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
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
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
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
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.
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.
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.
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: http://www.destination360.com/north-america/canada/folklorama 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
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
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.
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
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.
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.
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.
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
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
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
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.
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".
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.
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.
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.
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.
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.
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.
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:
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
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
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)?
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
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.
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.
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.
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.
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
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.
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.
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.
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.
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
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%
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
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 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
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
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
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