Enbridge, Northern Gateway Pipeling to Accelerate Economic Growth in Canada

Shane Neetichow 58841107

Northern Gateway Pipeline Project to Accelerate Economic Growth in Canada Stakeholder report for submission to Federal Government Review Panel Prepared for Director of SRP, Sauder School of Business UBC

Prepared by Shane Neetichow, SRP Intern (On behalf of Client, TD Investment Banking)

21 October 2012

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Shane Neetichow 58841107

Northern Gateway Pipeline Project to Accelerate Economic Growth in Canada I am addressing this research report on behalf of Investment Banking division TD in support of Enbridge and the Northern Pipeline Project. As you may know Enbridge is based in Calgary, specializing in transportation and distribution of energy. Enbridge distributes crude oil and natural gas through premium pipelines that primarily runs across Canada and the United States. Moreover, Enbridge is proposing a large-­‐scale project called the Northern Gateway Pipeline project. The project is the construction of twin oil pipelines that runs for 1,150km from Alberta through BC and arrives at Kitimat to be redistributed by ships to Asia.

Potential Economic Growth:

I want to bring up an important underlying issue that may concern many stakeholders. The project directly raises concerns for the provincial governments, federal governments, company shareholders and citizens of Western Canada. The Northern Gateway Pipeline project significantly pushes the Canadian economy forward in terms of growth, employment and international relations. However, the pipeline project it is largely criticized by environmentalist groups and other conservative social groups due to potential damages to the environment and the habitat in surrounding areas. Nevertheless, facts and statistics outweigh the environmental risk. Further analysis on GDP, government tax revenue, employment rate and foreign relations will be used to evaluate the Northern Gateway Pipeline project.

Firstly, the Northern Gateway pipeline will boost aggregate demand in the Canadian economy. Thus, if the project is accepted, Enbridge will enhance domestic economic benefits. Where the benefits are constructed from the positive impacts on GDP, local investments, tax/government revenue, employment rate and risk diversification.

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Shane Neetichow 58841107

GDP Economic growth or aggregate demand is measured by gross domestic product (GDP). The Northern Gateway Pipeline project directly contributes to the Canadian GDP. Therefore, the economic impact between 2013 and 2046 is the “GDP growth of 270 billion CAD”, according to Robyn Allan and The Wright Mansell Report. The report further highlights additional economic benefits in labor income of 48 billion CAD, 558,000 person years of employment and government revenue of 81 billion CAD”. Therefore, on average the Northern pipeline project evidently injects $9 billion into the economy each year. Furthermore, Natural Resources Canada reported that the energy sector contributed “$84.3 billion” to the national GDP in 2010 or approximately 6.8 percent of total GDP. Therefore, Enbridge’s investment in the project will improve the energy sector GDP by almost 10 percent at the end of each fiscal year.

Investments in Local Industries

Investments are also a contributor to national growth as it circulates money in the economy. The construction of the twin pipeline will stimulate local economies through purchases and investments. Both, BC and Alberta will capitalize from this project due to increasing activity in land, labor, capital and enterprise. Therefore business and activities such as equipment rentals, accommodation and electrical appliances generates significant cash flows for the province. This is tied down to the relationship between the Canadian economy and the Canadian energy sector output. Reinforced by the report, Economic Scan of Canada Energy Sector, Government of Canada. The report states that the “[energy sector] accounted for 20 percent of all capital investment and repair expenditures throughout Canada’s economy. Therefore it is clear that the approval of Enbridge’s project will simultaneously expand revenues in the energy sector and capital investments sector, leading to an improvement of local economies. Also, in addition to the extra output of $400 million and $112 in Central and North Eastern BC respectively, Enbridge also claims to generate $318 million in local goods and services locally at Coastal BC. Evidently this projection shows a positive economic chain effect leading from potential spending in capital goods and other domestic goods and services.

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Shane Neetichow 58841107

Taxes and Revenue Government revenue and taxes has a significant role in promoting economic stability and growth. Since, Enbridge is looking to penetrate emerging markets in Asia pacific, the projected revenue is largely promising. Therefore, the potential tax revenue is also substantial. The taxes then translate and magnifies into social benefits, healthcare and public infrastructure. Enbridge’s estimated local, provincial and federal taxes revenue to be approximately “$2.6 billion” where “$1.2 billion” of the revenue is accounted towards BC over the next 30 years. The total direct and indirect benefits for the Canadian government are summed up to be “$81 billion in revenue”. In addition, an opinion from Marc Lee’s Enbridge Pipe Dreams and Nightmares report suggest that, “even a very low carbon tax of $10 per tonne, applied nationally, would yield approximately $5 billion per year in government revenues. That is, it would raise the equivalent of the NGP [Northern Gateway Pipeline] investment every year, to be invested in ways that create more employment opportunities while putting Canada on a path to reducing emissions and reliance on fossil fuels”. Evidently, the potential tax revenue creates many flexible routes for federal and provincial government to pass on the benefits to the people of Canada.

Employment Employment is also a positive social economic effect generated by the proposed pipeline project. Within BC, Enbridge estimated that there will be an increase of 3,000 jobs during the construction phase and 520 permanent positions. In Alberta, approximately 1105 people will be employed during the construction period and 71 long-­‐term positions will be created. More over by using the output input model, total direct and indirect employment opportunities will rise up to approximately 63,000 positions. Overall, the project is expected to result in up to $48 billion in labor income. Therefore, potential growth in terms of the nation’s labor force is promising in accordance to the proposed Northern Gateway Pipeline project.

Diversification Risk diversification is an important economic concept. In reduces the amount of probable loss and increases the probable expected return. In practice rural British Columbia is dominated by the mining industry. Therefore, introducing effective pipelines and supertankers will diversify BC’s source of revenue. In support, Evan Van Dyke of Terrace

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Shane Neetichow 58841107

Economics Development Authority also claims “we’re going to see a really healthy and diversified economy as soon as these projects come along”. Therefore, the consistent source of revenue from the pipeline helps diversify risk associated with commodities and mining price fluctuations.

International Relations

Secondly, the Northern Gateway Pipeline project will improve international relationship between the Asia and Canada. It provides an opportunity to establish strong trading relationships with emerging markets of the Asia pacific region. A strong trade relationship with rapid growth markets like China will yield substantial economic benefits. It will also allow Canada to be a globally competitive exporter of energy products. More importantly, Honorable Joe Oliver, Minister of Natural Resources reinforces this point. In his open letter referring to the pipeline project he states that as “a country, we must seek new markets for our products and services and the booming Asia-­‐Pacific economies have shown great interest in our oil, gas, metals and minerals. For our government, the choice is clear: we need to diversify our markets in order to create jobs and economic growth for Canadians across this country. We must expand our trade with the fast growing Asian economies. We know that increasing trade will help ensure the financial security of Canadians and their families”. Thus, international trade sits as a cornerstone for Canada to be globally competitive.

Environmental Concerns

On the contrary, Northern Gateway has become a flashpoint for tar sands opponents, including native groups who fear spills on their territory. This has been led by the recent oil spills in the US and numerous leakages by Enbridge itself. However, the environmental risk is minimal compared to the expected return. Thus, Canada should be willing to take on this risk. The risk for Northern Gateway pipeline to leak is minimal compared to the 99.9% safety record claimed by Enbridge. In addition, “Enbridge announced it would invest another $500 million in safety improvements to the Northern Gateway pipeline” eliminating all potential risks, according to CBC news. Furthermore, infrastructure company

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Shane Neetichow 58841107

TransCanada states, “that pipelines provide the safest, most efficient and most economical way to transport crude oil”. Pipeline requires the lowest energy input and releases lowest carbon footprint compared to all other alternative transportation methods. In addition, Enbridge ensures that the following safety measures will be taken in exporting the essential energy products: • Only modern ships fitted with state of the art navigation, communication, and environmental monitoring equipment will be allowed at the new terminal. • Ships must pass Tanker Acceptance Program to meet these standards administered by 3rd party – follow rigorous operational protocols and strict Canadian and International regulation. • All tankers will be double-­‐hauled.

Social and Ethical Concerns

A large amount of resistance against the project has been raised from first nation and other conservative social groups. There are concerned rights, and habitat preservation that are at risk. However, The Globe And Mail helps point out that “Despite the fact that the constitutional requirement to consult with and accommodate first nations resides with governments and may not be delegated, Enbridge was left alone to negotiate and secure no less than 43 agreements with individual first nations along the environmentally treacherous 1,177-­‐kilometre proposed route”. More importantly, “first nations want to talk about aboriginal rights and title, topics open only to governments. Enbridge can offer only economic participation and environmental safeguards – necessary but hardly sufficient.”

In addition, for activists to stall the project comes with a high opportunity cost. PricewaterhouseCoopers estimated that “the net economic benefit (in 2009 dollars) to Canada of settlements is at least $14.5-­‐billion. The faster the pace of settlements, the greater the economic benefit. According to the Globe and Mail “The truth is that it is difficult to quantify the opportunity cost of unresolved claims. But common sense tells us that PwC’s analysis is conservative and only scratches the surface. Valuable lands and the awesome human potential of a great people are locked in a bureaucratic, legal and political purgatory.”

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Shane Neetichow 58841107

Another interesting social fact is that “a poll conducted on behalf of the Canadian Chamber of Commerce shows a majority of Canadians believe it is possible to respect the environment while increasing oil and gas production. Two-­‐thirds (65%) of Canadians agree that “it is possible to increase oil and gas production while protecting the environment at the same time,” including one-­‐quarter (26%) who ‘agree strongly’. One-­‐quarter (25%) of Canadians disagree with this idea (9% ‘disagree strongly’)”. Therefore concerns raised by activist groups are challenging yet intangible and ambiguous. Thus, these tangent issues may not benefit the nation’s democratic and economic interest as a whole.

Conclusion

The economic benefits and financial growth for Canada sufficiently out weights the cost of environmental risk largely speculated by activist groups and conservative communities. More importantly, the economic benefits are justified by statistical facts. Facts on projected national revenue, employment rate and trade relations prove that Canada’s potential growth is highly optimistic in respect to the approval of Enbridge Northern Gateway Pipeline project. Therefore, as a member of TD investment banking division I hope to have helped you evaluate the project economically, analyzing the benefits in a financial angle.

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Shane Neetichow 58841107

Bibliography

• Canada, Environment. "Energy and The Canadian Economy." Economic Scan of Canada’s Energy Sector 1 (2008): 22.Environment Canada. Web. 22 Oct. 2012. Edmonton Sun. "B.C. 's environmentalists are cool to the Northern Gateway, but the province 's gas and mineral industries are booming." Edmonton Sun. N.p., 28 Sept. 2012. Web. 22 Oct. 2012. . "Enbridge defends ad campaign on pipeline safety - Calgary - CBC News."CBC.ca - Canadian News Sports Entertainment Kids Docs Radio TV. N.p., 9 Aug. 2012. Web. 20 Oct. 2012. . Enbridge. "Benefits for Canadians - Northern Gateway." Enbridge Northern Gateway Project - Northern Gateway. N.p., n.d. Web. 22 Oct. 2012. . Ipsos. "Views on Canadian Oil and Gas."Ipsos North America. N.p., 3 May 2012. Web. 22 Oct. 2012. . Lee, Marc . "The Economic Cost and Benefits of the Proposed Northern Gateway Pipeline." Enbridge Pipe Dream and Nightmares 1 (2012): 26.www.policyalternatives.ca. Web. 22 Oct. 2012. Mallinder, Lorraine. "Viewpoint: Canada 's green image tarnished by new policies." BBC News. N.p., 15 May 2012. Web. 22 Oct. 2012. .

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Moore, Dene, and The Canadian Press. "Enbridge says B.C. premier declined offer to meet over benefits of pipeline."Edmonton Journal. N.p., 3 Oct. 2012. Web. 22 Oct. 2012.

Bibliography: • Canada, Environment. "Energy and The Canadian Economy." Economic Scan of Canada’s Energy Sector 1 (2008): 22.Environment Canada. Web. 22 Oct. 2012. Edmonton Sun. "B.C. 's environmentalists are cool to the Northern Gateway, but the province 's gas and mineral industries are booming." Edmonton Sun. N.p., 28 Sept. 2012. Web. 22 Oct. 2012. . "Enbridge defends ad campaign on pipeline safety - Calgary - CBC News."CBC.ca - Canadian News Sports Entertainment Kids Docs Radio TV. N.p., 9 Aug. 2012. Web. 20 Oct. 2012. . Enbridge. "Benefits for Canadians - Northern Gateway." Enbridge Northern Gateway Project - Northern Gateway. N.p., n.d. Web. 22 Oct. 2012. . Ipsos. "Views on Canadian Oil and Gas."Ipsos North America. N.p., 3 May 2012. Web. 22 Oct. 2012. . Lee, Marc . "The Economic Cost and Benefits of the Proposed Northern Gateway Pipeline." Enbridge Pipe Dream and Nightmares 1 (2012): 26.www.policyalternatives.ca. Web. 22 Oct. 2012. Mallinder, Lorraine. "Viewpoint: Canada 's green image tarnished by new policies." BBC News. N.p., 15 May 2012. Web. 22 Oct. 2012. . • • • • • • • Moore, Dene, and The Canadian Press. "Enbridge says B.C. premier declined offer to meet over benefits of pipeline."Edmonton Journal. N.p., 3 Oct. 2012. Web. 22 Oct. 2012.