4.3 Security of Fuel Supply

The research team concluded that:
“There is an abundance of propane in Canada available to meet transportation sector needs. Propane from domestic sources could replace up to 20% of domestic gasoline demand”

4.3.1 Approximately 70% (8.6 Billion Litres) of Canada’s annual production of propane is exported due to lack of domestic demand
Over the past five years, propane supply in Canada has averaged 11.9 billion litres, with domestic consumption averaging 3.3 billion litres, and exports averaging 8.6 billion litres, as shown on chart 3 below.³¹ The Canadian and retail demand is highly seasonal with demand peaking in the winter to meet heating requirements of consumers and industrial/commercial customers.

CHART 3

Canadian propane is supplied primarily by Alberta gas plant production, moved by pipeline, rail, and truck throughout the province, across Canada, and for export to the United States, as shown in Figure 1.³² The excess supply produced in Canada is shipped to US markets and consumed in a variety of applications.

FIGURE 1

The existing Canadian propane transportation segment consumes approximately 300 million litres of propane, the equivalent of about 10% of overall domestic demand.³³ Researchers estimate that there are 50,000 to 60,000 propane vehicles operating in Canada today, in applications that consume a relatively low average consumption of 5,000 to 6,000 litres per vehicle per year.³⁴ Current marketplace utilization aside, the propane industry believes that the target market of high-consumption vehicles such as police fleets, taxi and limousines, couriers and delivery vehicles is ideally suited to use propane as a transportation fuel. Typically, these vehicles consume 15,000 to 20,000 litres of propane per year depending upon their application. This potential target market could be another 60,000 vehicles.³⁵ With an average consumption of 20,000 litres per vehicle, additional demand could be 1.2 billion litres per year, the equivalent of approximately 10% of total propane supply in Canada.

This rise in demand can be met with existing and future Canadian supplies of propane, without disruption to the marketplace. Unlike domestic and export retail demand, which is highly seasonal with a high winter to summer usage ratio, transportation demand is constant year round, generating stable monthly volumes for the benefit of producers and transporters alike. Stable winter to summer volumes will allow industry players to capture distribution efficiencies not possible with high winter to summer ratios.

4.3.2 As existing North American petroleum refinery capacity is nearing 100% utilization, gasoline and diesel supply disruptions will continue into the foreseeable future, and the petroleum industry will face growing challenges to meet demand.
Crude oil is the primary input into the petroleum refining industry, satisfying thedemand for gasoline and diesel fuel. Canada is a large and growing net exporter of crude oil and refined products, primarily serving the neighbouring United States market.

Imported crude oil satisfies more than half of the Canadian refinery demand. The higher costs to ship western Canadian crude to the eastern regions in which it is consumed make it more economically viable for some Eastern Canadian refineries to use imported crude oil. Accordingly, refineries in Western Canada use primarily domestic crude, Ontario refiners run a mix of domestic and imported crude oil and Quebec and Maritime refiners run primarily imported crude oil.³⁶

There are 12 companies operating 19 refineries in Canada. Only Imperial Oil, Shell and Petro-Canada operate more than one refinery and market products nationally. Of the 19 refineries, 16 of the refineries manufacture a full slate of products. There are three main refining centres in Canada – Edmonton, Sarnia and Montreal.

In the early 1970’s there were 40 refineries in Canada. Surplus operating capacities forced the less efficient and smaller refineries to close. The last refinery to close was the Petro-Canada refinery in Oakville, Ontario in 2005. No new refineries have been built in Canada since the early 1980’s, although numerous refineries have been upgraded to meet environmental requirements and increased capacity requirements. Recently growth in demand has increased refinery utilization rates to over 90%.³⁷

With North American refinery capacity utilization nearing 100%, the aggregate refinery capacity in North America limits the supply of refined product.³⁸ Lack of flexibility in refining capacity creates an environment where minor disruptions in refinery output can lead very quickly to supply issues in certain markets. This scenario was evident in the winter of 2007 in Ontario, where refinery production issues resulted in unprecedented gasoline and diesel shortages in a number of retail locations across the Province. During 2005, the hurricanes, Katrina and Rita, disrupted refinery production on the US Gulf Coast. The effects of these refinery disruptions were felt throughout North America. Supply and demand in Western Canada remains tight, as refineries have been operating at near full capacity for years.

Figure 2 below illustrates refinery utilization rates regionally since 2003. High utilization rates across North America have reduced the flexibility and ability of the refining system to respond to unexpected supply disruptions and have substantially increased the volatility of petroleum product prices.³⁹

FIGURE 2

Refinery Utilization Rates

As existing North American refinery capacity is nearing 100% utilization, gasoline and diesel supply disruptions will continue into the foreseeable future, and the industry will face growing challenges to meet demand. Refinery expansion is planned for Sarnia and an additional refinery is planned for Atlantic Canada (primarily for the US market) but these projects will take years to implement from the planning and permit stage to full operation.

4.3.3 While Canada is enviably positioned to meet domestic natural gas demand, supply and price volatility within the North American market will result from increasing US natural gas demand coupled with shrinking US domestic supplies.
Regional Canadian and US natural gas commodity markets are well connected by natural gas pipelines. This infrastructure allows supply and demand fundamentals to be transferred across all markets. Natural gas prices in Canada and the US track each other. Canada and the US are often described as being an integrated continental natural gas market.⁴⁰

Canadian natural gas production levels exceed domestic gas consumption. In 2005, Canada produced 16.5 billion cubic feet per day (bcf/d) of marketable natural gas. Approximately 45% was consumed domestically with the remaining 55% exported to the United States. The US consumes more natural gas than it produces, and thus imports natural gas to satisfy its production deficit. The US imports natural gas from Canada by pipeline, and from other countries via large ocean tankers that carry liquefied natural gas (LNG). The US obtains roughly 16% of its natural gas supply from Canada and 3% from other countries via LNG imports.⁴¹ There are currently five operating import LNG terminals in North America, all located in the United States.

The potential for natural gas supply disruptions caused by the US Gulf coast hurricane season is similar to crude oil disruptions. During 2005, the hurricanes, Katrina and Rita, were able to disrupt approximately 90% of the US offshore production of natural gas, and consequently create significant price spikes.⁴²

Between 1986 and 2001, Canadian natural gas production grew steadily, more than doubling from 7.0 bcf/d to 16.6 bcf/d. Since 2001, however, production from Western Canada has flattened out despite high levels of drilling activity. Over time, producers have found and drilled the largest and highest-quality reservoirs first. Now, finding new natural gas involves drilling into smaller and lower quality reservoirs. More and more new wells are thus needed in order to replace old wells, which have declined, and increases in production come about more slowly. The situation is similar in the US. While natural gas production is essentially flat, natural gas demand continues to grow steadily, due to the clean burning nature and overall attractiveness of natural gas as a fuel for homes, businesses, industries, and electric power stations.⁴³

Underground and liquefied natural gas storage allows companies to stockpile natural gas supplies for use during winter, when demand is at its peak. The amount of available natural gas in storage affects natural gas prices and deliverability. Low storage levels offer a smaller supply cushion during periods of peak demand and consequently, contribute to price uncertainty.

Canadian natural gas production is forecast to be the same in 2020 as in 2005: approximately 6 trillion cubic feet (TCF) per year. Coal bed methane production is expected to increase in Canada becoming increasingly important to the Canadian natural gas production mix. The US, however, is facing the continuous decline of natural gas production in spite of the increase in the number of wells drilled in the last few years. Contrary to the situation faced by Canadians, the US natural gas domestic supply is expected to continue declining even when demand seems to be growing. Mexico faces similar challenges to the US with declining domestic supply and increasing domestic demand. Overall the North American picture is one where demand exceeds supply, and imports from overseas are increasing. To ensure the development of their own natural gas deposits, the US and Mexico must face significant challenges including environmental issues, political willingness, political support, and governmental policies. In contrast, Canada faces fewer challenges in developing its conventional and non-conventional resources^.44

In order to meet future demand, natural gas supplies for North America will come from a broad range of LNG suppliers outside of North America. To ease the increasing demand for natural gas for electricity generation, the US may increasingly turn to clean coal and nuclear alternatives. There are over 40 proposed LNG import terminals in North America, primarily in the U.S. Many of the proposed terminals that are located closer to major markets face significant regulatory and environmental hurdles. Canada is looking at LNG in a relatively small way to service coastal and export markets, rather than for broad domestic Canadian use. Energy projections suggest that Canada does not need to develop LNG in order to meet its future electricity and other demands.⁴⁵ A number of projects have been proposed to construct LNG import facilities in Canada and three projects on the east and west coasts (Canaport LNG, Bear Head LNG, and Kitimat LNG) have received Federal-Provincial regulatory approval. Two LNG projects in the Quebec City area (Rabaska and Gros- Cacouna) have been approved by the Quebec and Federal Governments; however the Gros-Cacouna project has been delayed to 2012 due to rising project costs.

It is clear that additional pipeline infrastructure will be required to meet rising future demand for natural gas in North America. Pipeline costs are going up and there is a shortage of both labour and materials to expand Canadian and North American natural gas transmission infrastructure. These challenges, manifesting themselves in construction delays and increasing infrastructure costs, will have an inflationary affect on the price consumer’s pay in Canada and more broadly, in the North American market.

Environmental regulations, inefficient agency coordination, and the lack of measures to reduce costs directly, were the most common factors identified as causes of pipeline construction delay and cost escalation in North America.⁴⁶ While Canada should be enviably positioned to meet domestic demand, supply and price volatility within the North American market will exist primarily due to US increasing demand with shrinking US domestic supplies.

4.3.4 While the estimated Canadian demand for Ethanol is 2.0 Billion litres annually, current Canadian capacity, including capacity under construction is estimated to be approximately 1.7 Billion litres.
The continued growth of the ethanol industry and the long-term market potential for ethanol depends upon the resolution of critical issues that influence the supply and demand for ethanol. Resolution of technical, economic, and regulatory issues remains critical to further development of ethanol in the United States and in North America.⁴⁷

It is estimated that 2.0 billion litres of ethanol per year will be required to meet current Canadian Provincial and Federal mandates using domestic resources. Currently there is approximately 1.7 billion litres of capacity in place or under construction in Canada.

Ethanol and ethanol-blended gasoline, because of its ability to pick up water, cannot be transported by pipeline. Ethanol can be shipped by railcar or truck; but it must be blended at the terminal. Dedicated tanks are required to store ethanol and the gasoline-blending component with which it will be mixed. The handling of ethanol-blended fuels also requires modifications to the other aspects of the fuel-distribution system, including trucks, retail storage tanks and service station pumps.

Canada is a net corn and feed wheat importer as well as being a net importer of ethanol. Additional ethanol production infrastructure is being developed with support from the Federal Ethanol Expansion Program and support from Provincial Governments in Alberta, Saskatchewan, Manitoba and Ontario. Currently Canadian ethanol production is approximately 700 million litres annually (Table 4)⁴⁸ with additional production coming on stream in 2007 and 2008(Table 5).⁴⁹

TABLE 4

2006 Canadian Ethanol Production

TABLE 5

Ethanol Production Additions for 2007 and 2008

Until there is greater market penetration, and until demand is more developed under the Government mandates, it will be difficult to predict the security of ethanol supply using current technology. Factors affecting supply will include: tightness in the supply and demand markets for crops; yields affected by weather; crop competition; input energy costs affecting ethanol production costs; US ethanol market dynamics; and the development of new technology.