Canadian Oil EmergenceCanadian Oil Emergence

OutlineOutline

– Basic Overview of Economic Status• Economic

Performance• Causes for Success• Looking Ahead• Current Trends• Limitations

– Energy Sector• Looking West • Oil Statistics• Energy Distribution• Bitumen• Alberta Tar Sands• Money to be Made• Impacts

Economic PerformanceEconomic Performance

– For almost a decade, Canada has recorded the fastest economic growth and strongest budget position of the Group of Seven (G-7) major industrial countries.

– Since 1995, Canada’s real GDP growth has averaged 3-1/2 percent a year—2-1/2 percent on a per capita basis—narrowing the gap with the United States and remaining well above most other G-7 countries.

– Only G7 country in surplus in 2006.• Likely to continue in 2007 and 2008.

– Canada has had the lowest total government net debt-to- GDP ratio of any G7 country since 2004 (less than 27%).

Canadian Growth: 1995-2003Canadian Growth: 1995-2003

Growth per capita Average 2003 Change 1995-2003 2003Canada 3.5 2.5 31,942 0.0 1.2 -34.5 34.8France 2.2 1.8 27,047 -3.0 -4.1 3.8 42.7

Germany 1.2 1.1 28,104 -2.5 -3.9 12.3 52.0Italy 1.5 1.5 27,480 -3.4 -2.5 -11.6 93.6

Japan 1.2 1.0 28,278 -6.2 -8.0 54.9 79.4United Kingdom 2.8 2.4 27,777 -1.2 -3.2 -3.8 33.5United States 3.3 2.1 38,031 -1.3 -4.7 -12.7 46.2Unweighted

Average excluding Canada 2.0 1.6 29,453 -2.9 -4.4 7.2 57.9

Real GDP GDP per capita

General Government percent of GDPFiscal Balance Net Debt

Causes for SuccessCauses for Success

– Strong institutional framework • Inflation targeting• National government committed to balanced

budget

– Continuing structural reforms• Employment insurance system• Tax cuts• Trade liberalization (In particular with the

U.S.)

Looking AheadLooking Ahead

– The FY 2006/07 budget has centered on the new government’s objective to reduce the federal debt by C$3 billion a year.

– FY 2005/06 surplus (the ninth consecutive federal budget surplus) to advance the target of lowering the ratio of federal debt to GDP to 25 percent by FY 2013/14.

– The budget also aimed to contain expenditure growth and lower the tax burden, through a 1 percentage point reduction in the goods and services tax and other measures designed to boost incentives to work, save, and invest.

– Canada continues to add over 3% more jobs per year

LimitationsLimitations– Labor productivity going down (In relation to Labor productivity going down (In relation to

U.S.) while the percentage of the population U.S.) while the percentage of the population working is going up. working is going up.

– Canadian Dollar is currently at .9505, a level not Canadian Dollar is currently at .9505, a level not seen since the late 1970s.seen since the late 1970s.• Consumption is staple of economyConsumption is staple of economy

– Manufacturing sector is struggling under the Manufacturing sector is struggling under the weight of a strong currency and weak U.S. weight of a strong currency and weak U.S. demand Rising C$ had an effect on net exports, demand Rising C$ had an effect on net exports, which continues to be drag on economic activity.which continues to be drag on economic activity.

Energy SectorEnergy Sector

– Gross revenues from exports of all forms of energy from Canada (mostly oil, natural gas and coal with some electricity) amounted 22% of the value of all Canadian goods and services sent out of the country. The importance of the Canadian energy sector has risen with higher prices and growing oil production.

– Energy exports accounted for only 12.5% of the value of all Canadian exports in 2002.

Looking WestLooking West

– Rising revenues from commodity exports-notably oil and gas.

– Labor demand shifting from manufacturing toward the natural resource sector and services. • Jobs shifting from east to west.• Largest migration in over a century.

– Unemployment rate has fallen to a 31- year low of 6.1 percent.

– Productivity growth has also accelerated since mid-2005, following several years of lackluster performance.

Energy StatisticsEnergy Statistics

– 7th leading producer and consumer of oil in the world for 2006*

– Canada is a net exporter of energy– Estimated to have the second largest oil reserves in

world**– Canada is the largest importer of crude oil to the U.S.– Canada is the largest petroleum importer to the U.S.– Blended heavy crude oil accounted for 64% of total

Canadian crude oil exports in 2006 with light crude and equivalent comprising the remaining 36%.

Oil DistributionOil Distribution

– Canada remained the leading source of oil imports to the gulf coast, ahead of both Mexico and Saudi Arabia

– The main market for Western Canadian crude is the U.S. Midwest where the refining centers of Chicago, Minneapolis/St. Paul, Minnesota and Toledo, Ohio absorbed 49% of total Canadian oil exports in 2006.

– In contrast, the export market for Eastern Canadian offshore oil production is mainly the U.S. East Coast which in 2006 accepted 82% of that production. Another 15% went to the U.S. Gulf Coast with three per cent to "foreign" markets.

Top Ten Oil Reserves

Bitumen (Tar Sands)Bitumen (Tar Sands)

– Bitumen:Bitumen:• Soluble organic matter, solid at room temperatureSoluble organic matter, solid at room temperature• The crude bitumen within the sands is a naturally occurring The crude bitumen within the sands is a naturally occurring

viscous mixture of hydrocarbonsviscous mixture of hydrocarbons• Solid in natural stateSolid in natural state• Upon heating, bitumen will flowUpon heating, bitumen will flow

Hot summer days will cause bitumen to oozes from outcrops along Hot summer days will cause bitumen to oozes from outcrops along the river valleys in northeast Albertathe river valleys in northeast Alberta

• Is refined into “synthetic” crudeIs refined into “synthetic” crude• Producing a barrel of synthetic oil through mining involves using Producing a barrel of synthetic oil through mining involves using

hot water to extract tarlike bitumen from two tons of sand, and hot water to extract tarlike bitumen from two tons of sand, and then processing the bitumen into high-quality oil that sells for then processing the bitumen into high-quality oil that sells for about the same price as the benchmark West Texas about the same price as the benchmark West Texas Intermediate.Intermediate.

Bitumen Mining Bitumen Mining

– The mining approach excavates the oil sand, removes it by truck and separates the bitumen from the sand by adding warm water and agitating it.

– The “The “in situ” ” process removes the oil from the sand underground through a variety of methods, such as cyclic steam stimulation or steam-assisted gravity drainage. Once the bitumen has been extracted it is either diluted and refined or upgraded into synthetic crude oil.

Alberta Tar SandsAlberta Tar Sands– The area is estimated to

contain about 2.5 trillion barrels of oil although less than 300 billion barrels are believed to be recoverable with today's technology.

– Alberta's oil sands Alberta's oil sands comprise one of the comprise one of the world's two largest world's two largest sources of bitumen; the sources of bitumen; the other is in Venezuela.other is in Venezuela.

Alberta Concentration of BitumenAlberta Concentration of Bitumen

Money to be MadeMoney to be Made

– In 2004, In 2004, Canada led Canada led the world in the world in planned planned exploration exploration expenditures, expenditures, accounting for accounting for almost 20%. almost 20%.

Why is Canadian Oil Attractive?Why is Canadian Oil Attractive?

– For the U.S.:For the U.S.:• It is not foreign energyIt is not foreign energy• Existing infrastructure of pipelines and refineriesExisting infrastructure of pipelines and refineries

– For the rest of the world:For the rest of the world:• Investment opportunities*Investment opportunities*• It is a stable country/ government (Low Risk)It is a stable country/ government (Low Risk)

– It looks like this is the future of oil (as long as It looks like this is the future of oil (as long as prices stay above $60 per barrel**)prices stay above $60 per barrel**)

– Potential for a stable supply***Potential for a stable supply***

ImpactsImpacts– Canada becomes a “Big Fish” in the North American and world energy

market • Given the importance of energy supply for the stability of the world

economy, this advantage could translate from economic benefit into increased political power.

– Destabilize politics• Competition for oil profits has the potential to destabilize the Canadian

political system.• Ottawa may have a difficult time leveraging its oil wealth in foreign

policy, because provincial governments own the resources. • Possible shift in domestic power from the east to the west.

.– Economic gains from the oil sands boom are concentrated in the Canadian

west. The negative impact of increasing energy costs and a slowdown in the automotive sector will be mostly felt in the Canadian east, particularly Ontario.

Questions?