; many native languages such as Cree and Ojibwa are still widely spoken. About 350,000 native people are classified as such: that is, they belong to one of 573 registered groups and can live on a federally protected reserve (though only about 70% actually do so). ―Metis‖ and those who do not have official status as ―native people― have historically enjoyed no separate legal recognition, but attempts are now being made to secure them special rights under the law.
  • 6. 5 Canada’s Shale Gas Resources: “Game Changer” or “Bridge too Far?” 2012 THE STATE: Official Name: Canada. Administrative Divisions: 10 Provinces and 2 Territories. Capital: Ottawa, 920,857 inhab. (1991). other cities: Toronto, 3,893,046 inhab.Montreal, 3,127,242 inhab.Vancouver, 1,602,502 inhab. (1991). Government: Ramon J. Hnatyshyn, Governor- General. Jean Chrétien, Prime Minister and head of government. Canada is a federation of ten provinces and a member of the British Commonwealth. The system of government is parliamentary.National Holiday: July 1, Canada Day (1867). Paramilitaries: 6,400 Coast Guard. 2. Electoral Geography in Canada: Making it possible for some 23 million electors to vote within a 12-hour period is no easy task. To ensure smooth operations, each elector is assigned to one of the more than 65,000 polling divisions across Canada and directed to the polling station nearest his or her place of ordinary residence. Efficient management of this process relies heavily on keeping electoral maps and geographic tools up to date and accurate. Elections Canada carries out various tasks in this area: ● It maintains the National Geographic Database jointly with Statistics Canada. The National Geographic Database contains data on streets in Canada, including their names and address ranges and many geographical features. It is used by Elections Canada for electoral operations and by Statistics Canada for census operations. ● It maintains the Electoral Geography Database, which is derived from the National Geographic Database and contains cartographic representations of federal electoral districts, with all polling divisions and advance polling districts. This database is used for creating the thousands of maps necessary for elections. It is also used to assign voters to the correct electoral districts and polling divisions based on their addresses. This process is known as ―georeferencing‖; it provides precise geographic coordinates with links to Elections Canadas geographic databases. ● It plans and maintains the digitized Geographic Information System to produce both printed and digital electoral maps, as well as a variety of other geography-related documents.
  • 7. 6 Canada’s Shale Gas Resources: “Game Changer” or “Bridge too Far?” 2012 ● It provides technical support and digitized mapping tools to the electoral boundaries commissions. 3. Climate: Canada is often associated with cold weather and snow, but in reality, its climate is as diverse as its landscape. Generally, Canadians enjoy four very distinct seasons, particularly in the more populated regions along the US border. Daytime summer temperatures can rise to 35°C and higher, while lows of -25°C are not uncommon in winter. More moderate temperatures are the norm in spring and fall. Summers can be hot and dry on the prairies, humid in central Canada, and milder on the coasts. Spring is generally pleasant across the country. Autumns are often crisp and cool, but brightened by rich orange and red leaves on trees. Winters are generally cold with periods of snow, although southern Alberta enjoys the occasional "Chinook", a warm dry wind from the Rocky Mountains those gusts through and melts the snow. Winters are mild and wet on the west coast, in cities such as Vancouver and Victoria. When the temperature does drop, Canadians stay warm thanks to an infrastructure of heated houses, cars and public transportation systems. Some cities have also installed walkways to and from buildings in schools. 4. Languages: English and French are official languages of Canada. 13% of the population is bilingual, 67% speak only English, 18% only French, and 2% speak other languages (Italian, German and Ukrainian). 5. Ethnic groups: More than 80% of the population is Canadian-born. In general, the percentage of the population born outside Canada increases as one goes westward from Newfoundland to British Columbia.
  • 8. 7 Canada’s Shale Gas Resources: “Game Changer” or “Bridge too Far?” 2012 Persons of whole or partial British (including Irish) origin make up about 28% of the total population; those of whole or partial French origin (centered mainly in Québec, where they constitute some 80% of the population) make up 23%. Other European groups account for 15% of the total populace. About 26% of the population is from mixed backgrounds. Others, mostly Asian, African, and Arab, make up about 6% of the population.Amerindians, commonly known as Indians constituted about 2%. These Indians were classified into ten major ethno linguistic groups; the Métis, of mixed European and Indian extraction, were recognized as an aboriginal people in the Constitution Act of 1982. Most of the Inuit (Eskimos) live in the Northwest Territories, with smaller numbers in northern Québec and northern Newfoundland (Labrador). 6. Cultural Holidays: Canada holidays and events include a number of fantastic events and happenings. Some holidays in Canada are similar to those in the U.S., but holidays that are exclusively Canadian truly show the Canadian spirit. The following are some of the best examples of celebrations in Canada: Canada Day On July 1, 1868 Canadians were called upon by the Governor General to celebrate the anniversary of the formation of the union of the British North American provinces (aka Canada). In 1879, the Canadian holiday called ―Dominion Day‖ was established to commemorate this great event. It wasn‘t until 1982 that the name ―Dominion Day‖ was changed to ―Canada Day‖. Today, Canada Day is celebrated throughout Canada, most visibly in Montrealand Ottawa, with fireworks and patriotic events. Saint Jean Baptiste Day (Quebec) To experience one of the most significant of the culture events in Canada, come see the festivities of Saint Jean- Baptiste Day. French Canadians across Canada celebrate Saint-Jean- Baptiste Day (also called La Fete Nationale) on June 24th. Nowhere is this truer than in the province of Quebec. In 1975 Quebec declared St-Jean-Baptiste Day as the official nation holiday of their province. French Canadians celebrate with parades and parties, honoring their
  • 9. 8 Canada’s Shale Gas Resources: “Game Changer” or “Bridge too Far?” 2012 patron saint. Along the St. Lawrence River it was a custom of those who lived there to take the first swim of the year on St. Jean Baptiste Day. Even today many pools open for the first time on this day. Remembrance Day On November 11 Canadians remember those who have served their country in times of war and peace. A moment of silence is observed to remember those who fell during World War I, World War II and the Korean War. Canadians wear a red poppy over their heart—a symbol taken from a poem written about the poppies that grew over the graves of the fallen soldiers of World War I. One of the more solemn holidays in Canada, Remembrance Day is an important one to peace-loving Canadians. Great Northern Arts Festival (Inuvik, Northwest Territories) Every summer in remote Inuvik, artists from all over Canada gather to show their work, meet each other, and learn new techniques. These artists are Inuit, Gwich‘in, Inuvialuit, Dene, Metis and many other Canadian First Nations, as well as non-Native artists from the Artic Archipelago, Gjoa Haven, Fort Smith and the Yukon Territories. In its 13th year, the Great Northern Arts Festival hosted 92 artists, 14 musicians and performers. Travelers from Europe, Asia, the U.S. and Canada come to this, one of the great culture events in Canada, for the range and variety of artistic talent in one setting. Caribana Created in 1967, Caribana is the largest Caribbean festival in North America. This two-week festival takes place every summer in Toronto. The city comes alive with the music, food, dance and costumes of Trinidad, the Bahamas, Guyana, and Jamaica. This is one of the culture events in Canada that really celebrates the diversity and beauty of the people who make of the mosaic of the country. Calgary Stampede The Calgary Stampede takes place in early July and attracts visitors from all over the world. This is one of the major events in Canada worth taking several days to enjoy. The Stampede celebrates ―Western Canadian heritage with dynamic contemporary entertainment‖. Highlights
  • 10. 9 Canada’s Shale Gas Resources: “Game Changer” or “Bridge too Far?” 2012 of this event are the afternoon rodeo, chuck wagon races, grandstand show and live entertainment acts. 7. Value System: The national character and cultural values of a nation best describe the values that will develop among consumers in that culture. Some marketers define that the core of the social value monitoring is if one understands peoples values, one can better predict how they will behave in the marketplace. Social value system of Canadians is evidence that there is growing optimism in Canada across all generations. Canadians across all generations are committed to liberal social values which mean that they are more accepting of diversity in lifestyles and social behavior. They value honesty, universality in education, health care, and welfare. There is a large evidence of voluntarism, charity, entrepreneurship, civility, tolerance and concern for the welfare of the poor. There is collective responsibility for the betterment of the nation. Trust is a major player in intuiting confidence in public institutions and optimism about their collective future. Consumer values of Canadian consumers, as a whole, are described as being less materialistic, more in control, less respective of authority. Canadian consumers value accountability. It is shown that the consumer and the marketer are responsible for display of both competence and responsibility in the marketplace. Canadian consumers do not fall back on assuming that a poor purchase decision is the marketers fault and the governments responsibility to fix it. Marketers suggest that consumers are developing a new critical awareness of their contributory role in the marketplace rather than taking things for granted. Recent polls of 2000 saw that an incredible 90% of Canadians placed themselves in the middle class (41% in the upper middle and 48% in the lower middle class). There is still a strong value and desire for moving forward and people feel that individual hard work and enterprise should be rewarded with a change in social status. Canadian consumers are placing increased importance on quality and functional product differences. People want things to last and to work. Consumers are redefining quality. Whereas quality was perceived as price, durability, fit, safety and the like, the trend is to perceive quality along the dimensions of product origin including social, ethical and environmental issues and impact on originating country.
  • 11. 10 Canada’s Shale Gas Resources: “Game Changer” or “Bridge too Far?” 2012 8. Negotiating: Most Canadian businesspeople, especially those among younger generations, are experienced in interacting and doing business with visitors from other cultures. They often take a genuine interest in other countries and are usually open-minded rather than forcing their ways upon you. Generally, business relationships are only moderately important in this country. They are usuallynot a necessary precondition for initial business interactions. Your counterparts‘ expectation may beto get to know you better as you do business together. This is especially true for Anglo-Canadians,while French-Canadians tend to place more emphasis on building stronger relationships before engagingin serious business interactions. Generally, people in the country may emphasize near-term results over long-range objectives but are usually also interested in building long-term relationships. Businesspeople in this country usually speak in a controlled fashion, only occasionally raising their voices to make a point. At restaurants, especially those used for business lunches and dinners, keep conversations at a quiet level. Being loud may be regarded as bad manners. Canadians are polite listeners and rarely interrupt others. Negotiations in Canada can be conducted by individuals or teams of negotiators. Both approaches have their distinct advantages. Since decisions are oft en made by individuals, meeting the decision maker one-on-one may help get results quickly. On the other hand, a well-aligned team with clearly assigned roles can be quite effective when negotiating with a group of Canadians. Owing to the high degree of individualism that characterizes the culture, Canadian teams are not always well aligned, which sometimes makes it easy to play one member against the other. To Canadians, negotiating is usually a joint problem-solving process. With French-Canadians, however, it may mean engaging in a somewhat more aggressive debate aimed at reaching a mutually agreeable solution. While the buyer is in a superior position, both sides in a business deal own the responsibility to reach agreement. They may focus equally on near-term and long- term benefits. The primary negotiation style is cooperative and people may be open to compromising if viewed helpful in order to move the negotiation forward. Since Canadians believe in the concept of win-win, they expect you to reciprocate their respect and trust. They are oft en very pragmatic and usually find compromises both sides can live with. While the negotiation exchange may include conflicts, you should keep a positive attitude and show
  • 12. 11 Canada’s Shale Gas Resources: “Game Changer” or “Bridge too Far?” 2012 willingness to work with the other side in an effort to reach agreement. Negotiations in Canada often move at a rapid pace. Though somewhat cautious, Canadians believe in the ‗time is money‘ philosophy almost as strongly as Americans do. Accordingly, your counterparts will generally want to finish the negotiation in a timely manner and implement actions soon. Even complex negotiations may not require more than one trip, as follow-up negotiations are oft en conducted via phone and e-mail. 9. Tips for doing business in Canada: Tip 1- Although there are similarities in approach to business between the USA and Canada, there are also enormous differences. Be aware of sensitivities in this area. Tip 2- Canada is officially a bilingual country and efforts should be made, wherever possible to recognize the linguistic heritage of the French-speaking minority. Tip 3- Canada has encouraged a multi-ethnic approach to its immigration policies. Cultural diversity is recognized and respected. It is very likely that you will encounter people from a wide range of cultural backgrounds. Tip 4- Business structures vary enormously - do your homework on the contact organization before visiting. Tip 5- Business meetings in Canada tend to be more formal than in the US with a more restrained approach. Tip 6- People expect the right to be heard and listened to in meetings situations regardless of rank or status. Tip 7- Detailed preparation prior to meetings is expected and respected - decisions are not usually made until all the facts are to hand. Tip 8- Communication styles are reserved and understated and there is a suspicion of hyperbole. Tip 9- Canadians are direct in their communication style and can usually be taken on face value without the need to try to decipher and coded messages. Tip 10- Women visitors should have little or no problems operating within the Canadian business environment.
  • 13. 12 Canada’s Shale Gas Resources: “Game Changer” or “Bridge too Far?” 2012 10. Economy Canada has the eleventh-largest economy in the world (measured in US dollars at market exchange rates), is one of the worlds wealthiest nations, and is a member of the Organization for Economic Co-operation and Development (OECD) and Group of Eight (G8). As with other developed nations, the Canadian economy is dominated by the service industry, which employs about three quarters of Canadians. Canada is unusual among developed countries in the importance of the primary sector, with the logging and oil industries being two of Canadas most important. Canada also has a sizable manufacturing sector, centered in Central Canada, with the automobile industry and aircraft industry especially important. With a long coastal line, Canada has the 8th largest commercial fishing and seafood industry in the world.The foundations of economic freedom are very strong in Canada, and the economy has emerged from the global economic slowdown relatively unscathed. The rule of law is sustained by an effective and independent court system, ensuring protection of property rights and the equitable application of the commercial code.Canada also performs well in other pillars of economic freedom and continues to sharpen its long-term competitiveness. The soundness of public finance has been notable, although government spending has been rising as a share of GDP. Along with open- market policies that support trade and dynamic investment, the efficient regulatory environment facilitates entrepreneurial activity and provides a high degree of certainty for business planning. The steady reduction of the standard corporate tax rate over the past three years has also contributed to Canada‘s competitiveness. Canadian inflation has been modest in the past few years but the government controls virtually all prices for health care services through its mandatory ―single-payer‖ nationalized program.Canada‘s bio-economy contributes $86.5 billion to our GDP. There are over 1 million Canadians working throughout the bio-economy employment network.
  • 14. 13 Canada’s Shale Gas Resources: “Game Changer” or “Bridge too Far?” 2012 11. Forecast The recent global economic downturn started late in Canada and its effect has been more moderate than in other countries. Canada‘s multicultural workforce is highly skilled and residents enjoy a high standard of living. Foreign investment that provides identifiable benefits to Canada and its citizens is welcome and there are excellent opportunities for non-residents to invest or do business there. Canadian exports have slowed this year as a result of the softening of demand in the US and the broader moderation of growth in world trade. Flight-to-quality purchases of the Canadian dollar have also caused the exchange rate to strengthen, compounding the pressures on exporters. Our expectation is that the exchange rate vis-à-vis the US dollar will be pushed further into overvalued territory next year, which will blunt any recovery of exports. But the strength of the currency should prove temporary and a gradual weakening of the exchange rate thereafter will help to restore export competitiveness. With over 70% of Canadian exports destined for the US, changing economic conditions in the US economy are critically important to Canada. Unfortunately, prospects for the US economy appear subdued, with the looming ―fiscal cliff‖ clouding the outlook for next year and persistently sluggish growth likely to continue for some time as the economy wrestles with the drawn-out process of debt deleveraging and on-going fiscal consolidation. Canadian exports to the US are forecast to expand at an average annual pace of 6% a year during 2021-30, which will be slower than the growth rate of total exports. While this implies that the share of Canadian exports destined for the US will be gradually eroded, it will nevertheless be many years before the dominant position of the US in Canadian trade is challenged by another trade partner. The medium term outlook for exports to Europe also appears disappointing. Canadian exports to Europe (excluding Russia) are forecast to rise at a similar pace as exports to the US of around 6% a year during 2021-30. Exports to the UK, which is currently Canada‘s second largest trading partner, are forecast to expand by just 5% a year over this period.
  • 15. 14 Canada’s Shale Gas Resources: “Game Changer” or “Bridge too Far?” 2012 With export growth to the US and Europe remaining relatively sluggish, Canada will increasingly look to new sources of growth in rapidly expanding emerging markets. As a commodity exporter, Canada will be able to benefit from the rapid industrialization of many Asian economies and the associated demand for raw materials. Exports to Asia (excluding Japan) are forecast to rise at an average annual rate of around 11% a year throughout 2021-30. By 2030, China will have surpassed the UK as the second-largest destination for exports, while India will overtake Mexico to take fifth place. Top Five Export Destinations Rank 2011 2030 1 USA USA 2 UK China 3 China UK 4 Mexico India 5 Germany Mexico
  • 16. 15 Canada’s Shale Gas Resources: “Game Changer” or “Bridge too Far?” 2012 Fastest Growing Exports (% year CAGR) Rank Destination 2012 Destination 2013-15 Destination 2016-20 Destination 2021-30 1 Poland 81 Vietnam 15 China 13 Vietnam 12 2 Saudi 81 Poland 15 Vietnam 13 China 11 3 UAE 42 China 15 India 13 India 11 4 China 22 India 15 Poland 11 Malaysia 10 5 Australia 19 UAE 14 Turkey 10 Turkey 10 6 Vietnam 18 Saudi 13 Brazil 10 Indonesia 9
  • 17. 16 Canada’s Shale Gas Resources: “Game Changer” or “Bridge too Far?” 2012 Rank Destination 2012 Destination 2013-15 Destination 2016-20 Destination 2021-30 7 Brazil 13 Indonesia 11 Malaysia 10 Egypt 8 8 France 13 Egypt 10 Indonesia 10 Saudi 8 9 UK 6 Brazil 10 UAE 9 Bangladesh 8 10 Indonesia 2 HK 9 Saudi 8 UAE 8 Fastest Growing Imports (% year CAGR) Rank Origin 2012 Origin 2013-15 Origin 2016-20 Origin 2021-30 1 India 82 India 22 India 14 Vietnam 12 2 Malaysia 80 Turkey 16 Vietnam 12 India 11 3 Vietnam 69 Vietnam 13 Turkey 12 China 11 4 Mexico 64 Mexico 12 China 11 Bangladesh 10 5 Turkey 51 Egypt 12 Poland 10 Turkey 9 6 Ireland 36 Malaysia 10 Mexico 8 Mexico 9 7 Poland 27 China 9 Egypt 8 Malaysia 8 8 Germany 18 Germany 7 Malaysia 8 Egypt 8 9 China 11 Poland 7 Bangladesh 8 Poland 8 10 Saudi 6 Ireland 6 Brazil 7 Ireland 8
  • 18. 17 Canada’s Shale Gas Resources: “Game Changer” or “Bridge too Far?” 2012 Trade Confidence Index Although confidence is down slightly compared to six months ago according to the HSBC Trade Confidence Index, Canadian traders remain optimistic with an overall score of 110 (115 in H1 2012). The majority (88%) of exporters and importers expect trade volumes to remain at current levels if not increase, and close to half (49%) of those surveyed anticipate business to grow over the next six months. They cite barriers to growth being foreign exchange, logistical issues and lack of demand. Attitudes on the global economy follow this trend as well with 70% of Canadian businesses saying the economy will either grow or hold steady. Yet even with this positive outlook, 20% of Canadian sellers plan to examine buyers‘ payment histories and financial positions thoroughly before entering into an agreement. An additional 14% of exporters will monitor debts and accounting items closely. In addition to this, nearly a quarter of Canadian traders believe they will need access to increased funding in the coming months, and almost half of these will turn to banks for trade finance solutions. Generally, traders in Canada conduct most of their business with the US (97%), China (53%) and Western Europe (43%). Troubles in the Eurozone have not had a negative impact on the country‘s dealings with Europe as all European countries have seen an increase in Canadian trade flows over the last six months. Even with this bump in trade activity in Europe, however, use of the Euro as settlement currency has dropped to 23% compared to 28% six months ago.
  • 19. 18 Canada’s Shale Gas Resources: “Game Changer” or “Bridge too Far?” 2012 12. TAX SYSTEM Administration Federal taxes are collected by the Canada Revenue Agency (CRA), formerly known as "Revenue Canada" or the "Canada Customs and Revenue Agency".
  • 20. 19 Canada’s Shale Gas Resources: “Game Changer” or “Bridge too Far?” 2012 Under "Tax Collection Agreements", CRA collects and remits to the provinces: Provincial personal income taxes on behalf of all provinces except Quebec, so that individuals outside of Quebec file only one set of tax forms each year for their federal and provincial income taxes. Corporate taxes on behalf of all provinces except Quebec and Alberta. The Ministère du revenu du Québec collects the GST in Quebec on behalf of the federal government, and remits it to Ottawa. The provincial governments of Nova Scotia, New Brunswick, Newfoundland and Labrador, British Columbia, and Ontario no longer impose a separate provincial sales tax and in those provinces the federal government collects goods and services tax at a rate higher than in the other provinces. The additional revenue from this Harmonized Sales Tax is paid by the federal government to the five harmonizing provinces. Personal income taxes Both the federal and provincial governments have imposed income taxes on individuals, and these are the most significant sources of revenue for those levels of government accounting for over 40% of tax revenue. The federal government charges the bulk of income taxes with the provinces charging a somewhat lower percentage, except in Quebec. Income taxes throughout Canada are progressive with the high income residents paying a higher percentage than the low income residents. Where income is earned in the form of a capital gain, only half of the gain is included in income for tax purposes; the other half is not taxed. Federal and provincial income tax rates are shown at Canada Revenue Agencys website. Personal income tax can be deferred in a Registered Retirement Savings Plan (RRSP) and tax sheltered savings accounts (which may include mutual funds and other financial instruments) that are intended to help individuals save for their retirement.
  • 21. 20 Canada’s Shale Gas Resources: “Game Changer” or “Bridge too Far?” 2012 Corporate taxes Companies and corporations pay tax on profit income and on capital. These make up a relatively small portion of total tax revenue. Tax is paid on corporate income at the corporate level before it is distributed to individual shareholders as dividends. A tax credit is provided to individuals who receive dividend to reflect the tax paid at the corporate level. This credit does not eliminate double taxation of this income completely, however, resulting in a higher level of tax on dividend income than other types of income. (Where income is earned in the form of a capital gain, only half of the gain is included in income for tax purposes; the other half is not taxed.) Corporations may deduct the cost of capital following capital cost allowance regulations. Starting in 2002, several large companies converted into "income trusts" in order to reduce or eliminate their income tax payments, making the trust sector the fastest-growing in Canada as of 2005. Conversions were largely halted on October 31, 2006, when Finance Minister Jim Flaherty announced that new income trusts would be subject to a tax system similar to that of corporations, and that these rules would apply to existing income trusts after 2011. Capital tax is a tax charged on a corporations taxable capital. Taxable capital is the amount determined under Part 1.3 of the Income Tax Act (Canada) plus accumulated other comprehensive income. On January 1, 2006, capital tax was eliminated at the federal level. Some provinces continued to charge corporate capital taxes, but effective July 1, 2012, provinces have stopped levying corporation capital taxes. In Ontario the corporate capital tax was eliminated July 1, 2010 for all corporations, although it was eliminated effective January 1, 2007, for Ontario corporations primarily engaged in manufacturing or resource activities. In British Columbia the corporate capital tax was eliminated as of April 1, 2010. Sales taxes The federal government levies a multi-stage sales tax of 5% (6% prior to January 1, 2008, and 7% before July 1, 2006), that is called the Goods and Services Tax (GST), and, in some provinces, the Harmonized Sales Tax (HST). The GST/HST is a value-added tax.
  • 22. 21 Canada’s Shale Gas Resources: “Game Changer” or “Bridge too Far?” 2012 All provincial governments except Alberta levy sales taxes as well. The provincial sales taxes for the provinces of British Columbia, Nova Scotia, New Brunswick, Newfoundland and Labrador, and Ontario are harmonized with the GST that is they have a combined tax instead of separate GST and PST. The provinces of Quebec and Prince Edward Island apply provincial sales tax to the sum of price and GST. The territories of Nunavut, Yukon and Northwest Territories charge GST only. Property taxes The municipal level of government is funded largely by property taxes on residential, industrial and commercial properties. These account for about ten percent of total taxation in Canada. There are two types. The first is an annual tax levied on the value of the property (land plus buildings). The second is a land transfer tax levied on the sale price of properties everywhere except Alberta, Saskatchewan and rural Nova Scotia. Excise taxes Both the federal and provincial governments impose excise taxes on inelastic goods such as cigarettes, gasoline, alcohol, and for vehicle air conditioners. A great bulk of the retail price of cigarettes and alcohol are excise taxes. The vehicle air conditioner tax is currently set at $100 per air conditioning unit. Canada has some of the highest rates of taxes on cigarettes and alcohol in the world. These are sometimes referred to as sin taxes. It is generally accepted that higher prices deter consumption of these items which have been deemed to increase health care costs stemming from those who use them. Payroll taxes Ontario levies a payroll tax on employers, the "Employer Health Tax", of 1.95% of payroll. Eligible employers are exempt on the first $400,000 of payroll. This tax was designed to replace revenues lost when health insurance premiums, which were often paid by employers for their employees, were eliminated in 1989.
  • 23. 22 Canada’s Shale Gas Resources: “Game Changer” or “Bridge too Far?” 2012 Quebec levies a similar tax called the "Health Services Fund". For those who are employees, the amount is paid by employers as part of payroll. For those who are not employees such as pensioners and self-employed individuals, the amount is paid by the taxpayer. Premiums for the Employment Insurance system and the Canada Pension Plan are paid by employees and employers. Premiums for Workers Compensation are paid by employers. These premiums account for 12% of government revenues. These premiums are not considered to be taxes because they create entitlements for employees to receive payments from the programs, unlike taxes, which are used to fund government activities. The funds collected by the Canada Pension Plan and by the Employment Insurance are in theory separated from the general fund. It should be noted that Unemployment Insurance was renamed to Employment Insurance to reflect the increased scope of the plan from its original intended purpose. Employment Insurance is unlike private insurance because the individuals yearly income impacts the received benefit. Unlike private insurance, the benefits are treated as taxable earnings and if the individual had a mid to high income for the year, they could have to repay up to the full benefit received. Health and Prescription Insurance Tax Ontario charges a tax on income for the health system. These amounts are collected through the income tax system, and do not determine eligibility for public health care. The Ontario Health Premium is an additional amount charged on an individuals income tax that ranges from $300 for people with $20,000 of taxable income to $900 for high income earners. Individuals with less than $20,000 in taxable income are exempt. Quebec also requires residents to obtain prescription insurance. When an individual does not have insurance, they must pay an income-derived premium. As these are income related, they are considered to be a tax on income under the law in Canada. Other provinces, such as British Columbia, charge premiums collected outside of the tax system for the provincial medicare systems. These are usually reduced or eliminated for low-income people.
  • 24. 23 Canada’s Shale Gas Resources: “Game Changer” or “Bridge too Far?” 2012 Alberta does not levy a premium for its provincial medicare. Estate tax Since the government of Pierre Trudeau repealed Canadas inheritance tax in 1972, estates have been treated as sales (a "deemed disposition") upon death, except where the estate is inherited by a surviving spouse or common law partner. Tax owing is paid by the estate, and not by the beneficiaries. Registered Retirement Savings Plans and Registered Retirement Income Funds are wound down, and the assets distributed to beneficiaries are treated as withdrawals, i.e., they are taxed as part of the income of the estate at the normal applicable personal income tax rates with no reduction for capital gains. Non-registered capital assets are treated as having been sold, and are taxed at the applicable capital gains tax rates. Interest or other income from non-registered non-capital assets that is accrued up to the date of death is taxed on the final tax return of the deceased as the normal tax rates, and is not included on the tax return of the estate. International taxation Canadian residents and corporations pay income taxes based on their world-wide income. Canadians are protected against double taxation receiving income from certain countries which gave agreements with Canada through the foreign tax credit, which allows taxpayers to deduct from their Canadian income tax otherwise payable from the income tax paid in other countries. A citizen who is currently not a resident of Canada may petition the CRA to change her or his status so that income from outside Canada is not taxed. 13. Environmental Legislation a. Permits Permits are documents that grant a group or individual legal permission to carry out an activity for a specified period of time. Environment Canada issues permits and licenses for a variety of commercial, industrial and recreational activities.
  • 25. 24 Canada’s Shale Gas Resources: “Game Changer” or “Bridge too Far?” 2012 Permits administered by the Department pertain to the protection or conservation of the natural environment. Examples include permits governing the disposal of substances at sea, the import and export of hazardous wastes, and the hunting of migratory birds. Antarctic Environmental Protection Act Permits The Antarctic Environmental Protection Act prohibits Canadians and Canadian vessels where applicable, from undertaking the following activities, except where a permit has been granted or under circumstances described in the Act: Activities related to mineral resources other than for scientific purposes Interference with wildlife indigenous to the Antarctic Introduction of animal or plant species that are not indigenous to the Antarctic Any activity related to waste disposal Any activity in a specially protected area Permit applications must include environmental impact assessment, waste management plans and emergency plans. In some cases, the Minister may require that a permit applicant provide and maintain a security to cover potential costs needed to prevent, mitigate or remedy any adverse environmental impacts caused by the permit holder while in the Antarctic. It is not necessary for everyone on an expedition, or everyone planning to carry out a specific activity in the Antarctic, to apply for a permit. One person may apply on behalf of others. The conditions of a permit apply to any person or vessel covered by that permit. A person who applies for and/or receives a permit is called a permit holder. The permit holder is responsible for the actions of every person and vessel covered by that permit. Permit application must be filled out and submitted to Environment Canada by a representative of an expedition or group. Recognizing the global effort to implement the Protocol, and the desire to avoid duplication, written authorization from another nation that is a Party to the Madrid Protocol is an adequate substitute under the AEPA.
  • 26. 25 Canada’s Shale Gas Resources: “Game Changer” or “Bridge too Far?” 2012 Canadian Environmental Protection Act: Permits Authorizations for Ozone-depleting Substances Under the Ozone-depleting Substances Regulations, 1998, every person must receive written authorization from the Minister of the Environment prior to manufacturing, importing or exporting a "controlled substance". There are two types of authorization: allowances and permits. Allowances Allowances provide authorization for the production and importation of unused hydro chlorofluorocarbons (HCFCs) and methyl bromide for circumstances not governed by permits, e.g., the importation of unused methyl bromide for uses other than quarantine or pre-shipment or the importation of unused HCFCs for non-essential uses. Unlike permits, persons do not make application for consumption allowances. The allowances are entitlements. The Regulations provide criteria to determine those activities that would entitle a person to an allowance and define the method by which the quantity of the allowance is calculated. The sum of all allowances within Canada for each group of controlled substance is progressively reduced according to a schedule fixed by the Regulations. In order to accommodate the shifting markets allowance holders face, in terms of their needs and choice of supplier, allowance holders may make application to transfer all or some portion of their allowance to others. At the end of each year, the authorizations provided by permits, allowances and transfers lapse. Persons may reapply for permits and transfers in the succeeding year. Allowance holders are automatically informed of their allowances for the succeeding year. Permits A permit is required by anyone who intends to:
  • 27. 26 Canada’s Shale Gas Resources: “Game Changer” or “Bridge too Far?” 2012 1. import or export a controlled substance that is recovered, recycled, reclaimed or used or a controlled substance for destruction; 2. export a controlled substance other than a recovered, recycled, reclaimed or used controlled substance or a controlled substance for destruction; 3. manufacture or import a controlled substance for a purpose set out in Schedule 3 of the Regulations (e.g., for essential uses, feedstock, quarantine application or pre-shipment application as defined in the Regulations or as an analytical standard); 4. export a product that contains, or is intended to contain, chlorofluorocarbons (CFCs), bromofluorocarbons (Halons), tetrachloromethane (carbon tetrachloride) or 1,1,1- trichloroethane (methyl chloroform); 5. manufacture, import, use, sell, offer for sale, or export a controlled substance for an essential purpose. Note: Individuals and companies are entitled to claim information provided under the Canadian Environmental Protection Act and its regulations as confidential. Where the Act or other legislation prohibits the disclosure of such information, it has been "masked" to protect it from disclosure. Disposal at Sea Permits A Disposal at Sea Permit is required by anyone who intends to dispose of materials at sea or load materials for that purpose. It sets out conditions controlling the disposal, including the type of material, the quantity, the location of the loading site and disposal site, equipment use and requirements and restrictions such as the timing of disposal operations. Before a permit is issued by Environment Canada, it is subject to a scientific review and public consultation which may take up to 90 days. Previously, permits were published in Part I of the Canada Gazette at least 30 days before the first date on which the loading or disposal was authorized by the permit. Since July 2012, permits are published on the CEPA Registry at least
  • 28. 27 Canada’s Shale Gas Resources: “Game Changer” or “Bridge too Far?” 2012 7days before the effective date of the permit. During the term of a permit, operations may be subject to inspections by Environment Canada staff. Permits of Equivalent Level of Environmental Safety (PELES) Section 190 of the Canadian Environmental Protection Act, 1999 (CEPA 1999) gives the Minister the authority to issue a permit authorizing any activity to be conducted in a manner that does not comply with the requirements of Division 8, Part 7 of CEPA 1999 (Control of Movement of Hazardous Waste and Hazardous Recyclable Material and of Prescribed Non- Hazardous Waste for Final Disposal), including requirements of the regulations made under Division 8. Such a permit is called a Permit of Equivalent Level of Environmental Safety (PELES). In order to issue a PELES, the Minister must be satisfied that the proposed activities provide a level of environmental safety at least equivalent to that provided by compliance with Division 8. A PELES must be consistent with international environmental agreements that are binding on Canada and is subject to conditions fixed by the Minister. CEPA 1999 also gives the Minister the authority to revoke the PELES if the permit holder does not comply with the conditions of the permit, or if there is a change in the regulations or a modification in international environmental agreements binding on Canada. Note: Individuals and companies are entitled to claim information under the Canadian Environmental Protection Act, 1999 and its regulations as confidential. Where the Act or other legislation prohibits the disclosure of such information, it has been "masked" to protect it from disclosure. Transboundary Permits Hazardous Waste & Hazardous Recyclable Material Transboundary permits apply to movements of hazardous wastes and hazardous recyclable materials that are exported or imported out of and into Canada respectively, including transits passing through Canadian territory en route to a foreign destination. These permits provide a way
  • 29. 28 Canada’s Shale Gas Resources: “Game Changer” or “Bridge too Far?” 2012 of controlling and tracking the movements of hazardous wastes and hazardous recyclable materials into and out of Canada. A Transboundary Permit is required by anyone who intends to transport across an international border hazardous waste destined for final disposal or hazardous recyclable material, which is destined for recovery (i.e. recycling). Section 187 of CEPA 1999 requires the publication of certain information provided on notices received for proposed imports, exports and transits of hazardous wastes. This information comprises: the name or characteristics of the waste or recyclable material; the name of the Canadian importer, exporter or, for transits, the name of the carrier; and the country of origin or destination, and in the case of transits both. b. Contaminated Lands In pursuit of its mandate, the CSMWG has developed a generic definition and a policy statement for contaminated sites: Definition: A contaminated site is defined as a site at which substances occur at concentrations: (1) above background levels and pose or are likely to pose an immediate or long-term hazard to human health or the environment, or (2) exceeding levels specified in policies and regulations. Policy: ―Contaminated sites on federal lands shall be identified, classified, managed and recorded in a consistent manner.‖ Inventory of sites The Federal Contaminated Sites Inventory (FCSI) is a searchable online database providing Canadians with information on identified and suspected federal contaminated sites across the country. About the Inventory What kind of information is available on the Federal Contaminated Sites Inventory (FCSI)?
  • 30. 29 Canada’s Shale Gas Resources: “Game Changer” or “Bridge too Far?” 2012 The Federal Contaminated Sites Inventory contains information about each site, including the classification of the site when initially added to the inventory. The initial classification is based on a number of factors including the level of contamination and the current status of remediation work. The inventory is updated annually to reflect current conditions. How many federal contaminated sites are there in Canada? There are over 21,000 federal sites listed in the Federal Contaminated Sites Inventory maintained by the Treasury Board Secretariat, including about 7,000 confirmed contaminated sites and about 6,000 suspected others. Approximately 9000 are listed as "closed" because remediation is complete or because no action was identified as necessary during assessment. Why does the federal government have so many contaminated sites? Federal contaminated sites are a legacy of past practices that have resulted in contamination. The Government of Canada continues the work initiated under the Federal Contaminated Sites Action Plan and remains committed to the proper management of contaminated sites for which it is responsible. Does the Government of Canada take responsibility for all contaminated sites that have been abandoned by the original owner? The Government of Canada is not legally liable for all contaminated sites that have been abandoned by the original owner. The "polluter pays" principle applies and therefore private companies or other owners are typically liable for the costs of cleaning up (or "remediating") the land they contaminate. The nature and extent of any liability is not always clear. Liability depends on many factors, including the location of the contaminated site and the role of the Government of Canada regarding the site. With regards to the location of the site, under the Constitution and other laws, provinces and territories have authority to make laws regarding property
  • 31. 30 Canada’s Shale Gas Resources: “Game Changer” or “Bridge too Far?” 2012 and commerce. As such, responsibility and legislative authority over contaminated sites is primarily the jurisdiction of the provinces and territories. With regards to the role or actions of the Government of Canada, there may be liability where it owns, leases or manages contaminated sites - in whole or in part. Similarly, provinces or territories may also be liable under the same circumstances. In some cases, there may be share liability between many parties. In addition, there may be some cases where the Government of Canada concludes that it is appropriate in the circumstances to assume some responsibility for the contaminated site. For example, when private companies who caused the contamination have gone out of business or were unable to pay for dealing with these sites and where no governments are legally liable, one or more levels of government have assumed responsibility of these orphan sites. This has occurred in the North where mining companies have gone bankrupt and there is a need to remediate the contaminated site. Why are the Sydney Tar Ponds not listed on the Federal Contaminated Sites Inventory? The Federal Contaminated Sites Inventory only lists sites that are strictly a federal responsibility, the majority of which are on federal lands. The Sydney Tar Ponds are not included on the list of federal contaminated sites because responsibility for the remediation of this large site is being shared with the Province of Nova Scotia. High Priority Projects Phase II (2011-2016) of the Federal Contaminated Sites Action Plan (FCSAP) will focus remediation efforts on the highest priority FCSAP sites, reducing risk and liability by 2016. From the original $3.5 billion commitment in Budget 2004, Phase II will draw a further $366 million in 2012-2013, with $333 million to be spent on remediation of an estimated 380 priority sites. This includes the largest, highest priority projects, Giant and Faro Mines, as well as hundreds of smaller high priority projects across Canada, resulting in safer, more productive environments for communities.
  • 32. 31 Canada’s Shale Gas Resources: “Game Changer” or “Bridge too Far?” 2012 This section describes some high priority projects that will be managed during Phase II of the Federal Contaminated Sites Action Plan. Lennard Island Remediation Project, Fisheries and Oceans Canada 5 Wing Goose Bay Remediation Project, Department of National Defence and the Canadian Forces DYE-M Remediation Project, Department of National Defence and the Canadian Forces Faro Mine Remediation Project, Aboriginal Affairs and Northern Development Canada - Northern Affairs Office Giant Mine Remediation Project, Aboriginal Affairs and Northern Development Canada - Northern Affairs Office Alaska Highway - Liard River Maintenance Camp Remediation/Risk Management, Public Works and Government Services Canada Rock Bay Remediation Project, Transport Canada 14. Employment Legislation Canadian labour law is that body of law which regulates the rights, restrictions obligations of trade unions, workers and employers in Canada. Canadian employment law is that body of law which regulates the rights, restrictions obligations of non-unioned workers and employers in Canada. Framework Both the federal and provincial (or territorial) governments have authority over labour and employment law in Canada. The constitution gives exclusive federal jurisdiction over employment in specific industries, such as banking, radio and TV broadcasting, inland and maritime navigation and shipping, inland fishing, as well as any form of transportation that crosses provincial boundaries. Employment that is not subject to federal jurisdiction is governed by the laws of the province or territory where the employment takes place.
  • 33. 32 Canada’s Shale Gas Resources: “Game Changer” or “Bridge too Far?” 2012 In areas of unrestricted provincial jurisdiction, each province (and increasingly each territory) is in charge. So, for example, education (except education on First Nation reserves) and municipal government are both subject to provincial legislation (the territories excepted). While Quebecs statutory environment is considerably different in many respects, most provinces and the federal Code all follow the standard of enterprise-based bargaining structures. They also share a certification process (the details of which differ somewhat from province to province) through which unions are recognized by the state as having the support of a majority of workers in a narrowly-defined workplace. One feature common to all provincial and federal labour laws is the "Rand Formula". This legal concept allows employees in unionized workplaces to decline union membership, but requires them to pay the equivalent of basic union dues even if they decide not to be union members. 15. Technological Environment Current Research and Development activities Canada‘s innovation performance is nothing to brag about. In 2012, the country lost its top 10 spot on the Global Innovation Index, ranking 12th. In spite of generous government programs to support R&D, a 2012 OECD report presented Canada as an R&D laggard, with business enterprise research and development (BERD) at 0.99 percent of GDP in 2009, against 2.04 percent for the U.S. and an OECD median of 1.62 percent. Figure 1 shows Canadian BERD slowly declining since 2007, despite non-financial corporations holding large cash reserves and the federal corporate tax rate having been halved since 2000 (to 15 percent). With a widespread belief that economic conditions will now improve, it is unclear whether businesses will invest in productivity-enhancing activities soon, or simply let future sales expansion drive revenue growth.
  • 34. 33 Canada’s Shale Gas Resources: “Game Changer” or “Bridge too Far?” 2012 A Shift of Approach Past data indicate that low investment in R&D is structural and chronic in Canada. No one was surprised, therefore, when the finance minister‘s March budget speech noted that Canada needs ―to promote innovation more effectively,‖ thereby recognizing Canada‘s lackluster performance. The 2012 federal budget introduced new measures to address Canada‘s lack of innovation in the last 30 years with respect to R&D support. This was one of few areas not to face belt-tightening, with the federal government committing CA$1.6 billion to various measures. The 2012 budget marked a change in philosophy in the way R&D and innovation are supported in Canada. The government took the first steps of moving away from a system of indirect funding, in the form of tax credits, toward a more direct approach using grants, venture capital, and government procurement.
  • 35. 34 Canada’s Shale Gas Resources: “Game Changer” or “Bridge too Far?” 2012 The change was predictable, as the budget announcement was preceded by a series of 2011 reports that were clearly influential. In particular, a federal expert panel‘s report recommended moving away from tax credits. The report criticized the very generous (35 percent) tax credit for small Canadian-controlled private corporations and argued that A) it should be reduced to the general rate available to other corporations (20 percent) and B) the latter should be lowered. Pre-budget rates are shown in Table 1, along with the rates of the refundable tax credit that most provinces offer in addition to federal programs. Foreign companies can benefit from these and other support programs if R&D activities are undertaken in Canada and take an eligible form (e.g., experimental development or applied research). Significant Changes As part of the new approach, the government committed to support further ―traditional‖ R&D, in the form of advanced research in universities and colleges, by earmarking CA$500 million over five years to the Canada Foundation for Innovation to support new competitions. It also made a clear case for supporting the private sector more vigorously: the Industrial Research Assistance Program saw its budget for supporting companies double to CA$220 million per year; the National Research Council received CA$67 million toward refocusing its activities on business- led, industry-relevant research; and CA$400 million was allocated to ―help increase private
  • 36. 35 Canada’s Shale Gas Resources: “Game Changer” or “Bridge too Far?” 2012 sector investments in early-stage risk capital, and to support the creation of large-scale venture capital funds led by the private sector.‖ These measures came at a cost, and the victim was Canada‘s largest R&D support program, the federal Scientific Research and Experimental Development (SR&ED) tax credit. Changes to the SR&ED program were presented as ―streamlining and improving‖ it, but the bottom line is that the program will be less generous starting in 2014. Main changes include a reduction of the rate from 20 percent to 15 percent for larger firms; the elimination of most capital expenditures as eligible expenditures; the reduction of eligible overhead expenditures (the proxy rate being lowered from 65 percent to 55 percent); and the eligibility of only 80 percent of the SR&ED amount paid to an arm‘s length contractor. The shift in ideology, in particular the proposed changes to the SR&ED program, were not welcomed by all, as SR&ED tax incentives seem to have generated a small benefit to Canada. Opponents point to drawbacks of direct funding: potential lack of transparency in the process, funds being given out before projects are undertaken, the threat to Canada‘s international competitiveness if funding contravenes WTO rules, and a heavier administrative burden as pointed out in the 2011 expert panel report. They also mention the Technology Partnerships Canada program, canceled in 2006 by the current conservative government after disbursing more than CA$2 billion in public money on controversially selected projects. A Different Future? With the changes introduced in the 2012 budget, foreign companies carrying out R&D in Canada will need to keep an eye on how tax credit changes may affect them. Currently, the Canadian tax credit is generous compared to other countries‘ equivalents, including that of the United States. Compared to its neighbor and other OECD countries, Canada has indeed promoted R&D largely through a system of tax credits (Figure 2). While the philosophical shift is important per se, changes announced in the 2012 budget will modify the proportions of direct and indirect government support for R&D only slightly. It seems likely, however, that future federal policy will move according to this new paradigm.
  • 37. 36 Canada’s Shale Gas Resources: “Game Changer” or “Bridge too Far?” 2012 b. Information and Communication Infrastructure i. Phone Network Networks Mobile Broadband The Canadian Radio-television Telecommunications Commission (CRTC)s Communications Monitoring Report, published in September 2012, indicated there were 13.2mn mobile broadband subscribers at the end of 2011, making up 48% of all mobile subscribers. The CRTC reported there were 10mn mobile broadband subscribers in the country at the end of 2010 and we previously highlighted that prior year data were not included for comparison. Of the 13.2mn mobile broadband subscribers, 12.0mn were served by standard mobile broadband services and the remainders were dedicated mobile broadband connections. The CRTCs mobile broadband definition includes 3G (and 3G equivalent), HSPA+ and LTE. Both 3G and HSPA+ achieved an availability of 99% of all households at the end of 2011, up from 98% and 97% respectively. Meanwhile, LTE had a respectable 45% availability at the end of 2011. 3G/HSPA SaskTel was the first to launch a 3G service in August 2005, with Bell Wireless and Telus following before the end of the year. Upgrades from their existing CDMA networks saw the CDMA 1xEV-DO standard launched across the network, with MTS Mobility following suit in 2006. Rogers Wireless was the last to launch but its services used the GSM-based HSDPA technology when launched in November 2006. In December 2008, Rogers announced the completion of its nationwide rollout of HSDPA; by the end of 2010, its UMTS/HSPA+ network covered 88% of the Canadian population and was able to provide data access rates of up to 21Mbps. Efforts to increase the capacity of its network continue, even as it turns to 4G technologies such as LTE.
  • 38. 37 Canada’s Shale Gas Resources: “Game Changer” or “Bridge too Far?” 2012 In Q211, Rogers began a CAD80mn investment to further enhance its wireless voice and data network in maritime Canada, extending its HSPA+ coverage to almost 1mn more people across Nova Scotia, New Brunswick and Prince Edward Island, a 130% increase over the existing population coverage of our network in those provinces. Earlier, in February 2011, Rogers and MTS jointly rolled out their HSPA+ networks, providing 96% coverage of the population of the Manitoba region. Despite networks being built on top of their existing CDMA bases, Telus and Bell announced in October 2008 that they would jointly build an HSPA network, sharing the expected CAD1bn cost. The network was built by Chinas Huawei Technologies and Nokia Siemens Networks (NSN). The contracts with these vendors include additional software, hardware and cell towers on top of the other infrastructure required by the build-out. The shared platform went live in November 2009, much earlier than planned. The decision to move to a W-CDMA platform is driven by the lower costs of handsets and wider range of models available. As GSM-based subscribers make up over 80% of the worlds mobile customers, there are significant economies of scale that Telus and Bell are hoping to take advantage of. The companies are also keen to add many of the industrys latest handsets and related devices that make explicit use of high-speed infrastructure HSPA. Devices are increasingly being used to lure customers away from rival networks. In November 2010 Bell announced plans to launch download speeds of 42Mbps using its HSPA+ network. Both Bell and Telus continued to invest in network capacity and presence expansion initiatives throughout 2011. LTE Bell formally launched its commercial LTE service in parts of Toronto, Mississauga, Hamilton, Kitchener-Waterloo and Guelph in mid-September 2011, and added Yellowknife in December 2011. In February 2012 Bell announced it had added seven more urban centres to its LTE coverage: Montréal, Québec City, Ottawa, London, Calgary, Edmonton and Vancouver join those in the Greater Toronto Area (GTA), Halifax, Hamilton, Kitchener-Waterloo, Guelph, Belleville and Yellowknife. By August 2012, Bell had completed the first phase of its LTE network expansion in Manitoba, with services available to approximately 70% of Manitobans.
  • 39. 38 Canada’s Shale Gas Resources: “Game Changer” or “Bridge too Far?” 2012 The timing of broader rural and remote coverage deployments would be contingent on the outcome of the auction of 700MHz spectrum, which is due to take place in early 2013. At launch, Bell LTE customers could buy dual-mode LTE/HSPA+ Turbo Sticks (plug-in wireless routers, or dongles) for use with laptops. However, in Q411, the company launched the LGOptimus LTE. More LTE-enabled smartphones and mobile computers are expected to be launched in 2012. Telus, too, is deploying an LTE-based 4G network to complement the jointly owned HSPA platform, which it launched in February 2012. The company completed field tests in 2011 and submitted a request to the regulator to permit network construction from H211. Telus LTE network operates on advanced wireless services (AWS) spectrum, acquired by the company for CAD882mn in Industry Canadas 2008 auction. Telus LTE services compliment its HSPA+ network, which it launched in March 2011, in the Greater Vancouver area, Calgary, Edmonton, Fort McMurray, Whistler, Camrose, Winnipeg, and the Greater Toronto area. Dual-cell capable devices available to Telus customers include the Sierra WirelessAirCard 319U 4G Internet Key and the Huawei E372 Mobile Internet Key. The dual-cell HSPA+ platform offered access speeds of up to 42Mbps. In announcing the HSPA+ expansion, Telus noted that its investments in the technology had been made to provide an optimal transition to LTE. The firm has promised maximum download speeds of up to 75Mbps, averaging at between 12-25Mbps. Fourteen metropolitan areas have already started using the service and Telus plans to roll out its 4G coverage to more than 25mn customers in Canada. Huawei signed contracts with Telus to provide LTE radio access network upgrades across Canada in February 2012. It has also signed a contract with Bell for a similar LTE RAN kit. No substantive details were provided about either contract. In August 2012, Telus announced that its LTE network was operation in Burnaby, New Westminster, West Vancouver, North Vancouver, South Delta and Vancouver. The operator is looking to provide coverage for 90% of the provinces population by end-2012.
  • 40. 39 Canada’s Shale Gas Resources: “Game Changer” or “Bridge too Far?” 2012 In January 2012 Rogers announced that it expanded its LTE coverage area in Montreal to now reach Laval, Terrebonne, Brossard, Longueuil and Vaudreuil. It also revealed plans to expand 4G coverage to more than 25 additional cities by the end of 2012, to reach 20mn customers. Rogers announced in August 2012 that its LTE network was operational in Moncton, making the operator the first to deliver LTE services in New Brunswick. Rogers has invested CAD20mn in its wireless network in New Brunswick and the development further expands Rogers LTE network in Atlantic Canada, adding to cities including Halifax and St. Johns. LTE services in Calgary and Halifax went live in April 2012 while commercial services in St Johns started in February 2012. At the beginning of September 2011, SaskTel said that it was committing itself to the deployment of 4G+ LTE technology. The network will be built alongside and interwork with the HSPA+ platform. The company said that work had begun on LTE planning, infrastructure development and internal systems. LTE will be deployed to other urban and rural areas starting in 2013 based on the demand for incremental data services, and it is anticipated that voice- optimised LTE will begin to be deployed in 2013. A supplier for LTE infrastructure had not been identified at the time of writing, though BMI would expect NSN and Huawei to secure the contracts. In September 2012, SaskTel announced it has awarded an LTE trial contract to Huawei for TD-LTE-based fixed wireless services in Saskatchewan. The trial will run from end- December 2012 to August 2013. Canadas smaller operators have not wanted to get left behind in the race to boost the expansion of 3G and 4G networks. Wind Mobile - an operator that is little more than a year old - announced in February 2011 that it had conducted a successful live trial of an LTE network, and had also introduced high-definition voice calling over its network. Following these tests, the operator claimed that its network was now capable of migrating to 4G technologies. However, following the auction rule announcement of March 2012, Wind announced it may not bid in the upcoming spectrum auction. CEP, Anthony Lacavera, stated that the10MHz bands of spectrum would not be sufficient to build an adequate LTE network capable of competing with the larger players. This is in contrast to the attitude to that of MTS, which, following the
  • 41. 40 Canada’s Shale Gas Resources: “Game Changer” or “Bridge too Far?” 2012 announcement, Stewart Lyons, Mobilicitys chief operating officer, said: Well be there, well be bidding 100 per cent and well be bidding aggressively. Key Market Developments SaskTel Introduces Commercial FTTP Services SaskTel introduced commercial FTTP high-speed broadband services, under the infiNET banner. The FTTP service offers data speeds of up to 200Mbps/60Mbps (download/upload). The FTTP service launch is part of a seven-year CAD670mn investment programme. The operator plans to deploy FTTP in nine of the biggest urban centres of SaskTels home province - Saskatoon, Regina, Moose Jaw, Weyburn, Estevan, Swift Current, Yorkton, North Battleford and Prince Albert by end-2017. The operator expected that more than 40,000 homes will be equipped with FTTP by end-2012. Telus Ownership under Scrutiny Canadas Globalive (Wind) has submitted a filing to the CRTC, the countrys telecoms regulator, accusing Telus of exceeding foreign ownership rules for telecommunications companies operating in the country. Foreign ownership cannot exceed 33.3% of shares in operators under Canadian law, and Wind has accused Telus of having around 48% foreign ownership. Although Telus contests this, BMI believes the move may help encourage greater transparency in shareholder structure, which would benefit the market. Astral Takeover To Benefit Bell - CRTC Approval Pending Despite a change to the law in March 2012, which allowed carriers with less than 10% market share to exceed the 33.3% ownership rule, the larger operators in the country, including Telus, were not included in the ruling. The move was to encourage competition in a market where three carriers, Bell, Rogers and Telus, hold 93% of the market between them. Telus has 28.4% of the Canadian mobile market, considerably higher than the 10% cut-off. On March 19 2012 Bell Canada revealed plans to acquire Astral Media for CAD3.38bn. The transaction will see Bell take ownership of 100% of Astrals non-voting shares at nearly a 40%
  • 42. 41 Canada’s Shale Gas Resources: “Game Changer” or “Bridge too Far?” 2012 premium on trading price. BMI believes the move is a good strategy on Bells part as it will leave the company well positioned to cater to growing demand for mobile content. However, we raise concerns that the deal may not pass regulators on anticompetitive grounds. Astral is the eighth largest media outlet in Canada, operating 22 TV channels and 84 radio stations, as well as 100 websites and other digital media content. The proposed takeover will integrate Astrals operations with Bell Media, which currently controls CTV, Canadas oldest and largest private broadcast television network, among other broadcasting content. BMI believes this is a sensible acquisition on Bells part, as it will facilitate Bell Canadas access to content. It will also cut capital expenditure considerably - currently, Astral is the single largest recipient of Bells expenditure on TV content. FIXED LINE As is the general trend in most markets, the fixed-line market in Canada continues to decline. The principal operators have reported a slow, but steady fall in recent quarters, with any market growth being generated by smaller operators. During Q212 the number of fixed-line subscribers fell further, decreasing 6.0% y-o-y. This decline had been factored in during our previous forecast adjustment, and we have largely maintained our expectation with 16.754mn fixed-line subscribers in the country at end-2012, a penetration rate of 48.3%. At the end of 2011, the number of fixed-line subscribers in Canada fell to 17.270mn or 50.3% penetration. Fixed-line penetration will fall below 50% in 2012 and will continue to on a downward trajectory through our forecast period. Not only have new mobile operators heightened price competition, which can only serve to lure more customers away from fixed-line connections, but smaller cable and broadband operators have turned to fixed-line services to boost income, primarily with bundled packages. BMI continues to believe that even the major operators triple-play services are not stemming the overall downward trend, although it is clear that such offerings have at least slowed the rate of decline. Additionally, while the subscription numbers may be supported by operators bundling strategy, we believe actual service usage continues to decline. Further, wireless is increasingly important, and less expensive to roll out in
  • 43. 42 Canada’s Shale Gas Resources: “Game Changer” or “Bridge too Far?” 2012 more remote regions, which will continue to augment the mobile markets lead over the fixed- line market. Canadas fixed-line penetration rate is higher than many developed markets and will remain so as there are regions that have more limited mobile infrastructure. While such infrastructure is expanding, fixed-line connections will remain an important part of the telecoms market and the number of lines in service will stay reasonably high. By 2016, BMI expects the market will have declined to 13.631mn lines, with a 37.9% penetration rate. ii. Broadband Broadband remains one of the strongest sectors within the market and is key to maintaining interest in fixed-line services as growth continues at a strong pace in Canada. Triple-play options have also encouraged take-up of broadband as subscribers see significant discounts through the bundling of services. The CRTC reports that approximately 13.2mn mobile broadband subscribers were served by mobile operators at the end of 2011. CRTC reports that there were around 500 active players in Canadas broadband and internet services market in 2011, generating total revenue of CAD7.2bn; this represented a 6.3% increase from CAD6.8bn in 2010. Access and transport revenue totalled CAD6.4bn in 2011, versus CAD6.0bn in 2010, with residential services accounting for 77% of that part of the market in 2011. The top five major ISPs, including affiliates, accounted for 76% of access revenue in 2011, unchanged y-o-y, reported the regulator. Cable operators accounted for 51% of revenue in 2011, up from 50% in 2010. Incumbent local telephone companies accounted for 37% of revenue in 2011. Meanwhile, network upgrades helped improve high-speed connection penetration among Canadian households, encouraging subscribers to download and upload more data. On average, 17.9GB of data were downloaded by each residential subscriber every month in 2011, up from 14.8GB in 2010. Meanwhile, on average, 3.8GB of data were uploaded by every residential subscriber each month in 2011 (3.7GB in 2010).
  • 44. 43 Canada’s Shale Gas Resources: “Game Changer” or “Bridge too Far?” 2012 Canada Broadband Market By Operator (000) % chg y-o-y Market Q111 Q211 Q311 Q411 Q112 Q212 (Q211-Q212) Share, Q212 e = BMI estimate. Source: BMI, operators Bell Canada 2,110 2,112 2,111 2,113 2,104 2,104 -0.4 18.8% Shaw* 1,848 1,860 1,877 1,888 1,907 1,906 2.5 17.0% Rogers Cable 1,698 1,729 1,768 1,793 1,806 1,815 5.0 16.2% Telus 1,183 1,196 1,218 1,242 1,298 1,315 9.9 11.7% Vidéotron 1,267 1,267 1,306 1,333 1,341 1,341 5.8 12.0% Bell Aliant 851 855 892 896 902 906 6.0 8.1% Manitoba Telecom Services (MTS) 185 186 187 189 190 190 2.0 1.7% Cogeco* 586 593 601 609 626 629 6.0 5.6% Other (e) 867 910 946 972 990 1,000 9.9 8.9%
  • 45. 44 Canada’s Shale Gas Resources: “Game Changer” or “Bridge too Far?” 2012 Canada Broadband Market By Operator (000) % chg y-o-y Market Q111 Q211 Q311 Q411 Q112 Q212 (Q211-Q212) Share, Q212 Total 10,597 10,707 10,906 11,034 11,163 11,206 4.7 100.0% The CRTCs Communications Monitoring Report 2011 suggests that cable connections accounted for 55% all residential internet accesses in 2011, versus 50% in 2007. Telecoms operators xDSL networks accounted for another 39% (38% in 2007) while dial-up connections accounted for 2% (down from 10% in 2007). Alternative platforms, such as satellite, Wi-Fi, powerlines and fibre accounted for the remaining 4% of accesses in 2011 (2% in 2007). The same report noted that cable connections accounted for just 20% of business internet connections in 2011 (10% in 2007), while xDSL led the field with 43% (46% in 2007). Canadian businesses are seeing the benefits of fibre: 27% of business internet connections were via fibre in 2011 (28% in 2009), while dial-up platforms served just 2% of customers (7% in 2007). Other technologies accounted for the remaining 8% in both periods. Market Shares Unsurprisingly, it is the largest fixed-line and cable-TV operators that top the fixed broadband market with Bell Canada. However, competition in the broadband market is fierce, with operators seeing the service as a means of getting subscribers to spend more on their accounts, as well as encourage greater loyalty. While Bells lead in the market is quite strong, it has been continually declining, from 22.3% in 2008 to 18.8% in Q212. Smaller operators, such as Bell Aliant, MTS and Cogeco, have reported stronger growth rates, although they are starting from a smaller base. Other, smaller operators have grown 9.9% y-o-y. The second largest operator, Shaw, had 17.0% of the market. However, as seen in the pay-TV market, smaller players are reporting strong growth and rapidly catching up to Bell. Shaws combination of HDTV and high-speed broadband options seems to be attractive to subscribers
  • 46. 45 Canada’s Shale Gas Resources: “Game Changer” or “Bridge too Far?” 2012 and is creating a significant boost to Shaws market shares across sectors. New services such as its Plan Personalizer also add value to the operators offerings, while Shaw has also cut the price of its broadband package. Rogers Cable maintains its third-ranked position with a market share of 16.2%. In January 2011 Rogers boosted its presence with the acquisition of Atria Networks, a fibre-optic data service network in Ontario. Canada Business Internet Access By Technology 2011 Source: CRTC WiMAX Investment focus remains on providing higher speed services to subscribers. As customers download increasingly media-rich content and use online services more and more, providing the latest technologies and services is important for customer satisfaction, as well as maintaining a competitive edge. This has seen operators increase their spending plans and invest heavily in next generation technologies such as WiMAX and fibre-optic cable. While fibre provides a faster download speed, WiMAX is a real option for Canadian operators given the large distances that must be covered in order to reach some areas of the population. That said, few operators have yet to put WiMAX networks into commercial service and many trials of the technology have either
  • 47. 46 Canada’s Shale Gas Resources: “Game Changer” or “Bridge too Far?” 2012 been abandoned or indefinitely postponed while operators consider alternative propositions, such as the mobile broadband capabilities of HSPA and LTE. In December 2011, Rogers announced it would discontinue its portable internet service, based on WiMAX technology, form March 2012. The service, operating over the Inukshuk Wireless network, mostly targeted rural customers who are unable to sign up for the cheaper DSL or cable internet offerings. In June 2010 Telus announced the launch of its Optik High Speed and Optik TV brands, both of which have served to boost subscriber numbers. Telus had an 11.2% broadband market share in Q311, reporting subscriber growth of 6% y-o-y and market share steady on last quarter. In March 2011, Telus announced plans to invest CAD650mn in Alberta to expand and enhance its wireless and wireline networks. Later that month, it went on to describe its plans to spend CAD670mn in British Columbia and CAD220mn in Quebec to expand its network further. In December 2011 it reported it was to invest CAD875,000 on expanding its WiMAXnextwork to more than 1,700km of Highway 1. The company is investing CAD670mn in its 4G networks across British Columbia. In April 2009, I-NetLink Wireless contracted Redline to supply it with RedMAX equipment to serve 150 communities in rural Manitoba with wireless broadband services. The RedMAX network, which was expected to be the largest 3.5GHz WiMAX network in Manitoba when completed, would also allow I-NetLink to expand its network to areas where high capacity services were not available due to lack of fibre and limited interest from larger carriers. The WiMAX network uses I-NetLinks 3.5GHz licensed spectrum holdings and extended its existing infrastructure of 135 privately owned and operated towers, making I-NetLink the second largest telecommunications provider in the province. In September 2009, Motorolas Home & Networks Mobility division was awarded a contract by Craig Wireless Systems to build a new 802.16e WiMAX network in Vancouver, British Columbia. Motorola said the system would be the first commercial deployment of its mobile WiMAX technology in Canada, and that it followed a recent decision by Industry Canada decision to award a Broadband Radio Service Licence to Craig Wireless. Motorola provided its end-to-end WiMAX platform, including base stations, wireless access controllers and an operation and maintenance centre. Motorola also provided supporting services for network
  • 48. 47 Canada’s Shale Gas Resources: “Game Changer” or “Bridge too Far?” 2012 design, planning, installation and optimization for end-to-end integration of the network, which operates in the 2.5GHz spectrum band. The value of Motorolas contract was not disclosed. However, in April 2010, it was announced that Craig Wireless Systems decided to exit the Canadian wireless broadband market and sold its SkyWeb business and wireless spectrum covering Manitoba and British Columbia for CAD80mn to Inukshuk Wireless Partnership, a joint venture between affiliates of Rogers Communications and Bell Canada. In November 2010 wireless internet solutions provider YourLink (a subsidiary of Vecima Networks) announced it would sell its licences in Saskatchewan to Inukshuk Wireless Partnership. The licences are worth CAD14mn and the agreement is subject to regulatory approval. In June 2010, TeraGo Networks agreed to purchase licences for 24GHz spectrum covering six of the largest markets in Canada. TeraGo exercised its option to purchase these spectrum assets for a gross purchase price of CAD5mn under an existing lease arrangement entered into in March 2007 with Mobilexchange Spectrum. This spectrum is used by TeraGo for Ethernet- based broadband links for business, government and cellular backhaul. The purchased spectrum includes 240MHz in each of Montreal, Ottawa and Toronto, as well as 80MHz in each of Edmonton, Calgary and Vancouver. Following completion of this purchase, TeraGo will own 76 spectrum licences in the 24GHz and 38GHz bands. TeraGo Networks has been offering carrier-grade wireless broadband and data communications services since 2001. The operator owns and manages its wireless IP network in 43 major markets across Canada, serving more than 4,800 customer locations. Broadband Canada: Connecting Rural CanadiansIn May 2010, Industry Canada announced that 52 projects across Canada had been conditionally approved for funding under the Broadband Canada: Connecting Rural Canadians programme. These projects, which will collectively receive a federal contribution of around CAD76.7mn, will bring broadband access to an estimated 169,000 households currently underserved by high-speed internet services. The following companies were conditionally approved for funding as part of this announcement: ABC Communications; Barrett Xplore; Corridor Communications; Cybernet Communications; FlexiNET Broadband; GwaiiTel Society; Manitoba NetSet; Naskapi
  • 49. 48 Canada’s Shale Gas Resources: “Game Changer” or “Bridge too Far?” 2012 Imuun;; Northern Broadband; Northwestel; OmniGlobe Networks; OmniGlobe Broadband; PCC Communications; Vidéotron; and WhapmagoostuiEeyouch Economic Development Corporation. This was the first tranche of funding to be offered under the programme. Others involving additional geographic areas, regions, provinces and companies will be made in the near future. As part of Budget 2009 - Canadas Economic Action Plan, the Canadian government provided CAD225mn over three years beginning in 2009/2010 for Industry Canada to develop and implement a strategy to extend broadband coverage. By far the biggest component of this strategy is the rural connectivity project. Of all the companies to receive funding in this first round, Manitoba NetSet is the most intriguing. The consortium consists of nine key rural ISPs and will use the funding to expand services by 5,330 households. The group is led by I-NetLink Wireless, which will leverage its 150 towers covering a substantial portion of Manitoba. I-NetLink Wireless claims there are 12,000 households in southern Manitoba that do not have access to broadband services. In July 2011, Huawei Technologies was awarded a contract to build a WiMAX network for Manitoba NetSet. The network, which is a two-phased project, will extend WiMAX coverage to rural areas of Manitoba, providing essential broadband internet access to more than 5,000 new households within the first year. Huaweis initial engagement with Manitoba NetSet will cover the southern portion of the province reaching from the Saskatchewan border to the west, the Ontario border to the east, the US border to the south, and services will also be made available to regions as far north as The Pas. The network will use Huaweis SingleRAN base transceiver stations (BTS). In September 2011, Manitoba NetSet contracted Tellabs to provide wireless broadband solutions for its rural wireless broadband project. By the end of 2011, more than 500 Manitoba communities and municipalities will be served by the Tellabs SmartCore 9100 platform. The platform, acting as the packet core in the network, will manage subscriber IP traffic, and assist with increased content and capacity needs through smart analytics and traffic management. Initially, Tellabs and Manitoba NetSet will base the network on WiMAX technology. When LTE
  • 50. 49 Canada’s Shale Gas Resources: “Game Changer” or “Bridge too Far?” 2012 standards become available in Canada, the network can be software upgraded to LTE. The network will use Tellabs technology to consolidate network services and create open network architecture. In August 2010, the CRTC announced its plans to deploy broadband internet to 287 rural and isolated communities. The plan will be developed over four years, with telecoms operators investing CAD412.9mn to expand their networks. The plan states that Bell and Bell Aliant will connect 112 communities in Ontario and Quebec, Telus will connect 159 communities in British Colombia, Alberta and Quebec and MTS will connect 16 areas in Manitoba. The companies themselves, using funds collected in their deferral accounts, are paying for the infrastructure. In October 2010 Rogers agreed to acquire local broadband services provider Atria Networks for CAD425mn), in a move that will improve Rogers offerings to business clients. Atria owns 5,600km of fibre-optic network that reaches nearly 4,000 buildings in Ontario. The deal was closed in January 2011. SaskTel, meanwhile, announced in April 2011 its plans to invest CAD27mn in its Rural Infrastructure Program, CAD15mn of which will be used to upgrade internet speeds in isolated communities. In June 2011, Bell Aliant announced the expansion of its FibreOP service in New Brunswick. In December 2011, Israeli WiMAX vendor Alvarion has announced the successful completion of its 4Motion solution tests over Canadian rural broadband services provider XplornetsWiMAX infrastructure. The Israeli vendor claims that the test was the first of its kind in the country, showing a migration path from WiMAX to TD-LTE. Alvarion is committed to catering to the unique requirements of rural broadband operators, including flexibility to take advantage of the full scope of the 4G device ecosystem. MTS also announced fibre-optic expansion, selecting US-based network specialist Ciena to supply equipment to upgrade its national optical fibre transmission network. The move will enable the operators network to support 100Gbps data transport. The upgrade will allow the operator to cater to the rising demand for higher speed services in the country.
  • 51. 50 Canada’s Shale Gas Resources: “Game Changer” or “Bridge too Far?” 2012 II SHALE GAS 1. OVERVIEW Depending on the nature of the rocks where hydrocarbon accumulations are found, deposits are divided into conventional and unconventional. Production of unconventional gas is more expensive and more challenging in terms of technology.Unconventional gas resources include shale gas, tight gas, coal-bed methane, and gas hydrates. The current advanced technology made gas production from unconventional sources commercially possible.1 The use of horizontal drilling in conjunction with hydraulic fracturing has greatly expanded the ability of producers to profitably produce natural gas from low permeability geologic formations, particularly shale formations. Application of fracturing techniques to stimulate oil and gas production began to grow rapidly in the 1950s, although experimentation dates back to the 19th century. Starting in the mid-1970s, a partnership of private operators, the U.S. Department of Energy (DOE) and the Gas Research Institute (GRI) endeavored to develop technologies for the commercial production of natural gas from the relatively shallow Devonian (Huron) shale in the Eastern United States. This partnership helped foster technologies that eventually became crucial to producing natural gas from shale rock, including horizontal wells, multi-stage fracturing, and slick-water fracturing.2 2. SHALE GAS IN NORTH AMERICA In the long term, gas production in North America will still follow an upward trend, due to associated gas produced from tight oil production and shale gas projects in western Canada. The development of shale gas resources will reverse Canadas falling gas production trend; this looks increasingly likely after Apache Corporationclaimed it had made the worlds largest shale gas discoveries in British Columbia – with recoverable gas estimates at 1.34trn cubic meters (tcm) – in June 2012. The development of this windfall is likely to be predicated upon access to new international markets with a number of plans to construct LNG export facilities on Canadas west coast.3 1 2 3 Canada Oil and Gas Report Q4 2012.
  • 52. 51 Canada’s Shale Gas Resources: “Game Changer” or “Bridge too Far?” 2012 While production volumes from shale gas resources in Canada are currently insignificant compared to United States, there is substantial potential for future growth in Canada. Energy companies, spurred by shale gas discoveries, added C$220 million to British Columbia‘s land sale coffers in the September 2008 auction. According to the Ministry of Energy, Mines and Petroleum Resources, British Columbia closed out the 2008-09 fiscal year with an all-time high of C$2.4 billion sold—more than doubling the previous record set in 2007.4 The following figure illustrates major shale gas basins in North America. There are dozens more that are considered minor and are only now being studied for their gas potential. North American Shale Gas and Shale Oil Plays 4 North American Natural Gas Market Dynamics: Shale Gas Plays in North America – A Review, February 2011, pp. 2.
  • 53. 52 Canada’s Shale Gas Resources: “Game Changer” or “Bridge too Far?” 2012 3. SHALE GAS IN CANADA a. Key facts Shale gas is emerging as the new low-cost source of natural gas in North America. In Canada, potential and producing shale gas resources are found in British Columbia, Alberta, Saskatchewan, Manitoba, Ontario, Quebec, New Brunswick and Nova Scotia. Most of the current drilling and production activities are occurring in northeast British Columbia in the Montney and Horn River shale basins. Natural gas is a relatively clean-burning, abundant and efficient source of energy. It has become a popular fuel for residential, commercial and industrial applications. Natural gas is an important transition fuel for a low-carbon economy, because it is cleaner burning than any other fossil fuel and is in abundant supply. Current research estimates that the natural gas supply in North America, largely in the form of shale gas, will last more than 100 years. Natural gas offers the potential to replace fuels that produce more greenhouse gases (GHGs) and that are currently used for power generation, heating and transportation. For example, GHG emissions from natural gas combustion are approximately 30 percent cleaner than those from oil and 45 percent cleaner than those from coal. Technological advancements in drilling (long-reach horizontal well bores) and completion techniques (multistage hydraulic fracturing) have allowed commercial production of natural gas from shales, which has increased the long-term outlook for the supply of natural gas in North America. Hydraulic fracturing has been used by the industry to safely stimulate oil and gas production in North American conventional reservoirs for more than 60 years. Although shale gas development is a relatively mature industry in the United States (with more than 40 000 producing wells), shale gas is still in its nascent stages in Canada.
  • 54. 53 Canada’s Shale Gas Resources: “Game Changer” or “Bridge too Far?” 2012 b. Canada shale gas market overview Canada is a major energy consumer and an even larger producer. Almost all of Canada‘s energy exports – oil, gas, electricity and uranium – go to the US and it is among the top sources for US oil imports, as well as being the biggest provider of US gas and power imports. Canada is expected to have produced about 149.9bcm of gas in 2011, making it the world‘s third largest producer (after the US and Russia) and second largest exporter (after Russia). 5 Gas production from the Western Canada Sedimentary Basin (WCSB) will decline. In fact, in two of the three scenarios, total gas production will decline. However, there are opportunities for the development of gas reserves in northern and offshore regions, including shale gas plays in the Horn River Basin and MontneyShales in north-eastern British Columbia, the Colorado Group in Alberta and Saskatchewan, the Utica Shale in Quebec, and the Horton Bluff Shale in New Brunswick and Nova Scotia. However, at the moment a moratorium has been placed on hydraulic fracturing (fraccing) in Quebec. The momentum to establish LNG export facilities in Canada is picking up, and with regulatory support could see Canada become a net LNG exporter. A quarterly report made by Business Monitor International (BMI) released on October 31, 2012 named CANADA OIL & GAS REPORT Q4 2012 says that conventional gas production, especially in Alberta and Saskatchewan, will decline from an estimated 149.9bcm (billion cubic meters) in 2011 to 148.7bcm in 2012, while unconventional gas production, or shale gas output, particularly from British Columbia, will growth, reversing the trend. Additionally, the forecast made by this report about gas production in Canada projects an increase to 157.0bcm in 2016 and 171.7bcm by 2021. 5 Canada Oil and Gas Report Q4 2012.
  • 55. 54 Canada’s Shale Gas Resources: “Game Changer” or “Bridge too Far?” 2012 According to this report in June 2012, Apache Corporationclaimed that it made the world’s largest shale gas discovery in the Liard Basin, British Columbia, with recoverable natural gas estimates at 1.34trn cubic meters (tcm)1 The same report says that gas demand will rise as the proportion of gas increases in Canada‘s energy mix. Consumption growth will also be propelled by the rising energy use at the oil sands facilities, as gas powers much of the oil sands production. Gas consumption is set to grow from 86.8bcm in 2012 to 97.2bcm in 2016. This upward trend will continue, with gas consumption expected to hit 112.6bcm by 2021. 1
  • 56. 55 Canada’s Shale Gas Resources: “Game Changer” or “Bridge too Far?” 2012 c. Canada’s unconventional potential in shale gas6 Many of the upstream gas players are looking to Canada‘s unconventional potential in shale gas, hoping to replicate the US‘ shale gas bonanza. Shale gas plays include: The Horn River Basin and MontneyShales in north-eastern British Columbia. The Liard Basin can also be added to this list, after Apache made what it claimed as the world‘s largest shale gas discover in its assets there, with recoverable natural gas estimates at 1.344trn cubic meters (tcm). The Colorado Group in Alberta and Saskatchewan. The Utica Shale in Quebec. The Canadian Society for Unconventional Gas (CSUG) estimates that in total the Utica shale formation – large portions of which lie in Quebec – could hold more than 1.1tcm of gas. The Horton Bluff Shale in New Brunswick and Nova Scotia. In May 2010, Corridor Resources chief executive Norm Miller told reporters that the amount of shale gas discovered by the company in New Brunswick (NB) was of a ‗magnitude larger than other shale plays on the continent‘. The monetization of these resources could help Quebec reduce its pipeline gas imports from Alberta, which supplies almost Quebec‘s entire gas requirement. However, Quebec‘s shale gas potential is not expected to be tapped in the near future due to a moratorium on fraccing over environmental concerns. 6 Canada Oil and Gas Report Q4 2012.
  • 57. 56 Canada’s Shale Gas Resources: “Game Changer” or “Bridge too Far?” 2012 Not only has Canada‘s shale gas potential drawn interest from majors such as Shell and ConocoPhilips, it also has attracted the attention and investment of several major Asia-based upstream players: Korea‘s sole LNG wholesale retailer Korea Gas Corporation (Kogas), in a farm-in deal with EnCana in its shale gas assets in February 2010. Mitsubishi Corp with two deals: the first in August 2010 with Penn West Energy in the Cordova Embayment area, British Columbia, and the second in February 2012 with EnCana in Cutbank Ridge, which spans the Montney, Cadmim and Doig formations.
  • 58. 57 Canada’s Shale Gas Resources: “Game Changer” or “Bridge too Far?” 2012 Chinese national oil company (NOC) PetroChina, which acquired a 20% stake in Shell‘s Groundbirch shale gas asset in British Columbia in February 2012; Malaysian NOC Petronas launched a US$4.7bn takeover bid for Canadian shale gas specialist Progress Energy in June 2012. It increased its offer to US$5.15bn in July after an unsolicited third party proposal for Progress. In July 2012, CNOOC made a US$15bn bid for Canada‘s third largest oil and gas producer Nexen. The latter‘s Horn River and Cordova Basin assets could hold between 112bn cubic meters (bcm) to 420bcm of recoverable contingent resources, while prospective resources for its Liard Basin properties are estimated at 140-644bcm With much investment ploughed into shale gas exploration, and proposed LNG export facilities in Canada gaining momentum, the commercial case for developing Canada‘s shale gas assets is strengthening.7 The forecast made by Business Monitor International report says that ―Canada‘s proven oil reserves will fall from 176.7bn bbl in 2012 to 159.7bn bbl in 2016, while proven gas reserves will increase from 1.8tcm in 2012 to 1.9tcm in 2016 as discoveries, mainly from shale deposits, are booked as reserves. Exploration breakthroughs in offshore Canada and shale resources pose considerable upside risks in the BMI forecasts. d. Infrastructure North America has the potential to see net exports of gas rise by 14.36% between 2012 and 2021 as gas output rises more than proportionately to consumption; in reality, actual export 7 Canada Oil and Gas Report Q4 2012.
  • 59. 58 Canada’s Shale Gas Resources: “Game Changer” or “Bridge too Far?” 2012 gains will be much less than this due to regulatory hurdles and a lack of adequate infrastructure. North Americas spare capacity for exports will come from Canada; its lack of infrastructure is a significant downside risk to the realization for export potential. Canada needs to advance key infrastructure projects, such as expanding the capacity of its oil and gas pipeline systems and constructing liquefaction and export terminals for liquefied natural gas. This will help it move oil and gas more effectively across the country to refineries and to foreign markets, such as energy-hungry Asia. Otherwise, there will be an over-supply in Canada, exacerbated by the fall in imports expected from its traditional export market, the US, as a result of the latters own growth in domestic production. Likewise for the US, the breakneck speed at which oil and gas production has been taking place will see its imports fall and companies increasingly contemplating the export of this output. Interest in exporting gas has risen as companies seek to capitalize on the arbitrage between global and domestic gas prices. e. Competitive Landscape Canada has a fully privatized energy sector, with the last federal government shares in Petro- Canada sold in 2004. The country has a large, competitive upstream oil and gas segment featuring domestic independents and integrated companies, plus direct and indirect participation by international oil companies (IOCs). The downstream segment is shared by IOC-controlled domestic companies and the main domestic firms such as Suncor and Husky. The main domestic gas company is Encana, which, in late-2009, spun off its Cenovus oil unit to concentrate on core activities. In 2011, Encana produced 15.0bcm of gas from its Canadian interests. Encana‘s total Canadian liquids output was about 14,500b/d in 2011. Encana has been selling various Canadian conventional properties.
  • 60. 59 Canada’s Shale Gas Resources: “Game Changer” or “Bridge too Far?” 2012 4. REGULATION AND LICENSING Under Canada‘s Constitution, provinces own onshore resources within their borders and are responsible for regulating their development.8 However, the National Energy Board is authorized to make orders respecting the allocation of areas, including the determination of the size of spacing units and the well production rates for the purpose of drilling for or producing oil and gas and to exercise any powers and perform any duties that may be necessary for the management and control of oil or gas production.9 a. Canada Oil and Gas Operations Act 10 The purpose of this Act is to promote, in respect of the exploration for and exploitation of oil and gas, (a) safety, particularly by encouraging persons exploring for and exploiting oil or gas to maintain a prudent regime for achieving safety; (b) the protection of the environment; (c) the conservation of oil and gas resources; (d) joint production arrangements; and (e) economically efficient infrastructures. i. Prohibition No person shall carry on any work or activity related to the exploration or drilling for or the production, conservation, processing or transportation of oil or gas in any area to which this Act applies unless (a) that person is the holder of an operating license (b) that person is the holder of an authorization issued, before the commencement of operations, (c) where it is required, that person is authorized or entitled to carry on business in the place where that person proposes to carry on the work or activity. 8 9 10
  • 61. 60 Canada’s Shale Gas Resources: “Game Changer” or “Bridge too Far?” 2012 ii. Licenses and authorizations The National Energy Board may, on application made in the form and containing the information fixed by the National Energy Board, and made in the prescribed manner, issue (a) an operating license; and (b) an authorization with respect to each work or activity proposed to be carried on. The National Energy Board may suspend or revoke an operating license or an authorization for failure to comply with, contravention of or default. iii. Safety of works and activities The National Energy Board shall, before issuing an authorization for a work or activity, consider the safety of the work or activity by reviewing, in consultation with the Chief Safety Officer, the system as a whole and its components, including its installations, equipment, operating procedures and personnel. b. Canada Oil and Gas Operations Regulations11 i. Operating License An application for an operating license may be made by an individual who is 18 years of age or over; a corporation that is registered with the Registrar of Companies pursuant to the Companies Ordinance of the Northwest Territories; and a corporation that is entitled to carry on business in any province. Every application for an operating license shall be in writing; contain the name and address of the applicant; be forwarded to the Chief Conservation Officer; and be accompanied by a fee of $25 made payable to the Receiver General. 11
  • 62. 61 Canada’s Shale Gas Resources: “Game Changer” or “Bridge too Far?” 2012 ii. Safety and environmental protection12 The Board shall grant the well approval if the operator demonstrates that the work or activity will be conducted safely, without waste and without pollution, in compliance with these Regulations. The operator shall take all reasonable precautions to ensure safety and environmental protection. The operator shall ensure that all chemical substances, including process fluids and diesel fuel, waste material, drilling fluid and drill cuttings generated at an installation, are handled in a way that does not create a hazard to safety or the environment. The operator shall ensure that every well that is suspended or abandoned can be readily located and left in a condition that provides for isolation of all oil or gas bearing zones and discrete pressure zones; and, in the case of an onshore well, potable water zones; and prevents any formation fluid from flowing through or escaping from the well-bore. iii. Annual environmental Reports For each production project, the operator shall ensure that, not later than March 31 of each year, an annual environmental report relating to the preceding year is submitted to the Board and includes, for an offshore installation, a summary of the general environmental conditions during the year and a description of ice management activities; and a summary of environmental protection matters during the year, including a summary of any incidents that may have an environmental impact, discharges that occurred and waste material that was produced, a discussion of efforts undertaken to reduce pollution and waste material and a description of environmental contingency plan exercises. 12
  • 63. 62 Canada’s Shale Gas Resources: “Game Changer” or “Bridge too Far?” 2012 iv. Annual safety report The operator shall ensure that, not later than March 31 of each year, an annual safety report relating to the preceding year is submitted to the Board and includes (a) a summary of lost or restricted workday injuries, minor injuries and safety-related incidents and near misses that have occurred during the preceding year; and (b) a discussion of efforts undertaken to improve safety. c. Regulations in Alberta 13 In June 2010, the Albertan government posted a new royalty framework that took effect on January 1 2011. The new policy is aimed at encouraging the use of emerging technologies to explore for Alberta‘s unconventional resources. While royalty rates were raised for conventional oil production, the royalty regime for gas has been made more attractive to encourage unconventional gas production. The royalty rate on gas production ranges between 5% and 36%, again depending on market prices and production volumes. The top 36% rate kicks in with production at 15.9mn cubic metres per day (Mcm/d) and prices at CAD261/Mcm. d. Regulations in British Columbia The brightest spot in Canada‘s new generation upstream prospects is British Colombia, which is seeing arise in drilling in the unconventional gas plays such as the Horn River and Montney shale basins. In early- 2009, British Colombia announced royalty breaks to encourage the construction of infrastructure required to exploit these areas, as well as out a 2% royalty rate on all wells drilled between September 2009 and June 2010. It also announced a 15% increase in the existing royalty deductions for deep gas drilling. 13 Canada Oil and Gas Report Q4 2012.
  • 64. 63 Canada’s Shale Gas Resources: “Game Changer” or “Bridge too Far?” 2012 e. Regulations in Quebec Quebec had hoped to finalize a regulatory oil and gas framework by end-2010 in a bid to encourage exploration work, the province‘s natural resources minister, Nathalie Normandeau, said in April 2010. As oil and gas exploration is a novelty in Quebec, explorers operating in the province fall under the purview of up to six different laws. The stated intent of Quebec‘s authorities is to create a streamlined law specifically to govern oil and gas operations. What Quebec has its eyes on is not oil, however, but natural gas. Owing to its proximity to the Utica shale formation in the US, explorers have been examining Canada‘s shale gas potential. Estimates from the Canadian Society for Unconventional Gas (CSUG) suggest that Utica holds in excess of 1,100bcm of natural gas. Quebec‘s shale hunt, however, has been put on hold. Quebec‘s environment minister Pierre Arcand announced in early March 2011 that no new shale well drilling permits would be issued for 30 months, while a ‗strategic environmental assessment‘ is carried out. The moratorium came after a long-awaited report into the safety of shale gas drilling in the province recommended that drilling should be paused. f. Regulations in the Arctic Offshore14 In December 2010, Canada‘s environment minister said that oil and gas activity in most of the Lancaster Sound, in the eastern Arctic, would be prohibited should the government designate the waterway as a marine conservation area. 14 Canada Oil and Gas Report Q4 2012.
  • 65. 64 Canada’s Shale Gas Resources: “Game Changer” or “Bridge too Far?” 2012 5. ENVIRONMENTAL CONDITIONS Strong environmental concerns will continue to hinder key projects such as the expansion of the TransMountain pipeline and Northern Gateway pipelines. Planned liquefied natural gas (LNG) export terminals are likely to face similar regulatory obstacles.1 a. Greenhouse gas emissions from shale gas15 Lifecycle greenhouse gas emissions from Canadian shale gas are approximately 4% higher than from conventional natural gas production and use. i. Key facts Lifecycle analysis considers all significant greenhouse gas emissions from all stages of production, processing, transportation, and use of a fuel to provide a complete carbon footprint. Natural Resources Canada‘s GHGenius lifecycle analysis tool was used to model the lifecycle greenhouse gas emissions of shale gas. Shale gas in Canada produces on average 4% higher lifecycle greenhouse gas emissions than average Canadian conventional gas3. For the two major shale gas developments currently underway, the results are 1% lower than from conventional gas for the Montney play and 10% higher than from conventional gas for the Horn River play. The large difference is due to the unusually high carbon dioxide content in the Horn River play. Production results from early stages of Canadian shale gas development indicate that these wells will be highly productive, and the incremental emissions produced during horizontal drilling and hydraulic fracturing will be small when spread over the expected lifetime production of a shale gas well. 15
  • 66. 65 Canada’s Shale Gas Resources: “Game Changer” or “Bridge too Far?” 2012 6. WATER USED IN HYDRAULIC FRACTURING With the bulk of frac fluid being comprised of water, ranging between 98 and 99.5 percent of the fluid, water is critical to developing shale gas. For this reason, water usage and management issues, from managing withdrawals, to transporting large volumes, to disposal issues, are important to regulators, whether they are at the federal, state/provincial or regional level. 16 Thus far, most of the water used in shale development is fresh surface water or groundwater. On occasion, water is trucked or piped to the well site, where it is stored in large tanks or large ponds.58 In areas where water demands are high or supply is limited, such as in arid regions or during times of low precipitation, operators are utilizing alternative sources, including recycling recovered water and non-potable brackish water. 1 Frac jobs require a great deal of heavy equipment and supplies. The entire frac job for one well may take a full day and uses 50,000 to 80,000 bbl (2 to 3 million gallons) of water and 1 to 1.5 million pounds of sand. When more than one well is located at the same well pad, fraccing operations can last several days, and the water and sand volumes increase proportionally. Sand is hauled onsite by a fleet of trucks. Water is either piped in from local ponds, streams, or reservoirs constructed by the natural gas operators in cooperation with local communities and landowners or can be trucked in when local water sources are not available.17 Even without numerous tank trucks carrying water, the pad area at a well beingfracced is crowded with heavy equipment. The service companies conducting the frac job will bring multiple engines and pumps, monitoring vans, frac tanks for making the frac fluid mixture and for capturing flow-back water, sand-hauling trucks, and other support equipment. 16 North American Natural Gas Market Dynamics: Shale Gas Plays in North America – A Review, February 2011, pp. 12 17
  • 67. 66 Canada’s Shale Gas Resources: “Game Changer” or “Bridge too Far?” 2012 a. How is drinking water protected? 18 Regulation of the oil and gas sector in Canada is designed to protect water resources during oil and gas development, including tight oil development. Specific regulations vary between jurisdictions, but in all cases steel casing and cement are used to isolate and protect groundwater zones from deeper oil, natural gas and saline water zones. Hydraulic fracturing is a proven technology already used safely in a large proportion of the roughly 11,000 oil and gas wells drilled each year in Canada; this technique is essential to the effective operation of the oil and gas sector; and it is routinely done without negative safety consequences or significant adverse environmental impacts. According to the British Columbia Oil and Gas Commission (BCOGC), the Saskatchewan Ministry of Energy Resources, and the Alberta Energy Resources Conservation Board (ERCB), there has never been a confirmed case of groundwater contamination resulting from hydraulic fracturing in British Columbia, Saskatchewan or Alberta, the three provinces where most oil and gas drilling activity in Canada occurs. 7. GOVERNMENT ENVIRONMENTAL POLICY GAS RESOURCES PRESERVATION ACT (CH.G-4, RSA 2000) (Updated to November 1, 2010) Regulations AR 334/2002 Approval of Short Term Permits Regulation AR 328/2002 Gas Resources Preservation Regulation 18
  • 68. 67 Canada’s Shale Gas Resources: “Game Changer” or “Bridge too Far?” 2012 (Consolidated up to 112/2010) ALBERTA REGULATION 334/2002 Gas Resources Preservation Act APPROVAL OF SHORT-TERM PERMITS REGULATION Ministerial approval 1 The Ministers approval under section 6 of the Act is not required in respect of an application for a permit or an amendment of a permit authorizing the removal of gas, unless the gas is a mixture mainly of ethane. Repeal 2 The Approval of Short-term Permits Regulation (AR 272/95) is repealed. Expiry 3 For the purpose of ensuring that this Regulation is reviewed for ongoing relevancy and necessity, with the option that it may be repassed in its present or an amended form following a review, this Regulation expires on October 31, 2015. AR 334/2002 s3;112/2010 (Consolidated up to 113/2010) ALBERTA REGULATION 328/2002 Gas Resources Preservation Act GAS RESOURCES PRESERVATION REGULATION Definitions 1(1) In this Regulation, (a) "Act" means the Gas Resources Preservation Act;
  • 69. 68 Canada’s Shale Gas Resources: “Game Changer” or “Bridge too Far?” 2012 (b) "Department" means the Department of Energy; (c) "Information" includes a record or return furnished before or after the coming into force of this Regulation to the Board or the Department pursuant to the Act, a regulation under the Act, a permit or an approval of the Lieutenant Governor in Council or the Minister under the Act. (2) For the purposes of section 9 of the Act "core consumer" means (a) a core consumer as defined in the Gas Utilities Core Market Regulation (AR 44/95), and (b) a core consumer as defined in the Municipal Gas Systems Core Market Regulation (AR 93/2001). Exclusion of propane 2(1) Any propane that is removed or that is intended to be removed from Alberta by pipeline or by any other means is excluded from the application of the Act until the exclusion is terminated by general regulation or special order of the Lieutenant Governor in Council. Section 3 GAS RESOURCES PRESERVATION REGULATION AR 328/2002 (2) A permit authorizing the removal of propane from Alberta has no force or effect while the exclusion prescribed in subsection (1) remains in effect, but when the exclusion is terminated, a permit that would have authorized the removal of propane from Alberta is, on the effective date of termination of the exclusion, effective to authorize the removal of propane from Alberta during any unexpired portion of its term that remains after the termination of the period of exclusion. Communication of information 3(1) Section 15(1) and (3) of the Act do not apply in relation to any information obtained by the Board in returns furnished to the Board by or on behalf of a permittee pursuant to a term or condition contained in a permit.
  • 70. 69 Canada’s Shale Gas Resources: “Game Changer” or “Bridge too Far?” 2012 (2) Information obtained by the Minister pursuant to the Act, a regulation under the Act or a condition contained in an approval of the Lieutenant Governor in Council or the Minister under the Act (a) subject to any restrictions imposed by the Minister, may be provided or published by the Minister or the Department in summarized or statistical form if the information is provided or published in such a manner that it is not possible to relate the information to a particular, identifiable permit or permittee; (b) May be communicated, disclosed or made available in (i) Any proceedings under the Act that pertain to the permit, or (ii) Any proceedings in respect of an offence under the Act; (c) May be communicated, disclosed or made available to a person employed in the Department or acting on behalf of the Minister for the purpose of: (i) Evaluating, formulating or administering any policy or program of the Department, or (ii) Administering any enactment under the administration of the Minister; (d) Subject to any restrictions imposed by the Minister, may be communicated, disclosed or made available to (i) The Board for a purpose related to the administration of the Act or for the purpose of assisting the Board to 2 Section 4 GAS RESOURCES PRESERVATION REGULATION AR 328/2002 prepare forecasts pertaining to gas resources in Alberta, or (ii) a person employed in another department of the Government of Alberta for the purpose of
  • 71. 70 Canada’s Shale Gas Resources: “Game Changer” or “Bridge too Far?” 2012 evaluating, formulating or administering any policy or program of that department or administering any enactment under the administration of the Minister of the Crown who is the head of that department; (e) May be communicated, disclosed or made available to (i) The person who furnished the information to the Minister, or (ii) Any other person with the consent of the person who furnished the information to the Minister. Cancellation of permit with consent 4 The Board may, without the approval of the Lieutenant Governor in Council or the Minister, as the case may be, cancel a permit at the request of or with the consent of the permittee. Conditions on permits 5(1) Every permit granted on or after October 15, 1996 is subject to the following conditions: (a) all gas to be removed from Alberta pursuant to the permit shall be measured by or on behalf of the permittee by meters approved by the Board; (b) the relative density, higher heating value and volume of all gas received by the permittee for removal from Alberta pursuant to the permit shall, in a manner approved by the Board, (i) be measured by or on behalf of the permittee at or near the points at which the gas is removed from Alberta, and (ii) be reported to the Board by or on behalf of the permittee; (c) all quantities of gas removed from Alberta pursuant to the permit shall be referred to a 101.325 kilopascal pressure base and a 15Ε Celsius temperature base. (2) Every permit is subject to the condition that the permittee may cease to comply with any terms and conditions of any approval
  • 72. 71 Canada’s Shale Gas Resources: “Game Changer” or “Bridge too Far?” 2012 Section 6 GAS RESOURCES PRESERVATION REGULATION AR 328/2002 given before October 15, 1996 by the Lieutenant Governor in Council or the Minister for the granting or amending of the permit. Repeal 6 The Gas Resources Preservation Regulation (AR 273/89) is repealed. Expiry 7 For the purpose of ensuring that this Regulation is reviewed for ongoing relevancy and necessity, with the option that it may be repassed in its present or an amended form following a review, this Regulation expires on October 31. 8. SOCIAL CONCERNS Protesters march to protest the Quebec governments refusal for a 20-year moratorium on Shale gas exploration and exploitation in the province in Montreal, Saturday, June 18, 2011. (THE CANADIAN PRESS/Graham Hughes)
  • 73. 72 Canada’s Shale Gas Resources: “Game Changer” or “Bridge too Far?” 2012 Protesters gather protesting the Quebec governments exploration and exploitation of Shale gas in the province, in Montreal, Saturday, June 18, 2011. (Graham Hughes / THE CANADIAN PRESS) It has been dubbed an unconventional gas because it was once seen as more expensive and difficult to produce than gas extracted from other underground sources. But in recent years, petroleum companies say they‘ve discovered a commercially-viable way to drill for the gas. Those drilling innovations have triggered an explosion of interest in North American shale gas exploration. While shale gas has been praised as a cleaner fossil fuel and a way to reduce dependency on foreign oil, it remains a polarizing topic. Questions still swirl around the regulation and long- term environmental effects of extraction. If shale gas is a transition fuel, then it appears to lead unknown territory in the Canadian energy industry. The National Energy Board estimates that Canada is sitting on 1,000 trillion cubic feet of recoverable shale gas, which many say has the power to fuel day-to-day tasks like heating homes and cooking food across the nation. Large shale formations in British Columbia, Alberta, Quebec and New Brunswick have been singled out as hotspots for drilling. But as an economist at a public policy think tank points out, each deposit has its own set of challenges. "Geology is different from province to province and the materials that are brought up will vary," said Gerry Angevine, senior economist at the Fraser Institute.There are different types of shale, depending on its location. Those geographic differences have made it difficult to regulate the fledgling industry, which environmental groups say suffers from a lack of oversight. Maxime Daigle says he has seen first-hand how labor-intensive and under-regulated shale gas exploration can be. He took up work with the energy industry after leaving the armed forces. The 33-year-old New Brunswick resident spent seven years drilling for several companies. His work brought him to fields in B.C., Alberta, Saskatchewan, Texas, Kansas and Louisiana. But after a few years in the industry, Daigle said he grew more skeptical of his employers.
  • 74. 73 Canada’s Shale Gas Resources: “Game Changer” or “Bridge too Far?” 2012 Extracting shale gas is harder, takes longer and the process uses far more water and chemicals than conventional drilling, he says. Disillusionment led Daigle to quit the drilling industry and go back to school to study renewable energy. Now, he uses that knowledge as a full-time activist against shale gas exploration. "My goal is to educate regular people about the energy industry," he said. "Most of these oil and gas PR people are just bookworms; they dont know what its like to be out there drilling." However, Angevine says that most petroleum companies appear to be both socially and environmentally cautious. "The industry certainly wants to believe that development is responsible; I think it will be an on-going process," said Angevine. That process appears to be in its early stages. Environment Canada and the National Energy Board have yet to aggressively scrutinize the pace of shale gas extraction in Canada or its impact on water resources, according to a 2010 report by the University Of Toronto Munk School Of Global Affairs. Those concerns prompted shale-gas wary residents in New Brunswick to protest the industry in early July. About 150 people rallied outside a hotel in downtown Fredericton, where a summit for shale gas stakeholders was taking place. A similar outcry occurred in Quebec last March, which resulted in the government agreeing to temporarily halt shale gas development in the province pending a thorough environmental reviewa decision that is not without its consequences. Global petroleum companies have already taken note of Quebecs disdain for shale gas exploration. The province is now viewed as one of the worst locations in Canada for investing in oil and natural gas development, according to a recent survey released by the Fraser Institute. The tug of war between financial gain and environmental concern has been a persistent debate for Canadians interested in shale gas development. "People seem to be in agreement that there are net benefits to shale gas exploration," said Angevine, former president of the Canadian
  • 75. 74 Canada’s Shale Gas Resources: “Game Changer” or “Bridge too Far?” 2012 Energy Research Association, said he believes that much of the opposition in Quebec and New Brunswick is coming from people who aren‘t well-informed. Geologists have known about shale gas for decades, but the drilling technology needed to efficiently extract the fuel was developed only a few years ago. Now, its drawing the attention of oil companies and clean-energy activists across North America. Hydraulic fracturing, also known as hydrofracking, and horizontal drilling has allowed companies to exploit deposits of natural gas locked up inside North Americas densely-packed shale formations. During the procedure, drills are sent down and out into the rock bed. A high-pressure cocktail of water, sand and chemicals are then injected into the shale, blasting the rock open and freeing the gas within. Environmental watchdogs have the following concerns about fracking: Groundwater - Many people, including Green Party leader Elizabeth May, say they worry that natural gas will seep into fresh groundwater during the extraction process. Storage - There isn't much that can be done with the high-pressure water used to extract shale gas because it has been treated with chemical agents, so the water is typically pumped back underground, said University of Toronto geology professor Andrew Miall. Emissions - Though the Obama administration has praised shale gas as a material that will help reduce greenhouse gas emissions, a study by Cornell University professor Robert Howarth found that natural gas extraction could do more to aggravate climate change than burning coal. These points, among other concerns, convinced Dale Marshall that shale gas exploration is a problematic industry, he says. Marshall, a policy analyst with the David Suzuki Foundation, says natural gas is merely a stepping stone on the path to renewable energy.
  • 76. 75 Canada’s Shale Gas Resources: “Game Changer” or “Bridge too Far?” 2012 "A world where we have more natural gas is inconsistent with a world where were dealing with climate change," he said in a phone interview from Ottawa. Marshall points out that most oil and gas wells in Canada dont have to adhere to certain provincial environmental procedures. For instance, he said, oil and gas well operators are not required to disclose the chemicals used in hydrofracking. The cloak-and-dagger approach leaves communities wondering what type of pollutants shale gas exploration might expose them to, he said. A recent report from the David Suzuki Foundation and the Pembina Institute urges Canada to consider natural gas a "bridging" fuel on the way to zero-emission solutions like wind and solar power. But even renewable energy sources have their fair share of resistance. Several communities across Canada have protested wind turbines. Andrew Miall concedes that any industry that could affect the environment will likely have opposition. However, the University of Toronto geology professor said he believes that right, now natural gas is Canada‘s most realistic alternative to conventional "dirty" fuel. "We have a potentially large domestic supply and we already have pipelines and infrastructure in place," he said. "I think the industry could be managed if it regulated properly and responsibly." Though there is much left to learn about the potential impact shale gas development would have on the environment, different stakeholders in the industry are already working to brand the gas as a friendly fuel. In early June, the International Energy Agency released a report heralding a "golden age" for natural gas, projecting a scenario where natural gas would overtake coal by 2030. As Canada‘s conventional gas supply dwindles, Miall said he sees natural gas as the nations most practical solution. "One can look at it this way: no one has come up with a solution for fossil fuels on a large scale," he said, adding that renewable energy sources haven‘t been able to keep up with demand.
  • 77. 76 Canada’s Shale Gas Resources: “Game Changer” or “Bridge too Far?” 2012 "Hopefully shale gas will prove to be as productive as the industry thinks it is, because at this point, it looks like we don‘t t have any choice." 9. POTENTIAL ISSUES ON THE WAY TOWARD SHALE GAS PRODUCTION IN CANADA New Brunswicks chief medical officer of health says the Alward government needs to take "targeted and strategic actions" to prevent and mitigate any negative health impacts associated with the development of the shale gas industry in the province."There are social and community health risks from this industry," Dr. Eilish Cleary states in her 82-page report, released on Monday. Cleary recommends requiring a health impact assessment and monitoring the health of the population on an ongoing basis to detect adverse impacts. She says "few studies" have looked at the overall health impact of shale gas development, but she believes the potential risks of hydro-fracking are greater than just chemicals. Air quality, noise, and vibration are among her concerns.Cleary spent part of the summer looking at the potential health impacts of the industry and what the provincial government should do to minimize them.TheAlward government initially would not commit to releasing the contents of Clearys report, but it was released in full.Cleary will not be answering any questions until Tuesday, when she is expected to hold a news conference."Proper controls and mechanisms to protect and monitor health must be put in place to reduce the risk of spoiling the potential benefits from economic gains through adverse health outcomes," she states in the report. Among her numerous recommendations: Require disclosure of all chemicals used. Monitor air, water and drinking water quality, including baseline measurements pre- development. Prevent fracking in sensitive areas, including wet fields. Require setbacks, noise/vibration standards, emergency response training. Monitor the health of people living, working or going to school near fracking sites. Establish an implementation group and oversight mechanism.
  • 78. 77 Canada’s Shale Gas Resources: “Game Changer” or “Bridge too Far?” 2012 Ensure optimal emergency response capacity to deal with potential physical injuries at work sites and in the vicinity. Industry could absorb much of the costs "Current infrastructure, capacity, processes and legislation are not adequate to meet these needs," Cleary stresses. The cost of funding her recommendations has not yet been determined, but they "will not be insubstantial," Cleary writes.But she has suggested if there are economic benefits from the shale gas industry, that could help cover some of the costs involved with measuring the health impacts.Cleary says her recommendations may seem onerous, but they should be seen as routine public health practice.The provincial government also released a report Monday by Louis LaPierre, a professor emeritus in biology at the University of Moncton.LaPierre, who was hired to solicit the opinions of citizens over proposed regulatory changes to the oil and gas industry, said the provincial government must address the "very serious concerns" people have, but ruled out a provincial moratorium on the shale gas industry.Opponents to the shale gas industry say the hydro-fracking process can cause water and air pollution.Hydro-fracking is a process where exploration companies inject a mixture of water, sand and chemicals into the ground, creating cracks in shale rock formations. That process allows companies to extract natural gas from areas that would otherwise go untapped.In May, the provincial government introduced 116 proposed changes to the regulatory framework that oversees the oil and gas industry.The new provincial regulations will set out stricter rules on protecting the environment, Natural Resources Minister
  • 79. 78 Canada’s Shale Gas Resources: “Game Changer” or “Bridge too Far?” 2012 10. DEVELOPMENT OF UNCONVENTIONAL GAS RESOURCES A huge investment play for leading shale portfolio players, the Marcellus is one of the busiest shale‘s in North America.With the majority of drilling and development involved within the Pennsylvania state lines, the Marcellus is a classic gas shale that is also evolving, to some degree, into a wet play segment that has growth opportunity. Several positives here: Close proximity to the largest gas-consuming market in the US plus earlier-established infrastructure from years-ago drilling (but with significant added assets to support growth). Liquids development in SW corner of Pennsylvania will help the Marcellus.
  • 80. 79 Canada’s Shale Gas Resources: “Game Changer” or “Bridge too Far?” 2012 One of todays most important early-stage shale‘s, the Utica is focused in Ohio with further extension eastward. Its a liquids-rich opportunity with big potential and will be supported do with huge investments by BP, Chesapeake, Hess, Total, and others. By some accounts, the Utica Shale may have up to 5.6 billion barrels of oil and liquids and is being compared with the Eagle Ford. . New drilling and development in the Bakken Shale are ramping up the fortunes of North Dakota. Some examples: Halliburton reports that a large share of its 11,000 new hires in North America will be going to the Bakken; Hess Bakken spending will reach $2 billion in 2011; and Oasis Petroleum will be running nine rigs by year-end 2011.WarlickEnergy estimates that by 2014, Bakken oil production could account for 15% of the US total. The Bakken Shale Market Report supplies a very current reading on this amazing play along with details about E&P leaders, recent deals, economics and metrics of the play itself and most important, a current drilling forecast with a late-year update to be made available to all subscribers. Overall, this report is a sound, businesslike assessment of market potentials for the Bakken Shale.
  • 81. 80 Canada’s Shale Gas Resources: “Game Changer” or “Bridge too Far?” 2012 11. OPPORTUNITIES AND BENEFITS ARISING FROM GROWTH OF SHALE GAS MARKET IN CANADA Canada is blessed with a natural wealth of oil and gas resources. The countrys vast bitumen and shale gas deposits have attracted investment from countries around the world, with state companies in Southeast Asia and China in particular, leading the charge. Politically stable, Canadas oil and gas industry is technically advanced, well regulated and has a reputation for contractual reliability. In fact, the country is one of the most stable, dependable and democratic of the worlds top 10 oil and gas producers. This is a distinct competitive advantage given the turmoil in oil producing nations in North Africa and the Middle East. With increasing long-term energy demand in emerging and developing economies around the world, many state-owned petroleum companies have already invested large amounts of capital in Canadas oil patch. That trend will continue and allow capital-intensive oil sands and shale gas projects to move forward. But how will that investment be viewed by Canadians and the government? Of late, the Canadian government has had a mixed response to large foreign investment deals. CNOOC Limiteds takeover of troubled oil sands developer OPTI Canada Inc., as well as Sinopec International‘s takeover of Daylight Energy Ltd. has been completed. But how would the federal government respond to a takeover bid for Syncrude Canada Ltd., Nexen Inc. or Encana Corporation? The federal governments decision to block U.S. arms makers Alliant Techsystems $1.3 billion bid for MacDonald Dettwiler and its clear signal that it would not allow BHP Billitons $39 billion hostile takeover of Saskatchewans Potash Corp. (Billiton later decided to pull out of the deal) are perhaps an indication. As for Canadians themselves, there remain concerns by some that our natural resources are "for sale." Could a rise in economic nationalism jeopardize foreign investment in Canadas oil and gas sector?
  • 82. 81 Canada’s Shale Gas Resources: “Game Changer” or “Bridge too Far?” 2012 With five strong benefits accruing to Canadas petroleum sector through an influx of global capital - detailed in this report - Canadians should welcome, not fear, increased foreign investment in the oilpatch. As the leading Canadian energy industry professional services firm, PwC Canadas Energy practice has more than 1,000 partners and members delivering industry specific solutions to more than 1,600 energy companies of all sizes. This document is published by PwC as part of our Energy Visions program, a series of publications and events that provide context around issues affecting the oil and gas sector. 01 - GREATER MARKET DIVERSIFICATION If you owned a corner grocery store, youd naturally be worried if you only had one main customer. For Canadas oil and gas sector, however, that analogy isnt far from the mark. The U.S. is our main customer for both oil and natural gas products. Many believe its in Canadas best interest to diversify its markets. Lower demand in the States, increased production of U.S. shale oil and gas, as well as the debate in the States over TransCanada Corporations proposed Keystone XL pipeline to export bitumen from Alberta to the Gulf Coast, are illustrative of issues and attitudes that could potentially stem exports to our southern neighbor. While Canadas excellent trade relationship with the U.S. is expected to continue, many believe its time for the country to also establish stronger relationships with countries in the Asia-Pacific region: Japan, China, Korea, India and others. The Alberta government has already stated its intention to expand trade and investment with Asia, home of some of the worlds largest and most diverse markets, to lessen dependence on the United States. The increased investment by foreign companies into Canadas oil and gas resources will naturally lead to opportunities to export those resources to a more diverse customer base. As such, there is
  • 83. 82 Canada’s Shale Gas Resources: “Game Changer” or “Bridge too Far?” 2012 increased support for export pipelines to Canadas West Coast - for both gas and oil. On Oct. 13, 2011, the National Energy Board (NEB) approved an application by KM LNG Operating General Partnership for a licence to export liquefied natural gas (LNG) from Kitimat, British Columbia, to markets in the Asia-Pacific region. The 20-year licence opens up a new market for Canadian gas. Meanwhile, Enbridge Inc.s proposed Northern Gateway oil pipeline to ship Alberta oil sands crude to the West Coast, for export to Asia-Pacific markets, is also receiving significant attention. During the economic downturn that followed the September 2008 global financial crash, U.S. oil consumption dropped sharply but world demand continued to rise. 02 - INCREASED PRODUCT VALUE Rising demand for energy in Asia and increases in supply - especially of natural gas in North America - has led to natural gas prices in Asia that are more closely aligned with global oil prices than they are in Canada and the United States (historically Canadas key energy export market). This price diversity, and a desire on the part of Canadian producers and government officials to diversity export markets, together provide a compelling opportunity to seek new export markets for both crude oil and natural gas throughout the Pacific Rim. In the NEBs decision on the Kitimat LNG terminal, it wrote: "The board recognizes that forecast demand growth for LNG in the Asia-Pacific region provides a new opportunity for Canadian producers to diversify their exports markets. The board also recognizes that long-term sales contracts could provide for higher netbacks to Canadian producers." The Kitimat LNG partnership - comprised of Apache Canada Ltd., EOG Resources Canada Inc. and Encana Corporation - plans to make a final investment decision in early 2012 and is working toward securing Asian buyers to backstop the LNG export facility. Long-term contract prices for LNG in the Asia-Pacific region typically are priced off of the Japan Customs Cleared index used for long-term crude pricing. "For Encana, one of the benefits we see this project providing is the opportunity to convert a portion of our natural gas pricing to crude oil-linked pricing," Dave Thorn, Encanas vice-
  • 84. 83 Canada’s Shale Gas Resources: “Game Changer” or “Bridge too Far?” 2012 president of Canadian marketing, recently said. "The Kitimat project may be sourced from any of our British Columbia or Alberta natural gas resource plays and we expect it to contribute to an overall increase in natural gas prices to a more sustainable level." While Encana and PetroChina International Investment Company abandoned plans for a proposed joint venture that would have developed Encanas prized Cutbank Ridge natural gas assets in B.C., the company is still searching for a partner to help develop the play. Value creation could also occur by converting natural gas to liquids. Talisman Energy Inc. announced that South African-based Sasol Limited will pay $1.05 billion to acquire a 50% working interest in the companys Farrell Creek Montney shale gas assets in northeast B.C. in a strategic partnership. In March, a second deal was announced between the two companies, with Talisman selling a 50% net working interest in its Cypress AMontney natural gas assets for $1.03 billion. As part of the agreement, the partners have decided to conduct a feasibility study over the next two years around the economic viability of a facility in Western Canada to convert natural gas to liquid fuels, using Sasols commercial GTL technology. Besides reducing gas competition, the GTL technology takes natural gas and creates premium-priced diesel, naphtha and jet fuel. 03 - ACCELERATED VALUE RECOGNITION Canadas oil sands and unconventional oil/gas plays require significant capital resources to develop them. Joint ventures allow Canadian producers to develop existing lands at a faster rate than would be achieved without the additional foreign investment - thereby allowing producers to extract value from their unbooked resources. "Weve got a 20 or 30 year inventory of light oil drilling locations but have got zero on an NPV [net present value] basis," Hillary Foulkes, executive vice-president and chief operating officer at Penn West Petroleum Ltd., recently said. "It doesnt do our shareholders any good for us to be sitting on this for 30 years."
  • 85. 84 Canada’s Shale Gas Resources: “Game Changer” or “Bridge too Far?” 2012 In selecting joint ventures, Penn West identified areas where it didnt have the capital to develop projects in a timely manner. In one deal, announced in May 2010, Chinese sovereign wealth fund China Investment Corporation (CIC) acquired a 45% interest in the companys bitumen assets in the Peace River area of northern Alberta, while a 50/50 deal with Mitsubishi Corporation will help fund development of shale gas assets in the Cordova Embayment area along with certain conventional gas assets in the Wildboy area, both in northeastern British Columbia. 04 - JOB CREATION ACROSS CANADA Critics of foreign investment or takeovers say it can lead to a hollowed out country as high- paying jobs are exported to overseas countries. But that hasnt happened in Canadas oil and gas sector, where investment has only increased job creation as projects move forward that may otherwise not have proceeded. And while the oilpatch remains Western Canadas economic lifeblood, its impact can be felt across the entire country and beyond.Encana Corporation estimates that up to 35,000 jobs are created with every 1% increase in North Americas natural gas production. Meanwhile, the Canadian Association of Petroleum Producers (CAPP) reports that every dollar invested in the oil sands creates about $8 in economic activity, with much of that economic value generated outside Alberta - in Canada, the U.S. and around the world. CAPP says the oil sands currently affects the jobs of 112,000 people across Canada and this is expected to grow to more than 500,000 jobs within the next 25 years. Many of these will be created in provinces outside of Alberta. Ontario is one of the largest benefactors with 7% of the total jobs from oil sands. British Columbia receives the benefit of 6% of total oil sands jobs and Quebec and Saskatchewan see about 3% each. Oil sands growth will create new jobs in these and other regions across Canada. 05 - TECHNOLOGY TRANSFER Oilpatch technology transfer is often viewed as a one-way street with technology and operational expertise flowing from Canada to foreign countries.
  • 86. 85 Canada’s Shale Gas Resources: “Game Changer” or “Bridge too Far?” 2012 True, China is moving to develop indigenous gas so its partnerships with Canadian companies developing tight gas/ liquids-rich gas using multi-frac technology brings them up the learning curve. But Canadian producers can also learn from foreign companies. PetroChina, for instance, already operates many worldclass heavy oil projects at its Liaoning fields - considered some of the most difficult in China - using sophisticated steam-assisted and fireflood techniques. PetroChina also has a very large R&D department working on ways to minimize environmental impacts while maximizing the amount of oil produced. After China Investment Corporation (CIC) committed to spend $817 million to develop Penn Wests bitumen deposits in the Peace River oil sands region of northwest Alberta, company vice- chairman Bill Andrew said CIC has a "tremendous interest" in trading of technology. He said the two companies have been sending technical crews back and forth and that Penn West has been impressed with CICs reservoir engineering capabilities. Penn West could also benefit from increased access to Chinese-made equipment. And what of Canadian technology exports? To look at Canadas enormous exports of hydrocarbons, it is easy to assume they, and they alone, constitute the only important measure of our international trade in oil and gas. In fact, the export of Canadian expertise in producing oil and gas should be recognized as a major trade asset in its own right. Increasingly, our countrys exploration, drilling, production and IT solutions are spreading around the globe. From cold production of heavy oil with sophisticated pumping systems, to thermal in-situ production, to the numerous adaptations such as hydrotransport technology and upgrading techniques that have made surface mining profitable, Canada is an undisputed world leader.
  • 87. 86 Canada’s Shale Gas Resources: “Game Changer” or “Bridge too Far?” 2012 Canadians also export communications solutions; horizontal, automated and coiled tubing drilling technology; hydraulic fracturing techniques; and customized software applications that help exploit resources from shale gas plays. The globalization of our industry will bring more international companies into contact with the cutting-edge, home-grown technology that could be used around the world, thereby positively impacting Canadian service and supply companies. SELECTED FOREIGN INVESTMENT HIGHLIGHTS OIL SANDS China Initial Deals In 2005, China National Offshore Oil Corporation (CNOOC) acquired a 16.69% interest in Calgary-based MEG Energy Corp. for $150 million In 2005, Sinopec Corp. purchased Calgary-based Synenco Energys 40% stake in Total E&P Canadas Northern Lights Oil Sands Project for $105 million In 2005, PetroChina and Enbridge Inc. entered into an MOU to co-operate on the development of Enbridges Northern Gateway pipeline project, which would ship bitumen to the West Coast and then by tankers to the Asia-Pacific region 2009 Deals In April, Sinopec purchased a 10% interest in Total E&P Canadas Northern Lights Oil Sands Project, adding to the 40% interest it purchased in the project in 2005 PetroChina Co. completed a $1.9 billion acquisition of a 60% working interest in the MacKay River and Dover oil sands projects from Athabasca Oil Sands Corp. 2010 Deals
  • 88. 87 Canada’s Shale Gas Resources: “Game Changer” or “Bridge too Far?” 2012 The largest transaction in 2010 was Sinopecs acquisition of ConocoPhillips 9.03% interest in Syncrude Canada Ltd. for $4.65 billion Chinese sovereign wealth fund China Investment Corporation (CIC) committed to spend $817 million to develop Penn West Exploration Ltd.s bitumen deposits in the Peace River oil sands region of northwest Alberta 2011 Deals CNOOC Limited agreed to acquire troubled oil sands developer OPTI Canada Inc. in a US$2.1 billion deal In January 2012, PetroChina acquired the remaining 40% of the MacKay River project from Athabasca Oil Sands Corp. that it didnt already own Thailand In 2010, Thai-based PTT Exploration and Production Public Company Limited purchased assets from Norways Statoil ASA for approximately $2.3 billion, marking Thailands first foray into the Canadian oil sands industry. PTT acquired a 40% interest in the Kai Kos Dehseh oil sands project. Statoil had acquired a 100% interest in the project through its $2.28 billion acquisition of North American Oil Sands Corp. in 2007 South Korea In 2006, Korea National Oil Corporation (KNOC) acquired Newmont Mining Corp.s BlackGold oil sands property for $270 million KNOC purchased Harvest Energy Trust late in 2009 for approximately $1.9 billion, including Harvests oil sands properties in the Peace River and Cold Lake area In August 2010, Korea Investment Corp. paid $50 million for a minor stake in privately- held oil sands developer Laricina Energy Limited In November 2010, Korea Investment Corp. purchased C$100 million worth of shares in privately-held Osum Oil Sands Corp.
  • 89. 88 Canada’s Shale Gas Resources: “Game Changer” or “Bridge too Far?” 2012 Japan In 1978, Japan Canada Oil Sands Ltd., a unit of Japan Petroleum Exploration, acquired stakes in oil sands properties. In 1983, the company launched a pilot thermal project, using steam assisted gravity drainage, at its Hanginstone property In 1992, Mitsubishi Oil Company of Alberta (Mocal) took a 5% stake in the Syncrude Canada Limited project " In July 2006, Japans Inpex Corp. took a 10% stake in Totals Joslyn oil sands project for an undisclosed price Norway In 2007, Statoil paid $2.2 billion to acquire Calgary-based North American Oil Sands Corp. (NAOSC) In fall 2010, Statoil commissioned the $350 million Leismer project, achieving first oil in early 2011 In November 2010, Statoil sold a 40% interest in its Kai Kos Dehseh oil sands projects to Thailand-based PTT Exploration and Production for $2.28 Billion France In January 2003, TotalFinaElf acquired a 43.5% stake in the proposed Surmont SAGD project, shared with ConocoPhillips (operator, 43.5%) and Devon Energy (13%). Devon has since divested its interest and Total and Conoco share the venture 50/50 In 2005, Total S.A. purchased Deer Creek Energy for $1.35 billion, providing it access to the companys proposed Joslyn project, which included plans for an open-pit mine as well as in situ operations that were ramping up after being commissioned in 2004 In August 2008, Total S.A. purchased Synenco Energy for $381 million, giving the company ownership of the proposed 115,000 barrel per day Northern Lights oil sands mine and 100,000 barrel per day Northern Lights upgrader
  • 90. 89 Canada’s Shale Gas Resources: “Game Changer” or “Bridge too Far?” 2012 In October 2010, UTS Energy accepted a $1.15 billion takeover offer from Total S.A. Purchasing UTS garnered Total a 20% stake in the undeveloped 190,000 barrel per day Fort Hills oil sands mine controlled by Suncor Energy In December 2010, Total paid $1.75 billion for Suncors 19.2% interest in the Fort Hills project and a 49% stake in Suncors Voyageur upgrader in a deal that also saw Suncor get a 36.75% interest in Totals Joslyn project Netherlands In 2002, Shell Canada marked a major milestone as it commissioned the first new oil sands mine and upgrader to be built in nearly 25 years. The 155,000 barrel per day Athabasca Oil Sands Project (AOSP), which cost about $6 billion, connected an oil sands mine north of Fort McMurray with an upgrader in the greater Edmonton region In June 2006, Shell Canada acquired BlackRock Ventures for $2.4 billion, giving Shell the junior companys Seal oil sands leases in the Peace River region, as well its Orion SAGD project at Cold Lake In 2006, Shell paid $465 million for 10 parcels of land in Albertas bitumen carbonates, a prospective but potentially giant play. The company has yet to achieve commercial production from these leases United Kingdom In late 2007, BP announced a $5.5 billion deal with Canadas Husky Energy that created two 50/50 joint ventures in oil sands production and downstream upgrading: the Sunrise SAGD project, operated by Husky, and BPs refinery at Toledo, Ohio In March 2010, BP sold 50% interest in its Alberta oil sands leases at Pike (formerly known as Kirby) to Devon Energy for $550 million, plus a $150 million commitment to fund related capital costs over the next three years Also in March 2010, BP announced its $900 million purchase of a majority ownership stake in private company Value Creation Inc.s proposed Terre de Grace project
  • 91. 90 Canada’s Shale Gas Resources: “Game Changer” or “Bridge too Far?” 2012 SHALE GAS Deals involving foreign investment in Canadas shale gas industry include: Malaysia In June 2011, Calgary-based Progress Energy Resources Corp. announced it had struck a strategic partnership with the Malaysian national oil company, PETRONAS, to develop a portion of its large Montney shale gas assets in northeast British Columbia, which could eventually be exported as LNG by the two companies under the joint venture. The purchase price was $1.07 billion (including a capital funding commitment) South Africa In June 2011, South African petrochemicals group Sasol Ltd. completed a C$1.03 billion shale gas acquisition from Talisman Energy Inc. Sasol acquired a 50% stake in Talismans Cypress A acreage in the Montney Basin in northeastern British Columbia, where the company had previously purchased a stake in Talismans Farrell Creek assets Japan In August 2010, Japans Mitsubishi Corporation agreed to spend $850 million under a joint venture with Penn West Petroleum Ltd. to develop shale gas in the Cordova Embayment and conventional natural gas in the Wildboy area of northeast B.C. South Korea In February 2010, South Koreas Korea Gas Corporation (KOGAS) bought into Encana Corporations Canadian gas assets for a planned investment of $565 million In July 2011, Encana expanded its Horn River farm-out agreement with the Canadian subsidiary of KOGAS at Kiwigana in northeast British Columbia. KOGAS agreed to invest a further $185 million.
  • 92. 91 Canada’s Shale Gas Resources: “Game Changer” or “Bridge too Far?” 2012 China In October 2011, Sinopec announced its intention to acquire Daylight Energy in a $2.2 billion deal that closed in December FUTURE INVESTMENTS While there has been no indication to date of Brazilian interest in Canadas oil and gas sector, India is increasingly interested in acquiring North American assets. In September 2011, Indian state-run GAIL India agreed to buy a 20% stake in Carrizo Oil & Gas Inc.s Eagle Ford shale gas assets. GAIL said it "will consider expanding its business portfolio in the North American market by pursuing various upstream and midstream opportunities including LNG export to India," chairman B.C. Tripathi said in a statement. In 2010, Indian energy major Reliance Industries struck three shale gas joint ventures in the United States, including a US$1.7 billion deal with Atlas Energy to own 40% of its Marcellus shale operations. To date, no India-based company has made a significant foray into Canadas oil and gas sector, although Reliance was reportedly interested in Alberta-based Value Creation Inc., before its deal with BP Canada. Many believe India is closely watching plans by Canadian companies to build bitumen or gas pipelines to the West Coast. As those plans move along, it will open up attempts by Indian oil and utility companies to invest in Canada. III. FUTURE PREDICTIONS WORLDWIDE 1. EUROPE In Western Europe, sizable quantities of shale gas and other unconventional fuel supplies have been reported in the United Kingdom, the Netherlands, Germany, France, Scandinavia and
  • 93. 92 Canada’s Shale Gas Resources: “Game Changer” or “Bridge too Far?” 2012 Norway. Exploration activity is occurring, primarily through joint ventures to share risk and know-how. But due to a wide range of economic, environmental and regulatory obstacles, the prospect of large-scale shale gas production remains doubtful. Additionally, European investors are watching the United States to see if US players decide to develop the country‘s capabilities as a natural gas exporter. Greater competition, high production costs and low margins are curbing the appetite for investment in shale gas production start-ups. The regulatory regime in Europe is relatively undeveloped. Companies are forced to work without a predictable regulatory framework, and, even within the EU, there is no universal approach. Access to exploration permits and development licenses is uncertain, creating significant regulatory risks. As reserves in France, Scandinavia and elsewhere in Western Europe tend to be close to populated areas and as European environmental laws tend to be quite strict, the potential for significant shale gas development there in the near future seems unlikely. Even though shale gas production is largely undeveloped, the US environmental debate has crossed over to Europe, and environmental groups have been publicizing concerns over the chemicals used in fracking techniques. France banned hydraulic fracturing, as of July 1, 2011, including its use for research purposes.Environmental concerns aside, European countries also lack skilled resources and the infrastructure, creating questions over the long-term economic viability of shale gas ventures. While there is a hope that technological innovations could bring down the costs of shale gas production, this is not likely to happen in the short term. In the United Kingdom, shale gas production has commenced at the Blackpool aquifer in Lancashire, and new shale gas deposits have been recently found in the Mendips. In May 2011, a UK parliamentary committee looking into the risks and benefits of shale gas said it found no evidence that fracking poses a direct risk to underground water aquifers, provided the drilling well is constructed properly. The committee concluded that, on balance, a moratorium in the UK is not justified or necessary at present. The committee also concluded that, based on estimates of the UK‘s onshore shale gas resources, there will not be a ―shale gas revolution‖ in the UK based on domestic resources alone – nevertheless, developing shale gas reserves could make the country more self-sufficient by reducing its reliance on imported natural gas.
  • 94. 93 Canada’s Shale Gas Resources: “Game Changer” or “Bridge too Far?” 2012 In Eastern Europe, Poland‘s shale gas development potential is high on radar screens, while Turkey and the Ukraine have some potential. Russia‘s dominance of the conventional gas production could present obstacles for companies seeking to develop shale gas production capacity in the region. Ultimately, the future of shale gas production in Europe rests on whether US producers decide to develop their potential to export liquefied natural gas to European markets. Perhaps more than any other European country, Poland has sizable shale gas reserves that it is actively seeking to exploit. Shale gas poses a significant threat to Russian interests in conventional gas production, and Russian politicians have become quite vocal in European debates over shale gas production‘s environmental safety. Further, nearly 25 percent of the natural gas flowing into Europe via Ukraine is transported by Gazprom, the Russian national gas transmission company. In the past, Europe has often been held hostage to decreased gas supplies due to contract disputes between Russia and Ukraine. Perhaps more than any other European country, Poland has sizable shale gas reserves that it is actively seeking to exploit. Seeking to diminish the country‘s reliance on Russian imports, private companies in Poland are working to develop the industry in cooperation with scientists, private research and development, state labs and geological services and regulators. If Poland, Hungary, and other countries are able to develop commercial shale gas production capabilities, Russia‘s influence on Europe could diminish. 2. ASIA In 2010, the Chinese government began to explore shale gas production. While there are no official statistics, it is estimated that China has over 1,275 trillion cubic feet of shale gas deposits. Shale gas could be China‘s largest onshore source of energy, and the country is looking to develop this resource in order to decrease dependence on Russian and other foreign natural gas sources.
  • 95. 94 Canada’s Shale Gas Resources: “Game Changer” or “Bridge too Far?” 2012 China‘s target is to fulfill most of its energy needs from alternative sources by 2020. China‘s latest five-year plan places great emphasis on the exploration of non-traditional/alternative energy sources, such as coal seam, petroleum gas and oil sands. China‘s target is to fulfill most of its energy needs from alternative sources by 2020. As part of this strategy, China will enter into strategic partnerships with foreign companies in order to help China acquire the skills and technologies needed to develop and exploit its shale gas reserves. China‘s Ministry of Resources has invited some major oil and gas companies to pitch for shale gas exploration work, offering four licenses for exploration in western China. As shale gas production is in its infancy, there is no regulatory framework in place in China. China is pursuing joint ventures with foreign companies to help build up know-how in shale gas exploration and extraction, and it appears likely that the Chinese government will continue to promote and support shale gas development. IV. EXECUTIVE SUMMARY Shale gas has the potential to turn the world‘s energy industry on its head. It‘s abundant. It‘s cheap. It burns cleaner than fossil fuels. And it‘s being found almost everywhere. But for shale gas to become the game-changer that some analysts predict, the industry has to surmount tremendous reputational and regulatory hurdles. And there are no guarantees that natural gas prices will ever rise high enough to make the high costs, financial risk, and extended development periods worth the returns. Even still, with the prospects of substantial profits and stable, secure supplies, players at the national and industry levels are placing their bets. By offering countries a cheap, carbon-friendly way to help meet their energy needs, shale gas has the potential to displace fossil fuels in selected locations and potentially slow the development of renewable sources. With shale gas deposits being found in areas that previously had no exploitable gas reserves, shale gas production could turn countries that traditionally import natural gas into producers, making them more self-sufficient with domestic supplies. And shale gas deposits are being found in both mature and underdeveloped energy markets, opening the potential to level the playing field when it comes to supply and demand. Shale gas has become a viable energy source due to the use of hydraulic fracturing, or ―fracking‖, technology to extract
  • 96. 95 Canada’s Shale Gas Resources: “Game Changer” or “Bridge too Far?” 2012 it. Frackingtechnology has been used in oil reservoirs and tight formations for many years without raising any significant concerns compared to the more traditional methods of extraction. All energy production creates safety and environmental risks. The extent to which shale gas will be a larger component of the energy mix will depend, to a certain extent, on the environmental protection versus economic growth trade-off. In some countries, such as France, environmental concerns have caused regulators to suspend or ban hydraulic fracturing in some areas completely. Other countries, such as Argentina and China, may be willing to take on greater environmental risks to advance shale gas production in order to become more self-sufficient and to meet rising energy demands. An attractive side benefit of full-scale production is the substantial number of new jobs that full-scale production would open for low-skilled workers in these countries. Once captured and processed, natural gas is one of the cleanest burning and lowest carbon content fossil fuels. In addition to the economic benefits, developing new natural gas supplies may provide a means to help countries meet their greenhouse. gas emission targets. For companies subject to greenhouse gas emission reduction targets, natural gas usage may offer more ―tick-the-box‖ benefits than traditional fossil fuel sources. At the consumer level, regions that rely on oil-based heating, such as parts of the United States, could bring their emissions down by encouraging homeowners to convert to natural gas heating. Additional incentives could be granted to encourage the development and sale of natural gas-powered vehicles. In regards to Canada, Canada‘s National Energy Board (NEB), development of shale gas, and other unconventional resources, will help ensure supplies of natural gas are available to the growing North American natural gas market for many decades. The NEB predicts that shale gas will likely help the country meet its domestic requirements for natural gas ―far into the 21st century. Early drilling at Quebec‘s Utica shale reserve shows promise. Preliminary estimates suggest the reserve could hold more than 20 trillion cubic feet of recoverable gas. Producers are proceeding with caution, but if estimates are correct, shale gas development in eastern Canada could tilt the balance of production away from the western provinces. Canada currently exports about 50 percent of the natural gas it produces, but it lacks the processing facilities to liquefy and ship liquefied natural gas (LNG) beyond North America.
  • 97. 96 Canada’s Shale Gas Resources: “Game Changer” or “Bridge too Far?” 2012 With US production rising, Canada will need to develop other markets for its excess natural gas supplies, and there are signs that the industry is preparing to invest in the necessary infrastructure. In October 2011, the NEB issued the first long-term license to export LNG, clearing the way for a proposed $5 billion project to develop an LNG export terminal in northeastern British Columbia. This terminal would allow Canada to export LNG to Japan, South Korea and China, allowing Canadian producers to enter markets beyond the United States for the first time. This in turn proves that shale gas will be a game changer for Canada