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Syncrude and the oilsands : an economic evaluation May, Gerry 1976

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SYNCRUDE AND THE OILSANDS AN ECONOMIC EVALUATION by Gerry May B. A. University of B r i t i s h Columbia, 1973 A Thesis Submitted in P a r t i a l Fulfillment of The Requirements for the Degree of Master of Arts i n The Faculty of Graduate Studies Department of Economics University of B r i t i s h Columbia We accept this thesis as conforming to the required standard The University of B r i t i s h Columbia September, 1976 @ Gerry May, 1976 In presenting th i s thes is in pa r t i a l fu l f i lment of the requirements for an advanced degree at the Un ivers i ty of B r i t i s h Columbia, I agree that the L ibrary shal l make it f ree ly ava i l ab le for reference and study. I further agree that permission for extensive copying of th is thesis for scho lar ly purposes may be granted by the Head of my Department or by his representat ives. It is understood that copying or pub l i ca t ion of th is thes is fo r f inanc ia l gain sha l l not be allowed without my writ ten permission. Department of The Univers i ty of B r i t i s h Columbia 2075 Wesbrook Place Vancouver, Canada V6T 1W5 Date i i Abstract In recent years, Canada's previously stable energy economy has undergone a series of remarkable changes. The early seventies, and p a r t i c u l a r l y the dramatic OPEC price increases of 1973, have marked the advent of a new era i n energy poli c y . Canadian governments seem unwilling to accept the fact that national net s e l f - s u f f i c i e n c y in energy, p a r t i c u l a r l y i n o i l , may well be a thing of the past. Thus, mammoth energy projects have been proposed or undertaken by industry and government a l i k e , i n a desperate attempt to reduce dependence on foreign sources of supply. This new sense of urgency has led to unprecedented co-operation between government and industry, while increasing the t r a d i t i o n a l tension amongst d i f f e r e n t levels of government. Typical both of the novel pattern of development and of the unusual government-industry a l l i a n c e i s the Syncrude project, the l a t e s t attempt at exploiting the Alberta o i l sands. This paper investigates the potential role that the o i l sands might play i n Canada's energy future. Mora s p e c i f i c a l l y , the economics of Syncrude i t s e l f are analysed, and conclusions of a general nature are based on th i s case study. In section 1, the reader i s introduced to the topic through a description of the o i l sands, a review of currently a v a i l a b l e recovery and r e f i n i n g methods, and a short history of o i l sands development. Sections 2 and 3 constitute the main body of the paper, dealing f i r s t with the expected costs and benefits of the Syncrude project and, second, with the l i k e l y macroeconomic i i i consequences. F i n a l l y , section -i explores the implications of more substantial o i l sands development, compares the various techniques that might be employed in the future, and discusses the o i l sands' role i n the national energy policy. The conclusions of the paper have several dimensions. With regard to the cost-benefit analysis, Syncrude as a whole seems to be a rather marginal venture. P a r t i c u l a r l y i n t e r e s t i n g i s the manner in which the returns are distributed among the various consortium members, as alberta and the private industry participants are subsidized by Ontario and the federal government. Although consideration of sunk costs at the time of Syncrude's "go" decision somewhat improves the basic economic picture, an analysis of risk and uncertainty demonstrates how sensitive returns are with respect to several unknown parameters. Some of the special arrangements of royalty and taxation that distinguish Syncrude from the petroleum industry in general are quantified, thus demonstrating the extent to which t h i s project i s being subsidized r e l a t i v e to others. Also, a crude appraisal of the scale economies in o i l sands development i s attempted. On the macroeconomic side, a dynamic simulation model of Syncrude i s incorporated into RDX2, an aggregate econometric model of the Canadian economy. This enables an appraisal of the l i k e l y consequences that o i l sands development may have f o r the national economy. The major conclusion i s that such projects can hardly be j u s t i f i e d on the basis of t h e i r aggregate e f f e c t s , i f the cost-benefit r e s u l t s are unfavourable. In the f i n a l section, an analysis of more intensive o i l i v sands development (several Syncrude-size plants) shows that the present government-industry arrangements are unlikely to apply to future o i l sands ventures. Thus, private industry w i l l probably be dissuaded from engaging in further surface-mining schemes, pending some major cost-rsducing technological breakthrough and/or a substantial increase i n the r e l a t i v e price of o i l . Although s i m i l a r f i n a n c i a l and technical problems currently haunt 'in s i t u ' development, i t i s believed that t h i s recovery method w i l l play a greater part in the o i l sands' future. F i n a l l y , some c r i t i c a l remarks are included on the national energy policy and the governments' handling of Syncrude. An attempt i s made to analyze why Ottawa, Alberta and Ontario decided to join the companies in an obviously marginal and risky undertaking. Sy res u l t s suggest that l i t t l e , i f any, analysis preceded either the federal or the Ontario government's decision to p a r t i c i p a t e in the project. In thi s regard, I conclude that Syncrude could set a dangerous precedent for the future management of the country's resources. P A U L G . B R A D L E Y DEPARTMENT OF ECONOMICS V IABLJ OF CONTENTS Abstract 1 1. An Introduction to the O i l Sands 6 1.1 The Alberta O i l Sands - A Description 6 1.2 A Review of Crude Bitumen Recovery and Upgrading Technology 10 1.3 A History of O i l Sands Development 15 2. Syncrude Cost-Benefit Analysis 25 2.1 The Structure of the Model 25 2.2 The Base Case and S e n s i t i v i t y Analysis 29 2.3 Syncrude - A Special Deal? 46 2.4 The Question of Sunk Costs and the "Go" Decision 50 2.5 Questions of Scale 56 2.6 Limitations of the Analysis 60 3. Macroeconomic Effects of Syncrude 6 3 3.1 Integrating Macroeconomics and Cost-Benefit Analysis 63 3.2 A Model of Macroeconomic Impact Assessment 68 3.3 The Control Solution 71 3.4 Shock-Control Results 72 3.5 An Interpretation of Shock-Ccntrol Results 77 4. Beyond Syncrude - Canada's Energy Future 87 4.1 The Effects of Several Syncrude-Size Plants 87 4.2 »In S i t u 1 Versus Surface-Mining 94 4.3 Syncrude, the O i l Sands, and the National Energy Policy 99 Selected Bibliography 107 v i Appendices Appendix A 112 Figure/Table A-1 Syncrude With Alternate O i l Prices 112 Figure/Table A-2 Syncrude With Alternate Capital Costs 113 Figure/Table A-3 Syncrude With Alternate Costs 114 Figure/Table A-4 Syncrude With Alternate Bates of I n f l a t i o n 115 Figure/Table A-5 Syncrude With Alternate Discount Rates 116 Figure/Table A-6 Syncrude Internal Rate of Return Analysis 117 Table a-7 Macroeconomic Control Solution Values 118 Appendix B 119 1. Description of the Model 119 2. Equations for Endogenous Variables 120 3. Macroeconomic Links 127 4. Variables and Definitions 128 5. Values for Exogenous Variables 133 6. Coefficient Values and Def i n i t i o n s 140 Appendix C A Discussion of Data Sources and Assumptions 142 1. Exogenous Data 142 2. Coefficients 142 3. Taxation, Royalty, and Equity Arrangements 143 ACKNOWLEDGEMENT Throughout the past year I have received considerable encouragement and assistance i n the preparation of t h i s paper. Above a l l , I f e e l indebted to John flelliwell, for whenever the going got rough, he gave fre e l y of his time to provide both moral and technical support. I am gratef u l also to Robert McRae, as his assistance helped me conceal the fact that I remain a novice in the f i e l d of computing. Por the contents and i t s errors, the respons-i b i l i t y .is of course e n t i r e l y mine. p&^es 1-5" <U rtot e-x'sf- 6 1 • kQ IHiI&^U£ii2Il i 2 the O i l Sands Although their existence has been known to ffian for centuries, i t has only been during the l a s t few decades that a commercial in t e r e s t i n the o i l sands has emerged. As large-scale development of t h i s resource i s s t i l l i n i t s early stages, few people outside industry and government have a good notion of what the o i l sands are, and how they might help serve Canada's energy needs. With t h i s in mind, I f i n d i t appropriate to introduce the reader to t h i s paper by way of a short description of the o i l sands, along with a review of currently a v a i l a b l e technology, and a history of past development. 1.1 The Alberta O i l Sands - A Description The mixture of sand, mineral matter, water and crude bitumen 1 known as tar or o i l sand occurs i n varying quantities throughout northern Alberta and the northwestern portion of Saskatchewan. P a r t i c u l a r l y dense concentrations of o i l sand are found in four major deposits extending over a t o t a l surface area of 19,000 square miles (see figure 1-1). While a l l four deposits contain vast amounts of heavy o i l buried under as much as 2,500 feet of muskeg, g l a c i a l t i l l and cretaceous bedrock, only the Athabasca deposit, about 250 miles northeast of Edmonton, includes o i l sand s u f f i c i e n t l y close to the surface to permit recovery by surface mining techniques. The Alberta Energy Resources Conservation Board (AERCB) has 1 Crude bitumen i s a heavy, black, asphaltic naptheaic base hydrocarbon which i s very viscous and contains some sulphur, nitrogen and trace metals. 7 estimated the ultimate amount of crude bitumen in place in the presently delineated deposits to be in the v i c i n i t y of 900 b i l l i o n barrels, using a cut-off grade of 2 to 3 weigat percent crude bitumen 2- Given the Board's assumptions on potential recovery techniques and deposit c h a r a c t e r i s t i c s , the corresponding t o t a l of ultimately recoverable crude bitumen i s estimated at approximately 330 b i l l i o n barrels. Taking into account the projected loss in converting crude bitumen into synthetic crude o i l , the o i l sands could ultimately y i e l d as much as 250 b i l l i o n barrels of refinery feedstock. 3 2 For the Coli Lake deposit as well a s . f o r a portion or the Wabas.ca deposit a cut-off grade of three weight percent crude bitumen was applied in reserve estimation. Two weight percent was applied to a l l other deposits. 3 This c a l c u l a t i o n assumes that i t takes roughly 1.3 oarrels of bitumen to produce 1 barrel of synthetic crude o i l , s l i g h t l y higher than the. 1.2 conversion factor realised at existing extraction f a c i l i t i e s . 8 Estimates of ultimately recoverable reserves, such as the one just outlined, are of course sensitive to future trends i n technology and prices and by no means represent a r e l i a b l e measure of the extent to which the o i l sands are an economic proposition today. Indeed, under current prices and technology, only the surface-mineable portion of the Athabasca deposit can be considered proved recoverable. source: Canadian Petroleum Association, 1974 S t a t i s t i c a l Year Book, Calgary, 1975. The Athabasca deposit i s found under an overburden ranging from 0 - 2000 feet, but open-pit mining i s believed to be feasible only in areas with an overburden of 150 feet or l e s s . In-place reserves of crude bitumen i n the 0 - 1 5 0 feet overburden range are estimated at 14 b i l l i o n barrels, which i n * Based on only those sands containing 5 or more weight percent crude bitumen, under less than 150 feet of overburden, with an overburden-to-pay r a t i o of less than one, and a 90 percent mining recovery, 38 b i l l i o n of the 74 b i l l i o n barrels in-place have been estimated as proved recoverable crude bitumen. Assuming a conservative 70 volume percent separation and conversion factor, 38 b i l l i o n barrels of crude bitumen would y i e l d 26.5 b i l l i o n barrels of synthetic crude o i l . Table 1-1 Proved Remaining Recoverable Reserves of Conventional Crude O i l (as at the end of 1974) Be<jion B i l l i o n s of Barrels Alberta North America Caribbean S South America Western Europe Middle East Far East & Australasia A f r i c a Soviet Bloc S China World Total 6.4 44.6 21.9 20.3 380.0 20.5 80. 0 6 5.0 632. 3 9 turn should y i e l d about 26.5* b i l l i o n barrels of synthetic crude o i l . 5 Notwithstanding that the 26.5 b i l l i o n barrels proved recoverable are a far cry from the ultimately recoverable 250 b i l l i o n barrels mentioned e a r l i e r , they constitute an impressive figure when compared with reserve estimates of conventional crude o i l in Alberta or, for that matter, world reserves, as indicated in table 1-1. Table 1-2 shows that the 26.5 b i l l i o n barrels amount to roughly 36 percent of Alberta's t o t a l proved recoverable reserves of a l l f o s s i l f u e l s i n terms of B.T.U. equivalents. Yet another indication of the r e l a t i v e magnitude of these proved reserves of synthetic crude o i l might be the fact that they alone would provide Canada's t o t a l crude o i l needs for as long as 25 years, assuming demand growth at an annual rate of 5 percent. Table 1-2 Proved Remaining Recoverable Reserves of Various F o s s i l Fuels i n Alberta (as at the end of 1974) Synthetic Conventional Natural Coal O i l O i l Gas B i l l i o n Barrels * 26.5 6.4 8.0 32.0 % of A l l F o s s i l Fuels 36.0 9.0 11.0 44.0 * expressed i n equivalent b i l l i o n s of barrels of crude o i l (at 5.7 mil l i o n B.T.U,'s per barrel) source: compiled from various AEECB data Beyond th i s mineable f r a c t i o n of the Athabasca deposit, the o i l sands can be developed only by 'in s i t u ' methods, a process 5 The term 'synthetic crude o i l * , which has arisen to describe o i l that i s derived from crude bitumen, i s rather misleading, since the product i s neither synthetic nor very crude but actually a highly desirable ref i n e r y feedstock. 10 by which the o i l i s separated from the sand while i t i s s t i l l in-place beneath the surface, In-place reserves of crude bitumen in t h i s category are estimated to amount to 552, 164, 50 and 54 b i l l i o n barrels for the Athabasca, Cold Lake, Peace River and Wabasca deposits respectively. One must bear in mind, of course, that these figures indicate in-place reserves only; without detailed knowledge of the technologies involved in the extraction of deep heavy-oils, one can only speculate as to the corresponding recoverable reserves of synthetic crude o i l that might be proved in the future. 1.2 A Review of Crude Bitumen Recovery and Upgrading Technology 6 A discussion of crude bitumen recovery and upgrading technology necessitates a • d i s t i n c t i o n between that portion of the o i l sands that may be exploited by surface mining techniques and the remainder which require in s i t u extraction. Mining schemes are dealt with f i r s t , followed by a review of ' i n s i t u ' technology. - Mining -An o i l sands mining project t y p i c a l l y consists of the following development components: a) land c l e a r i n g , muskeg and overburden removal b) mining of the o i l sands c) transportation of recovered material to crude bitumen 6 The following discussion i s based primarily on two sources: The Alberta O i l Sands Story_ , The Government of Alberta, . January, 1974; and The Athabasca O i l Sands, Proceedings of the F i r s t Regional Conference, Western Region, Engineering Institute of Canada, 1974. 11 extraction plant d) separation of crude bitumen from sand e) upgrading into synthetic crude o i l f) t a i l i n g s disposal g) land reclamation Approximately one-third of the area covering the surface-mineable portion of the o i l sands i s overlain by organic t e r r a i n , commonly referred to as muskeg or bog. Due to the high moisture content of t h i s organic material, land-clearing and muskeg removal must take place during the winter months when the muskeg, which can be up to 20 feet i n depth, i s frozen. Once removed, the muskeg must be contained in large d i k e - l i k e arrangements i n order to prevent the material from flowing when thawed. Next comes the removal of the inorganic overburden, consisting of a wide range of p a r t i c l e size from boulders and gravel, through sands and s i l t s to clays. I n i t i a l l y , t h i s material i s used to form the dikes for muskeg and t a i l i n g s disposal; once the mining process has commenced, however, newly removed overburden i s returned to the already mined out area. The choice of mining machinery and equipment to ba used i n an o i l sands mine i s influenced strongly by the complicated development stage of an open-pit mine in the Athabasca environment. Generally, i t i s desirable to employ v e r s a t i l e machinery capable of removing overburden during the early stages of the project, and as the p i t i s expanded, as well as excavating the o i l sand during the production phase. Two types of earth moving equipment are currently believed to best meet the requirements of the Athabasca deposit. They are the bucket-12 wheel excavator and the walking dragline. The choice between these two machines depends on such factors as deposit thickness (pay depth), slope s t a b i l i t y of the open p i t wall and various other c h a r a c t e r i s t i c s of the material to be excavated. Once mined, the bituminous sand i s moved by a system of conveyor belts to the extraction plant where an i n i t i a l separation of the bitumen from the sand i s achieved. Although a number of extraction processes may be used, only the so - c a l l e d Clark 7 process i s currently being employed. The Clark process involves the mixing of hot water and chemicals with the tar sand whereby the bitumen i s floated and the sand raked o f f . Alternative methods include a chemical cold water separation system and a newly developed dry system, both of which are s t i l l i n experimental and prototype stages. 8 Having separated the bitumen from the sand, a further extraction process, referred to as froth treatment, eliminates any remaining water and s o l i d s . At t h i s point the bitumen i s ready for the upgrading stage. Upgrading i s achieved primarily through a process known as coking, whereby the bitumen molecules are fragmented through thermal cracking. There are two forms of coking currently in use. Delayed coking physically breaks down the crude bitumen into l i g h t e r materials, and deposits the heavy coke, some sulphur, and v i r t u a l l y a l l the metals contained in the bitumen. The l i g h t e r materials are then separated i n t o l i g h t gases, naptha, kerosene and gas o i l , from which heating f u e l s , 7 Dr. Karl Adolph Clark was a s c i e n t i s t with the Research Council of Alberta during the 1920's. 8 O.ilgggJS > Maclean-Hunter, Calgary, Alberta, Vol. 26 , No. 30, September 8, 1975, and Vol. 26, No. 36, October 20, 1975. 13 gasoline, jet f u e l , and heating o i l s may be derived. S i m i l a r l y , continuous or f l u i d coking uses thermal cracking to produce two streams, naptha and l i g h t and heavy gas o i l , which are i n d i v i d u a l l y hydrotreated to remove sulphur and nitrogen. The r e s u l t i n g products ara then blended into synthetic crude o i l , a product which flows f r e e l y through pipelines and represents a highly desirable refinery feedstock. Let me digress and return once again to the extraction phase, t h i s time concentrating on the t a i l i n g s that r e s u l t from the chemical hot water and froth treatment processes. This residue is disposed of in a so-called t a i l i n g s pond. Once the mine p i t has become s u f f i c i e n t l y large that i t may be r e f i l l e d without interference with ongoing mining operations, the t a i l i n g s are returned to the p i t and covered with the stored muskeg. P a r t i c u l a r l y i n t e r e s t i n g at t h i s stage i s the f a c t that, although the bitumen has been extracted from the tar-bearing sand, the t a i l i n g s , when returned, have a greater volume than the i n i t i a l l y in-place material, since i t i s impossible to compact the material to i t s v i r g i n state. In general, the swell factor i s estimated at approximately 7 percent. 9 Hence the ground l e v e l may be up to 14 feet higher after land reclamation for a pit of 2 00 feet depth. This concludes the description of the o i l sand mining, extraction and upgrading processes as they are perceived today, I intend to investigate questions of economies of scale and the 9 Dean N. Clay, The Contribution of Alberta's Tar and Heavy-Oil Sands to Canada's Intermediate-Term O i l Supply, paper written for the Research Branch, Library of Parliament, Ottawa, January, 1974, 14 costs of alternative combinations of mining, extraction and upgrading methods, as far as t h i s i s possible, i n section 2.5, - 'In S i t u ' -Research has been underway for a number of years to develop 'in s i t u * technigues for the recovery of crude bitumen where excessive overburden depths render open-pit mining i n f e a s i b l e . 'In s i t u ' technigues involve the recovery of crude bitumen from deeply buried o i l sands reservoirs without removing the overburden or the sand which bears the raw o i l . Consequently, these processes eliminate several major steps reguired i n the mining scheme discussed above. In fact the only step encountered in mining which i s duplicated under 'in s i t u * methods i s the upgrading of crude bitumen to synthetic crude o i l . 'In s i t u ' extraction may involve non-thermal technigues, p r i n c i p a l l y the addition of a diluent to the reservoir, or thermal technigues involving hot water or high pressure steam i n j e c t i o n into the reservoir. Even nuclear devices have been considered. A l l of these technigues are directed mainly at reducing the v i s c o s i t y of the crude bitumen, which must be either heated, dissolved or emulsified in order to cause i t to flow to production wells. Procedures used to force the bitumen to flow include i n j e c t i n g heat or f l u i d into i n j e c t i o n wells d r i l l e d through the overburden to the o i l sands layer. By one technigue these wells may also be producers or, a l t e r n a t i v e l y , flooding of the reservoir may be achieved through i n j e c t i o n into one set of wells with production or recovery from another set. This method i s si m i l a r to some secondary recovery methods used to increase conventional o i l production from reservoirs whose 15 natural pressure has diminished. The crude bitumen produced in t h i s manner i s s i m i l a r to that which i s derived through open p i t mining and the chemical hot water extraction process. Hence i t must be upgraded by means of coking and hydrotreating before i t q u a l i f i e s as a ref i n e r y feedstock. 1.3 A History of O i l Sands Development as early as 1788 Alexander Mackenzie took interest i n the o i l sands as indicated by his journal entry: "The bitumen i s i n a f l u i d state, and when mixed with gum, or the resinous substance co l l e c t e d from the spruce f i r , serves to gum the Indians' canoes. In i t s heated state i t emits a smell l i k e that of sea-coal... 1 , 1 0 Almost a century l a t e r , the f i r s t government geological surveys and studies of the Athabasca o i l sands were undertaken, and in 1899 a member of the Laird expedition noted: "That t h i s region i s stored with a substance of great economic value i s beyond a l l doubt, and, when the hour of development comes, i t w i l l , I believe, prove to be one of the wonders of northern Canada." 1 1 Private entrepreneurs began to take interest i n the o i l sands towards the end of the nineteenth century, but i t was not u n t i l the 1920's that a concerted e f f o r t was made to unlock the secrets of producing synthetic crude o i l . During that rime. Dr. Karl Aldolph Clark, a s c i e n t i s t with the Alberta Research 1 0 Syncrude: A P r o f i l e , Syncrude Public A f f a i r s Department , Syncrude Canada Ltd., Edmonton, Alta. 1 1 Ibidj, 16 Council, pioneered the chemical hot water extraction process that now bears his name. Based on his research, a p i l o t plant was build at Bitumont, roughly forty miles north of Fort McMurray, where approximately 500 tons of tar sand per day were processed for several years. Enthusiasm in tar sand development faded, however, with the discovery of the Leduc o i l f i e l d south of Edmonton in 1947, and only recently, with the dramatic increase in o i l prices and conventional reserves on the decline, has there arisen a renewed interest i n the production of synthetic crude o i l . - Great Canadian O i l Sands Ltd. -The f i r s t commercial scale plant to obtain o i l from the Athabasca deposit was that of Great Canadian O i l Sands Ltd. (GCOS) , completed in 1967 for a c a p i t a l cost of about $260 mi l l i o n , or about $5800 per barrel-day for i t s i n i t i a l design capacity of 45,000 barrels per day. 1 2 The f a c i l i t i e s are located some twenty miles north of Fort McMurray adjacent to the Athabasca r i v e r . GCOS uses two giant bucket-wheel excavators, each weighing about 1800 tons. A conveyor system transports the mined material to an extraction plant, where the bitumen i s separated from the sand by means of the Clark process. Delayed coking i s used in the upgrading stage. Additionally, a 266-mile 16-inch-diameter pipeline to Edmonton was constructed to bring the synthetic crude to market, and a power plant was b u i l t to supply the 1 2 G.W. Govier, "Alberta's O i l Sands in the Energy Supply Picture", in K.J. L a i d l e r , ad. Energy Resources , Ottawa, 1973. (Proceedings of a Eoyal Society of Canada Conference, October 15-17, 1973) p. 64 17 required e l e c t r i c i t y . A gas pipeline, extending from the v i c i n i t y of Lac La Biche to the GCOS plant, supplies natural gas for use in bitumen upgrading. GCOS pays a royalty to the Alberta government at a rate of 8 percent on the f i r s t 900,000 barrels produced monthly and 20 percent on the remainder. 1 3 The company i s taxed f e d e r a l l y and p r o v i n c i a l l y i n the same manner as any producer of conventional o i l in Alberta. This pioneering e f f o r t in the o i l sands has been a costly one. During the early years of operation the company experienced a number of technical problems requiring major modification of power plant b o i l e r s , redesign of excavator buckets, and expansion of conveyor systems and extraction plant f a c i l i t i e s . In an attempt to overcome the almost insurmountable problems of excavating o i l sand during the winter season, the deposit i s now dynamited during the summer months, in order to " f l u f f - u p " the material and permit a i r to permeate the sand and act as an insulator. As a res u l t of these setbacks, GCOS, a subsidiary of the Sun O i l Company of Philadelphia, had invested some $545 mi l l i o n in c a p i t a l and operating expenditures and accumulated a d e f i c i t of $88 m i l l i o n by the end of 1972.4* Although recent years have not brought an end to the technical problems experienced by GCOS, r i s i n g o i l prices have provided a welcome respite from the f i n a n c i a l l y troubled early years of operation. 1 3 Dean N. Clay, op. c i t . , p. 9 1 4 Creat Canadian O i l Sands Limited Annu§i l e ^ o r t ^ 1972 18 - Syncruda -Syncrude Canada Limited, which made i t s f i r s t i n a series of applications to the alberta government in 1962, received f i n a l authorization to construct a plant of 125,00 0 barrel per day (bbl/d) capacity i n September, 1973. 1 S At that time, Syncrude was a consortium of four major companies; Imperial O i l Ltd., A l t a n t i c l i c h f i e l d Canada Ltd., and Canada C i t i e s Service Ltd., each holding 30 percent i n t e r e s t s , and Gulf O i l Canada Ltd, with a 10 percent interest. Capital costs were estimated to accumulate to $960 mi l l i o n over a fi v e year construction period, with t o t a l production costs amounting to $5 per barrel in terms of 1972 d o l l a r s . 1 6 Including such a n c i l l a r y development as the power plant, pipelines, roads and townsite f a c i l i t i e s , the costs were expected to well exceed $1 b i l l i o n . Special arrangements were made with the Alberta and federal governments on issues of royalty and taxation. It was agreed that Alberta would c o l l e c t a royalty i n the form of 50 percent of the p r o f i t s or, a l t e r n a t i v e l y , exercise a once-and-for-all option of reverting to a gross levy on production of 7.5 percent on or before the f i f t h anniversary of commercial start-up. Additionally, Alberta negotiated the option of acquiring, through the Alberta Energy Company, 20 percent of the operating 1 5 September 14, 1973 l a t t e r of agreement between Syncrude and Alberta Government, tabled before the Alberta Legislature on December 13, 1973. 1 6 The 1972 c a p i t a l cost estimates are from the February 1975 report prepared by Loram International for the Alberta Government as excerpted in the Proceedings of the House of Commons Standing Committee on National Resources and Public Works , March 4, 1975, p. 6 : 73. The per barrel costs are from p. 90, vol. 1 of An Energy. Policy for Canada^ Phase I, published by the federal Department of Energy, Mines and Resources i n 1973. 19 plant and 80 percent of the pipeline needed to transport the o i l to Edmonton. The u t i l i t y plant was to be owned 50 percent by the province, with the costs of operation borne e n t i r e l y by Syncrude. With regard to taxation, Syncrude would be treated as a consortium and, for the purpose of c a p i t a l cost allowances, would enjoy the benefits of accelerated depreciation rates i d e n t i c a l to those i n the mining i n d u s t r y . 1 7 Since l a t e 1973, however, both the costs and the participants have changed markedly. In December 1974, A t l a n t i c H i c h f i e l d abandoned i t s 30 percent i n t e r e s t in the project, and news reports were circulated to the effect that the estimated t o t a l of c a p i t a l expenditures had risen to over $2 b i l l i o n , or about $16,000 per barrel-day for a revised design capacity of 128,900 b b l / d . 1 8 The remaining participants stated that the entire project would be dropped unless an additional $1 b i l l i o n were obtained from government or other sources by the end of January, 1975. Government requests managed to extend the deadline for a few days, but the terms of the new arrangement were nevertheless worked out in great haste and agreed upon at a meeting i n Winnipeg on February 3, 1975. Under the new agreement, the remaining non-defaulting partners would retain their 70 percent equity interest i n the project by putting up $400 mil l i o n of the additional $1 b i l l i o n , obtaining $200 mi l l i o n of that amount by convertible dabenture loan from the province of Alberta. The remaining 30 percent 1 7 Larry Pratt, "The Tar Sands Deals: Syncrude Gets the Bigger Porkchop" in The Last Post , A p r i l 1975, Vol. 4, No. 6/75. 1 8 F i n a n c i a l Times , December 9 and 10, 1974; Financial Post December 7, 1974 and January 4, 1975; and Oilweek, January 20, 1 975. 20 would be provided by the federal, Alberta and Ontario governments, contributing 15 percent, 10 percent and 5 percent respectively. These equity interests involve corresponding percentage commitments to the t o t a l costs of the project and e n t i t l e governments, as equity participants, to corresponding shares of the project's ret urns. 1 9 Additionally, Alberta maintains i t s option of acquiring 20 percent of t o t a l equity through the Alberta Energy company, and has increased to 100 percent i t s share of the u t i l i t y plant and the pipeline to Edmonton, as opposed to 50 percent and 80 percent i n the o r i g i n a l 1973 agreement. The tax treatment of Syncrude was changed only i n the sense that the federal minister of finance confirmed at the Winnipeg meeting that r o y a l t i e s c o l l e c t e d by Alberta from Syncrude would be deductible i n determining the federal income tax base, thus exempting Syncrude from the provisions of the November, 1974 federal budget. A further concession granted Syncrude as a r e s u l t of the Winnipeg agreement was a guarantee of world l e v e l prices for the plant's prod u c t . 2 0 Construction at the Syncrude s i t e at Mildred Lake, some 25 miles north of Fort McMurray, has proceeded at a rapid pace since completion of the new agreement, so that commercial 1 9 These and other features of the Winnipeg agreement were reported by Premier Loughead to the Alberta Legislature on February 4th, 1975, (Alberta Hansard, Vol, 4, No. 9, pp. 318-321) and i n Oilweek, February 10, 1975, p. 9. According to Oilweek's c a l c u l a t i o n s , the equity interests of Imperial, C i t i e s Service, and Gulf are to s h i f t from 30 percent, 30 percent and 10 percent to 31.24 percent, 22 percent, and 16.75 percent by way of d i f f e r i n g contributions towards the additional $400 mill i o n estimated to be required from the private participants. 2 0 For a complete history of Syncrude agreements see Larry Pratt, op^ cit_j. 21 production is.now estimated to commence during early 1979. The Syncrude plant i s , i n p r i n c i p l e , guite similar to the GCOS operation, but, i n d e t a i l , i t involves considerable modification. Rather than employing bucket-wheels i n the mining scheme, Syncrude w i l l use four large draglines, each with a capacity of 90 cubic yards. They w i l l serve both to remove the overburden and to excavate the oil-bearing sand. The maximum depth to which these draglines can operate i s roughly 2 10 feet, which s l i g h t l y exceeds the anticipated pit-depth on the Syncrude lease. The mined material w i l l be transported by conveyor systems to the extraction plant, where more or less the same methods as i n the GCOS operation w i l l be used to separate the bitumen from the sand. The upgrading stage w i l l consist primarily of f l u i d or continuous coking and hydrotreating. The two streams obtained from hydrotreating may be blended i n a variable r a t i o , thus allowing Syncrude some f l e x i b i l i t y i n meeting the d i f f e r e n t feedstock reguirements of i n d i v i d u a l r e f i n e r i e s . It i s anticipated that the combination of mining, extraction, and upgrading techniques to be used by Syncrude w i l l r esult i n an o v e r a l l recovery of synthetic crude o i l of about 56 weight or 65 volume percent of the in-place crude bitumen. If achieved, t h i s would represent a s i g n i f i c a n t improvement over the 56 volume percent conversion achieved by GCOS.21 In addition to the f a c i l i t i e s that w i l l be owned and operated by the Syncrude consortium, a 260 megawatt power plant i s currently being i n s t a l l e d and a pipeline to Edmonton i s i n 2 1 G.w. Govier, "Alberta's O i l Sands i n the Energy Supply Picture", a presentation to the Canadian E l e c t r i c a l Association 84th Annual Meeting, Banff, Alberta, June 25, 1974. 22 i t s f i n a l planning stages. Syncrude w i l l use the Lac La Biche-Fort McMurray pipeline to obtain natural gas for use i n the power plant and bitumen upgrading. To give some f i n a l Indication of the magnitude of the Syncrude project, the following figures are worth presenting. The plant s i t e area, mine-pit, and t a i l i n g s pond w i l l respectively cover 2,800, 7,000, and 7,500 acres. When completed, the project w i l l have used 234,000 cubic yards of concrete, 24,000 tons of st r u c t u r a l s t e e l and over 2 m i l l i o n l i n e a l feet of pipe (excluding the pipeline to Edmonton). Once capacity production i s achieved, over 250,000 tons of material w i l l be mined daily, employing more than 2,000 persons on s i t e . S u f f i c i e n t o i l bearing sand i s contained in the presently delineated mine area to maintain capacity output f o r 25 y e a r s . 2 2 - Future O i l Sands Mines -In addition to GCOS and Syncrude, three further applicants have been granted approval by the AERCB to proceed with plants, a l l i n excess of 100,000 b.bl/d c a p a c i t y . 2 3 For one reason or another, however, a l l of these proposed projects have been either shelved i n d e f i n i t e l y or cancelled outright. The three groups are headed by Shell Canada, Petrofina and Home O i l . In mid-1974 each of these proposed plants was estimated to cost a cumulative t o t a l of about $1 b i l l i o n over a four to f i v e year construction period with t o t a l operating costs predicted to be roughly $5-$6 per barrel in terms of 1972 d o l l a r s . 2 4 2 2 "Facts and Figures", information provided by Syncrude Canada Ltd., Public A f f a i r s Department, Edmonton, Alberta. 2 3 Oilweek, May 26, 1975. 2 * figures obtained from various submissions to the ASRCB, and from p. 90 of Vol. 1 of An Enerjgjr Policy, for Canada x og. cit.. 23 The project led by Shell Canada Ltd. was shelved i n October 1974 when a major partner. Shell Explorer Ltd., a subsidiary of the Shell O i l Co., Houston, dropped i t s i n t e r e s t i n the proposed o i l sands mine. The reason for the U.S. Shell pullout, according to the Financial Post, was the almost certainty that synthetic o i l would not be available for assured export to the United States.zs As far as the Petrcfina and Heme groups are. concerned, no public statements have been made indicating the reasons for the i r withdrawal. It requires l i t t l e imagination, though, to picture the effect that Syncrude 1s dramatic upward re v i s i o n of cost estimates must have had on the confidence of potential investors in addit i o n a l o i l sands plants. In a l l l i k e l i h o o d , i t was the discouraging e f f e c t of the unexpected Syncrude cost increase which caused Home and Petrofina to hold back on th e i r projects, at lea s t temporarily. Any reduction i n the apparent reluctance of the petroleum industry to engage in further development of the surface-mineable o i l sands, w i l l l i k e l y hinge on the p o s s i b i l i t y of either very s i g n i f i c a n t cost-reducing technological breakthroughs or sharply increased o i l p r i c e s , providing a s u f f i c i e n t l y large expected return to warrant such large committments of high r i s k c a p i t a l . - Mn S i t u ' Development -•In s i t u ' recovery techniques have also been receiving t h e i r share of attention during the l a s t two decades. In a l l , some 24 f i e l d tests or p i l o t schemes involving 'in s i t u * methods 2 5 IiSSH£iSl H2St , December 7, 19 74, 24 have been carried out i n the o i l sands - nine of these tests were undertaken in the Cold Lake area, four in the Peace River deposit, and the remainder in the Athabasca deposit. Four 'in s i t u ' p i l o t schemes have been underway in recent years, of which two can be considered major p r o j e c t s . 2 6 S h e l l has engaged in an 'in s i t u ' test f a c i l i t y involving steam i n j e c t i o n in the Peace River deposit. Provided that these tests show encouraging res u l t s , the company plans to go ahead with a $15 m i l l i o n p i l o t scheme. Ultimately the ASRCB anticipates that Shell w i l l seek approval for a commercial scheme of 100,000 bbl/d capacity and s i m i l a r i n cost to an Athabasca surface mining venture. The on-stream date of such a plant has been predicted as early as 1983. 2 7 A number of other companies, including Amoco Canada, Texaco, B r i t i s h Petroleum and Chevron Standard, have been active in o i l sands research, a l l of them having more or less d e f i n i t e plans to proceed with 'in s i t u ' p i l o t projects in the near future. As mentioned e a r l i e r , though, the enthusiasm with which such plans are pursued w i l l depend, quite naturally, on the degree to which the cost and revenue uncertainties surrounding o i l sands development are settled i n the years ahead. 2 6 G.H. Govier, ££.. c i t ^ 2 7 I i i i • 25 2» Sxncrudg Cost-Benefit Analysis This section focusses on the costs and benefits of the Syncrude project and t h e i r d i s t r i b u t i o n among the part i c i p a n t s . After b r i e f l y describing the model on which my analysis rests, I proceed to offer some answers to what I perceive to be the major guestions involved. F i r s t , the project as a whole i s evaluated in l i g h t of the uncertainties that surround o i l sands development and r e s u l t s of s e n s i t i v i t y analysis are presented. Second, attention i s directed towards the special arrangements of governmental equity p a r t i c i p a t i o n , taxation and royalty treatment that d i s t i n g u i s h Syncrude from conventional petroleum producers in Alberta. Third, an attempt i s made to deal with sunk costs and the extent to which they may have influenced the consortium's decision to proceed with a project that showed only marginal private returns when evaluated i n t o t a l . Next, I touch b r i e f l y on the subject of economies of scale, and, f i n a l l y , some li m i t a t i o n s of the analysis are pointed out. 2.1 The Structure of the Model 2 8 The simulation model, a detailed description of which may be found in Appendix B, i s in annual terms, and deals primarily with the expected costs and benefits of Syncrude as they accrue 2 8 The model used here had i t s beginnings in early 1975 and has evolved continuously over the past year. P a r t i c u l a r l y during i t s early stages considerable assistance was obtained from John H e l l i w e l l . A well developed but already outdated version of the model has been previously documented i n "A Model for Assessing the Economic Costs and Benefits of Athabaska O i l Sands Projects," U.B.C. Department of Economics Discussion Paper, October, 1975. 26 to each of the economic actors concerned. 2 9 Since a s i g n i f i c a n t amount of uncertainty surrounds projects of t h i s nature the model i s structured f l e x i b l y , allowing both s e n s i t i v i t y analysis for a l l of those variables whose values cannot be accurately predicted and the simulation of budgetary changes which may affect the d i s t r i b u t i o n of returns among the actors. For the purpose of t h i s analysis, only the actual mine and operating plant w i l l be considered, since the services of both the u t i l i t y plant and the pipeline to Edmonton are to be priced to produce a normal u t i l i t y rate of r e t u r n . 3 0 Much of the model i s scarcely more than an accounting framework which provides the basis for the so-called economic rent equations. Within t h i s framework exogenous data f o r o i l production, prices and investment outlays are used to c a l c u l a t e stocks of c a p i t a l , taxable p r o f i t s , income taxes and r o y a l t i e s . I refer to t h i s section of the model as an accounting framework simply because i t simulates both the i n t e r n a l f i n a n c i a l operations of the consortium and the working of the taxation and royalty rules as they apply i n each period. The rent equations then serve to alloc a t e the resulting flows to the respective 2 9 By economic actors i s meant a l l the direct participants in the project. Consumers of Syncrude o i l and producers of conventional o i l are excluded from t h i s category because i t i s assumed that the Canadian domestic price of conventional crude w i l l have ris e n to world l e v e l equivalence by the time Syncrude's product comes to market; moreover, i t i s assumed that any surplus of t o t a l Canadian crude o i l production over domestic requirements will.be exported at world prices. Hence there i s no economic rent to be earned or l o s t either by Canadian o i l consumers or by producers of Alberta conventional crude, as a result of Syncrude's emergence. 3 0 According to Premier Lougheed, as stated before the Alberta Legislature on February 4th, 1975 (Alberta Hansard, Vol. 4, No. 9, pp. 318 - 321) 27 participants. Each rent equation keeps track of one group of p a r t i c i p a n t s 3 1 under a given version of the Syncrude deal, alternative versions of the Syncrude deal result from the options that Alberta obtained during negotiation of the February 3rd, 1975 Syncrude agreement, which e s s e n t i a l l y leaves the province with three d i s t i n c t choices: 1. to maintain the basic arrangement e n t i t l i n g Alberta to an equity share of 10 percent and a royalty i n the form of 50 percent of book p r o f i t s . 3 2 2. in the f i f t h year of production, to exercise the option of reverting, once-and-for-all, to a gross production royalty of 7.5 percent, leaving the current 10 percent equity share unchanged. 3. to acquire a maximum equity of 36 percent - the combined effect of converting the $200 million debenture loan and excercising the option of obtaining 20 percent of t o t a l project eguity through the Alberta Energy Company at cost when the plant comes into production -and to maintain the 50 percent profit-sharing royalty. These options obviously increase the expected value and decrease the r i s k i n e s s of Alberta's share of net revenues. In 3 1 L i t t l e seems to be gained from making a d i s t i n c t i o n between the private members of the consortium. Hence Imperial, C i t i e s Service and Gulf are considered as one group. The governments of Canada, Alberta, and Ontario are necessarily treated as separate i n t e r e s t groups so that, i n a l l , there are four rent eguations for each version of the Syncrude deal. 3 2 Book p r o f i t s are defined as gross revenue less allowed operating costs (excluding income tax), s t r a i g h t - l i n e depreciation of the c a p i t a l cost, interest expense at 8 percent of 75 percent of the c a p i t a l employed and operating losses carried forward. 28 general, i f costs are p a r t i c u l a r l y low i n r e l a t i o n to revenues, Alberta i s l i k e l y to choose option 3, while i f costs are very high and revenues low, the course given by option 2 ought to be followed. Over some intermediate range of p r o f i t a b i l i t y , the province may be content with the basic arrangements outlined i n option 1. I have modelled t h i s decision process on the assumption that a l l major cost and revenue uncertainties w i l l be eliminated by the time Syncrude comes on-stream, and that Alberta w i l l choose at that time the option with the highest expected net present value. To the extent that a l l uncertainties w i l l not be s e t t l e d by 1979, but may indeed remain, to some degree at l e a s t , throughout the plant's operating l i f e , t h i s method of analysis c l e a r l y overstates the extent to which Alberta may insulate herself from the r i s k s involved. Each rent equation accumulates the year-by-year flows of net returns after deducting the amount that each participant would have obtained from his most obvious a l t e r n a t i v e . 3 3 The cumulative net rents to each party are compounded forward over the l i f e t i m e of the project using the s o c i a l time preference factor, STFNOM, which i s expressed i n nominal terms (see Appendix B). At the end of the project's estimated 25-year operating l i f e , the accumulated future values of net costs or 3 3 This procedure for charging opportunity costs i s based on some rather s e n s i t i v e assumptions - a l l investment in the Syncrude project i s assumed to simply displace investment that would have taken place in Canada i n the absence of the project. In c a l c u l a t i n g rents to Alberta and Ontario I have assumed that Ontario's share would otherwise have remained within the province, but that a l l other investment would have taken place in Alberta regardless of Syncrude's existence. 29 benefits are discounted, back at the same nominal rate of time preference to obtain net present values, as at the end of 1975, measured in terms of 1975 prices. The main output from each dynamic simulation i s thus a set of present values, one for each participant under each of the revenue sharing systems that result'from Alberta's options, and given an assumed set of values for the variables whose actual values cannot be eas i l y forecast. Hence, holding a l l else constant but varying the value of a single sensitive variable over a range of simulations, the modal enables me to show how sensi t i v e results are with respect to that variable. Thus, the reader may also reach his own conclusions as determined by his idea of the values of such key variables as, for example, the rate of s o c i a l time preference or the opportunity cost of funds. 2.2 The Base Case and S e n s i t i v i t y A n a l y s i s 3 4 The following discussion summarizes the res u l t s of my economic evaluation of the Syncrude project. Appendix A contains supporting figures and tables to which I s h a l l refer from time to time, since the r e s u l t s of s e n s i t i v i t y analysis are much more c l e a r l y i l l u s t r a t e d i n graphical form. My so-called base-case results are arrived at by assuming a given set of values for a l l those variables that are subject to 3 4 The res u l t s presented here are considerably d i f f e r e n t from those presented i n H e l l i w e l l and May (July, 1975 and October, 1975). This r e f l e c t s primarily the addition to and re v i s i o n of some important underlying data and exogenous assumptions. Moreover, some previous errors in programming have been detected and eliminated. S p e c i f i c information regarding these changes and their r e l a t i v e importance i s available on request,. 30 uncertainty. Moreover, i t i s assumed that the values of such sensitive variables remain unchanged over the l i f e of the project. These base-case values are generally drawn from the Foster (1975) economic study, which i n early 1975 was made available to the various governments who eventually decided to acquire eguity i n t e r e s t s in the project. The values of c e r t a i n c o e f f i c i e n t s , such as the re a l pre- and post-tax returns on c a p i t a l (used to charge opportunity costs) are based on economy-wide h i s t o r i c a l averages. As for the tax and royalty structure that governs the d i s t r i b u t i o n of net returns, I have assumed the provisions of the most recent federal and Alberta budgets to remain in force throughout the plant's operating l i f e . These and other features of the model are described in greater d e t a i l i n Appendices B and C, with references to a l l appropriate primary sources. Table 2-1 Syncrude Simulation Results Base Case Values (present values of net rents i n millions of 1975 $) COST/EBL TOTAL FEDERAL ALBERTA ONTARIO PRIVATE $10.98 +114.6 -682.7 +468.3 -13.7 +342.7 jBase Case Assumptions: | Alberta maint ains basic ! | Syncrude agreement: |capital costs * =$2.1 b i l l . ) 50% p r o f i t share royalty joperating costs ** =$118 m i l l . | Equity j i n f l a t i o n rate =4% | Federal 15% jsoc. time preference =7.44% I Alberta 101 |cost of c a p i t a l =7.44$ | Ontario 5% |tax return on c a p i t a l =3% | Private 70% 11975$ o i l price =$11.28 | Total 100% i - - .... . < * h i s t o r i c d o l l a r s accumulated over construction period ** annual operating costs at capacity output, in constant 1961 d o l l a r s Table 2-1 provides a short l i s t of sensitive variables with 31 t h e i r base-case values and the r e s u l t i n g t o t a l and component rents. Total rents to the project are $114 million in terms of t h e i r present value at the end of 1975, measured i n 1975 prices, or, expressed another way, about 30 cents per barrel. The discounted 1975 cost of producing one barrel of synthetic crude o i l amounts to about $11. 3 5 Quite astonishing i s the uneven d i s t r i b u t i o n of the t o t a l return to the project among the four participants. Both the federal and Ontario governments take a loss while Alberta,, i n remaining with the basic option and the private participants receive disproportionately large returns r e l a t i v e to the t o t a l . A number of complicated factors interact to bring about t h i s r e s u l t ; i n an attempt to disentangle them, I offer the following explanation. The federal government's net l o s s of $682 mil l i o n i s attributable to the fact that the other participants are in e f f e c t being subsidized through the tax immunity of government investment, the d e d u c t i b i l i t y of r o y a l t i e s from the tax base, and the consortium aspect of Syncrude which allows large early losses to be written o f f against taxable income from the private participants' other Canadian operations. Alberta benefits to the tune of $4 6 8 m i l l i o n l a r g e l y from the p r o f i t -sharing royalty which i t c o l l e c t s from a l l participants including governments, and i t s equity return which i s not subject to federal tax. Ontario loses marginally since i t i s neither a tax or royalty c o l l e c t o r nor a private p a r t i c i p a n t 3 5 The discounted cost per barrel i s calculated by dividing the present value of a l l costs (over the project's l i f e ) by t o t a l production (over the project's l i f e ) , discounted at the r e a l rate of s o c i a l time preference. 32 able to write o f f early losses against other taxable income. Although positive returns to Ontario's equity share are generated towards the l a t t e r half of the project's l i f e , these when discounted (and af t e r deducting Alberta's royalty share) are i n s u f f i c i e n t to cover the present value of substantial early losses. F i n a l l y , private industry members of the consortium obtain t h e i r positive return of $342 mi l l i o n through transfers from the federal government, and to a lesser extent from Alberta, primarily in the form of the early tax credits mentioned above. So much for base-case re s u l t s . Keeping i n mind that an economic evaluation of Syncrude must concentrate on questions of r i s k and uncertainty so prevalent in projects of th i s nature, I turn now to s e n s i t i v i t y analysis. I direct the reader's attention to figures and tables A-1 through A-6 in Appendix A. Each of these shows the ef f e c t s on t o t a l rents and t h e i r d i s t r i b u t i o n of varying the value of a single key variable or c o e f f i c i e n t over a range of possible values. Each table corresponds to a graph and simply presents the r e s u l t s of s e n s i t i v i t y analysis i n an alternative format. I shall-begin by discussing the figures one at a time, and then I s h a l l attempt to make a combined assessment. F i r s t , I s h a l l consider the effects of changes i n the price of crude o i l , then proceed with c a p i t a l and operating costs, the general rate of i n f l a t i o n , the s o c i a l discount rate and, f i n a l l y , the opportunity cost of c a p i t a l . Uncertainties resulting from the exploration for and delineation of a mineral deposit may conveniently be ignored here, because location and extent of the surface-mineable o i l sands are considered to be firmly 33 established parameters. I have modelled the o i l price in a manner that i s consistent with the year-by-year plant-gate price estimates of Foster Research. Under the assumption that the r e a l price of o i l w i l l be set at some value by the time Syncrude comes on-stream and w i l l thereafter remain constant, Foster's nominal prices for the years 1978 - 2003 can be approximated by taking a base price in r e a l 1975 d o l l a r s that yi e l d s almost i d e n t i c a l nominal future values when i n f l a t e d by the price index. Given a base value of 4 percent for the general rate of i n f l a t i o n , the resulting 1975$ o i l price that corresponds to the Foster forecast i s approximately $11.28. I have, in other words, represented an entire vector of future prices by a single value, given my assumption of a constant 4 percent average annual rate of i n f l a t i o n . The prices are per 35 gallon barrel of synthetic o i l at Fort McMurray. A Toronto price can be obtained by adding about .25 1975$ for transportation to Edmonton and another .60 1975$ for transportation to Toronto. An equivalent price for the Montreal market can be obtained by adding a further .35 1975$ to the t o t a l cost of transportation to Toronto. This exposes a s l i g h t problem i n modelling a plant-gate price for Syncrude that i s consistent with both Foster's estimate and the 1975$ world price landed i n Montreal, approximately $12 per b a r r e l . Since Foster did not make e x p l i c i t his assumptions on the basing point for Canada's p r i c e - s e t t i n g policy, transportation costs from Fort McMurray to that basing point, or even Canada's world l e v e l equivalent price given some basing point, I have chosen to simply deduct .72 1975$ from the $12 world price i n my plant-34 gate price equation. 3 6 Whatever Foster's assumptions may have been, any difference between the .72 1975$ and my estimate of transportation costs from Fort McMurray to Toronto or Montreal can be regarded as a premium paid to Syncrude for the q u a l i t y -advantage of synthetic o i l over the conventional product. In figure A-1 o i l prices are plotted on the horizontal a x i s 3 7 and net returns are measured in millions of present value 1975 d o l l a r s along the v e r t i c a l axis. There are f i v e curves i n figures A-1 to A-6. Curves 1 through 4 show the present value of net rents accruing to the federal government, Alberta, Ontario, and the private producers, respectively. Curve 5 shows the t o t a l economic rents accruing to the project as a whole. It i s thus the sum of the amounts measured by curves 1 through 4. Net benefits of the project as a whole take account of the d i r e c t operating costs and the before-tax opportunity cost of the c a p i t a l employed, and are therefore independent of Alberta's choice of options or changes in the tax and royalty structure. Curve 5 shows, quite naturally, that t o t a l rents are large and negative at low o i l prices, pass through the break-even point at a plant-gate price of about $11 per b a r r e l , and become increasingly p o s i t i v e at higher o i l prices. How does t h i s relate to world l e v e l equivalent prices, to which Canada w i l l most l i k e l y have adjusted by the time Syncrude comes on-stream? 3 6 Making the modelling of plant-gate prices consistent with world prices Is necessary i f the Syncrude model i s to be incorporated i n a larger, more general Canadian energy model currently being developed at U.B.C. 3 7 while I a l t e r the r e a l price of o i l by a constant amount over the entire simulation period i n t h i s experiment, the model has been designed to also allow s e n s i t i v i t y analysis on the r e l a t i v e growth rate of o i l prices. 35 Working backwards from the world price of o i l landed at Montreal, about $12 (1975$), I deduct the cost of transportation from Fort McMurray, roughly $1.20 (1975$). Assuming no subsidy that would guarantee Syncrude a break-even price, net returns to the project would be approximately -$80 mi l l i o n . I f the basing point for the national o i l price were Toronto ( i . e . : world l e v e l equivalence landed in Toronto) Syncrude would fare s l i g h t l y better, receiving about $11.50 (1975$) at the plant-gate. It i s of course true, in general, that the further west the basing point for Canada's o i l pricing strategy i s moved, the better Syncrude w i l l do in f i n a n c i a l terms. A strong p o s s i b i l i t y e x i s t s , however, that both Toronto and Montreal w i l l be covered by a single t a r i f f zone, with the additional costs of pipeline service to Montreal being r o l l e d i n with the Toronto t a r i f f . This method of' t a r i f f setting, which subsidizes the Sarnia-Montreal leg of Canada's i n t e r p r o v i n c i a l pipeline system, would make Syncrude's return insensitive to the choice between Toronto and Montreal as a basing point for the national o i l price, but would r a i s e the average transportation cost to the Toronto market to a figure i n the order of roughly $1 per b a r r e l . Late-1975 world o i l prices on which the cal c u l a t i o n s of the preceding pages are based, have been regarded by many analysts as being l i k e l y to f a l l in r e a l terms in the future. Recent OPEC price increases, however, have been s p e c i f i c a l l y related to changes i n the prices of OPEC imports, suggesting that, over the longer term., world o i l prices are l i k e l y to increase at the general rate of i n f l a t i o n . Hence, given a basing zona of Toronto-Montreal for the Canadian domestic price, with Syncrude 36 o i l costing about. $12 per barrel delivered to that market, the undertaking could just break even, assuming no Alberta royalty and no premium f o r synthetic o i l . At t h i s point I should mention two further complications a r i s i n g from the fact that the federal government has assured Syncrude's private industry participants that synthetic o i l would command world l e v e l prices. The f i r s t i s the-question of what course government policy would take, should the future world o i l price once again f a l l below the domestic price. I have simply ignored t h i s p o s s i b i l i t y throughout my analysis. The second complication relates to the fact that the fe d e r a l government has not, to my knowledge, spec i f i e d what quality benchmarks, i f any, would be used to establish world l e v e l equivalence. This question i s s i g n i f i c a n t for an economic evaluation such as the present one, since synthetic o i l i s already a p a r t i a l l y refined commodity - i t may well command a premium of up to $1 per barrel as a refinery f e e d s t o c k . 3 8 I have modelled the o i l price in a way that does not preclude the p o s s i b i l i t y of adding such a premium, but for a l l of the analysis presented here, the relevant c o e f f i c i e n t has simply been set to zero. As pointed out e a r l i e r , though, Foster's 1975$ plant-gate price estimate may already incorporate some element of premium, depending on his i m p l i c i t assumptions i n converting from the world price to the price at Fort McMurray. Hence, e x p l i c i t addition of a premium i n my simulations would be incremental to that already included i n Foster's forecast. Turning now to the effects of a l t e r i n g o i l prices on 3 8 Dean N. Clay, op_._ ext.. , page 16. 37 component rents, I r e f e r to curves 1 through 4 in figure A-1. It i s perhaps best to begin with Alberta's share given by curve 2, since i t i s Alberta's choice of options that w i l l determine the f i n a l d i s t r i b u t i o n of rents among a l l participants. Alberta, in making use of the gross royalty, would minimize i t s losses at o i l prices under $9 per barrel and, s i m i l a r l y , could maximize i t s return by acquiring additional eguify in the project i f o i l prices were to exceed $11.50 per barrel. The relevant break-even price i s about $9.10. Quite i n t e r e s t i n g i s the degree to which Alberta i s able to insulate herself, through excercising either of the main options, from the v a r i a b i l i t y of returns given the wide range of o i l prices assessed. By converting to the gross royalty, Alberta improves her net loss position by more than $1.5 b i l l i o n over the basic arrangement at a r e a l 1975 o i l price of $5. At the other end of the scale, the increased equity option adds about $120 million present value to the province's net return when the o i l price reaches $14 per barrel. Federal rents, as depicted by curve 1, are negative at any of the o i l prices assessed, remaining as low as -$462 m i l l i o n at $14 per barrel. Ontario's return i s less variable than that of the other participants, but turns positive only at o i l prices over about $12.75 per barrel. F i n a l l y , the private participants break even at approximately $8.30 per b a r r e l , much lower than the project as a whole since the federal government i s taking correspondingly larger losses. Concluding t h i s discussion cf o i l prices, I should caution the reader to keep i n mind that a l l of the points made have been based on the assumption that a l l other variables which are 38 subject to uncertainty take on the i r base case values. The ' p a r t i a l ' s e n s i t i v i t y of results with respect to these variables i s assessed below. In the context of a project whose anticipated r e a l costs nearly doubled over the course of a year, i t i s scarcely necessary to state that there i s a substantial amount of cost uncertainty to be shared among the participants. Figures A-2 and A-3 as well as the corresponding tables show the e f f e c t s of al t e r i n g , f i r s t , r e a l c a p i t a l costs and, second, both c a p i t a l and operating costs over a range between 50 percent and 150 percent of the costs estimated for Syncrude at the time of the Winnipeg agreement i n early 1975. 3 9 In addition to the results shown i n the two figures, tables A-2 and A-3 also indicate how the discounted cost per barrel changes with alternate cost scenarios. Comparison of the ' COST/BBL • columns i n the two tables shows that t o t a l costs of the project are divided almost equally between c a p i t a l investment and operating expenditures on a present value basis. The various curves in each figure once again show the net returns to the project in t o t a l and to each consortium member given the assessed range of cost va r i a t i o n . When only c a p i t a l costs are varied, Alberta either remains with the basic arrangement or acguires additional equity i f costs drop s u f f i c i e n t l y . When both c a p i t a l and operating costs are varied, the province makes use cf the gross royalty option as well. 3 9 The base case cost estimate i s derived from two sources: operating costs are taken from the Foster Research report of January 1, 1975; c a p i t a l costs are based on a lata-1975 estimate obtained from Syncrude Canada Ltd. 39 Somewhat surprising i s the fact that alberta i s not able to insulate herself from the v a r i a b i l i t y of returns when t o t a l costs change to the same degree as she did with variable o i l prices - indeed, when costs increase by 25 percent she loses more in absolute terms than the federal government. This results primarily from the fact that Alberta maintains the basic p r o f i t -sharing arrangement over quite a wide range of cost v a r i a t i o n ; and, as long as the p r o f i t sharing formula i s i n e f f e c t , the t o t a l write-off of operating costs and allowed amortization of c a p i t a l represents a greater loss to Alberta at the combined 5 0 percent royalty and 11 percent p r o v i n c i a l tax rates than i t does to the federal government at a 36 percent tax rate. Moving on to figure A-4, I analyze the effects of varying the general rate of i n f l a t i o n . In the preceding s e n s i t i v i t y analysis of project returns with respect to o i l prices and costs I considered the effects of once-and-for- a l l changes i n the relevant variable, i n each case r e l a t i v e to a general price l e v e l growing at 4 percent per year. Here, I hold r e l a t i v e prices constant and vary the trend rate of growth of a l l prices, making a corresponding adjustment to nominal interest rates, i n the equations underlying the estimation of economic costs, a l l c a p i t a l stocks, depreciation, etc. have been measured i n a manner that leaves these factors unaffected by anticipated changes in the general price l e v e l . Thus when net benefits are graphed under various i n f l a t i o n rates, the t o t a l benefit l i n e , curve 5, i s horizontal, depicting i t s i n s e n s i t i v i t y to changes i n the general rate of i n f l a t i o n . However, the d i s t r i b u t i o n of net returns does change because the tax and royalty structure 40 t y p i c a l l y i s not designed to eliminate the effects of i n f l a t i o n . 4 0 In pa r t i c u l a r , the Alberta profit-sharing royalty and the corporation income tax are both higher in real terms at higher rates of i n f l a t i o n . This arises from the fact that conventional depreciation allowances provide a smaller t o t a l r e a l recovery of c a p i t a l when i n f l a t i o n i s greater. Alberta benefits additionally by way of a royalty base c a l c u l a t i o n that allows only a fixed percentage of c a p i t a l employed as i n t e r e s t expense, without adjustment for i n f l a t i o n . I turn now to figure A-5, where the ef f e c t s of a l t e r i n g the so c i a l discount rate are i l l u s t r a t e d . In the base case, as i n a l l s e n s i t i v i t y analysis thus f a r , I have used a 7.44 percent real rate of s o c i a l time preference, a figure chosen to make the s o c i a l time preference rate equal to the after-tax cost of c a p i t a l to business. Uncertainty about the s o c i a l discount rate i s d i f f e r e n t i n nature from that assessed e a r l i e r - there i s less l i k e l i h o o d that the value w i l l change markedly over time, but there are perennial problems and hence considerable disagreement i n measuring appropriate s o c i a l time preference rates for discounting. In the face of diverging views, s e n s i t i v i t y analysis can be helpful. Thus, in figure A-5, the re a l discount rate i s varied from 0 percent to 12 percent, with corresponding nominal rates 4 percent higher, as the 4 percent i n f l a t i o n rate along with a l l other assumptions from the base case are maintained. P a r t i c u l a r l y i n t e r e s t i n g i s the eff e c t on Alberta's share *° see, for example, John H e l l i w e l l , "Towards an Inflation-Proof Income Tax", a presentation to the Canadian Tax Foundation (24th conference), Toronto, 1972. 41 of t o t a l rents - curve 2 i s much f l a t t e r r e l a t i v e to curve 5 i n figure A-5 than, for example, in figures A-1 through A-3, where Alberta was able to insulate herself considerably from the major cost and revenue uncertainties. This greater r e l a t i v e v a r i a b i l i t y in the present value of Alberta's return i s attributable to the fac t that i t s largest revenues r e s u l t from the 50 percent profit-sharing royalty, which generates i t s major cash flows towards the l a t t e r half of the project's l i f e . Discounting at higher or lower rates of time preference w i l l , of course, attach l e s s e r or greater importance to returns that accrue many years into the future. This basic p r i n c i p l e also explains the r e l a t i v e i n s e n s i t i v i t y of private producer rents to changes in the discount rate, as long as the basic Syncrude agreement remains unaltered - while discounting at a higher rate places l e s s value on the gains from early tax write-offs, i t attaches even lower present value to Syncrude's tax l i a b i l i t i e s , accruing later i n the l i f e of the project. Concentrating on curve 5, one can see how very s e n s i t i v e t o t a l results are with respect to the choice of the discount rate, as the present value of net rents varies by over $2 b i l l i o n for a 12 percentage point s h i f t i n the s o c i a l time preference rate. As a guide to the reader i t may be useful to define what might be considered a reasonable range of values from which an appropriate discount rate ought to be selected. As a-lower bound, most economists would be w i l l i n g to accept the real rate of return on long-term government bonds, about 3 percent; the upper bound could be approximated with the economy-42 wide average pre-tax rate of return on c a p i t a l . * 1 F i n a l l y , I refer to figure A-6 and discuss the implications of varying the s o c i a l discount rate and the after-tax cost of c a p i t a l t o g e t h e r . 4 2 Equating the two i n t e r e s t rates and varying them over some range to find that rate which y i e l d s a zero net present value of t o t a l project returns i s equivalent to standard discounted cash flow analysis. The various i n t e r n a l rates of return for the project as a whole as well as for each consortium member are measured as a proportion of t o t a l c a p i t a l employed, regardless of the r e l a t i v e shares cf debt and equity, In general, the applicable return on equity i s higher than that on t o t a l c a p i t a l employed, since debt service costs are usually lower than p r o f i t rates. In any case, presenting my r e s u l t s i n th i s fashion more readi l y enables comparison of my r e s u l t s with figures quoted from time to time by private industry and the media. Figure A-6 shows that the Syncrude project in t o t a l has an after-tax r e a l rate of return of just about 8 percent; that i s , curve 5 passes through the zero net present value mark on the v e r t i c a l axis at a rate of return (on the horizontal axis) of roughly 8 percent. S i m i l a r l y , private industry members of the ' consortium obtain an after-tax rate of return of s l i g h t l y more than 11 percent on t h e i r share of the c a p i t a l invested. Corresponding figures for Alberta and the federal government are 4 1 A recent paper by Robert Dorfman (1975) provides an excellent example of the procedure by which s o c i a l time preference rates may be determined. 4 2 Equating these two interest rates can be regarded as an eguilibrium condition for savers i f net personal taxes on corporation income are negligible. not available from the assessed range of simulations, but i t i s clear that the applicable rates are well above 12 percent and well below 2 percent, respectively. Ontario's rata of return i s in the order of 6 percent. To avoid any confusion regarding the meaning of these figures, I emphasize that the analysis has been carried out as i f no sunk costs had been incurred and under the assumption that a l l uncertain parameters take on base-case values. An analysis of sunk costs and the i r impact on project economics i s given detailed treatment i n section 2.4. Moving on now to les s secure ground, I attempt to make a combined assessment of the various types of uncertainty just discussed. As I have been unable to define any joint subjective probability d i s t r i b u t i o n s (held by any of the part i c i p a n t s , or by an outside observer) of the various risks to which the project i s subject, my analysis of the effects of uncertainty has been limited to a separate assessment of the consequences of dif f e r e n t cost and revenue assumptions under the a l t e r n a t i v e revenue sharing systems provided for i n the Syncrude agreement. Even i n thi s case, I have s i m p l i f i e d matters to a somewhat u n r e a l i s t i c extent by assuming only a single dimension to the uncertainty about each variable. Given a better stock of information, the future movements of uncertain variables could be modelled as time dependent stochastic processes, using multiple dynamic simulations to obtain frequency d i s t r i b u t i o n s of present values. At present, however, I find that the lack of some decision rule governing the choice of representative parameters for such processes l i m i t s the incremental value of information obtainable from stochastic simulations. 44 Nevertheless, even in the absence of such detailed modelling (incorporating joint p r o b a b i l i t i e s and stochastic processes), the present analysis allows me to make some assessment, a l b e i t i n a rather vague and subjective manner, of the l i k e l y covariance of various uncertainties and i t s e f f e c t on my r e s u l t s . In the Syncrude case, i t could probably be argued that the sharp r i s e i n o i l prices and the equally dramatic increase in construction costs were not independent, but were rather a consequence of the same forces. The sharp r i s e in world o i l prices spurs the search for domestic substitutes, exerting strong upward pressure on the prices of those labour and c a p i t a l inputs s p e c i f i c a l l y used i n the petroleum industry. Economists predict t h i s to happen more generally - when an industry's price of output ri s e s substantially there are l i k e l y to be increases in the prices of i t s factor inputs, especially where the inputs are specialized to the production of the output whose price has ri s e n . This i s p a r t i c u l a r l y relevant to the Syncrude case, where -only a handful of producers are geared to the manufacture of large-scale open-pit mining machinery, the demand for which has risen substantially in l i g h t of i n f l a t e d coal prices, oil-sand development, and prospective development of the Colorado o i l shales. The sudden world-wide upsurge of such a c t i v i t y together with the r e l a t i v e l y long lead-time for delivery of bucket-wheels, draglines, and the l i k e has created a sit u a t i o n where prospective buyers are said to be bidding i n competition for future spots-on the production l i n e . S i m i l a r l y , the hunt for domestic alternatives to imported o i l at world prices has 45 occasionally pushed industry to the f r o n t i e r s of technology where the costs of experimental techniques and p i l o t schemes have t y p i c a l l y been unpredictably high. A l l of these f a c t o r s apply to Syncrude, which leads me to surmise that independent analysis of changes in o i l prices and project costs w i l l generally overstate the effects on net rents, especially i f the changes occur just before the bulk of investment i s to take place. A further question of interest i s the interdependence of price, cost and budget changes. So far, I have not discussed the effe c t s of tax changes since the matter i s given more detailed treatment i n H e l l i w e l l and May (October, 1975). Nevertheless, the issue of policy response to general market conditions warrants some consideration here because an understanding of the relationship between price, cost and tax changes w i l l further enhance the usefulness of my r e s u l t s . If the experience of the 1970's i s much of a guide, tax and royalty rates w i l l probably move to further dampen the o v e r a l l effects of price and cost variation. Rising costs are l i k e l y to lead to tax decreases, while r i s i n g output prices w i l l lead to tax rate increases. If both costs and prices r i s e , tax and royalty changes w i l l probably depend on which increase most, Thus, tax and royalty rates have risen for the production of 'old' 4 3 o i l and gas in western Canada, while providing Syncrude with a more favourable f i s c a l regime. If such interdependence between government policy and market conditions can be expected to apply throughout 4 3 'Old* o i l and gas i s defined as the product from o i l and gas wells brought into production before a certain date. The c r i t i c a l date varies from one province to another. Syncrude's operating l i f e , there i s c l e a r l y even more reason to believe that my ' p a r t i a l ' treatment of the major cost and revenue uncertainties has exaggerated the consequences to some degree. How such interdependence ought to be measured, though, i s a guestion I have not yet been able to come to grips with. 2.3 Syncrude - A Special Deal? The impact of alternative revenue sharing arrangements on the d i s t r i b u t i o n of project r i s k s and returns in the Syncrude case i s the topic of a paper by H e l l i w e l l and May (July, 1975). Although I do not intend to duplicate the analysis in d e t a i l here, I s h a l l repeat some of the major conclusions of that paper in demonstrating that the Syncrude tax, royalty and equity arrangements are indeed d i s t i n c t l y d i f f e r e n t from more common-place f i s c a l regimes and, as such, profoundly affect the economics of the project as seen by a given consortium participant. As a basis for evaluating the r e l a t i v e impact of each major difference between Syncrude's and the more conventional sharing arrangements I have used the rules that apply to GCOS, the only o i l sands plant presently i n operation. Table 2-2 contains the output from f i v e simulations designed to show the r e l a t i v e importance of the four main differences between the Syncrude and GCOS tax, royalty, and equity arrangements. These simulations are based on tax rules of the 1975 federal budget, with the exceptions (as part of the Syncrude agreement) that pr o v i n c i a l r o y a l t i e s collected from Syncrude are deductible from the federal income tax base and that o i l sands mines and extraction plants are treated as mines, 47 rather than petroleum producers, i n the ca l c u l a t i o n of taxable income. Spe c i f i c modelling of these various revenue sharing schemes i s not presented along with the basic Syncrude equations i n Appendix B, but i s available on request. Table 2-2 Bents Under Alternative Revenue Sharing Schemes net present values (millions of 1975 $) SYNCRUDE GCOS NO GOV. SEPARATE ROYALTY BASE CASE ROYALTY EQUITY COMPANY NON-DEDUCT. FEDERAL -682.7 -692.6 -813.6 -297.6 -168.0 ALBERTA +468.3 +488.7 +452.2 +623.0 +640.9 ONTARIO -13.7 -14.9 PRIVATE +342.7 +333.5 +476.0 -210.8 -358.3 TOTALS +114.6 figures may not add due to rounding The left-hand column of table 2-2 represents the •extra-i n s t i t u t i o n a l * arrangements applicable to Syncrude, the r i g h t -hand column i s based on the more conventional tax and royalty position of GCOS, and the move from l e f t to right across the intervening columns shows the ef f e c t of sequentially removing the main Syncrude advantages. The figures presented in column 1 are of course i d e n t i c a l to those already explained in table 2-1. The second column shows the ef f e c t s of applying the GCOS gross royalty schedule instead of the Syncrude profit-sharing royalty, with a l l other provisions unchanged. Using the base-case values for prices and a l l other sensitive variables, net rents to each party remain almost unchanged - Alberta's share increases by about $20 m i l l i o n at the expense of the other participants. However, switching from a net to a gross royalty considerably a l t e r s expected returns under uncertainty, s h i f t i n g much of the r i s k of cost and revenue variation from the Alberta government 48 to the private producers. The middle column of table 2-2, where I have removed the government equity positions, shows a s i g n i f i c a n t improvement in the private producers' position primarily at the expense of the federal government. Nevertheless, as i n the case of column 2, the v a r i a b i l i t y of private returns has also increased. Whether or not removal of the government equity positions would be considered an advantage to the private participants i s therefore a question of t h e i r j o i n t subjective probability d i s t r i b u t i o n of the various r i s k s to which their return i s subject. The analysis in the H e l l i w e l l and May paper mentioned above focusses more di r e c t l y on the e f f e c t s of alternative revenue-sharing schemes under uncertainty. The fourth column of table 2-2 shows the very large consequences of a l t e r i n g the tax treatment from a consortium to a non-consortium basis, which leads to a substantial delay of tax write-offs. Thus almost $690 m i l l i o n are subtracted from the present value of rents accruing to the private producers; over three-quarters of t h i s amount accrues to the federal government. Moving from the fourth to the f i n a l column shows the e f f e c t s of switching from a deductible royalty to one that i s deductible only from the p r o v i n c i a l income tax base. Since I have ruled out p r o v i n c i a l transfer payments to the private producers i n compensation for the federal tax on r o y a l t i e s , the private producers lose almost $150 m i l l i o n , most of which accrues to the 49 federal government. 4 4 This completes the t r a n s i t i o n from the Syncrude system to the GCOS system. That Syncrude has been granted exceptional concessions regarding the tax and royalty position of the consortium's private industry members ought to be s u f f i c i e n t l y clear by now. What remains to be explained, however, i s the rationale underlying the federal government's policy of subsidizing an obviously marginal and very r i s k y project - a question that becomes even more puzzling when one considers the magnitude of the transfer to both the private participants and the government of alberta, which i s quite d e f i n i t e l y a 'have' province in the context of Canada's regional f i s c a l d i v e r s i t y . a number of answers come to mind, but unfortunately none of these are p a r t i c u l a r l y convincing to the economist; although much of the federal government's action can be explained in l i g h t of i t s rather weak bargaining position under the time constraint imposed by the firms' ultimatum, I find no j u s t i f i c a t i o n , on economic grounds, for the decision that was reached- by the federal negotiators i n Winnipeg. Both the federal and Ontario governments seem to have been motivated by their blind acceptance of ' s e l f - s u f f i c i e n c y * as the single most important goal o f a national energy policy. While they most l i k e l y saw Syncrude (a precedent for further o i l sands development) as an insurance policy against the p o s s i b i l i t y of future s h o r t f a l l s in domestic supply together with the more 4 4 I f alberta continues to accept the federal d e f i n i t i o n of taxable income once r o y a l t i e s are non-deductible, but o f f e r s the firms a p r o v i n c i a l tax c r e d i t in the amount of the r o y a l t i e s , i t s return nevertheless increases s l i g h t l y , as taxable income becomes positive sooner. 50 remote chance of a renewed OPEC embargo, the cost of such an insurance policy, i f i t was at a l l considered, seemed to be only a secondary issue. Hence, faced with a situation where the firms and Alberta exclusively had almost a l l of the available information, Ottawa and Ontario, i f they were intent on pursuing their objective of s e l f - s u f f i c i e n c y at a l l cost, had l i t t l e choice but to accept the terms that they were being offered. Both Judy Maxwell (1975) and Larry Pratt (1976) have discussed these issues at length and, I f e e l , with considerable success, so that any further attempt on my part to explain the motives underlying each party's actions would serve only to duplicate t h e i r e f f o r t s . . 2.4 The Question of Sunk Costs and the 'Go' Decision So far my analysis has ignored the existence of sunk costs. A more or less standard procedure in investment decision making, however, requires the prospective investor to make his decision on the basis of his expected return on a l l future investment, regardless of what he has already i r r e t r i e v a b l y committed. In the case of Syncrude, the three non-defaulting o r i g i n a l consortium members would most l i k e l y have evaluated t h e i r prospects i n t h i s manner. Hence, i f the private p a r t i c i p a n t s ' return were to be assessed as perceived by them at a c r i t i c a l point in time, such as February 3, 1975, their prospects would indeed look considerably brighter than the picture I have painted thus f a r . It may therefore be useful to consider how the economics of Syncrude most l i k e l y appeared to each of the participants at various c r i t i c a l points i n time. 51 • Whan the four o r i g i n a l Syncrude partners threatened to abandon the project i n January, 1975 they had already incurred expenditures of about $200 m i l l i o n and would have required an additional $350 m i l l i o n to negotiate out of signed contracts for supplies and eguipment. 4 S Had the i r threat become r e a l i t y , the net economic return to the project as a whole and to each party would have looked something l i k e the 'no-go scenario' i n column 1 of table 2-3. Assuming that the tax rates of the November, 1974 federal budget, which applied in early 1975, were to have remained unchanged throughout the relevant time period, the t o t a l loss of $577 mil l i o n {present value 1975$) would have accrued to governments and industry i n the amounts of $233 mil l i o n and $344 m i l l i o n , respectively. The federal government i s the prime loser as a result of the previously mentioned benefits that the private participants obtain from the Syncrude consortium arrangements. I have modelled t h i s 'no-go scenario' using a l l the base case assumptions but, of course, excluding government eguity p a r t i c i p a t i o n . Also, I have distinguished between the three non-defaulting members of the o r i g i n a l consortium and ARCO, as only the former had a stake in the project's future, ARCO having already irrevocably abandoned i t s equity interest. The t o t a l l o s s , then, takes account cf a l l d i r e c t expenses incurred or committed by January, 1975 as well as the before-tax opportunity charge on a l l c a p i t a l employed, a l l of which i s compounded forward at the s o c i a l time preference rate to obtain present 4 5 statement by Frank spragins (Chairman of Syncrude), guoted i n Oilweek, January 20, 1975, p. 5. 52 values as at the end of 1975. assuming that the decision to abandon the project i s reached on January 1, 1975, a l l remaining expenditures are written-off immediately against taxable income from the partic i p a n t s ' other Canadian business. S i m i l a r l y , stocks of c a p i t a l accumulated before January 1, 1975 are written-off • at allowable depreciation rates reducing the taxable income from other Canadian business of the consortium members. It i s t h i s tax accounting framework which produces the d i s t r i b u t i o n of t o t a l economic loss shown in column 1 of table 2-3. Should any further information on the modelling be required, the detailed equations used to perform the various experiments in t h i s section are available on request. Table 2-3 In Assessment of Project Economics at Various Points i n Time net present values (millions of 1975 $) TOTAL FEDERAL ALBERTA ONTARIO PRIVATE * ARCO "NO-GO" SCENARIO -577.8 -162.4 -71 . 1 -241.0 -103.3 WINNIPEG AGREEMENT +114.6 -545.0 +492.3 -13.7 +181.0 SUNK-COSTS ** +692.4 -382. 6 +563.4 -13.7 + 4 22. 0 +103.3 SU NK-COSTS '75 BUDGET +6 92.4 -520.3 +3 39.4 -13.7 +583.7 +103.3 * non-defaulting o r i g i n a l consortium members ** column shows changes in net returns when costs incurred or committed prior to January, 1975 are excluded from evaluation (ie . : col.3 = col.2 - col.1) The second column of table 2-3 shows t o t a l and component rents for the project as perceived aft e r completion of the Winnipeg agreement, but ignoring the existence of sunk costs. Here, I have modelled the project as i f the various governments had been equity participants from the inception of Syncrude, e f f e c t i v e l y the si t u a t i o n that arose when they decided to 5 3 acquire the equity share abandoned by ARCO. Although t o t a l rents are i d e n t i c a l to the figure presented i n table 2-1 which showed base-case r e s u l t s , t h e i r d i s t r i b u t i o n i s considerably d i f f e r e n t . Again assuming that the November 1974 budget would apply throughout Syncrude*s l i f e , the non-defaulting o r i g i n a l consortium members receive p o s i t i v e rents of $280 m i l l i o n - a rate of return on the i r investment of about 9 percent i n r e a l terms afte r tax, s l i g h t l y above average for Canadian business in general but considerably less than the average for the petroleum industry. Alberta fares even better, gaining almost $500 mi l l i o n , while the governments of Ontario and Canada take a net loss. Comparing columns 1 and 2 of table 2-3, the s i g n i f i c a n c e of sunk costs becomes apparent. To i l l u s t r a t e t h i s more c l e a r l y , column 3 shows the incremental advantage or disadvantage for each participant of taking the conseguences of the Winnipeg agreement, rather than abandoning the project. Thus, f o r example, the non-defaulting o r i g i n a l consortium members obtain a net return of $422 m i l l i o n when they treat their share of past investment as a sunk cost. S i m i l a r l y , Alberta's return increases from $492 m i l l i o n to $563 m i l l i o n . Quite surprising, though, i s the limited extent to which the federal and Ontario governments are able-to minimize t h e i r losses by treating past costs as sunk costs.. This, of course, results from the fact that sunk costs to the governments are attributable only to the tax loss that would have accrued, had the project been abandoned. Their decision to acquire ASCO's equity share, on the other hand, involved a committment to treat what was a sunk cost to the company as a 54 rea l cost yet to be-incurred by themselves. In other words, while i n early 1975 the o r i g i n a l consortium members could evaluate their investment prospects on the basis of remaining outlays only, potential new investors such as the fe d e r a l , Alberta and Ontario governments had to consider a l l costs, including that of obtaining the 30 percent of t o t a l equity abandoned by A'RCO. As the figures in columns 1,2, and 3 indicate, neither Ontario nor the federal government had much to gain, on economic grounds alone, through acquiring equity shares i n the project. Turning now to the f i n a l column of table 2-3, I show the consequences of switching from a f i s c a l environment where the tax rules of the 1974 budget apply throughout the project's l i f e to one where these rules are replaced once-and-for-all by the provisions of the 1975 federal budget, eff e c t i v e January 1, 1976, Hence, the figures represent an estimate of net returns to the various participants, as perceived by them at the time of the Winnipeg agreement, had they known of the upcoming federal budget changes.•The most relevant provision of the new budget for Syncrude was the r a i s i n g of the federal corporation income tax rate applicable to o i l sands plants from 25 percent to 36 percent, coupled with an extra deduction from taxable income equal to 25 percent of production income* 6 from petroleum resources. Assuming that Alberta continues to accept the federal d e f i n i t i o n of taxable income, taxes would be reduced by an amount which depends on the r e l a t i v e magnitudes of production * 6 Production income i s defined as revenues net of operating costs and depreciation, but before development, i n t e r e s t , depletion and royalty deductions. 55 income and t a x a b l e income - the l a r g e r production income i s r e l a t i v e to t a x a b l e income, the g r e a t e r the tax r e d u c t i o n . T h i s i s e s p e c i a l l y so i n the case of Syncrude, with l a r g e immediate deductions from t a x a b l e income, a l l of which are worth s u b s t a n t i a l l y more at a 36 percent tax r a t e than a t a 2 5 percent r a t e . Thus, the f i g u r e s i n column 4 of t a b l e 2-3 r e f l e c t an i n c r e a s e of about $160 m i l l i o n i n the present value of t r a n s f e r payments that the p r i v a t e producers r e c e i v e from the governments of A l b e r t a and Canada. What have I l e a r n e d from the v a r i o u s experiments r e l a t e d above? By t r e a t i n g the investment i n c u r r e d or committed before the c r i t i c a l 'go d e c i s i o n ' date as an i r r e t r i e v a b l e sunk c o s t , I have demonstrated how the r e l a t i v e d i s t r i b u t i o n of net r e t u r n s among the Syncrude p a r t i c i p a n t s s h i f t s i n a manner which f a v o u r s A l b e r t a and the p r i v a t e producers at r e l a t i v e l y g r e a t e r expense to the f e d e r a l and O n t a r i o governments than was apparent from my base case r e s u l t s . Moreover, when the p r i v a t e producers* investment i s e v a l u a t e d i n c o r p o r a t i n g the e x i s t e n c e of sunk c o s t s , t h e i r r e t u r n becomes c o n s i d e r a b l y more a t t r a c t i v e , perhaps s u f f i c i e n t l y so to e x p l a i n t h e i r d e s i r e to continue with the p r o j e c t , even i n l i g h t of the many r i s k s yet to be r e s o l v e d . These c o n c l u s i o n s tend to be r e i n f o r c e d by the s i g n i f i c a n t impact of a p p l y i n g the tax r u l e s of the June, 1975 f e d e r a l budget to the p r o j e c t , while these are a l l apparently f a v o u r a b l e conseguences f o r the p r i v a t e p a r t i c i p a n t s and, to a l e s s e r e x t e n t , f o r A l b e r t a , they once again r a i s e the question of what the taxpayer of Canada and O n t a r i o can expect to g a i n from the Winnipeg agreement. Since my stock of answers to t h i s q u e s t i o n 56 has already been depleted in the previous section, I move on now to a short discussion of economies of scale in synthetic o i l production. 2.5 Questions of Scale This section i s necessarily quite brief since the prerequisite information for a detailed investigation of economies of scale i s s t i l l largely c o n f i d e n t i a l . Nevertheless, I s h a l l attempt to deal with questions of scale i n a broader context, incorporating not only a comparison of costs for various plant sizes but also some indication of the l i k e l y scope of environmental impact of alternative technologies. A l o g i c a l place to begin i s a comparison of GCOS and Syncrude costs. Some indication of the r e l a t i v e sizes and costs of GCOS and Syncrude has already been given in section 1.3. The GCOS plant was completed i n 1967 for a ca p i t a l cost of about $260 m i l l i o n , or about $5,800 per barrel-day. In l i g h t of the major redesign of eguipment and f a c i l i t i e s immediately following commercial start-up, though, these cost figures probably ought to be revised upward to about $350 million or $7,800 per barrel-day, in order to allow a sensible comparison with Syncrude costs. Accurate indices with which the costs of the main factor inputs for the two plants could be converted to a common constant d o l l a r figure ara, of course, unavailable due to the prototype nature of the mining and processing eguipment used by both projects; thus, at the ris k of erring on the conservative side, I s h a l l allow for a doubling of construction costs between 57 the mid-1960's and the mid-1970's.* 7 Escalating the GCOS figures accordingly, the mid-1970's equivalent construction costs amount to $700 m i l l i o n , or $15,600 per barrel-day. This compares with an estimated figure of $16,000 for Syncrude. As pointed out e a r l i e r , c a p i t a l costs take account of approximately half of the t o t a l cost of producing synthetic o i l . Hence, a comparison of operating costs for the two. plants i s necessary to complete the picture. Hampered again by the lack of s u f f i c i e n t data, I am forced to make the comparison using an approximation. As both GCOS and Syncrude have a p a r t i c u l a r l y high labour content during the operations phase, employment figures might be a useful indicator. This i s p a r t i c u l a r l y true since the labour content, taken as a proportion of t o t a l operating costs, i s s i m i l a r for both projects, as both use almost i d e n t i c a l technigues throughout most of the plant. GCOS employs roughly 33 persons per thousand barrels or d a i l y output, while the comparable figure for Syncrude i s anticipated to be i n the order of only 20 persons/ MBD . Taking both c a p i t a l and operating costs together, then, i t would seem that Syncrude does enjoy the benefits of increasing returns to scale, given the technologies that both Syncrude and GCOS employ. What about other technologies? As far as the mining segment of these projects i s concerned, few alternatives have been suggested, as only draglines and bucketwheel excavators seem to be compatible with the Athabasca environment and deposit 4 7 Over the same period, 1964 - 1974, Canada's aggregate industry s e l l i n g price index rose by less than 70 percent. (Bank of Canada Review, August, 1975, table 62) •* Kaminsky (1973) 58 c h a r a c t e r i s t i c s . 4 8 More can be said, however, with regard to the extraction and upgrading stages. Two alternatives were mentioned in section 1.2 - a chemical cold water method and a dry d i s t i l l a t i o n process. The former i s estimated to cost about $1.90 per barrel of recovered o i l at a scale of 5000 barrels per day; the l a t t e r i s s l i g h t l y more expensive, but could cost as l i t t l e as $2 per barrel for a 100,000 b/d p l a n t . 4 9 These figures can be compared with Syncrude's costs of extraction and upgrading, anticipated to be about $5 per barrel i n terms of 1975$, 5 0 Considerable caution must be used, however, i n drawing conclusions from t h i s analysis, as neither of the alternative schemes suggested above has been commercially tested i n the Athabasca o i l sands. I f e e l more confident, though, in contrasting these alternatives with the present methods i n regard to t h e i r l i k e l y impact on the environment. The Clark process used by GCOS and Syncrude has the potential for rather major negative e x t e r n a l i t i e s . In p a r t i c u l a r , the Syncrude t a i l i n g s pond, planned to cover an area of almost 10 sguare miles, w i l l l i k e l y contain some to x i c substances, and i t s heat and weight could conceivably have devastating implications for the natural 4 9 The chemical cold water process i s described in Oilweek , September 8, 1975, p. 17. Data for the dry d i s t i l l a t i o n method are reported in Oilweek , October 20, 1975, p. 17. 5 0 In Application No. 5849 to the AERCB, 1971, the o r i g i n a l Syncrude consortium members estimated the costs of extraction and upgrading to be i n the order of 40-50 percent of t o t a l project costs (excluding u t i l i t i e s and pipeline). As I have been unable to obtain more recent information on the breakdown, I have taken 45 percent of the discounted cost per barrel calculated in my analysis, thereby a r r i v i n g at a figure of $5. 59 s t a b i l i t y of the permafrost and muskeg environment. 3 1 Moreover, along with the anticipated d a i l y by-production of 830 long tons of sulphur, a sizeable amount of sulphur dioxide w i l l be emitted from the plant's stack. By contrast, both the chemical cold water process and the dry d i s t i l l a t i o n method seem, from present indications at least, to be substantially more environmentally sound, whereas the cold water process would emit only cold effluent containing l i t t l e or no toxic material, a p p l i c a t i o n of the dry method could altogether eliminate the need for a t a i l i n g s pond. Thus i t would seem that consideration of some of the environmental s p i l l o v e r s of o i l sands mining and processing schemes further favours the use of available a l t e r n a t i v e technologies over those presently used. Questions of scale are obviously very s i g n i f i c a n t i n projects of t h i s nature, as the degree of environmental impact and the economics of o i l sands plants are l i k e l y to be highly sensitive to the choice of project s i z e . As far as purely f i n a n c i a l considerations go, Syncrude has probably done well i n t h i s regard. Consideration of the environmental s p i l l o v e r s , however, tends to rai s e the question of whether alternative extraction and upgrading technologies ought not to be considered more seriously. While I t i s now too l a t a to raise these Issues for projects that are already beyond the drawing-board stage, c r i t i c a l appraisal of the GCOS and Syncrude experiences i s one way of generating better guidelines for future o i l sands development. 5 1 Environmental concerns of o i l sands development are given detailed consideration in Decision Making i n the Norths O i l Sands Case Study_x Science Council of Canada, Ottawa, November, 197^7 PP. 136-150. 60 2.6 Limitations of the Analysis Although I have come to grips with the economic and f i n a n c i a l d e t a i l of the Syncrude project, with the complicated dynamics of sharing the economic costs and benefits over time, and among the par t i c i p a n t s , and, to-some extend at l e a s t , with the nature and implications of uncertainty, my analysis nevertheless has some important gaps. Indeed, the l i s t of shortcomings I present below may i t s e l f be incomplete - any c r i t i c i s m or suggestions that might serve to improve or extend i t w i l l naturally be appreciated. I have assessed the Syncrude project without regard for foregone future uses of the o i l sand leases devoted to the project. This means that I am treating user cost as zero, a procedure that might be j u s t i f i e d in t h i s case only on the basis of the f a i r l y vast extent of o i l sands deposits, the supposed requirement that mining, extraction and processing techniques be developed in such large-scale experiments and the l i k e l y slow pace of-future development. The question of user cost w i l l be taken up to some extent i n section 4.2. Another l i m i t a t i o n of the present analysis i s that i t ignores the positive and negative s p i l l o v e r s created by Syncrude and si m i l a r large projects. Environmental factors loom large here, as was indicated to some extent i n the preceding section. The construction phase can put stress on the l o c a l economy, or provide a welcome stimulus, depending on the circumstances and one's point of reference. In t h i s regard Alberta's return may well be over- or under-stated, depending on the course that public spending in the province would have taken i n the absence 61 of Syncrude. With s u f f i c i e n t information, the l a t t e r f a c t o r s could be roughly costed, while the inclusion of environmental costs i s more l i k e l y to be achieved through regulations that l i m i t the environmental impact and thus increase direct operating costs. I f such regulations are i n s u f f i c i e n t to impose the entire cost of the externality on the developer, I foresee r e a l d i f f i c u l t i e s in attaching a s p e c i f i c value to a public good such as environmental guality. The current analysis suffers also from the lack of some mechanism by which the optimal timing of o i l sands development could be established. In a combined research e f f o r t together with others at U.B.C., I am not far from completing a framework within which such guest ions can be analyzed. 5 2 This involves the modelling of Canada's conventional o i l production so that for a given forecast of demand, one can establish when conventional production w i l l most l i k e l y become i n s u f f i c i e n t to meet that demand, or, a l t e r n a t i v e l y , at what point synthetic o i l could be tapped without displacing lower marginal cost conventional o i l . In the absence of such detailed modelling, I have simply assumed that any excess of synthetic o i l production over domestic requirements would be exported at prevailing world prices. Another s i m p l i f i c a t i o n in the analysis i s the assumption that operations at the Syncrude pla n t - s i t e w i l l shut down once the estimated 25 year operating l i f e has come to an end. 5 2 This research i s being conducted under the supervision of Dr. John H e l l i w e l l . Throughout the past few years numerous students, both graduate and undergraduate, have contributed to the construction of a general energy model for Canada. The 'non-f r o n t i e r ' or conventional o i l production sector of this model i s primarily the work of Robert McSae and Bruce Duncan. 62 Although i t i s currently anticipated that reserves of bituminous sand at the present mine-site w i l l be depleted after 25 years, i t i s e n t i r e l y conceivable that additional p i t s could be brought into production, while s t i l l using the existing Syncrude extraction and upgrading f a c i l i t i e s for the processing of such additional reserves. Even i n the case where technological obsolescence or pro h i b i t i v e transportation costs would render such an extension of Syncrude's l i f e i n f e a s i b l e , I ought to have at least considered the potential salvage value of the mining and processing machinery and eguipment. Other shortcomings of the analysis that ought not to be swept aside are the rather sketchy treatment of interdependent r i s k s and my s u p e r f i c i a l investigation of economies of scale. Due to informational problems, though, I see l i t t l e opportunity for improvement on these points. 63 3• Macroeconomic Effects of S y_ncrud§ In t h i s section I s h a l l take a s l i g h t l y d i f f e r e n t tack i n evaluating the economics of Syncrude. Whereas in section 2 my analysis concentrated on issues that f a l l within the sphere of microeconomics, I move on now to investigate the d i s t o r t i o n s and adjustment problems which the national economy might face as a consequence of undertaking projects as large as Syncrude. This section contains f i v e main parts; I s h a l l begin by explaining how a combination of macroeconomics and cost-benefit analysis, i f properly applied, can be a powerful tool in project evaluation. Second, I s h a l l b r i e f l y outline how one might go about modelling the macroeconomic impact of large investment projects. Next, the underlying assumptions and r e s u l t i n g forecast values for key macroeconomic variables - i n short, the control solution values - are presented; then, I s h a l l i l l u s t r a t e and discuss the effects of "shocking 1 1 the economy with a project that i s expected to reguire in excess of $12 b i l l i o n in c a p i t a l and labour over a 30-year period; and, f i n a l l y , these r e s u l t s are interpreted and compared with the findings of s i m i l a r research on concurrent energy projects. 3.1 Integrating•Macroeconomics and Cost-Benefit Analysis While i t would c e r t a i n l y be wrong to assess a project solely on the basis of i t s aggregate economic impact, the macroeconomic approach can considerably enhance and complement the r e s u l t s obtainable frcm cost-benefit analysis. In the following few pages, I s h a l l attempt to point out the merits of such an integrated approach. 64 In the previous section, the Syncrude project was analyzed in a p a r t i a l equilibrium sense, assuming that the prices and quantities of a l l other goods traded in the economy would remain unaffected by o i l sands development. The weaknesses of such an approach are obvious. The fact that construction and operation of an o i l sands plant are not independent and isolated economic events, but rather a part of the process by which the various sectors of an aggregate economy i n t e r a c t , i s not s u f f i c i e n t l y recognized i n p a r t i a l equilibrium analysis. Generally speaking, the degree of inaccuracy resulting from such an approach w i l l depend on the nature and size of the project*s inputs and outputs, r e l a t i v e to the rest of the economy. Can the tools of aggregate economics be of use in adjusting for some of these problems? To some extent, I believe they can. Ideally, of course, one would want to conduct cost-benefit analysis not i n a Marshallian ceterj.s paribus context, but rather i n terms of a Walrasian general equilibrium. However, as i t i s v i r t u a l l y impossible to locate and measure the price and guantity i n t e r r e l a t i o n s h i p s among a l l of the markets i n an actual economy, the general equilibrium model i s hardly as appealing in application as i t i s in theory. In spite of some frequently mentioned aggregation problems, 5 3 macroeconomic modelscan be seen as a means of overcoming some of the empirical d i f f i c u l t i e s associated with the general equilibrium method; In p a r t i c u l a r , the aggregation of factors of production 5 3 While the t h e o r e t i c a l appeal of economic aggregates i s guite apparent, there has been considerable debate over the existence of such aggregates in practice. 65 and outputs across markets s i g n i f i c a n t l y reduces the number of linkages to be observed. To be sure, a considerable amount of d e t a i l and important information i s l o s t in the aggregation process, 5* but macro-models nevertheless enable a type of "quasi-general equilibrium" assessment of a given project. This i s e s p e c i a l l y so i f the fools of the macroeconomist and those of the cost-benefit analyst are used concurrently in a co-ordinated manner. Let me o f f e r some examples. Many of the shadow prices used in cost-benefit analysis depend larg e l y on aggregate economic conditions. So, f o r example, opportunity costs of c a p i t a l for the private participants and for governments, used in the previous section to estimate economic rent, were based on h i s t o r i c a l economy-wide averages. A more accurate and t h e o r e t i c a l l y correct treatment would recognize the f a c t that such prices change over time and, perhaps more importantly, that they are l i k e l y to change as a result of the very project under consideration. Thus, by introducing the Syncrude project to the aggregate economy and solving simultaneously for the cost of c a p i t a l , a revised shadow price would be available, allowing rent c a l c u l a t i o n i n a more general equilibrium c o n t e x t . 5 5 S i m i l a r l y , a dynamic assessment of opportunity values for domestic o i l could be achieved. The cost-benefit analysis 5 4 One of the most common c r i t i c i s m s of measuring aggregate quantities - personal income, for example - i s that such measures reveal nothing about d i s t r i b u t i o n . 5 5 Unfortunately, t h i s new shadow price i s s t i l l u n l i k e l y to r e f l e c t true s o c i a l cost. To the extent that the general equilibrium e f f ects are being traced through imperfect markets, the whole cost-benefit analysis i s subject to the usual problems of "second-best". 66 assumed that synthetic o i l would command the Canadian aguivalent cf world-level prices. Hence, the domestic price w i l l depend not only on OPEC prices and transportation costs, but also on the price of foreign exchange, which, in turn, w i l l be affected both d i r e c t l y and i n d i r e c t l y by the production of synthetic o i l i t s e l f . This i s true more generally, as the national energy policy indicates that a l l of the country's energy resources w i l l eventually be priced at some measure of world-level equivalence. Thus, an approach which keeps track of the exchange rate e f f e c t s of a project allows a more accurate cost-benefit analysis with respect to output prices and the r e s u l t i n g supplies and demands for energy in Canada as a whole. In the Syncrude case, an integrated micro and macroeconomic approach could also improve the valuation of the project's r e l a t i v e l y important labour component. The results of cost-benefit analysis reported in section 2 are based on the rather tenuous assumption that market prices r e f l e c t the true s o c i a l value of the resource. The mere fact that the project i s being undertaken in an aggregate environment characterized by substantial unemployment suggests that the s o c i a l cost of the labour input has been misrepresented. I f a s i g n i f i c a n t portion of Syncrude labour i s drawn from the ranks of the unemployed, then I have c l e a r l y overstated the costs to society and, consequently, understated the expected net benefits. Moreover, an integrated approach can provide some indicatio n of the e f f e c t on employment and wages induced by the project i t s e l f - a part of the general equilibrium e f f e c t . This i s important, because the project whose net contribution to 67 s o c i a l output one i s attempting to measure, w i l l make i t s presence f e l t over a number of years. Thus, the more dynamic the e v a l u a t i o n method, the more accurate w i l l be one's s o c i a l c o s t i n g of the v a r i o u s i n p u t s over time. These examples show j u s t a few of the f a c t o r s that w i l l be s e n s i t i v e to the c h o i c e of p a r t i a l or general e g u i l i b r i u m technigues. Although I have d i s c u s s e d each of the cases s e p a r a t e l y , t h i s i s not intended to suggest that they are i s o l a t e d and independent events. On the c o n t r a r y , the very meaning of g e n e r a l e g u i l i b r i u m i s t h a t any one economic a c t i v i t y w i l l depend on a l l other contemporaneous events throughout the economy. Thus, the v a r i a b l e s used i n the preceding examples w i l l , i n f a c t , a l l i n f l u e n c e one another to some degree. The t r i c k i n modelling r e a l world s i t u a t i o n s i s to d i s t i n g u i s h between the v a r i o u s l i n k a g e s a c c o r d i n g to t h e i r r e l a t i v e importance. Even i f the a p p l i e d economist can t r a c e and g u a n t i f y only a s e l e c t few of the more s i g n i f i c a n t i n t e r a c t i o n s , t h i s would s t i l l r e p r e s e n t a c o n s i d e r a b l e improvement over standard p a r t i a l e g u i l i b r i u m a n a l y s i s . The c o n t r i b u t i o n of macroeconomic t o o l s t o the assessment of p r o j e c t s l i k e Syncrude i s not r e s t r i c t e d to the measurement of more accurate shadow p r i c e s . An e q u a l l y important aspect of a p p l y i n g aggregate models to such p r o j e c t e v a l u a t i o n i s the f a c t t h a t they allow us t o keep tr a c k of the v a r i o u s s h o r t - and long-term i m p l i c a t i o n s f o r the n a t i o n a l economy. So, f o r example, one can l o c a t e i n advance where b o t t l e n e c k s might occur i n the t r a n s f e r of r e s o u r c e s from one s e c t o r of the economy t o another. By i d e n t i f y i n g t h e type of d i s t o r t i o n s a given p r o j e c t can be 68 expected to give r i s e to, policy makers may be able to take accomodating action to minimize the undesirable and otherwise unpredictable consequences. And, f i n a l l y , analysis of Syncrude's macroeconomic ef f e c t s can help test the v a l i d i t y of claims that large-scale resource development i s a "good thing" or a "bad thing" because of i t s aggregate impact. 3.2 A Model of Macroeconomic Impact Assessment In the l a s t decade or so, quantitative macroeconomic models have become increasingly popular as a decision t o o l for policy makers and academic economists a l i k e . In Canada, as in some other countries, several such models e x i s t . One of these, the guarterly model RDX2, has been developed by the Bank of Canada, and has been used extensively i n the assessment of f i s c a l and monetary p o l i c y . S 6 In 1973, one of the authors of this aggregate model, John H e l l i w e l l , set a precedent for the type of analysis I propose to undertake here, by l i n k i n g to RDX2 a separate but compatible model of the proposed Mackenzie Valley pipeline and delta gas development, 5 7 Using more or less the same technique as H e l l i w e l l , I have linked a model of synthetic o i l production to RCX2. In p r i n c i p l e , t h i s model closely follows the one used for the Syncrude cost-benefit analysis, as described i n Appendix B; the only difference, i n f a c t , r e s u l t s from the need to convert 5 6 The model and some of i t s properties are described i n John F. H e l l i w e l l et a l . , The Structure of RDX2 , Bank of Canada Research Studies No. 7, Bank of Canada, Ottawa, 1971. 5 7 A detailed description and summarized r e s u l t s of t h i s research are reported i n Peter H. Pearse, ed., The Mackenzie £ip.®2ili§x Arctic Gas and Canadian Jnercjy. Policy. , chapter 8, McClelland and Stewart, Toronto, 1S74. 69 annual values of c o e f f i c i e n t s and variables to their quarterly equivalents i n order to ensure compatibility with RDX2, which i s constructed i n quarterly terms. Hence, no separate set of equations for the simulation of the Syncrude project i n a macroeconomic context i s contained i n the Appendices. Nevertheless, something must be said about the manner i n which the l i n k s between the Syncrude project and the rest of the Canadian economy are constructed, so as to ensure that the main macroeconomic effects of the project are duly taken i n t o consideration. How does one keep track of these effects? Without taking the reader on an in-depth excursion through the complicated dynamics of -RDX2 - which I have not been able to thoroughly master myself - one can hardly o f f e r what might be c a l l e d a rigorous answer. However, as my main concern here i s not to provide the reader with a thorough understanding of f u l l - s c a l e , aggregate econometric models, I have chosen to simply give a br i e f explanation of how the so-called l i n k s between the Syncrude model and BDX2 have been developed. To begin with, RDX2 consists of 21 sectors, each of which deals with a subset of the behavioural equations and technical relationships used to simulate the entire economy. In l i n k i n g the Syncrude model to RDX2, e x p l i c i t changes were made to one or more of the equations i n six of these sectors. I s h a l l explain the l i n k s in order of their appearance in RDX2. The direct trade effects of Syncrude have been dealt with by making the relevant adjustments, both in nominal and i n re a l terms., to the import equations, in the macroeconomic model. 70 Import substitution has been coded in here as well, since the a v a i l a b i l i t y of Syncrude o i l w i l l reduce the demand for offshore o i l imported to Eastern Canada. Direct employment effects of the project have been kept track of by adding Syncrude's t o t a l number employed to the employment variable for the economy as a whole. In order to avoid serious problems i n modelling o i l sands development as a separate value-added sector of the economy, I have considered only expenditures during the construction phase in augmenting the 'wages', 'prices', and 'income' sectors of RDX2. The operations phase of the project i s dealt with i n d i r e c t l y , as a part of general business output. The 'wages' sector has been expanded through the addition of Syncrude's construction wage b i l l to aggregate wage income, i n the 'income' sector I have added Syncrude's c a p i t a l investment to gross national expenditure, making corresponding adjustments to the GNE price deflator i n the 'prices' sector of RDX2. A f i n a l adjustment to the national accounts has been made i n the 'foreign exchange' sector, where I have simply kept track of the net balance of payments effects that are attributable to Syncrude. For those readers with a desire to become further acquainted with the modelling of Syncrude's macroeconomic l i n k s , I have included the detailed equations along with some. explanatory notes i n section 3 of Appendix B. The l i n k s described above are s u f f i c i e n t to capture the main aggregate economic effects of an investment project the size of Syncrude. As the relevant information that i s generated within the Syncrude model i s transferred, by way of the l i n k s , 71 t'o the aggregate model, the simulation output r e f l e c t s the anticipated behaviour of the economy incorporating both the direct and induced e f f e c t s of undertaking the Syncrude project. In order to i s o l a t e the r e l a t i v e e f f e c t of Syncrude on major aggregate economic indicators, one must compare the simulation r e s u l t s with the picture that would emerge in the absence of the project. This scenario i s simulated in the so-called c o n t r o l solution. 3.3 The Control Solution Control solution values for key macroeconomic variables i n RDX2 represent a view of the future - a forecast of how the national economy might perform in the years ahead. Fortunately, for the purpose of t h i s paper, I need not worry as much about problems of accuracy i n prediction as, for example, the Bank of Canada or federal policy makers ought to, since I use the control solution merely as a basis for measuring the impact of incremental economic a c t i v i t y , such as o i l sands development. Thus, I am concerned much less with the absolute values that certain economic indicators take on in the control solution than with the r e l a t i v e changes in those values that result from including Syncrude in the macroeconomic model. Nevertheless, a reasonable degree of realism ought to be refle c t e d i n the control solution and, therefore, care must be taken i n choosing the assumptions upon which one's basic forecast i s generated. Some of these are reported below. For a l l exogenous variables, simple i n t e r n a l l y consistent forecasting rules have been used along the following pattern: 72 variable annual growth rate (1) assumed rate of technical progress (2) population increase (3) re a l expenditures (4) i n f l a t i o n (5) money expenditures and assets 2.69% 4 .25% 8. 25% The r e s u l t i n g forecast values for several key endogenous variables are as follows. Gross national expenditure i n nominal terms grows at an average annual rate of 7.36 percent over the eleven year period, 1974-1985, while the average rate of growth in the i m p l i c i t price of GNE i s 5. 1 percent. The unemployment rate i s about 7.6 percent on average. Underlying t h i s trend i s of course some c y c l i c a l v a r i a t i o n , with more rapid expansion i n the l a t e 1970's than i n the mid-70»s and SO's. These v a r i a t i o n s are not extreme, however, as the the rate of growth i n nominal GNE gradually declines from a peak of about 10 percent in 1977 to 6 percent i n 1984-85. In terms of current d o l l a r l e v e l s GNE passes $200 b i l l i o n per year i n 1980 and $300 b i l l i o n i n 1985. A more comprehensive table of control solution values may be found at the end of Appendix A. 3.4 Shock - control Results RDX2 allows me to make a f a i r l y sophisticated assessment of the dynamic manner i n which a macroeconomic system reacts to an exogenous disturbance. One of the most interesting features of the model, which distinguishes i t from i t s counterparts currently used i n Canada, i s i t s a b i l i t y to trigger policy responses endogenously. At the heart of t h i s response mechanism i s the rule which determines monetary policy. In the version of 73 R.DX2 which I have used, 5 8 the money supply i s governed by an estimated interest rate reaction function of the a u t h o r i t i e s , tied to a f l e x i b l e target interest rate. Other endogenous responses are-related to f i s c a l policy, as some of ta government expenditure categories move co u n t e r - c y c l i c a l l y . The existence of endogenous policy responses within RDX2, while considerably enhancing the model's "realism", does not preclude the addition of further p o l i c y adjustment mechanisms. In p a r t i c u l a r , where policy makers have advance knowledge of the dire c t and induced e f f e c t s expected to accompany large exogenous shocks, as in the case of o i l sands development, i t might be argued that accomodating policy adjustments ought to be e x p l i c i t l y modelled to supplement those incorporated i n RDX2. Although this approach was taken by H e l l i w e l l i n his assessment of the Mackenzie pipeli n e , I have not made use of the option i n the present analysis. Had I done so, the c y c l i c a l impact on the economy indicated by the figures i n table 3-1 would be somewhat dampened. The re s u l t s presented in the table are "shock minus control" - i n other words, they show changes i n the control solution values of several key macroeconomic variables, when Syncrude i s introduced to the aggregate economy. I s h a l l attempt to explain the r e s u l t s in table 3-1 by tracing the adjustment processes that occur when an exogenous shock i s introduced to a 5 8 As the structure of RDX2 has evolved considerably since i t s inception, several versions of the model are now a v a i l a b l e . For the experiments reported here, the so-called "green book" was used. The complete set of eguations i s documented i n John H e l l i w e l l and Tom Maxwell, The Eguations of RDX2 Hevised and I s t i m a t e d to <££ 1_970x Bank of~Canada,~0ttawa,~1974. 74 macroeconomic system. 5 9 The way I have modelled i t , Syncrude imposes an exogenous increase i n demand for c a p i t a l goods and services on the aggregate economy. As expected, t h i s does not lead to an immediate domestic production response of the same magnitude. Rather, the additional demand i s met through a number of adjustments, each contributing to a different degree and at different points in time. In short, t h e i r exists a hierarchy of adjustments in terms of the r e l a t i v e size and speed of response. Thus, for example, some of the increase in aggregate demand i s i n i t i a l l y met by running down inventories and increasing net imports. As these changes are i n s u f f i c i e n t to o f f s e t the entire increase in aggregate demand, production, employment, investment, and so on must also react. In the case of Syncrude, business inventory investment (IIB) declines only s l i g h t l y during the early years of construction. More significant•responses are induced in the trade sector, where imports are up and exports are down sharply. Production increases, as indicated by the r i s e in business output (UGPP), requiring f i r s t an increase in employment (note changes in NE and RNU) and, l a t e r , some growth i n the c a p i t a l stock (IME and INRC) . After the i n i t i a l shock, buffer stock decumulation of inventories gives way to accelerator-induced accumulation. Meanwhile, the growth i n YGNE, NE, and f a l l i n g unemployment rates encourage net immigration. Thus, t o t a l population, NPOPT, i s r i s i n g throughout the observed period. Increased employment and u t i l i z a t i o n rates during the early 5 9 see, for example, John H e l l i w e l l and C. I. Higgins, "Macroeconcmic Adjustment Processes", European Economic Review 7(1976), pp. 221-238 75 years of the shock naturally exert upward pressure on prices (PCPI), and the adjustments i n prices and factor inputs together determine the affect on nominal income flows. Wage income and corporate p r o f i t s are up substantially between 1974 and 1978. The difference between personal income, YP, and^personal disposable income, Y DP, i l l u s t r a t e s how taxes respond endogenously. S i m i l a r l y , government balances, GBALF, are p o s i t i v e l y influenced, as revenues exceed expenditures during the induced boom period. Turning now to the trade e f f e c t s , increased income gives r i s e to increased demand for goods and services, part of which i s s a t i s f i e d by greater imports and smaller exports. Concurrently, inte r e s t rates (RS) are up, inducing c a p i t a l inflows. The net e f f e c t on the balance of payments, however, i s negative and the r e l a t i v e value of the Canadian dollar i s declining 'as PFX i s up. This p a r t i a l l y cushions the negative impact on current account during the l a t e 1970's and l a t e r helps to reverse the trade impacts during the 1980's. In order to distinguish between the direct and induced trade.effects of Syncrude, one can compare the sum of S ANDM$12 and SANDH$13 with XBAL$. (Note that the two Syncrude trade variables r e f e r only to imports and therefore enter XBAL$ as negative components.) Thus, in 1974, the di r e c t trade impact of the project accounts for almost $32 m i l l i o n of the $59 mil l i o n t o t a l decline i n XBAL$. Table 3-1 Macroeconomic Consequences of Syncrude YGNE UGPP PC PI NE 1974 139.945 62.598 0. 000 0.006 1975 494.488 180.508 0. 002 0.019 1976 1170.320 374.438 0. 005 0. 043 1977 1742.715 481.684 0. 010 0. 059 1978 1742.844 400.676 0.011 0. 051 1979 . 1335.582 328.824 0.010 0.0 36 1980 748.363 269.469 0. 005 0. 022 1981 55.598 204.348 -0. 000 0.013 1982 -686.500 63.961 -0.004 0. 002 1983 -1248.363 -37. 848 -0. 007 -0.007 1984 -1458.313 -78.875 -0.008 -0.012 1985 -1311. 188 -72. 055 -0.007 -0. 010 B NU IME INRC I I B UGPP A -0. 056 6 .889 2. 839 -4.850 78.895 -0. 164 35 .694 19.691 -5.195 215. 488 -0. 336 99 .054 80.546 18.273 417.738 -0. 401 180 .632 186. 343 50.072 491.309 -0. 198 170 .985 217.813 12.723 374.715 0. 052 92 .166 162.818 9.205 289.590 0. 236 37 .646 85. 146 -40.514 255.832 0. 250 -23 .256 10.026 -22.190 183. 926 0.211 -151 .910 -74. 806 -46 .445 46.691 0. 149 -209 .133 -158.214 -21.057 -53.344 0. 080 -174 .20 7 - 198. 199 3.612 -83.621 0. 006 -108 .744 -171. 572 12.880 -65.500 ¥8 YC YP YDP NPOPT SANBMJ12 1974 91.895 51.523 81.172 61,445 0. 000 19.659 19 75 333.781 152.882 304.242 232.492 0. 001 53.648 1976 790.797 314.497 737.926 565.238 0. 007 86.714 1977 1214.891 328.564 1 154. 883 890.902 0. 019 66.956 1978 1214.039 183.529 1 179.219 926.520 0. 037 54.0 82 1979 964.680 -84.629 953.914 776.988 0. 05 3 66.163 1980 581.504 -281. 370 556.76 2 475.402 0. 062 52.430 1981 170.285 -482.601 107.633 121.691 0. 058 5 2.120 1982 -242.457 -659. 840 - 362. 945 -260.938 0. 047 51.474 1983 -568.211 -673.574 -732. 492 -568.184 0. 034 51.012 1984 -734.742 -512. 951 -909.117 -716.969 0. 023 50.448 1985 -671.965 -300.554 -828.715 -663.113 0. 015 50.059 M$12 X$12 X$13 M X RABEL 1974 37.887 2. 422 -8.420 32.883 -9. 336 0.010 1975 122.730 * 13. 996 -32. 007 94.293 -37.258 0.002 1976 265.578 49.016 -77.204 185.430 -90. 156 -0.046 1977 33 2.6 29 84.949 -83.908 213.145 - 104. 770 -0.207 1978 247.809 106.898 -17.482 138.289 -55. 723 -0.090 1979 312.113 95.059 70. 816 74.109 18.8 63 0.020 1980 178.258 57.789 151. 106 -92.590 74.410 -0.025 1981 69.508 5. 383 192.980 -202.828 103. 324 -0.016 1982 -105.980 -42.262 213.855 -308.535 116.957 -0.002 198 3 -215.352 -93.656 174.844 -349.945 100.891 0.050 1984 -230.887 -128.555 101.508 -310.719 67.246 0.019 1985 -196.047 - 134. 465 17.922 -242.047 26. 445 0.011 SANDM$13 12, 163 31. 59 6 46. 166 24. 719 10.831 14.087 5. 5. 5. 5. 6. 091 386 601 867 113 6. 408 R S 0. 007 0. 027 0. 070 0. 105 0. 045 0. 01 1 •0. 048 -0. 087 •0.104 -0. 085 •0. 052 •0. 018 XBALS -59.039 •190.699 •394.640 •465.226 •319.178 •30 3.543 -73.125 82.555 325.258 436.742 381 .023 242.000 ABBCD 0.857 2.403 6.623 11 .109 15.429 35.9 84 46.723 48.016 35.578 22.207 3.855 12.156 UB AL -18.464 -75. 578 •183.576 •226.370 •108.275 •162.752 30.56 0 117.902 281.390 323.684 219.949 83. 316 B HO 0. 017 0. 056 0. 169 0.217 0. 210 0. 124 0. 021 •0. 160 •0. 220 •0. 242 •0. 175 •0. 084 [JGPPD 2. 723 25. 391 91.066 215.340 361.016 445.387 472.434 417. 938 282.516 113. 660 -24.809 102.992 PFX 0. 000 0. 000 0. 001 0. 003 0. 005 0. 008 0. 009 0. 010 0. 008 0. 005 0. 001 -0. 002 G B A L F 43.937 143. 833 314. 485 412. 678 301. 219 105. 837 -53. 795 102. 673 142. 378 157. 451 120. 438 -32. 137 BDX2 vari a b l e s are defined in section 4 of Appendix B 77 Once the construction period comes to an end, the induced boom begins to taper o f f . As Syncrude enters the production phase, much of the aggregate e f f e c t experienced during the l a t e 1970's i s reversed, leading to a d e f i n i t e slump in the mid-1980's. This i s partly a conseguence of the lumpy expenditure and employment pattern cf the construction period, but also r e f l e c t s the c y c l i c a l manner i n which the economy responds to the exogenous shock. T y p i c a l l y , desired levels of investment and business output are overshot by actual values. Inventories move to dampen the impact somewhat, but over the longer term e f f e c t s on prices, employment and income become inevitable. Thus, once Syncrude has passed i t s peak construction year, unemployment begins to r i s e , prices and interest rates f a l l and, f i n a l l y , businesses begin to run down the c a p i t a l stock. The impact on income flows and government balances i s , of course, also negative. S i m i l a r l y , the trade e f f e c t s are reversed, as slack demand discourages imports and, together with the weakened Canadian d o l l a r , increases r e a l exports. F i n a l l y , t h i s process seems to be changing d i r e c t i o n once again around 1985, as the figures for most variables indicate a smaller negative impact, and prices and employment figures remain more or less unchanged. If one could trace the e f f e c t s further into the future, the c y c l i c a l responses would l i k e l y become smaller i n amplitude, eventually approaching the more balanced growth path of the control solution. 3.5 An Interpretation of Shock-Control results In t h i s f i n a l part of section 3 I attempt an int e r p r e t a t i o n 78 of the r e s u l t s reported i n table 3-1. .First., I relat,e these to the e a r l i e r discussion of integrated micro and macroeconomic analysis. Next, my findings are compared with those of s i m i l a r empirical work. I then proceed to place the shock-control assessment in the context of Canada's o v e r a l l energy environment anticipated to 1985 and beyond. And, f i n a l l y , the implications of Syncrude's aggregate impact for an evaluation of the project in general are discussed. I have not, as yet, been i n a position to simultaneously use cost-benefit analysis and macroeconomic models as suggested in section 3.1. A model which does allow some guasi-general equilibrium analysis i s currently near completion, though, and results should soon be forthcoming. 6 0 Nevertheless, consideration of the project's aggregate economic impact does enable i d e n t i f i c a t i o n of at least the d i r e c t i o n a l bias in cost-benefit r e s u l t s , a r i s i n g from my i n a b i l i t y to calculate a l l of the proper shadow prices. To i l l u s t r a t e the s e n s i t i v i t y of cost-benefit r e s u l t s to the choice between p a r t i a l and more general equilibrium techniques, I have recalculated t o t a l and component rents i n the base case, using estimates of the r e a l supply price of c a p i t a l (after-tax) generated within the RDX2 control ad shock simulations. Since the macro analysis covers only the period from 1974 to 1985, I have returned the opportunity cost of c a p i t a l to i t s o r i g i n a l base value, 7.44 percent, for a l l other years. In both experiments, the s o c i a l discount rate i s at a l l 6 0 John H e l l i w e l l and others, "An Integrated Model for Energy Policy Analysis", forthcoming in the Natural Resources Programme paper series of the Department of Economics, U.B.C. 79 times held constant at i t s 7.44 percent base value. Table 3-2 shows the differences resulting from these various approaches. Table 3-2 Syncrude Base Case Results With Alternate Cost of Capital Assumptions (present values of net rents i n millions of 19753) TOTAL FEDERAL ALBERTA ONTARIO PRIVATE HISTORICAL RATE1 +1 14.6 -682.7 +468.3 -13.7 +342.7 REVISED CTRL R R 2 +234.5 -664.7 +480.3 -7.7 +426.6 REVISED SHOCK RR3 +234.7 -664.7 +480.4 -7.7 +426.7 1 Annual rea l rate of return on c a p i t a l (after-tax) based on h i s t o r i c a l economy-wide average = 7.44%. 2 Annual r e a l rate of return on c a p i t a l (after-tax) as re-estimated in RDX2 control simulation - varies between 1974-85 from a low of 5.79% to a high of 9.76%, thereafter set egual to 7.44%. 3 Annual rea l rate of return on c a p i t a l (after-tax) as re-estimated in RDX2 shock simulation - varies between 1974-85 from a low of 5.77% to a high of 9.11%, thereafter set equal to 7.44%. The f i r s t row shows t o t a l and component rents when the cost of c a p i t a l i s derived from an h i s t o r i c a l average - the method used i n section 2. The. second row contains the altered rents r e s u l t i n g from the use of RDX2's control solution values for the cost of c a p i t a l . And, f i n a l l y , the t h i r d row indicates the value of t o t a l rents and t h e i r d i s t r i b u t i o n , assuming a cost of c a p i t a l as estimated within Syncrude*s shock simulation. As the recalculated cost of c a p i t a l i s lower, on- average, for the years 1974 to 1985, than the h i s t o r i c a l l y estimated rate, the previously generated rents c l e a r l y e n t a i l a downward bias - t h i s i s apparent from a comparison of rows 2 and 3 with row 1. Relative to the change in t o t a l rents, the private 80 participants' share makes the greatest gain. The fact that the second and t h i r d rows contain more or less i d e n t i c a l f i g u r e s indicates an i n s i g n i f i c a n t general equilibrium effect on the cost of c a p i t a l . Nevertheless, my experiment has shown that the commonly accepted practice of using h i s t o r i c a l averages as estimates of shadow prices may produce rather substantial biases in rent c a l c u l a t i o n . The use of more accurate shadow prices for the project's labour input and the foreign exchange rate would s i m i l a r l y a l t e r the o r i g i n a l cost-benefit r e s u l t s to some degree. However, without detailed modelling, even the d i r e c t i o n a l e f f e c t of applying these revised prices to the analysis i s not e n t i r e l y clear. This problem i s attributable to the complicated dynamics of rent c a l c u l a t i o n over time, from the available information, I can only surmise that the s o c i a l cost of Syncrude's labour input has been somewhat overstated. The extent to which this i s true, depends, quite naturally, on the amount of general unemployment in the economy and the s p e c i a l i z a t i o n of the project's labour requirements. With regard to the price of foreign exchange, and the associated valuation of synthetic o i l , the answer i s even les s c l e a r , as I have been unable to assess the aggregate impact much beyond the construction period. Even i f a complete revision of shadow prices were to a l t e r my o r i g i n a l cost-benefit results to the extent indicated by the revised cost of c a p i t a l simulations, i t i s l i k e l y that consideration of environmental and other external costs would s t i l l make the project a rather marginal proposition. l e t me now turn to a short discussion of how the present 81 assessment of Syncrude's aggregate impact compares with s i m i l a r research on other energy projects. Perhaps the most obvious opportunity f o r comparison with other macroeconomic impact studies i s provided by the currently proposed construction of one or more pipelines to carry Canadian and/or Alaskan gas from the a r c t i c region to southern markets. Several independent studies have been undertaken to assess the aggregate impact of such proposals on the Canadian economy. Of these, the most widely known are the previously mentioned assessment by H e l l i w e l l , using RDX2, and a s i m i l a r evaluation by the University of Toronto's Institute for Policy Analysis, using the TRACE model. 6 1 Although both of these studies have been updated at various times to keep track of continually changing data for the various p i p e l i n e s , 6 2 the o r i g i n a l impact forecasts have themselves not been d r a s t i c a l l y a l t e r e d . 6 3 I therefore f e e l safe in using what are now perhaps s l i g h t l y outdated results of these studies for comparison with the assessment contained here. Shock-control values for Syncrude are similar to those obtained with RDX2 f o r the Mackenzie pipeline. Some minor inconsistencies in the modelling of the pipeline and my treatment of Syncrude arise from d i f f e r i n g assumptions on the use of e x p l i c i t policy o f f s e t s , but t h i s i n no way prohibits a meaningful comparison. The main divergence between H e l l i w e l l ' s 6 1 Carr, Jump, and Sawyer, "The Macroeconomic Effects of an Arctic Gas Pipeline on the Canadian Economy, 1976-1985", Toronto, 1974. 6 2 Indeed, the models themselves have evolved both in t h e i r structure and through the re-estimation of equations. 6 3 One exception i s the impact on the trade balance, as Canadian gas i s no longer assumed to be exported as i t was in the early studies. 82 r e s u l t s and those presented here can be e x p l a i n e d l a r g e l y with the r e l a t i v e s i z e s , import content and t i m i n g of the two p r o j e c t s . The p i p e l i n e c a l l s f o r c o n s i d e r a b l y mora c a p i t a l e x p enditure over a s l i g h t l y s h o r t e r c o n s t r u c t i o n p e r i o d than t h a t f o r e s e e n f o r an o i l sands p l a n t . Conversely, the o p e r a t i o n s phase of Syncrude i s a n t i c i p a t e d to r e q u i r e s u b s t a n t i a l l y more • l a b o u r and c a p i t a l than i s expected f o r the p i p e l i n e . Another important d i s t i n c t i o n I s that the o r i g i n a l modelling of the p i p e l i n e assumed almost twice the import content c u r r e n t l y c o n s i d e r e d f o r the Syncrude p r o j e c t . A l l of these f a c t o r s n a t u r a l l y cause the impact of the p i p e l i n e to be c y c l i c a l l y more pronounced than that of an o i l sands p l a n t . T h i s i s t r u e even i n the presence of H e l l i w e l l * s e x p l i c i t p o l i c y o f f s e t s . The r e l a t i v e l y s t r o nger boom and bust e f f e c t during and f o l l o w i n g the p i p e l i n e ' s c o n s t r u c t i o n p e r i o d i s perhaps best i l l u s t r a t e d by the d i r e c t and induced conseguences f o r aggregate employment. In the peak, c o n s t r u c t i o n year the unemployment r a t e i s reduced by about h a l f a percentage p o i n t , but during the f i r s t two f u l l years of o p e r a t i o n i t Is pushed almost a f u l l percentage p o i n t above i t s c o n t r o l s o l u t i o n l e v e l - more than f o u r times the e f f e c t of Syncrude. S i m i l a r though l e s s pronounced d i f f e r e n c e s i n the shock to v a r i o u s investment, income and p r i c e v a r i a b l e s are a l s o apparent. Comparison of my r e s u l t s with the TRACE assessment of a Mackenzie p i p e l i n e i s somewhat more complicated. At f i r s t g l a nce, the two f o r e c a s t s seem completely i n c o n s i s t e n t , but much of the d i f f e r e n c e i s l i k e l y to be a t t r i b u t a b l e to the i n d i v i d u a l s t r u c t u r e s of the models themselves. As t h i s problem has been given d e t a i l e d a t t e n t i o n by Tom Maxwell (1975), I s h a l l move on to a more general d i s c u s s i o n of the context within which these various aggregate impact s t u d i e s ought to be viewed. Let me r e t u r n f o r a moment to the c o n t r o l s o l u t i o n and i t s underlying assumptions. The reader w i l l r e c a l l that nothing was e x p l i c i t y s a i d with regard to the manner i n which the economy would obtain the energy required to achieve i t s f o r e c a s t growth. Since RDX2 has no separate energy supply and demand s e c t o r , the use of the model's h i s t o r i c a l l y estimated eguations i n generating the c o n t r o l s o l u t i o n i m p l i c i t l y assumed that energy sources would grow at a rate r e f l e c t i n g the t r a d i t i o n a l r e l a t i o n s h i p with economic growth i n general. What these sources are i s simply not s p e c i f i e d ; but i n assessing the impact of an energy producing p r o j e c t , i t i s e s s e n t i a l to r e a l i z e t h a t the c o n t r o l s o l u t i o n already assumes s u f f i c i e n t energy to be a v a i l a b l e . Hence, the p r o j e c t ' s output w i l l d i s p l a c e e i t h e r d o m e s t i c a l l y produced or imported energy. Given Canada's probable future supply and demand balance f o r o i l , I have attempted t o recognize t h i s f a c t by e x p l i c i t l y modelling Syncrude's output as displacement of of f s h o r e Imports. C l e a r l y , though, the assumption that the country's energy requirements w i l l be met according t o some t r a d i t i o n a l l y e s t a b l i s h e d r e l a t i o n s h i p with general economic growth i n v i t e s some r a t h e r well-deserved c r i t i c i s m . P a r t i c u l a r l y when one considers the f a c t t h a t Canadian energy p o l i c y i s obv i o u s l y emphasizing a greater use cf domestic s u p p l i e s , and th a t these are a v a i l a b l e only at unprecedented c o s t , severe doubts are 84 raised as to the control solution's s i g n i f i c a n c e . 6 4 How can the problem be solved? Presumably/ the most appropriate way of providing a more r e a l i s t i c basis for forecasting a project's aggregate impact i s to e x p l i c i t l y model Canada's entire energy economy. This would enable'detailed recognition of the country's most l i k e l y energy sources over the complete time horizon under consideration. The r e s u l t i n g implications for the economy as a whole would be taken account of, and, i f combined with proper cost-benefit a n a l y s i s , such modelling could even help select least-cost energy sources to meet the aggregate economy's needs. To date, however, none of the econometric experiments I am fa m i l i a r with have attempted to tackle the problem i n t h i s fashion. Failure to do so i s of course not surprising; on the other hand, the rewards of such an approach may well be worth the e f f o r t . And, i f current progress on the integrated energy model being developed at O.B.C. can be taken as an i n d i c a t i o n , we may have such a framework before too long. Even in the absence of that framework, though, I must r i s k a conclusion regarding Syncrude*s macroeconomic iiapact and i t s implications for my assessment of the project. To those who are acguainted with H e l l i w e l l ' s assessment of the Mackenzie pipeline, the following w i l l have a f a m i l i a r ring. Although 6 4 "An Energy Strategy for Canada" (Energy, Mines, and Resources, Ottawa, 1976) outlines a policy of relying increasingly on domestic energy sources. Depending on future prices, t h i s study predicts energy-related c a p i t a l investments of between $170 b i l l i o n and $180 b i l l i o n (in r e a l 1975 terms) during the next 15 years. As a proportion of GNP, such expenditure would be almost 50% greater than that experienced during 19 50-75. 85 Syncrude's induced boom by far exceeds the direct expenditure and employment e f f e c t s cf the project, the results of table 3-1 indicate an induced slump of s i m i l a r magnitude following the construction phase. Thus, i t i s d i f f i c u l t to say whether an o i l sands project i s , on balance, b e n e f i c i a l to Canada's aggregate economy. This i s p a r t i c u l a r l y so when one considers that the model, due to i t s lack: of disaggregation, probably f a i l s to capture the high degree of s p e c i a l i z a t i o n of Syncrude's labour and material requiremeats. Moreover, i t i s doubtful that the model adequately recognizes the disl o c a t i o n and adjustment costs imposed on society by such a large-scale project. Another point to be considered regards Syncrude's trade impact. I f Canadian policy makers argue for a greater use of domestic energy sources in the b e l i e f that t h i s "helps" the country's trade balance, they are probably mistaken. The trade balance doesn't require that type of "help", f o r under a f l e x i b l e exchange rate the sum of trade and c a p i t a l flows are always kept i n balance. Hence, even in the absence of Syncrude, or s i m i l a r large domestic o i l producers, a f l e x i b l e exchange rate would encourage s u f f i c i e n t exports and c a p i t a l inflows to off s e t the d e f i c i t a r i s i n g from greater o i l imports. The production of synthetic o i l , then, reduces o i l imports and raises the value of the Canadian d o l l a r ; as a re s u l t , other imports w i l l increase, exports w i l l drop, and some c a p i t a l inflows w i l l be displaced. To what extent such substitution of synthetic o i l for other items in the balance of payments i s desirable depends, quite naturally, on the r e l a t i v e values we place on our long-term trade alternatives. For a l l of these reasons, I f i n d i t d i f f i c u l t to sea how c o n s i d e r a t i o n of Syncrude*s macroeconomic e f f e c t s can improve the outcome p r e d i c t e d by c o s t - b e n e f i t a n a l y s i s . 87 Beyond Syncrude - Canada'„s Energy. Future In t h i s c o n c l u d i n g s e c t i o n i s h a l l attempt t 0 c a s t l i g h t on the r o l e that A l b e r t a ' s o i l sands might play i n Canada's energy f u t u r e . More s p e c i f i c a l l y , I s h a l l demonstrate the l i k e l y conseguences f o r government and i n d u s t r y , as w e l l as f o r the economy as a whole, of pursuing a development s t r a t e g y i n c o r p o r a t i n g a s e r i e s cf syncrude-type ventures. This i s followed by a more g e n e r a l d i s c u s s i o n of the r e l a t i v e m e r i t s of • i n s i t u ' versus surface-mining technigues as means of ha r n e s s i n g the o i l sands' p o t e n t i a l . And, f i n a l l y , the Syncrude d e c i s i o n and i t s i m p l i c a t i o n s f o r f u t u r e o i l sands development i s examined i n the broader context of Canada's n a t i o n a l energy p o l i c y . 4.1 The E f f e c t s of S e v e r a l Syncrude-Size P l a n t s "... O i l sands production i s expected t o provide as much as 300,000 to 500,000 b a r r e l s a day by 1980."*s "... Reserves are considered adequate to support 20 to 30 o i l sands developments, each with a c a p a c i t y to produce 100,000 to 150,000 b a r r e l s per day of s y n t h e t i c crude o i l . The A l b e r t a Energy Resources Conservation Board has estimated that s y n t h e t i c crude o i l p r o d u c t i o n w i l l approximate 200,000 b a r r e l s per day i n 1980 and 800,000 b a r r e l s per day i n 1985 and w i l l c o n s i s t of f o u r open-pit mining o p e r a t i o n s and p o s s i b l y two ' i n s i t u * o p e r a t i o n s . " 6 6 These statements were made as r e c e n t l y as 1974, when both f e d e r a l and A l b e r t a government r e s e a r c h e r s p u b l i c i z e d t h e i r view * s AS Ill§£31 E2li£Y. £21 Canada , Phase 1, Vol. 2, Information Canada, OttawaT 1973, page "l01. 6 6 IkS. l i M £ i § : Sands Story. , The Government of A l b e r t a , January, 1974, page 40. 88 of the l i k e l y pace of future o i l sands development. Who, at that time, would have predicted such a dramatic revision of Syncrude's cost estimates? Indeed, not even the consortium members themselves had such foresight. Now that the near doubling of Syncrude's costs has become history, though, something ought to be l s a r n t from experience. The s i n g l e most important question to be answered today i s , of course, whether the dramatic cost escalation i n the Syncrude case represents a doubling forever i n the real cost of o i l sands surface-mining schemes, or simply r e f l e c t s a symptom of gross mismanagement. Indications from other prospective investors support the former view. If one can believe Shell's most recent cost estimate, the days of $1 b i l l i o n plants of 100,000 bbl/d capacity are indeed a thing of the p a s t . 6 7 Hence, predictions of substantial and rapid development of the o i l sands, such as those quoted above, are proving to be increasingly u n r e a l i s t i c even at today's o i l prices. Nevertheless, i t may be of inter e s t to demonstrate, i n quantitative terms, what implications such immediate and intensive development of the o i l sands might have entailed. Osing the same approach as in sections 2 and 3, I have modelled a number of development scenarios, each of which incorporates several Syncrude-size plants coming on-stream at various i n t e r v a l s . From these d i f f e r e n t scenarios I have selected one i n which four plants come on-stream sequentially, each at the e a r l i e s t possible date, given such constraints as 6 7 Shell has recently estimated the cost of i t s proposed development to be i n the order of $3 b i l l i o n (cumulative h i s t o r i c dollars over construction period). Oilweek, March 15, 1976. 89 labour and c a p i t a l a v a i l a b i l i t y and the present stage of development. The second plant i s assumed to enter the construction phase only once Syncrude becomes operational, allowing for a four year construction period, production could commence in 1983. The t h i r d and fourth plants are assumed to come on-stream at three-year i n t e r v a l s thereafter, as I allow t h e i r construction periods to overlap by only one year. This scenario, which would have been considered highly conservative less than two years ago, i s the example I s h a l l use to i l l u s t r a t e the l i k e l y costs and benefits and aggregate economic repercussions of continued o i l sands development. In modelling plants 2, 3, and 4, I have removed the government equity positions but have maintained Alberta's profit-sharing royalty formula. While I have kept the royalty accounting separata f o r each plant, a l l four plants are assumed to be owned by a single consortium, for tax accounting purposes. Despite removal of the government equity positions for post-Syncrude plants, I have assumed that a l l of the federal tax concessions granted Syncrude w i l l also be available to future investors. F i n a l l y , the base-case values for production, plant-l i f e , r e a l c a p i t a l and operating costs, and employment for Syncrude are assumed to apply to subsequent-plants as well. Using these assumptions, the net economic return from successive o i l sands mining ventures would accrue to the various parties as indicated i n table 4-1. The d i s t r i b u t i o n of net returns for Syncrude alone has been adequately dealt with in section 2.2. Columns 2, 3, and 4 of table 4-1, show the outcome for each participant of sequentially 90 constructing and operating additional plants at given i n t e r v a l s . Table 4-1 Economic Rents of Successive O i l Sands Plants net present values (millions of 1975 $) on-stream in TOTAL FEDERAL ALBERTA ONTARIO PRIVATE SYNCRUDE 1979 +114.6 -682.7 +4 68.3 - 13.7 +342.7 + 1 19 63 +200.0 •1309. 5 +792.6 -13.7 +730.6 + 2 1986 +268.8 -1814.9 +1954.1 -13. 7 +1043.3 + J 1989 +324.3 -2222.4 +1264.9 -13.7 +1295.5 The figures in column 4 thus represent the sum of rents, i n terms of their net present values, accruing from four Syncrude-siz e developments. As I have held a l l prices constant i n real terras, the net present value of rents from future plants d i f f e r s from that cf Syncrude only to the extent that a p o s i t i v e discount rate attaches lesser importance to costs and benefits which accrue further into the future. Hence, the net present value of t o t a l rents from two plants, for example, i s somewhat le s s than twice the Syncrude t o t a l . Keeping th i s c h a r a c t e r i s t i c of discounting i n mind, the figures in columns 2, 3, and 4 are simply a blow-up of those presented i n column 1. The only anomaly arises from the removal of the government equity positions for a l l post-Syncrude plants; thus, as was shown in table 2-2, the private participants are able to increase t h e i r share of the t o t a l rent to a figure somewhat greater than Alberta's return. Once again, discounting attaches l e s s e r importance to t h i s gain, so that the private return from a l l plants only r i s e s above Alberta's share once the fourth plant i s included in the analysis. The federal government loses over $2 b i l l i o n i f a l l four plants go ahead, while Ontario, of course, 91 remains unaffected by a l l future development. I t may also be useful to give some indication of the demands that such intensive development might place on c a p i t a l and labour markets. If a l l four plants were to proceed, t o t a l construction and operating labour requirements would amount to roughly 300,000 man-years over a 40 year period, peaking at about 10,500 man-years in 1987, as three plants are already operating and the fourth i s in i t s peak construction year. Thus, average direct employment over the 40 years would be i n the order of 7,500 persons per year. Capital and operating costs would accumulate to over $60 b i l l i o n or roughly $20 b i l l i o n i n r e a l (1961) terms. Of the cumulative t o t a l of c a p i t a l expenditures, about $18 b i l l i o n , some 75 percent are assumed to be raised through debt financing. I have further assumed that 35 percent of the c a p i t a l requirements (debt and equity) would be obtained from fo r e i g n , presumably U.S., sources and that 30 percent of the goods and services used during construction would have to be imported. Hence, i t should come as no surprise that such a pattern of o i l sands development could have major implications for the Canadian economy as a whole. Table 4-2 shows how a few major aggregate economic indicators are affected by a development scenario incorporating up to four Syncrude-size plants. The values are "shock-control", based on the control solution described in section 3.3. As t h i s control solution has been simulated only u n t i l 1985, I have captured only the impact of the construction period for most of 92 Table 4-2 Macroeconomic Consequences of Several Syncrude-Size Plants SYNCRUDE PLUS 1: YGNE UGPP PCPI RNU II B M X UBAL PFX GB AL F 1974 13 9.945 62.598 0. 000 -0.056 -4. 850 32.8 83 -9. 336 - 18.464 0. 000 43. 937 1975 494.488 180.508 0. 002 -0. 164 -5. 195 94.293 -37.258 -75.578 0. 000 143. 833 1976 1170.320 374.438 0.005 -0.336 18.273 185.430 -90.156 - 183.576 0.001 314.485 1977 1748.668 483,949 0.010 -0.402 49. 134 214.207 -104.961 -226.298 0. 003 414. 091 1978 1941.266 470.688 0. 012 -0. 255 9. 604 175.668 -66. 617 -141.303 0. 005 358. 012 1979 1977.762 525.156 0. 012 -0.112 4. 326 169.746 -13. 797 -260.058 0. 008 278. 638 1980 2225.980 668. 332 0.011 -0.087 -23.241 86.922 7. 836 -209.166 0. 01 1 308. 321 1981 2289.582 712.082 0. 012 -0.102 17.576 -12.195 29.86 3 - 190.64 8 0. 014 341. 35'4 1982 1920.090 583.918 0.011 -0.001 -5. 248 - 137.438 76.840 -23.902 0. 016 262. 701 1983 905.703 381.898 0.008 0. 136 -16. 331 -325 . 129 121.027 129.789 0. 016 68. 260 1984 21.56 3 271.828 0.00 3 0.232 -32. 957 -432.820 151.277 244.203 0. 015 -53. 465 1985 -427.875 265.270 -0.000 0. 185 2. 513 -455.555 141.742 164.000 0. 014 1. 345 SYNCBUDE PLUS 2: YGNE UGPP PCPI RNU II E M X UBAL PFX GB A LP 1974 139.945 62.598 0. 000 -0.056 -4. 850 3 2.8 83 -9. 33 6 -18.464 0. 000 43. 937 1975 494.488 180.508 0. 002 -0.164 -5. 195 94 .293 -37. 258 -75.578 0. 000 14 3. 833 1976 1170.320 374.438 0.0 05 -0.336 18.273 185.430 -90.156 -183.576 0. 00 1 314. 485 1977 1748.668 483.949 0.010 -0.402 49. 134 214.207 - 104. 961 -226.298 0.003 414.091 1978 1941.266 470.688 0.012 -0.255 9. 604 175.668 -66.617 -141 .303 0. 005 358. 012 1979 1S77.762 525.156 0.012 -0. 112 4. 32 6 169.746 -13. 797 -260.058 0. 008 278. 638 1980 2232.945 670.652 0.011 -0. 0 89 -24.185 88 .000 7. 668 -209.017 0. 011 30 9. 91 1 1981 2523.457 784.664 0.012 -0.155 14.073 24.258 20.285 -225.410 0.014 40 4. 62 4 1982 2712.910 798.191 0.014 -0.161 -7.764 -37.492 47.270 -149.887 0. 017 462. 521 198 3 2700,902 809. 21 1 0.016 -0.180 2. 725 - 145.355 60. 355 - 159.367 0. 019 487.985 1984 2580.250 778.184 0.0 17 -0.106 1. 3 05 -259.922 88.938 -90.914 ' 0. 021 442. 545 1985 2359.813 739.164 0. 018 0.004 30.900 -328.137 121.281 -100.023 0. 023 409.636 SYNCBUDE PLCS 3: YGNE UGPP PCPI RNU IIB M X UBAL PFX GB ALF 1974 139.945 62.598 0. 000 -0.056 -4. 850 32.883 -9. 336 - 18.464 0. 000 43.937 1975 494.488 180.508 0. 002 -0. 164 -5. 195 94.293 -37. 258 -75.578 0. 000 14 3. 833 1976 1170.320 374.438 0.005 -0.336 18.273 185.430 -90. 156 - 183.576 0.00-1 314.485 1977 1748.668 483.949 0. 010 -0.402 49. 134 214.207 -104.961 -226.298 0, 003 414. 091 1978 1941.266 470.688 0. 012 -0.255 9. 604 175.668 -66.617 -141.303 0. 005 358. 012 1979 1977.762 525.156 0. 012 -0.112 4. 326 169.746 - 13.797 -260.058 0. 008 27 8. 638 1980 223 2.945 670.652 0. 011 -C. 089 -24. 165 88 .000 7. 668 -209.017 0.011 309. 911 1981 2523.457 784.664 0.012 -0.155 14.073 24.258 20.285 -225.410 0.014 404. 6 24 1982 2712.910 798.191 0. 014 -0.161 -7. 764 -37.492 47. 270 - 149.887 0. 017 462. 521 1983 2708.965 811.535 0.016 -0.181 1.858 -144,305 60.184 - 159.117 0. 019 489. 587 1984 2841.125 849.875 0. 018 -0.154 -2. 737 -223 .980 80.219 - 127.285 0. 021 510. 746 1985 3230.000 948.883 0.021 -0.143 26. 265 -230.660 94.72 3 -231.055 0. 024 622. 576 BDX2 variables are defined in section 4 of Appendix B 93 the p l a n t s and the e a r l y years of o p e r a t i o n f o r p l a n t s 1 and 2. The f i g u r e s r e g u i r e l i t t l e e x p l a n a t i o n beyond that a l r e a d y given i n s e c t i o n 3.4. The aggregate impact of m u l t i p l e p l a n t s w i l l c l e a r l y be l a r g e r and more prolonged, as the v a r i o u s c o n s t r u c t i o n and o p e r a t i o n s p e r i o d s begin to o v e r l a p . S i m i l a r l y , the induced s l a c k which f o l l o w e d Syncrude's c o n s t r u c t i o n p e r i o d i n my e a r l i e r experiment i s now postponed somewhat, as new demand i s c r e a t e d by subseguent p l a n t s , Allowi.ng the p l a n t s to come on stream at 3 year i n t e r v a l s provides a r e l a t i v e l y c o nstant s t i m u l u s to the economy and assures a f a i r l y smooth growth r a t e . The important q u e s t i o n now i s whether t h i s more constant p a t t e r n of development can be maintained a f t e r c o n s t r u c t i o n at the f o u r t h p l a n t has ended. U n f o r t u n a t e l y , the s i m u l a t i o n p e r i o d does not allow q u a n t i t a t i v e a p p r a i s a l of the impact once a l l of the p l a n t s are o p e r a t i n g . N e v e r t h e l e s s , some c o n c l u s i o n s may be drawn from the employment and expenditure p a t t e r n s which I have been a b l e to s i m u l a t e over the f u l l time h o r i z o n . Based on these d a t a , I would r i s k a f o r e c a s t that the r e l a t i v e c y c l i c a l downswing, a n t i c i p a t e d to f o l l o w the c o n s t r u c t i o n period of one and even two p l a n t s , would probably be no g r e a t e r , i f a l l f o u r p l a n t s were"to proceed. T h i s i s l a r g e l y because c u r r e n t labour reguirements, o p e r a t i n g expenditures and c a p i t a l replacement f o r the three p l a n t s a l r e a d y o p e r a t i n g are l a r g e enough t o p a r t l y cushion the r e l a t i v e e f f e c t of the f o u r t h p l a n t ' s t r a n s i t i o n from c o n s t r u c t i o n to o p e r a t i o n s . Moreover, i f the employment of labour and c a p i t a l c o n t i n u e s to expand more g e n e r a l l y , then the s l a c k f o l l o w i n g a given p l a n t ' s c o n s t r u c t i o n p e r i o d w i l l 94 presumably become l e s s s i g n i f i c a n t , r e l a t i v e to the economy as a whole, the l a t e r c o n s t r u c t i o n takes place. Another i n t e r e s t i n g r e s u l t can be obtained from t h i s type of modelling. I have been able t o t e s t the s e n s i t i v i t y of RDX2's f o r e c a s t with r e s p e c t to the c h o i c e of a s s e s s i n g a given p l a n t ' s impact independently or i n c o n j u n c t i o n with a l a r g e r p a t t e r n of development. Bore s p e c i f i c a l l y , I have compared the c o n s t r u c t i o n impact o f the t h i r d o i l sands p r o j e c t , as shown i n t a b l e 4-2, 6 8 with the impact of a s i n g l e p l a n t coming on-stream i n 1986. The d i f f e r e n c e t urns out to be very n e g l i g i b l e , suggesting t h a t , a t l e a s t f o r a s m a l l group of s e q u e n t i a l p r o j e c t s , RDX2's impact assessment i s r e l a t i v e l y i n s e n s i t i v e t o the choice of ' p a r t i a l ' or more 'general' technigues. T h i s r e s u l t i n d i c a t e s t h a t one can probably o b t a i n reasonably accurate i n f o r m a t i o n on a g i v e n p r o j e c t without having to assess a l l development c u r r e n t l y under c o n s i d e r a t i o n . Care must be taken, however, i n g e n e r a l i z i n g these f i n d i n g s , as a group of s i m i l a r p r o j e c t s r e q u i r i n g h i g h l y s p e c i a l i z e d i n p u t s may well e x e r t g r e a t e r pressure on the economy than the model p r e d i c t s . 6 9 4.2 'In S i t u ' Versus Surface-Mining Having pointed out the l i k e l y micro and macroeconomic consequences of c o n s e c u t i v e surface-mining ventures, I now 6 8 The e f f e c t of the t h i r d plant can be i s o l a t e d by s u b t r a c t i n g the f i g u r e s f o r "Syncrude plus 1" from those f o r "Syncrude plu s 2". 6 9 The argument presented here should not be confused with the p r e v i o u s l y mentioned problems of choosing an a p p r o p r i a t e c o n t r o l s o l u t i o n . N a t u r a l l y , the s t a t e of the economy a n t i c i p a t e d i n one's c o n t r o l f o r e c a s t w i l l i t s e l f i n f l u e n c e the r e l a t i v e pressures a given p r o j e c t or s e r i e s of p r o j e c t s can be expected t o generate. 95 attempt to compare surfa c e - m i n i n g with ' i n s i t u ' methods, reg a r d i n g the p o t e n t i a l r o l e that each might play i n c o n t r i b u t i n g to f u t u r e o i l sands development. I f the r e s u l t s of my experiments i n the previous s e c t i o n can be taken as i n d i c a t i v e of the way i n which the r e t u r n s of such development would be d i s t r i b u t e d among the va r i o u s p a r t i e s , p r i v a t e i n d u s t r y may indeed be w i l l i n g to proceed with f u r t h e r o i l sands mines. I doubt, however, whether the f e d e r a l government could j u s t i f y s u b s i d i z i n g the petroleum i n d u s t r y to such an extent. I f , on the other hand, Ottawa were to t r e a t the t a x a t i o n of f u t u r e i n v e s t o r s i n the o i l sands i n much the same manner as i t t r e a t s GCOS, my r e s u l t s from s e c t i o n 2.3 i n d i c a t e how poorly p r i v a t e i n d u s t r y would f a r e . Under these circumstances, p r i v a t e i n v e s t o r s would have a b s o l u t e l y no i n c e n t i v e to undertake f u r t h e r s u r f a c e - m i n i n g schemes. Thus, b a r r i n g any s i g n i f i c a n t c o s t - r e d u c i n g breakthrough i n the technology of o i l sands mining, the problems a l r e a d y encountered by GCOS and s i m i l a r l y a n t i c i p a t e d f o r the Syncrude p r o j e c t , together with the l i k e l y f u t u r e f i s c a l environment, w i l l s u r e l y render most e x i s t i n g proposals f o r f u r t h e r surface-mining ventures uneconomic. what about ' i n s i t u ' technology? One i s tempted to argue that t h i s technigue r e p r e s e n t s a h i g h l y d e s i r a b l e a l t e r n a t i v e to surf a c e - m i n i n g , s i n c e a we l l e s t a b l i s h e d ' i n s i t u ' technology would provide access t o a much l a r g e r resource base than can be recovered by surfa c e - m i n i n g technigues - almost 90 percent of the estimated u l t i m a t e l y r e c o v e r a b l e s y n t h e t i c crude o i l i s a c c e s s i b l e only by ' i n s i t u * methods. U n f o r t u n a t e l y , such a 96 technology does not yet exist in a commercially fea s i b l e form. Moreover, present experiments and p i l o t projects indicate that the unit costs of a 10 0,000 bbl/d * in s i t u ' plant w i l l probably approach those of Syncrude. Thus, private c a p i t a l i s l i k e l y to be as reluctant to engage in •in s i t u ' development as I expect i t to be with surface-mining ventures. Clearly, the fate of the o i l sands w i l l be decided to a large degree by the course of future developments i n technology. Let me b r i e f l y review the problems associated with the various recovery and extraction methods, as they are perceived today. Present experiments with surface-mining have encountered numerous obstacles: GCOS i s experiencing ongoing trouble with i t s bucketwheel reclaimers and Syncrude's proposed use of draglines w i l l mean the application of a s t i l l unproved recovery method. The r e a l costs associated with these mining systems are as yet not e n t i r e l y predictable, p a r t i c u l a r l y i n the case of Syncrude. With regard to the extraction processes to be used i n conjunction with open-pit mining, several options are open to future developers. One of these, the currently popular hot water process, i s the f o c a l point of seme major environmental concerns of surface-mining schemes. Yet, oddly enough, i t has received more than i t s f a i r share of promotion - so much, i n f a c t , that the alternative cold water and dry methods have remained r e l a t i v e l y unknown. As was mentioned i n section 2.5, however, both of these systems have considerable appeal from an environmental point of view. The dry method is perhaps the more promising of the two, as a variation of i t has been in 97 commercial use i n West Germany s i n c e 1958. A l s o , i t i s the only c u r r e n t l y a v a i l a b l e e x t r a c t i o n system, that does not r e q u i r e a t a i l i n g s pond, and, although the exact c o s t s are not a v a i l a b l e f o r comparison, i t would probably be no more expensive than the hot water process. Thus, i t i s e n t i r e l y c o n c e i v a b l e t h a t the r e a l s o c i a l c o s t s of mining-based development could be reduced i n the f u t u r e , i f a l t e r n a t i v e s t o present e x t r a c t i o n methods are taken more s e r i o u s l y . The A l b e r t a government seems to have already decided on these i s s u e s , though, as i t has r e c e n t l y o f f e r e d s u b s t a n t i a l p u b l i c funds t o p a r t i e s i n t e r e s t e d i n ' i n s i t u ' experiments. Perhaps i n the hope that a much l a r g e r resource w i l l be unlocked, the A l b e r t a O i l Sands Technology and Research A u t h o r i t y i s e i t h e r encouraging or p a r t i c i p a t i n g d i r e c t l y i n more than a dozen ' i n s i t u ' p i l o t p r o j e c t s . 7 0 Although there are probably as many u n c e r t a i n t i e s surrounding ' i n s i t u ' methods as t h e r e are with surface-mining schemes, t h e i r nature i s c o n s i d e r a b l y d i f f e r e n t . Once the o i l has been separated from the sand beneath the s u r f a c e and caused to flow to p r o d u c t i o n w e l l s , i t need only be upgraded, which e n t a i l s c o n s i d e r a b l y l e s s environmental damage than c u r r e n t mining and e x t r a c t i o n methods. The problem i s t h a t , as yet, only s m a l l s c a l e and r e l a t i v e l y uneconomic schemes have been developed t o b r i n g the o i l to the s u r f a c e . The f a c t that ' i n s i t u * methods are being given o f f i c i a l p r i o r i t y i n o i l sands r e s e a r c h , however, does suggest where t e c h n o l o g i c a l breakthroughs are foreseen to occur i n the f u t u r e . A l l of t h i s i s r a t h e r i m p o r t a n t - f o r the present a n a l y s i s , 7 0 Oilw^SJS / V o l . 27, No. 5, March 15, 1976. 98 as i t provides some i n d i c a t i o n , a l b e i t i n a rather s p e c u l a t i v e manner, of the user c o s t to be attached to c u r r e n t development. As I see i t , one can s a f e l y d i v i d e the o i l sands i n t o two separate and d i s t i n g u i s h a b l e r e s o u r c e s - that p o r t i o n amenable to surface-mining and the deeper d e p o s i t s a c c e s s i b l e o n l y by ' i n s i t u ' means. The d i s t i n c t i o n i s j u s t i f i e d on two grounds: f i r s t , the r e g u i r e d t e c h n o l o g i e s are q u i t e d i f f e r e n t and, second, the p h y s i c a l c h a r a c t e r i s t i c s are such that one can c l e a r l y draw the l i n e between shallow and deep d e p o s i t s . In other words, the bitumen i s not spread evenly through the sands with r e s p e c t t o depth, and l i t t l e , i f any, of the d e p o s i t i s l i k e l y to be a c c e s s i b l e by both techniques. The s y n t h e t i c o i l produced by e i t h e r method i s more or l e s s homogeneous i n terms of q u a l i t y , though, and can t h e r e f o r e be expected to command a s i n g l e p r i c e . Thus the r e l a t i v e f u t u r e value of deep versus shallow o i l sands d e p o s i t s becomes a f u n c t i o n of the expected d i f f e r e n t i a l i n the c o s t s of s u r f a c e - m i n i n g and ' i n s i t u ' . D i f f e r i n g t e c h n o l o g i c a l progress w i l l , of course, be r e f l e c t e d i n the r e l a t i v e c o s t s of the two t e c h n i g u e s . Two f a c t o r s l e a d me to surmise t h a t the deeper sands w i l l have a greater net resource value than shallow d e p o s i t s i n the years ahead. On the one hand, I b e l i e v e t h a t A l b e r t a ' s present encouragement of ' i n s i t u ' r esearch has r a i s e d the p r o b a b i l i t y of such technology developing more r a p i d l y than i t s c o u n t e r p a r t . On the other hand, the environmental c o s t s a s s o c i a t e d with s e g u e n t i a l development are l i k e l y t o be l e s s severe f o r ' i n s i t u ' schemes than f o r surface-mining. I f my reasoning i s c o r r e c t , then, deeper d e p o s i t s are l i k e l y to be worth more i n 99 the ground than shallow ones. And, i f the c o s t s of both technigues can be expected to r i s e at a slower r a t e than o i l p r i c e s , both resources are worth more i n the ground today than i f e x t r a c t e d . U n f o r t u n a t e l y , t h i s c o n c l u s i o n does not help me c a l c u l a t e the user c o s t which was emitted from my a n a l y s i s of net b e n e f i t s , and c e r t a i n l y does not j u s t i f y an assumption that the a p p r o p r i a t e user c o s t i s zero. I t does, however, suggest t h a t n e g l e c t i n g the foregone f u t u r e use of o i l sands l e a s e s i s l e s s c r u c i a l f o r shallow than f o r deep d e p o s i t s , p a r t i c u l a r l y where ' i n s i t u ' and surface-mining technigues do not o v e r l a p . 4.3 Syncrude, the O i l Sands, and the N a t i o n a l Energy P o l i c y " . . . I t h i n k the reason we're concerned about having the deal go through i s t h a t we could l o s e the momentum of developing what i s - a l b e i t a high c o s t - very important petroleum resource i n Canada...we know there i s petroleum there and i t ' s r e a l l y a guestion of p u t t i n g i n t o place a system t h a t can b r i n g i t out. I f t h i s p r o j e c t does not go ahead, then we w i l l have l o s t an important o p t i o n i n our n a t i o n a l energy p o l i c y . " 7 1 Donald Macdonald M i n i s t e r of Energy, Mines, and Resources January 30, 1975 Confronted with the companies* ultimatium t h r e a t e n i n g abandonment of the p r o j e c t i n e a r l y 1975, the governments of Canada, O n t a r i o and A l b e r t a had l i t t l e more than a month to decide whether they c o u l d j u s t i f y committing s u b s t a n t i a l amounts 7 1 from a CBC r a d i o i n t e r v i e w with Barbara Frum, "As I t Happens," January 30, 1975 (guoted i n L a r r y P r a t t , The Tar Sands, Edmonton, 1976, page 173). 100 of public funds to an obviously r i s k y and marginal venture. It was rather i r o n i c that these three governments - the prime actors i n a many-sided dispute over p r i c i n g , taxation and trade p o l i c i e s for Canada's o i l and gas industry - joined forces to rescue a project that had been started by some of the world's largest and wealthiest private corporations. Yet each of the governments seams to have had a v i t a l interest i n ensuring the project's continuance. P o l i t i c a l l y at l e a s t , Alberta had l i t t l e choice but to off e r i t s assistance, as the Lougheed government had f o r some time been emphasizing how esse n t i a l o i l sands development would be to the province's economic future. Ontario, perhaps a less l i k e l y source of additional funds, probably made i t s decision for one of two reasons. Either i t believed that synthetic o i l would soon be e s s e n t i a l to meet the province's expected demands or, more plausibly, i t anticipated some long-awaited price and tax concessions from Alberta and Ottawa in return for i t s assistance in the Syncrude c r i s i s . As indicated by Mr. Macdonald's statement, the federal government was motivated primarily by i t s fear that future o i l sands development would depend larg e l y on Syncrude's success or f a i l u r e . Moreover, i t was f e l t that the o i l sands would play an ess e n t i a l role i n ensuring Canada's continued s e l f - s u f f i c i e n c y in energy. Hence, Syncrude had become inextricably associated with an objective that, at least u n t i l recently, has dominated 101 our national energy p o l i c y . 7 2 The results of cost-benefit analysis in section 2 indicate the probable conseguences for each government of meeting the companies' ultimatum. Rather i n t e r e s t i n g i s the fact that Alberta, whose investment earns by far the highest return, was alone in i t s attempt to seriously assess Syncrude's prospects before joining the consortium. 7 3 Neither Ottawa nor Ontario undertook to evaluate t h e i r investments independently. Instead, they r e l i e d on the reports of Alberta's consultants, which of course made no mention of the l i k e l y returns to the f e d e r a l government or other prospective partners. This may, to some extent, be the reason for the type of outcome my analysis predicts - a poorly informed negotiator i s less l i k e l y to s t r i k e 7 2 It i s d i f f i c u l t to determine exactly when " s e l f - s u f f i c i e n c y " was adopted as the foremost objective of Canada's energy policy. Most l i k e l y , though, i t s beginnings can be traced to a House of Commons speech by Prime Minister Trudeau in December of 1973. Probably influenced by the optimistic forecasts contained i n An Energy Policy for Canada x Phase J (EMR, 1973) the Prime Minister announced that. Canada should be " s e l f - s u f f i c i e n t " in o i l before the end of the decade. Since " s e l f - s u f f i c i e n c y " was never c l e a r l y defined in t h i s context, I have simply taken i t to describe a situation in which our balance of trade in o i l i s zero or greater. More recently, with the publication of An Strategy for Canada (EMR, 1976), the government's view appears to have been modified to r e f l e c t what i s perhaps a more r e a l i s t i c goal., referred to as " s e l f - r e l i a n c e " . This revised objective e n t a i l s a zero dependence on foreign sources of supply, such that, i n the event of an interruption of imports, the country's t o t a l reliance on domestic o i l would create only ne g l i g i b l e hardship. 7 3 The previously mentioned Foster Research Study (1975) seems to have been the major report on which Alberta based i t s decision. Three additional consultants were commissioned to investigate various f i n a n c i a l and technical Issues raised by the dramatic escalation i n Syncrude's cost estimates. These include: Price waterhouse and Company, Chartered Accountants; Hu Harries and Associates Ltd., Economic Consultants, Edmonton, Calgary; and loram International Ltd. Summaries of these consultant reports are attached to the Minutes of Proceedings and Evidence of the House of Commons Standing Committee on National Resources and Public Works, No. 6, Tuesday, March 4, 1975. 102 a hard bargain than one who has seriously considered h i s alternatives. But Mr. Macdonald's statement does indicate that the federal government had some notion of how costly i t s investment could turn out to be. Thus, i t i s worth investigating whether Ottawa's decision may be j u s t i f i e d on grounds that have not e x p l i c i t l y entered my analysis. The most obvious consideration I have neglected i s the degree to which Syncrude can be expected to contribute to further o i l sands development. It i s not cl e a r , from Mr. Macdonald's statement, in what way Syncrude may have been anticipated to provide t h i s type of benefit; most l i k e l y , though, he was r e f e r r i n g to the p o s s i b i l i t y of induced technological change. While benefits of t h i s nature ara t y p i c a l l y excluded from quantitative analysis, due to problems of measurement, i t i s quite understandable and even appropriate that they be considered by policy makers. On the other hand, p o l i t i c i a n s ought to be aware of the i m p l i c i t value they attach to such benefits. In the Syncrude case, for example, r a t i o n a l i z a t i o n of the project on the grounds that i f would contribute to future development implies that the federal government, on behalf of society, expected the present value of such future benefits to exceed the federal government's losses incurred today. Any other explanation simply has no basis i n sound investment decision making. How does one analyze t h i s type of j u s t i f i c a t i o n f or an otherwise unattractive investment? Since I prefer not to become entangled in a maze of value-judgments the answer i s perhaps 103 best provided by the course of history. Given the events since Syncrude's "go" decision, I would r i s k a guess that Ottawa no longer has such f a i t h i n the project's a b i l i t y to stimulate further development. The federal Department of Energy, Mines and Resources has recently taken a rather pessimistic view of the o i l sands' contribution to future petroleum supply, even in the otherwise more optimistic high price scenario of in Energy Strategy for Canada (April, 1976). In addition to Syncrude, at most two o i l sands plants are anticipated to come on-stream by 1990, only one of which i s presumed to be a surface-mining venture. This i s rather interesting when compared with what the government would be predicting had Syncrude been shelved. Even i f the project's abandonment was expected to forever impede mining-based development, the difference in the two forecasts would amount to a mere 200,000 to 250,000 barrels of daily supply towards the end of the 1980's. 7* In the longer term, of course, the Syncrude decision i s l i k e l y to have even less bearing on future development, p a r t i c u l a r l y i f I am correct i n assuming that we w i l l see an increasing application of 'in s i t u ' processes, which are technologically quite unrelated to surface-mining methods. To be sure, i t i s s t i l l much too early to reach any de f i n i t e conclusion as to the role that Syncrude might eventually play; however, the fact that Ottawa's assessment of the o i l sands seems to have changed so sharply in the space of less than a year, suggests that the Syncrude decision was 7* less than 10% of E.M.R.'s (high price scenario) forecast demand in 1990 104 reached without much p r i o r a n a l y s i s . Given t h i s apparent l a c k of a n a l y s i s , the f e d e r a l government i s u n l i k e l y to have s e r i o u s l y c o nsidered any a l t e r n a t i v e s other than the route i t i n f a c t took. Some of the o p t i o n s i t probably ought to have assessed i n c l u d e the a p p l i c a t i o n of a l t e r n a t i v e t e c h n o l o g i e s , a p o s s i b l e r e d u c t i o n i n Syncrude's s c a l e , p u b l i c ownership or, indeed, temporary or permanent abandonment of the p r o j e c t a l t o g e t h e r . While the f i r s t t h r ee were probably n e g l e c t e d l a r g e l y due to the absence of necessary i n f o r m a t i o n , the l a s t o p t i o n i s l i k e l y t o have r e c e i v e d only passing a t t e n t i o n , as i t c o n f l i c t e d with the government's plans f o r s e l f - s u f f i c i e n c y . T h i s p o l i c y of meeting Canada's own requirements f o r o i l and other f u e l s e n t i r e l y from domestic sources, or at l e a s t of ensuring a l e v e l of exports high enough to compensate f o r imports, seems to have been adopted as an end i n i t s e l f . I t i s t h e r e f o r e not s u r p r i s i n g t h at development which would reduce net imports and i n c r e a s e the use of domestic o i l was seen as d e s i r a b l e . However, i f the economic c o s t s and b e n e f i t s of such a g e n e r a l energy p o l i c y had been given more s e r i o u s c o n s i d e r a t i o n , then'approval of a g i v e n p r o j e c t such as Syncrude would l i k e l y have been l e s s spontaneous. Rather the c o s t s and b e n e f i t s of t h a t p r o j e c t i t s e l f would have determined i t s d e s i r a b i l i t y . In the case of Syncrude, the government was f a c e d with a t r a d e - o f f between g r e a t e r s e c u r i t y of supply ( i a . l e s s dependence on p o l i t i c a l l y u n c e r t a i n imports) and the c o s t of p r o v i d i n g the companies with a s u f f i c i e n t l y a t t r a c t i v e r e t u r n on t h e i r investment to proceed with the p r o j e c t . P a r t i c u l a r l y when 105 one i n c l u d e s the environmental i m p l i c a t i o n s , not c o n s i d e r e d i n the preceding a n a l y s i s , the p r i c e t hat Ottawa was w i l l i n g to pay f o r such s e c u r i t y may well t u r n out to be e x c e s s i v e . Of course, one cannot be e n t i r e l y sure, as y e t , about the merits of choosing Syncrude and the o i l sands as a means of meeting our f u t u r e energy needs. But, almost c e r t a i n l y , a framework that a l l o w s some assessment cf p r o j e c t s such as Syncrude i n the context of the c o u n t r y ' s o v e r a l l energy supply and demand p i c t u r e ( i n c l u d i n g energy trade) would enable us to make more informed c h o i c e s . U n c e r t a i n t y , of course, w i l l always c h a r a c t e r i z e such a n a l y s i s , as the consequences of d e c i s i o n s made today become apparent only a f t e r the passage of time. T h i s b a s i c f a c t o f l i f e , though, should not deter us from using the a n a l y t i c a l t o o l s at our d i s p o s a l . To some extent, I have attempted to apply such t o o l s i n my assessment of Syncrude and f u t u r e o i l sands development. However, I have done so in a p a r t i a l way, without c o n s i d e r a t i o n of the broader context within which energy p o l i c y must be fo r m u l a t e d . An e x t e n s i o n of the framework i s a l r e a d y underway and, h o p e f u l l y , more g e n e r a l l y a p p l i c a b l e r e s u l t s w i l l soon be forthcoming. B e t t e r i n f o r m a t i o n on a l l of Canada's energy o p t i o n s i s an obvious n e c e s s i t y i f one expects to d e a l capably with Syncrude-type problems i n an environment r e g u i r i n g prompt and r e s p o n s i b l e d e c i s i o n s . Without such i n f o r m a t i o n , our s o l u t i o n s are d e s t i n e d to remain spontaneous and s u p e r f i c i a l . And, i f the development of new domestic energy sources c a l l s f o r ever i n c r e a s i n g amounts of c a p i t a l and la b o u r , as i s c u r r e n t l y i n d i c a t e d , the s t a k e s are 106 l i k e l y to become l a r g e r and mistakes more c o s t l y . .Policy makers must bear i n mind t h a t another Syncrude c o u l d be j u s t around the co r n e r . 107 Selected Bibliograp,hy Ballast!, John Bishop, "The Trouble with Tapping Alberta's Tar Sands", Maclean_ls x December 1974 Carr, J.L., G.V. Jump, and J,A. Sawyer, The Sa££Ssc212iDi£ Effects of an A r c t i c Gas Pipeline on the Canadian Econom x x 1976-1985x Report Series, Number 6, Institute for Policy Analysis, University of Toronto, Toronto, November 1974 Clay, Dean N., "The Contribution of Alberta's Tar and Heavy-Oil Sands to Canada's Intermediate-Term O i l Supply", paper written for the Research Branch, Library of Parliament, Ottawa, January 1974 Dorfman, Robert, "An Estimate of the Social Rate of Discount", Discussion Paper 442, Harvard University, Cambridge, Massachusetts, November 1975 Erikson, E.W. and 1. Waverman, editors, The Energy Questioni An International Failure of Policy,. Vol. 2, University of Toronto Press, Toronto, 19 74 Govier, G.W., "Alberta's O i l Sands in the Energy Supply Picture", in K.J. L a i d l e r , editor, Energy. Bgsources , Ottawa, 1973 (Proceedings of a Royal Society of Canada Conference, October 15-17, 1973) Govier, G.W., "Alberta's O i l Sands in the Energy Supply Picture", a presentation to the Canadian E l e c t r i c a l Association 84th Annual Meeting, Banff, Alberta, June 25, 1974 Goyer, J.P., "Energy: A Look at Alberta's O i l Sands", Vancouver, 1974 (notes for a speech by the Minister of Supply and Services at the University of B r i t i s h Columbia, February 7, 1974) Gray, Ronald G., "The Syncrude Project: An Engineering Challenge", Chemistry i n Canada, 27,1,27, Ottawa, 1975 H e l l i w e l l , John F. , "Towards an Inflation-Proof Income Tax", J§£P.££ °f EESceedincjs 2£ the Twenty-Fourth Tax Conference^ Canadian Tax Foundation, Toronto, 1973 (Conference held November 27-29, 1972) H e l l i w e l l , John F., "The National Energy Board's 1974-1975 Natural Gas Supply Hearings", Canadian Public P o l i c y x summer, 1975 H e l l i w e l l , John F. , " A r c t i c Pipelines in a Broader Context", a presentation to the Vancouver Institute, October 18, 1975 H e l l i w e l l , John F. et a l . , The Structure of RDX2X Bank of Canada Research Studies, No. 7, Bank of~Canada, Ottawa, 1971 108 H e l l i w e l l , John F. et a l . , "An Integrated Model f o r Energy Policy Analysis", forthcoming in the Natural Resources Programme discussion paper series, Department of Economics, U.B.C., 1976 H e l l i w e l l , John F. and C.I. Higgins, "Macroeconomic Adjustment Processes", European Economic Review, Vol, 7, No, 3, North Holland Publishing Co., 1976 H e l l i w e l l , John F. and Tom Maxwell, The Eguations °f RD.X2 Revised and Intimated To 4p. 1970 x Bank of Canada, Ottawa, 1974 H e l l i w e l l , John F. and Gerry May, "Taxes, Royalties, and Eguify Participation as Alternative Methods of Dividing Resource Revenues: The Syncrude Example", forthcoming i n Natural Resource Revenues^ A Test of Federalism^ U.3.C. Press" (Proceedings of the V i c t o r i a Conference on Natural Resource Revenues, June 5-7, 1975) H e l l i w e l l , John F. and Gerry May, "A Model for Assessing the Economic Costs and Benefits of Athabasca O i l Sands Projects", O.B.C. Department of Economics Discussion Paper 75-29, October 1975 Kaminsky, "Selection of a Mining Scheme for a Tar Sands Extraction Plant", paper presented to the Canadian Society of Petroleum Geologists, Calgary, September 7, 1973 Layard, Richard, edi t o r , Cost-Benefit Analy_sis x Penguin Modern Economics Headings, 1972 Maxwell, Judith, Developing New .Energy Soureas: The Syncrude Case^ CD. Howe Research I n s t i t u t e , ObservationsT No.~10, Montreal, November 1975 Maxwell, Tom, "An Assessment cf the Trace Simulations of the Macroeconomic Effects of an Ar c t i c Gas Pip e l i n e " , working paper (limited c i r c u l a t i o n ) , mimeographed June 6, 1975 Mishan, E.J., Cost-Benefit Analyj;is x Onwin University Books, London, 1971 Pearce, D.W., Cost-Benefit Analy.sj.s_j_ Macmillan Studies i n Economics, London, 1971 Pearse, Peter H., editor, The Mackenzie Pipeline^ A r c t i c Gas and Canadian Energy Policy^, McLelland~and Stewart,"Toronto, 1974 Pratt, Larry, "Syncrude or Socialism?", Alternatives^. Vol. 3, No. 4, summer 1974 Pratt, Larry, "The Tar Sands Deals: Syncrude Gets the Bigger Porkchop", The Last Post x Vol. 4, No. 6/7 5, A p r i l 1975 Pratt, Larry, The Tar Sands x Syncrude and t h e . P o l i t i c s of O i l x Hurtig Publishers, Edmonton, 1976 109 Scott, A . D. , Natural Resources^ The Economics of • Conservation.*• McClelland and Stewart Ltd., Toronto, 1973 Scott, A.D., "Government Policy and S e l f - s u f f i c i e n c y " , presentation at the Conference on Economics of O i l and Gas S e l f - s u f f i c i e n c y , University of Calgary, October 8-9, 1975 Winch, D.M., An a l y t i c a l Welfare Economics*. Penguin Modern Economics Texts, 1973 Government, Industry, and I n s t i t u t i o n a l Publications Alberta Conservation and U t i l i z a t i o n Committee, Fort McMurray Athabasca Tar Sands Development Strategy*, mimeographed, August 1972~ Alberta Energy Resources Conservation Board (AERCB) , Reserves of Crude Oil*. Gas x Natural Gas Liguids and Sulphur.*, Calgary, December~31, Isi" AEHCB, Application by Great Canadian O i l Sands Limited for a Scheme for the Recovery of 31,500 BPD of Synthetic Crude O i l , June 1960 (Hearing No. 167) AEHCB, Application by At l a n t i c R i c h f i e l d Canada Limited et a l . for the Amendment of Approval No. 1223, August 1971 (Application No. 5849) AERCB, Application by Shell Canada Ltd. and Shell Explorer Ltd. to Construct a Plant of 100,000 BPD Capacity, June 1973 (Application No. 7184) Alberta Government, The Alberta O i l Sands Story*. Edmonton, January 1974 Alberta Hansard, December 13, 1973 and February 4, 1975 Bank of Canada, Bank of Canada S t a t i s t i c a l Review*. Ottawa, August 1975 Canada, Department of Energy, Mines, and Resources, An Energy E£liSI JLP.E Canada*. Phase I x Ottawa, 1973 Canada, Department of Energy, Mines, and Resources, An Energy Strategy for Canada, Ottawa, 1976 Canada, Department of Finance, Budget Speech*. November 1974 Canada, Department of Finance, Budget Speech*. June 1975 Canada., Proceedings of the House of Commons Standing Committee on National Resources and Public Works, Ottawa, March 4, 1975 110 Economic Council of Canada, Eleventh Amma.1 Hevie» x Economic Targets and Social Indieators x Ottawa, 1974 Engineering Ins t i t u t e of Canada, Western Region, The Athabasca O i l SaniSi Proceedings of the F i r s t Regional Conference, 1974 Foster Research Ltd., "Economic Evaluation of the Syncrude Project", Calgary, January 1975 {report prepared for the Alberta Government and tabled before the Alberta Legislature on February 4, 1975) Great Canadian O i l Sands Limited, various Annual Reports Hu Harries and Associates Ltd., Economic Consultants, Edmonton, Calgary, The Impact of the Syncrude Project on the Economy of A l k§£ia x prepared for the Alberta Department of Industry and Commerce, January 1975 Loram International Ltd., "Executive Summary of Conclusions and Findings", February 4, 1975 (appended to the Minutes of Proceedings and Evidence of the Standing Committee on National Resources and Public Works, House of Commons, Issue No. 6, Tuesday, March 4, 1975) Price, Watsrhouse and Co., Chartered Accountants, "Highlights -Accounting and Audit Review of Syncrude Canada Ltd., February 1, 1975 (appended to the Minutes of Proceedings and Evidence of the Standing Committee on National Resources and Public Works, House of Commons, Issue No. 6, Tuesday, March 4, 1975) Science Council of Canada, Decision Makjjsg in the North:. O i l Case Study x Ottawa, November 1974 Science Council of Canada, Canada.^s Energy Og£ortunities x Report No. 23, Ottawa, March 1975~ Syncrude Canada Limited, "Facts and Figures", Syncrude Public A f f a i r s Department, Edmonton, 1975 Syncrude Canada Limited, Syncrude:, A Profile*. Syncrude Public A f f a i r s Department, Edmonton, 1975 Periodicals Oilweek, Maclean-Hunter, Calgary, Alberta, January 20, 1975 Oilweek, Maclean-Hunter, Calgary, Alberta, February 10, 1975 Oilweek, Maclean-Hunter, Calgary, Alberta, May 26, 1975 Oilweek, Maclean-Hunter, Calgary, Alberta, September 8, 1975 Oilweek, Maclean-Hunter, Calgary, Alberta, October 20, 1975 Oilweek, Maclean-Hunter, Calgary, Alberta, March 15, 1976 Financial Tiroes, December 9 and 10, 1974 Financial Post, December 7, 1974 and January 4, 1975 112 APPENDIX A T h i s appendix c o n t a i n s the f i g u r e s and t a b l e s r e f e r r e d t o i n s e c t i o n s 2.2 ana 3.3 of the t e x t . FIG R-l: SYNCRUDE WITH RLTERNflTE OIL PRICES 1=FEDERRL in 1 6.00 I 7.00 fl .00 I 9.00 I 10. 1 00 11.00 I I 12.00 13. 00 I 14.00 OIL PRICE (1975?) TABLE A-1 5YNCRUD E WITH ALTERNATE OIL PRICES (PRESENT VALUES OF NET REN TS IN MILLIONS Or 1975 3) 0ILP3ICE TOTAL FEDERAL ALBERT A ONTARIO PRIVATE 5.00 -2285. 0 - 1270.0 - 372.7 - 105.6 -536.5 • 6.00 - 1 903. 0 - 1152.0 -288.3 -87. 9 -374.0 7.00 -1521.0 - 10 3 4.0 -205.0 -70.3 -211.4 3.00 -113 9.0 -916.2 -121.1 -52.6 -48.3' 9.00 -756.6 -806.4 -20. 4 -35.9 106.2 -10.00 -374. 5 -751.6 1 92.7 - 2o . 1 210.5 11.00 7.6 -697.3 4 03.0 -16.4 313.7 11.28 114.6 -682. 7 468.3 -13.7 34 2.7 12.00 38 9.7 -541.9 651. 3 -5.4 285.7 13.00 771. 9 -502.2 915.8 2.3 356.0 14.00 115 4.0 -462.6 1180.0 • 9. 9 426. 3 11 PIG R-2; SYNCRUDE! V]TH RLTERNRTE CRPITRL COSTS J ^ FEDERAL 2=RLBERTR 3=ONTRRI.O 4=PRIVRTE 5=TOTRL 0.50 0.75 1.00 CRPJTRL COST/ BR5E CRSE ESTIMRTE 1.25 1.50 TABLE A-2 SYNCRUDE WITH ALTERNATE CAPITAL COSTS (PRESENT VALUES OF NET RENTS IN MILLIONS Or 1975 $) :AP.COST COST/33L TOTAL FEDERAL ALBERTA ONTARIO 0.50 3.0 1 2 3 3 . -163.5 1 0 4 9 . 0 13.1 0.75 9.5 6 7 5 . - 3 5 7 . 0 7 5 4 . 3 3.6 1.00 11.0 114. - 6 3 2 . 7 4 6 3 . 3 -13.7 1.25 12.U - U 4 7 . - 9 3 5 . 4 2 5 1 . 0 -32.0 1 . 5 0 13.9 - 1 0 0 9 . -1188.0 33.8 -50.3 1 U FIG R-3; SYNCRUDE WITH RLTERNflTE COSTS 1=FEDERRL 2=RLBERTR 3=0NTRRIQ 4=PRIVRTE 5=T0TRL i i i i i I 3.50 0.75 1.00 1.25 1.50 COSTS/ SHSE CRSE ESTIMATE TABLE A-3 SYNCRUDE WITH ALTE ?. N A TE COSTS (PRESENT V ALU ES 0? } JET RENTS IN MILLIONS OF 1975 COST COST/BBL TOTAL FEDERAL ALBERTA ON IA Rl 0.50 5. 5 2212. -62. 6 1723.0 37.7 0.75 8. 2 1164. -316.1 1091.0 13.4 1.00 11.0 114. -682.7 4 6 8.3 -13.7 1 .25 13.7 -934 . -1006.0 -19.2 ' - * 4 . o 1. 50 1 6. 5 -19 8 3. -1459.0 -241.9 -91.6 11 a a FIG SYNCRUDE WITH RLTERNRTE RRTE5 OF 1NFLRTIQN l=FEDERRL 2=RLBERTR 3=0NTRRI0 4=PRIVRTE 5=T0TRL a a. in in r-cn a I a a a 0.00 0.02 0.04 0.06 RRTE DP INFLRT30N 0.0B 0.10 0.12 SYNCRUDE wT (PRESENT VALUES TABLE A-4 'H ALTERNATE RATES OF' INFLATION OF NET RENTS IN MILLIONS O? 1975 $) INFLRATS COST/B3L TOTAL FEDERAL ALBERTA ONTARIO PRIVAT 0.0 11.0 1 1 U . -552.1 312.5 -1.3 356.0 0.02 11.0 114. -563.8 397. 1 -7. 1 238.3 o . oa 11.0 1 14. -682.7 468.3 -13.7 342.7 0 .06 11.0 .114. -686.0 537. 9 -17.4 280.1 0.08 11.0 114. -686.7 592. 7 -20.3 2.23.9 0.10 11.0 114. -685.8 6 35.6 -22.5 186.4 0.12 11.0 114. -633. 7 672.2 -24.5 - 130.6 FIG R-5; SYNCR'JDE WITH ALTERNATE DI5C0UNT RRTE5 1-FEDERRL 2=RLBERTR 3=ONTRRI0 4=PRIVRTE 5=T0TRL 11 i r — r 0.00 0.02 0.04 0.06 SOCJRL RRTE OF TIME PREFERENCE 0.08 0.10 0 . 1 2 TABLE A-5 SYNCRUDE WITH ALTERNATE DISCOUNT RATES (PRESENT VALUES OF HET RENTS IN MILLIONS OF 1975 S) STP C0ST/3BL TOTAL FEDERAL ALBERTA ONTARIO PRIVAT 0.0 9. '4 2062 . -645.8 2263. 0 15.0 0.0 2 9. 8 1191. -639.0 1482.0 2.7 0.04 1 0. 2 6 40. -618.1 973.0 -4.6 0.05 10. 6 283. -591.2 5 34. 4 -9.0 0 . 0 7 U U 1 1. 0 114. -682 .7 463.3 . -13.7 0.08 11. 1 60. -676.1 417.3 -14.4 0.10 1 1 . 6 -37. -651. 1 272.0 -16.1 0.12 12. 1 -183. -625.0 169.6 -17.0 430.0 345. 1 290.2 253.8 342.7 333. 8 308. 1 239.3 FIG R-6: 5YNCRUDE INTERNRL RRTE OF RETURN RNRLY5IS ]=FEDERRL 2=RLBERTR a o a 7-} , , r r j 0.02 0.04 0.06 0.06 0.10 0 12 RFTER-TRX RERL RRTE OF RETURN TABLE A-6 SYNCRUDE WITH ALTERNATE RATES OF RETURN (PRESENT VALUES 05 NET RENTS IN MILLIONS OF 1975 3) RP. COST/3BL TOTAL FEDERAL ALBERTA . ONTARIO PRIVATi 0.02 3.3 2413. -491.7 1924.0 51.3 934.1 0.04 9. 1 1283. -540. 5 1206. 0 21 . 3 600.9 0.06 10.1 513. -553.6 717.2 0.2 3 64.2 0.0744 11.0 114. -682.7 463.3 -13.7 342.7 0.08 11.3 -15. -637.7 409.6 -13.3 279.9 0.10 12.7 -394. -697.1 241.2 -31.5 92.9 0.12 14.2 -565. -697.5 121.2 -41.2 -49.1 118 Table A C o n t r o l S o l u t i o n Values For YGNE PGNE OGNE UGPP PCPI 1974 139606. 313 1. 717 81252.750 54661.379 1. 665 197 5 143496. 000 1. 812 79124.688 51522. 453 1. 784 1976 151959. 063 1. 875 80984.188 52643.957 1. 862 1977 166932. 000 1. 951 85518.125 56155.109 1. 938 1978 181839. 188 2. 061 88145.625 58322.930 2. 043 1979 198259. 4 38 2. 184 90723. 625 60338.508 2. 169 1980 215417. 313 2. 312 931 16. 93 8 62033.008 2, 301 1981 233681. 625 2. 450 95322.625 63746.410 2. 433 1982 253247. 563 2. 570 • 98469. 625 66101.188 2. 560 1983 271897. 938 2. 694 100879.750 67781.500 2. 681 1984 288897. 813 2. 816 102546.688 68747.000 2. 798 1985 305109. 4 38 2. 936 103874.938 69331.125 2.907 UGPPA OGPPD Yi YC YP 1974 53756. 891 54450. 613 75 367. 625 17831.113 109006.438 1975 49816. 121 56805. 480 82 168. 625 8522. 527 119050.750 1976 51843. 582 58364. 781 86884.938 8898.875 125987.938 1977 55192. 887 59658. 121 93872. 438 12802.535 135395. 938 1978 57440. 672 61041. 656 103365.500 13624.207 147279.938 1979 59323. 656 62741. 145 114478.625 13688.0 12 160846.563 1980 60870. 906 64680. 098 125908.000 13675.547 175232.375 1981 62643. 281 67 028. 063 137095.313 15149.945 189896. 313 1982 64831. 379 69813. 188 148523.688 16839.977 205331.813 1983 66461 . 750 72467. 375 159889.188 17223.215 220 762.125 1984 67 239. 438 74484. 125 170776.313 16 55 3.5 43 235637.375 1985 67638. 188 75902. 000 180758. 688 16255.340 249773.313 M$12 X$12 X$13 M X 1974 24731. 621 23619. 488 11988.699 23874.793 21444.574 1975 25S78. 637 23083. 641 14061.742 23470.762 21319. 238 1976 26338. 238 25 809. 719 15774.371 22017.648 23047. 297 1977 30532. 730 28147.219 16170.680 23832.402 23364.655 1978 31832. 246 30784. 000 16540. 035 24148.066 23614.457 1979 344 35. 043 33928. 578 17006.676 251 16.059 "24 104. 453 1980 37697. 824 37 473. 055 17818.813 26223.164 24848. 828 1981 39 83 2. 594 41271. 570 18708.887 26788.840 25632.547 1982 43871. 496 45282. 277 19546.621 28320.418 26478.785 1983 46691. 906 49612. 727 20630.313 29153.781 "27448. 051 1984 490 28. 566 54151. 906 21683. 035 29802.859 28459. 219 1985 51547.750 58872. 410 22431.719 30798.828 '29404. 344 RDX2 v a r i a b l e s are d e f i n e d i n s e c t i o n 4 of Appendix B -7 Selected RDX2 V a r i a b l e s NE RNU I HE INRC IIB 9. 125 4. 872 8206.832 4665.855 2384. 183 8.911 7. 846 7393.707 4260.383 539. 838 8.667 10.748 5975.598 4267.730 -625.9 89 8.750 9. 625 6785.277 4444. 082 1233. 6 83 8.874 7. 408 7934 .570 5905. 586 844. 059 8.962 5. 854 8220.664 6868.770 764". 771 8.981 5. 450 8063.348 7097.992 702.854 8.951 6. 337 8411 .586 7357.375 4 33. 037 8.952 7. 391 9389.484 7551.902 947. 82'8 8.933 8. 168 9842.957 7807.023 634. 821 8.863 8. 754 9685.023 7865.977 473. 84'9 8.740 9. 337 9476.113 7478.883 494. 35'6 YDP NPO PT XBAL$ UBAL PFX 88465.875 22. 423 -1503.898 511.801 0. 988 95409.875 22. 775 -3912.871 -2 473. 42 5 1.000 100748.000 23. 120 -746.421 426. 115 1. 00 9 108062.625 23.30 8 -2181.493 -1 255. 254 1". 017 117071.750 23.434 -1789.500 -635.591 i : 0l"5 127265.688 23.631 -2244 .663 -1315.216 1. 019 138173,43 8 23.911 -2476.008 -1459.618 1. 027 149349.063 24. 260 -1400.355 224.958 1. 0 26 161 173.063 24. 617 -2385 .770 -300.950 1. 02 6 172 878.875 24.934 -1636.375 722.241 1. 024 183987.625 25.205 119.813 2763.673 1. 00'6 194423.188 25.439 1820.754 4521. 508 0. 96'4 RABEL ES AB BCD SHO GBALF 6. 801 9. 371 1931.445 16. 783 -131. 104 5.887 7. 799 2288.569 14.520 -2924.556 8.894 5.812 2424.250 13.931 -5060.500 8.246 5. 937 2792.108 13.023 -3611 . 586 3.764 5. 983 2848.454 11.849 -2200.922 5.599 5. 693 2999.751 11.166 - 1440. 34 8 4.551 6. 279 3275.733 11. 559 - 1570. 137 4.876 6. 178 3550.516 11.962 -2243'. 858 4.755 6. 284 3925.158 11. 548 -2737. 464' 3.898 6. 146 4217.059 11.681 -3276.380 4.433 5. 907 4543.289 10.977 -4189. 508 4.665 5. 794 4875.254 10.411 -5447. 816 119 APPENDIX B There are s i x s e c t i o n s to t h i s appendix. F i r s t , I g i v e a g e n e r a l d e s c r i p t i o n of the model. Second, eguations d e f i n i n g endogenous v a r i a b l e s are presented, f o l l o w e d by some explanatory n o t e s . T h i r d , the macroeconomic l i n k s are d i s c u s s e d . Section four p r o v i d e s an a l p h a b e t i c l i s t of endogenous and exogenous v a r i a b l e s with d e f i n i t i o n s , s e c t i o n f i v e c o n t a i n s the values of exogenous v a r i a b l e s , and s e c t i o n s i x l i s t s the c o e f f i c i e n t s with t h e i r values and d e f i n i t i o n s . 1. D e s c r i p t i o n of the Model There are two v e r s i o n s of the model used i n t h i s paper. The f i r s t , which i s i n annual terms, d e a l s p r i m a r i l y with the r e n t s t h a t accrue to v a r i o u s p a r t i c i p a n t s i n the Syncrude p r o j e c t , The second i s a q u a r t e r l y e q u i v a l e n t of the annual model, and i s used i n c o n j u n c t i o n with HDX2, an aggregate model of the Canadian economy. Since the move from the annual to the q u a r t e r l y model i n v o l v e s l i t t l e more than c o n v e r t i n g i n t e r e s t r a t e s and the l i k e to t h e i r q u a r t e r l y e g u i v a l e n t s , I s h a l l d e s c r i b e only the annual model i n d e t a i l . Exogenous data f o r o i l p r o d u c t i o n , p r i c e s , and investment o u t l a y s are used as a b a s i s f o r c a l c u l a t i n g s t o c k s of c a p i t a l , taxable p r o f i t s , income taxes and r o y a l t i e s . The s i m u l a t i o n s begin i n 1974 and end i n 2003, but by coding exogenous data i n terms of the r e l a t i o n s h i p between SSTAR ( s t a r t i n g date of commercial production) and RTIME (calendar year) I am-able to s i m u l a t e the Syncrude p r o j e c t under d i f f e r e n t assumptions of s t a r t i n g date or, ^ a l t e r n a t i v e l y , under the assumption t h a t s e v e r a l o i l sands p l a n t s come on-stream s e q u e n t i a l l y . To f u r t h e r f a c i l i t a t e the modelling of these a l t e r n a t i v e s , exogenous investment data are expressed i n 1961 d o l l a r s and then i n f l a t e d by PEXOG {the p r i c e index) to- a r r i v e at c u r r e n t d o l l a r v a l u e s . The g r e a t e r p a r t of the model i s made up of r e n t e q u a t i o n s , each of which keeps t r a c k of one group of p a r t i c i p a n t s under a given t a x a t i o n and r i s k - s h a r i n g arrangement. These may be d i v i d e d i n t o three main groups, which c a l c u l a t e the r e n t s that accrue to v a r i o u s p a r t i c i p a n t s under A l b e r t a ' s a l t e r n a t i v e o p t i o n s provided f o r by the c u r r e n t Alberta-Syncrude agreement. A l b e r t a then chooses t h a t o p t i o n which maximizes the net present value of i t s investment, thus determining the f i n a l e q u i t y arrangement of Syncrude and the corresponding r e n t s to each p a r t i c i p a n t . Each rent eguation accumulates net r e t u r n s a f t e r d e d u c t i n g the amount t h a t the p a r t i c i p a n t would have obtained from h i s most obvious a l t e r n a t i v e . The r e n t s are accumulated using the s o c i a l time pr e f e r e n c e f a c t o r , STPNOM, which i s expressed i n nominal terms using c o e f f i c i e n t s A (1894) ( r e a l s o c i a l time preference) and A (1972) ( i n f l a t i o n r a t e ) . At the end o f each s i m u l a t i o n run, every rent t o t a l i s discounted back at the same d i s c o u n t r a t e t o y i e l d a net present value i n m i l l i o n s of year-end 1975 d o l l a r s . 2. Eguations f o r Endogenous V a r i a b l e s Some Conventions: :* denotes m u l t i p l i c a t i o n X**2 denotes X squared J1L* denotes a one-year lag o p e r a t i o n NTIME i s the year, with 73 r e p r e s e n t i n g 1973, 101 r e p r e s e n t i n g 2001, and so on. >= denotes 'greater than or equal t o ' <= denotes ' l e s s than or egual t o ' LIFE denotes u s e f u l l i f e cf an o i l sands plant NSTAR denotes f i r s t year cf commercial production f o r the various p l a n t s START i s a switch geared to the on-stream dates of the v a r i o u s p l a n t s STPNOM d e f i n e s the nominal s o c i a l time preference f a c t o r K7 denotes the c u r r e n t s i m u l a t i o n year M9 denotes the t o t a l number of s i m u l a t i o n years •IF K7=M9' i s read ' i f the s i m u l a t i o n i s i n i t s t e r m i n a l year' SET PARAMETERS FOR DISCOUNTING, PROJECT LIFE, AND START IF NTIME=74 THEN STPN0M= {1.+A (1894))* (1.67/1.5) IF NTIME=75 THEN STPNOM— (1. + A (1894) ) * (1. 85/1. 67) IF NTIME> = 76 THEN STPNOM= (1. + A (1 894) ) * (1 . + A (1 972) ) LIFE=25. NSTAR1=79 NSTAR2=A (1850) NSTAR3=NSTAR2+A(1912) NSTAR4=NSTAR3+A(1912) R'LIFE=LIFE RSTAR1=NSTAR1 RSTAR2=NSTAR2 RSTAR3=NSTAR3 RSTAR4=NSTA84 IF A (1980) = 1. THEN ESTA.R=RSTAR 1 IF A (1980)=2. THEN RSTAR=BSTAR2 IF A (1980)=3, THEN RSTAR=RSTAR3 IF A (1980)=4. THEN RSTAR=RSTAR4 RTI.ME= NTIME IF RTIMECRSTAR1 THEN START1=0. IF RTIME>= RSTAR1 THEN START1=1. IF RTIME<RSTAR2 THEN START2=0. IF RTIME>~ RSTAR2 THEN START2=1. IF RTIME<RSTAR3 THEN STAST3=0. IF RTIME>=RSTAR3 THEN START3=1. IF RTIME<RSTAR4 THEN START4=0. IF RT.IME>=RSTAR4 THEN START4=1. EQUATIONS FOR SANDS PRODUCTION SECTOR COEXP$=OPCOST1$+OPCOST2$+OPCOSI3$+OPCOST4$ CCEXP$=ISC1$+IS01$+ISC2$+TSC3$+ ISC4$+IS02$+ISQ3$+IS04$ CDEXP$=DEVEL1$+DEVEL2$ + DEVEL3.$+DEVEL4$ CPR0SUM=0ILPR0S1+0ILPR0S2+QILPR0S3+0ILPR0S4 CT0TEMP=NESC1+NES01+NESC2+NES0 2+ NESC3 + NES03 + NESC4 +NESO 4 CC8EXP$='WSC1$ + WSC2$ + SSC3$ + 8SC4$ C08EXP$=HSO1$+HSO2$+WSO3$+BS04$ K30S$H=.7*(J1L*K30S$H+CCEXP$) IF RIIME=RSTAR + RLIFE-1 . THEN K30S$H=0. KDE?EL$H=.7*(J1L*KDEVEL$H+CDEXP$) IF NTIHE>73 AND NTIME<=75 THEN TOTALIS.*A (1975) IF NTI.HE>73 AND NTIME< = 75 THEN Y0ILT=Y0IL-.3* (J1I*K30S$H + CCEXP$)-COEXPI-A(1961) * (STABT1*.5*(J1L*KUPD$H1+KUPD$H1) +START2*.5* (J1L*KUPD$H2+KUPD$H2) +START3*.5*(J1L*KUPD$H3+KUPD$H3) + START4*,5*(J1L*KUPD$H4+KUPD$H4)) -A(1891) *(CCEXP$) -.5*A(1891)*TOTAL IF NTIME>75 THEN YOIIT=YOIL-.3* (J1L*K30S$H + CCEXP$) -COEXP$-A (1961) * (START1*. 5* (J1L*KUPD$H1+KUPD$H1) + START2*.5* (J1L*KUPD$H2+KUPD$H2) + START3*.5*(J1L*KUPD$H3 + KUPD$H3) +START4*.5*(J1L*KUPD$H4+KUPD$H4)) -A (1891) * (CCEXPS) -TROYALA-A(1978)*(YOIL-COEXP$-.3 *(J1L*K30S$H+CCEXP$- (J1L*KDEVEL$H +CDEXP$)) ) IF RTTME= RSTAR + R.LIFE- 1. THEN YCILT= YOIL-1 . * (J1L*K30S$H+CCEXP$)-COEXP$-A (1961)* . 5* (J1L*KUPD$HT+KUPD$HT) -A (1891) * (CCEXP$) -TROYALA-A (1978)* (YOIL-COEXP$-J1L*K30S$H-CCEXP$+J1L*KDEVEL$H+CDEXP$) IF RTIME< = ESTAR1 + 4. THEN KARS$H1 = J1L*KARS$H1+ISC1$+ISO1 $ IF RTIHEXRSTART+4. THEN KARS$ H 1= {1.-1 . / (RLIFE- (RTIME-SST AR1) ) ) (JTL*KARS$H1+ISC1$+IS01$) IF RTIME>=RSTAH1 AND RTIME<=RSTARl+4. THEN Y0ILAR1= CILPROS1*POILSYN*.365-0PC0ST1S-. 08*. 5*(J1L*KUPD$H1+KUPD$H1) IF ST.IMEXESTAS1+4. THEN YCI.LAE1 = QILP.R0S1*P0.I.LSYN*. 36 5-OPCOST1I-.08*..5* (J1 L*KUPD$H1+KUPD$H1)-(1 ./ (RLIFE- (RTIME-RSTAR1) ) ) * {J1 L*KARS$H 1 +1 SC1 $+ IS01 $) IF J1L*YOILAR1<0. THEN YOILAR1 = YOTL.A.R 1+J 1.L* YOILAR1 IF RT.IMEORSTA.R2 + 4 . THEN KARS$H2=J1L*KASS$H2+ISC2$+ISO2$ IF RT.IMEXRST A.R2+4. THEN KAES$H2= {1.-1./(RLIFE-(RIIME-RSTAR2) )) * (J1L*KARS$H2+ISC2$+IS0 2$) IF .RTIME> = RSTAR2 AND RTTME<=RSTAR2+4. THEN YOI.LAR2 = OILPROS2*POILSYN*.365-OPCOST2$-.08*.5* (J1L*K0PD$H2+KUPD$H2) IF RTIHE>RSTAR2+ 4. THEN Y0ILAR2= OILPROS2*POILSYN*.365-OPCOST2$-.08*.5*(J1L*KUPD$H2+KDPD$H2)-(1. /(RLIFE-{RTIME-RSTAR2)))*(J1L*KARS$H2+ISC2$+IS02$) IF J1L*YOILAS2<0. THEN Y0ILA.R2=Y0ILA.R2+J1.L*Y0I.LAii2 IF RT.IME<= ESTAE3 +4. THEN KABS$H3=JTL*KARS$H3+ISC3$+IS03$ IF RTIM.E>RSTA.R3+4. THEN KARS$H3= (1.-1./ (RLIFE- {RT.IME-RSTAR3) } ) * (J1L*KARS$H3+ISC3$+IS0 3$) IF RT.IME>= EST A R3 AND'RTIMEC=RSTAR3+4. THEN YOILAR3= OILPROS3*POILSYN*.365-OPCOST3S-.08*.5* (J1L*KUPD$H3+KUPD$H3) IF ETIME>RSTA.E3+4. THEN YOILAE3= OILPBOS3*POILSYN*.365-OPCOST3S-.08*. 5*(J1L*KUPD$H3+KUPD$H3)-(1 ./ (RLIFE- (.RTIME-RSTAR3) ) ) * (J1 L*KABS$H3+ISC3$ + IS03$) IF J1L*YOILAR3<0. THEN YOILAR3=YOILAR3+J1L*YOILAH3 IF .RTlBE<=ESTAS4 + 4. THEN KARS$H4=J1L*KASS$H4+1SC4$+ISQ 4$ IF RT.IME>RSTAR4+4. THEN KARS$H4=(1.-1./(RLIFE-(RTIME-fiSTAR4)))* (J1L*KARS$H4+ISC4$+IS04$) IF ETIM.E>=RSTAS4 AND .ST.IME< = RSTAR4+4. THEN YOILAB4= 0ILPR0S4*P0ILSYN*.365-0PC0ST4S-.08*.5*(J1L*KOPD$H4+KOPD$H4) IF ETIME>RSTA.R4 + 4. THEN Y0ILAR4= OILPROS4*POILSYN*.365-0PC0ST4$-.08*.5*(JlL*KUPD$H4+KaPD$H4)-(1./(RLIFE-(RTIME-RSTAR4)))*(J1L*KARS$H4+ISC<+$+IS04$) IF J1L*Y0ILAR4<0. THEN YOILAR4= YOILAR4+J1L*YOILAR4 IF YOILA.R1<=0. THEN IF YO.ILAR1>0. THEN IF YOILAR2>0. THEN IF YO.ILAR3>0.. THEN IF YCILAR4>0. THEN TROY AL A=0. TROYALA=.5*YOILAR1 TROYALA=.5*(YOILAR1+Y0ILAR2) TROYALA=.5* (YOILAR 1+YOILAR2 + YOILAE3) TRO YA.LA=.5*(YOILAR1+YOILAE2+YOILAR3+YOILAR4) YOIL=CPROSaM*POILSYN*.365 IF RTIME< RSTAR1 THEN KUPD$H1=J1L*K0PD$H1 + A (1963)*(ISC1$ + IS01$) IF RTIHE>=BSTAR1 THEN KUPD$H1= (1.-1./ (RL.IFE- ( RTIME-RST AR1) ) ) (J1L*KUPD$H1 + A (1963) *{ISC1$+ISOl$)) IF RTIME<RSTAR2 THEN KUPD$H2=J1L*KUPD$H2 + A (1963)* (ISC2$+ IS02$) IF RTIHE>=RSTAR2 THEN K0PD$H2= (1.-1./(RLIFE-(RTIHE-BSTAR2))) (J1L*KUPD$H2 + A(1963)*(ISC2$+ISQ2$) ) IF RTIMECRSTAR3 THEN KUPD$H3=J1L*KUPD$H3 + A (1963)*(ISC3$ + I SO 3$) IF BTIHE>=RSTAR3 THEN KUPD$H3=(1.-1./(RLIFE-{RTISE-RST AR3))) (J1L*KUPD$H3+A(1963)*(ISC3$ + IS03$) ) IF RTIME< RSTAR4 THEN KUPD$H4=J1L*KUPD$H4+A (1963)*(ISC4$+ IS04$) IF RTIME>=RSTAR4 THEN KDPD$H4=(1.-1./ (RLIFE-(RTIM E-RSIAR4))) (J1L*KUPD$H4 + A (1963) * (ISC4$ + IS04$) ) K0PD$HT=KUPD$H1+K0PD$H2+KUPD$H3+KUPD$H4 TCOIL= (A (1964) + A (1965) ) *YOILT* (1.-A (1966) -A (1967) - A (1968) ) KSAND=J1L*KSAND+CCEXP$/PEX0G-A (1969) *CPBOSUM -(BEALIDC1+REALIDC2+ REALIDC3 + REALIDC4) PBBLCOST-=STPNOM*J1L*PBBLCOST + (A (1890) +A(1895) ) *. 5* (J1L*KSAND + KSAND) *PEXOG+ A(1969)*CPROSUM*PEXOG+COEXP$ IF K7=M9 THEN PBBLCOST = PBBLCOST/(STPNOM**(K7-2) ) SOHPROS= (1. + A(1894)) *J1L*SUMPROS+ CPE0SUM*365. IF K7=M9 THEN SOMPROS=S0MPROS/((1.+A(1894) ) ** (K7-2) ) IF K7=M9 THEN PBBLCOST=PBBLCOST/(SUMPROS/1000.) ECONOMIC RENT EQUATIONS KRENSFG$=STPNOM*J1L*KRENSFG$+((A(1964)/(A(1964)+ A (1965) ) ) *TC0IL-A (1970) *A (1895) *.5* (J1L*KSAND+ KSAND)*PEXOG+A(1966)*(YCIL-C0EXP$-TB0YALA-A(1890)* . 5* (J1 L*KSAND+ KSAND) *PEXOG-A (1969) *CPR0SUM* PEXOG) ) KRENSAG$=STPNOM*J1L*KRENSAG$+((A(1965)/ (A(1964) + A (1965))) *TCOIL-A (1971)*A(1895)*(1 .-A(1968) ) * . 5* (J11*KSAND + KSAND) * PEXOG+TROYALA+A (1967)*(YOIL-COEXP$-TROYALA-A (1890) *. 5* (J1 L*KSAND + KSAND) *PEXOG-A (1 969) * CPBOSUM*PEXOG)) • KBENSOG$=STPNOM*J1L*KRENSOG$+ (A(1968)* (YOIL-COEXP$-TROYALA-A (1890) *. 5*(J1L*KSAND+KSAND)*PEXOG -A (196 9) *CPROSUM*PEXOG) - A (1968) *A {1 971) *A(1895) * .5* (J1L*KSAND+KSAND)*PEXOG) KREMSPP$=STPNOM*J1L*KRENS.PP$ + ( (1 .-A (196 6) -A (1967) -A (1968) ) * (YOIL-COEXP$-TBOYALA-A (1890) * .5 * ( J 1 L*KS AND+KSAND) * PEXOG-A { 1969) *CPROSOM*PEXOG) -TCO.I1) PRESENT VALUE CALCULATIONS IE K7=M9 THEN K RENSFG$=KR ENS.FG$/(STPNOM**(K7-2) ) IF K7=M9 THEN KRENSAG$=KBENSAG$/(STPNOM**(K7-2)) IF K7=M9 THEN KBENSOG$=KEENSOG$/(STPNOM**(K7-2) ) IF K7=M9 THEN KEENSPP$ = KR.BNS.PP$/(STPNOM**(K7-2) ) ADJUST SYNC. RENTS FOR GOV. EQUITY IF # OF PLANTS > 1. IF K7=M9 AND A(1980)>1. THEN KRENSFG$=KRENSFG$+ 1 22 . 0 IF K7=M9 AND A(1980)>1. THEN KRENSAG$=KR3NSAG$+38.1 IF K7=.M9 AND A(1980)>1. THEN KRENSOG$=KRENSOG$-13,7 IF K7=M9 AND A(1980)>1. THEN KRENSPP$= KRENS PP$- 146.4 KRSU M75$~KRENSAG$+KREN SFGS + KR ENSGGS +KEENSPP$ ALBERTA SYNCRUDE OPTIONS Y 01LTS ND= YOILT +T RO Y AL A G ROYALA-.075*C PROSUM*POILS YN*.365 KRF7.5%$=STPNOM*J1L*KRF7.55I$+A (1964)* (YOILTRND-GROYALA) * (1.-A (1966) - A (1967)-A (1968) ) -A (1970)* A(1895)*.5*(J1L*KSAND+KSAND)*PEXOG+ A(1966) *(YOIL-COEXP$-GROYALA-A (1890)* .5*(J1L*KSAND + KSAND) *PEXOG-A (1969)* C.PEOSUM*PEXOG) KBA7.5%$=STPNOM*J1L*KRA7.5%$+A(1965)*(YOILTRND-GROYALA)* (1.-A (1966) - A (1967) - A (1968) ) -A (1971) *A (189 5) * (1.-A(1968)) *.5*(J1L*KSAND+KSa ND)*PEXOG+GROYALA+ A (1967) * (YOIL-COEXP$-GROYALA-A (1890) *. 5* (JTL*KS AND+KSAND)*PEXOG-A (1969) *CPROSUM*PEXOG) KRP7.5%$=STPNOM*J1L*KRP7.5%$+ (1.-A(1966)-A (1967)-A(1968))*(YOIL-COEXP$-GROYALA-A(1890)*.5*(J1L*KSAND+KSAND)+PEXOG-A (1969) * CPROSUM*PEXOG)- (A(1964)+A(1965))*{YOILTRND-GEOYALA) (1.-A (1966) - A ( 1967)-A (19 68) ) KR07.5%$=STPN0M*J1L*KS07.5%$+A (1968)* (YOIL-COEXP$-GROYALA-A(1890)*.5*{J1L*KSAND+KSAND)*PEX0G-A (1969) *CPEOSUM* PSXOG) -A (1968)*A (1971) *A (1895)*.5* (J1L*KSAND+ KSAND)*PEXOG KRFEQNR$=STPN0H*J11*KRFEQNR$+A (1964) * (YOILTRND-TROYALA) * (1.-. 12-.36-. 04)-A (1970)* A(1895)*. 5*(J 1L*KSAND+ KSAND)*PEXOG+.12* (Y0IL-C0EXP$-TR0YALA-A(1890)*. 5*(J1L*KS AND+K SAND)*P2X0G-A (1969) *CPROSUM*PEXOG) KRAEQNR$=STPNOM*J1 L*KRAEQNR$+A (1965) * {YOILTRND-TROYALA) * (1.-. 12-. 36-. 04)-A (1971) *A (1895)* (1 .-. 04) *. 5* (J1L*KSAND + KSAND) *PEXOG+TRQYALA+. 3 6* (YOIL-COEXP$-TSOYALA-A (1890) *. 5* (J1 L*KSAND+KSAND) * PEXOG-A(1969)*CPBOSOM*P£XQG) KRPEQNR$=STPNOM*J1L*RRPEQNB$+ (1.-. 12-. 36-. 04)* (YOIL-COEXPS-TROYALA-A (1890) *. 5*(J1L*KSAND+KSAND)*PEX0G-A (1969) *CPROSOM*PEXOG) - (A (1964) +A (1965) ) * (Y OIL TEND T ROYAL A) *(1. -. 12-. 36-. 04) KR0EQNR$=STPN0M*J1L*KR0EQNR$+.04* (Y0IL-C0EXP$-TROYALA-A (1890) *. 5* (J 1 L*KSAND+KSAND) *PEXOG-A (1969) CPROSUM*PSXOG) -.04*A (1971) *A (1895) *.5* (J 1 L*KSAND + KSA ND) * PEXOG PRESENT VALUE CALCULATIONS IF K7=M9 THEN KRF7. 5%$=KR7l. 5%$/ (STPNOM** (K7-2) ) IF K7 = M9 THEN KRA7, 5%$=KRA7.5%$/(STPNOM** (K7-2)) IF K7=B9 THEN KRP7.5%$=KRP7.5%$/(STPNOM**(K7-2)) IF K7 = M9 THEN KR07. 5%$=KR07 . 5%$/ (STPNOM** (K7-2) ) IF K7=M9 THEN KBFEQNR$=KRFEQNRS/(STPNOM** (K7-2)) IF K7=M9 THEN KRAEQNR$=KRAEQNB$/(STPNOM**(K7-2)) IF K7 = M9 THEN KRPEQNR$=KRPEQNB$/ (STPNOM** (K7-2)) IF K7=M9 THEN KROEQNR$=KROEQNR$/(STPNOM**(K7-2)) NET PRESENT VALUES FINAL ARRANGEMENT IF K7=M9 THEN KRAFIN$=KRENSAG$ IF K7=M9 AND KRA7.5%$>KRAFIN$ THEN KRAFIN$=KEA7.5%$ IF K7=M9 AND KRAEQNR$>KRAFIN$ THEN KRAFIN$=KRAEQNR$ IF K7=M9 AND KRAFIN$=KRENSAGl THEN KRFFIN$=KRENSFG $ IF K7=M9 AND KRAFIN$=KRA7.5%$ THEN KRFFIN$=KRF7.5K$ IF K7=M9 AND KRAFIN$=KRAEQNR$ THEN KRFFIN$=KBFEQNR$ IF K7=M9 AND KRAFIH$=KRENSAG$ THEN KRPFIN$=KRENSPP$ IF K7=M9 AND KRAFIN$=KRA7.5X$ THEN KRPFIN$=KBP7.5SS$ IF K7=M9 AND KRAFIN$=KRAEQNR$ THEN KRPFIN$=KRPEQNR$ IF K7=M9 AND KBAFIN$=KR!NSAG$ THEN 126 KE0FIN$=KRENS0G$ IF K7=M9 AND KRAFIN$=KR A7. 555$ THEN KR0FIN$=KR07.5%$ IF K7=M9 AND KRAFIN$=KBAEQNR$ THEN K80FIN$=KB0EQNR$ TRADE EQUATIONS FOB SANDS SANDM$12=A (1851) *(CCEXP$-CCWEXP$ '- (HEAL IDC 1 +REALIBC2+EEALIDC3+REALIDC4) *P£XOG) + A (1853) * (COEXP$-COWEXP$) + A (1 961) *A (1 855) *. 5* (J1L*KUPD$HT+KUPD$HT) SANDM$13=A (1852)*(CCEXP$-CCHEXP$ - (REALIDC1+ EEALIDC2 + REALIDC3 +BE ALIDC4) *PEXOG) + A (1854)* (COEXP$-COWEXP$) -MOILDIS%*CPROSUM*.365*PFX*PO.OFF Some Explanatory Notes Equations which d e f i n e c a p i t a l s t o c k s , t a x a b l e p r o f i t s , income taxes and r o y a l t i e s are r e l a t i v e l y s t r a i g h t f o r w a r d . The reader w i l l f i n d the d e f i n i t i o n s of endogenous v a r i a b l e s i n s e c t i o n 4 to be s u f f i c i e n t l y e x p l a n a t o r y . The rent e g u a t i o n s , on the other hand, r e q u i r e g r e a t e r a t t e n t i o n . To be q u i t e e x p l i c i t , I s h a l l d e s c r i b e i n d e t a i l one equation and comment only b r i e f l y on other equations where necessary. KBENSFG$, my example, c a l c u l a t e s r e n t s to the f e d e r a l government from Syncrude under the c u r r e n t revenue sharing arrangements. The term STPNOM*J1L*KRENSFG$ simply compounds annual net return s forward at the nominal s o c i a l time p r e f e r e n c e r a t e . To t h i s I add the f e d e r a l government's share o f c u r r e n t year's c o r p o r a t i o n tax, (A (1965) / (A (1964)+A (1965)) ) *TC0IL, and deduct a corresponding o p p o r t u n i t y c o s t . For lack of b e t t e r i n f o r m a t i o n a t t h i s p o i n t I assume t h a t t o t a l c a p i t a l i n v e s t e d i n Syncrude would i n f a c t have been i n v e s t e d i n Canada i r r e s p e c t i v e of the ex i s t e n c e o f Syncrude. The op p o r t u n i t y c o s t of c o l l e c t i n g tax from Syncrude i s gi v e n by A(1970)*A (1895)*.5*(J1L*KSAND+KSAND)*PEX0G, where A{1970) i s the f e d e r a l share of the average annual tax r e t u r n on i n d u s t r i a l c a p i t a l i n Canada, A (1895), and .5* (J 1 L*KSAND+KSAND)*PEXOG r e p r e s e n t s the replacement value of the average stock of c a p i t a l i n v e s t e d i n Syncrude. To these f a c t o r s I add the share of net p r i v a t e r e t u r n which accrues to the f e d e r a l government as an equity p a r t i c i p a n t . Current o p e r a t i n g c o s t , COEXP$, r o y a l t i e s , TBOYALA, a c a r r y i n g charqe on c a p i t a l , A (1890)*.5* (J1L*KSAND+KSAND)*PEXOG, and d e p r e c i a t i o n , A(1969)*CPBOSUM*PEXOG, are deducted from gross income, YOIL, and the r e s u l t i n g amount m u l t i p l i e d by A (1966), denoting the f e d e r a l government's e q u i t y (15%). At the end of the f i n a l s i m u l a t i o n year, KBENSFG$ i s discounted back to y i e l d a net present value i n m i l l i o n s of year-end 1975 d o l l a r s . The equation that performs t h i s o p e r a t i o n i s IF K7=M9 THEN KRENSFG$=KRENSFG$/ST£NOM**(K7-2) 127 There are of course s l i g h t a l t e r a t i o n s i n the s t r u c t u r e of the r e n t equations, depending on the p a r t i c u l a r revenue s h a r i n g arrangement t h a t i s being s i m u l a t e d , but, i n g e n e r a l , the preceding d e s c r i p t i o n of KRENSFGl i s a p p l i c a b l e throughout the model. For A l b e r t a ' s rent eguations I n a t u r a l l y add r o y a l t i e s and a l t e r a few c o e f f i c i e n t s t o take account of p r o v i n c i a l tax r a t e s and A l b e r t a ' s e g u i t y i n the p r o j e c t . O n t a r i o ' s r e n t s are derived only from an e q u i t y share and f o r p r i v a t e p a r t i c i p a n t s I deduct c o r p o r a t i o n tax, TCOIL . The reader w i l l f i n d the r e n t eguations p e r t a i n i n g to A l b e r t a ' s choice of o p t i o n s under the heading ' A l b e r t a Syncrude O p t i o n s ' . The f i r s t f o u r eguations of t h i s s e c t i o n simulate r e n t s to v a r i o u s p a r t i e s under c u r r e n t e g u i t y arrangements, with A l b e r t a t a k i n g a 7.5% gross production r o y a l t y i n p l a c e of a p r o f i t - s h a r i n g scheme. The next s e t d e s c r i b e s the case where A l b e r t a maintains the p r o f i t - s h a r i n g r o y a l t y and o b t a i n s a 36% share of t o t a l e q u i t y , reducing f e d e r a l , O n t a r i o , and p r i v a t e p a r t i c i p a n t s ' i n t e r e s t s to 12%, 4%, and 48% r e s p e c t i v e l y . Having determined the net present value of each p a r t i c i p a n t ' s investment under these a l t e r n a t i v e s and under the c u r r e n t Syncrude arrangement ( A l b e r t a having an e g u i t y share of only 10% and c h a r g i n g a 50% p r o f i t r o y a l t y ) , I then model A l b e r t a ' s d e c i s i o n r u l e under KRAFIN$. KRAFIN$ i s s e t equal to the g r e a t e r of KRENSAG$, KRA7.5%$, and KRAEQNR$ and, f i n a l l y , KRFFIN $, KROFIN$, and KRPFIN$ are s e t egual to t h e i r r e s p e c t i v e r e n t v a r i a b l e s which correspond to the arrangement that maximizes the net present value of A l b e r t a ' s r e t u r n . 3. Macroeconomic L i n k s The l i n k s between the o i l sands model and RDX2 are d e s c r i b e d s e c t o r by s e c t o r , i n order of appearance i n the aggregate model. - Trade -To M$12, c u r r e n t d o l l a r value of imports from the U.S., i s added SANDM$12. To M$13, c u r r e n t d o l l a r value of imports from other c o u n t r i e s , i s added SANDMS13. Th i s v a r i a b l e , c a l c u l a t e d w i t h i n the o i l sands model, a l s o takes account of import s u b s t i t u t i o n , given ay; M0ILDIS% * CPROSUM * .36 5 * PFX * PO.OFF, where import s u b s t i t u t i o n i s expressed i n terms $MM Canadian and o i l sands production i s assumed to d i s p l a c e an equal amount of imported crude o i l ( i e . : M0ILDIS% =1.) To M, r e a l imports of goods, i s added the r e a l e q u i v a l e n t of SANDM$12 and SANDMJ13. The p r i c e d e f l a t o r used t o express import s u b s t i t u t i o n i n r e a l terms i s taken s e p a r a t e l y as PO.OFF/2.71, where PO.OFF i s the c u r r e n t o f f s h o r e p r i c e c f crude o i l and 2.71 i s i t s 1961 constant d o l l a r e q u i v a l e n t . - Labour -To NE, aggregate employment, I have added CTOTEMP/(10.**6.) , thus e x p r e s s i n g t o t a l o i l sands employment;in terms of m i l l i o n s of persons to maintain c o n s i s t e n c y with the RDX2 measure, NE. Although o p e r a t i n g employment ought to be accounted f o r i n d i r e c t l y to maintain c o n s i s t e n c y with my treatment of the 'wages', ' p r i c e s ' , and 'income' 128 s e c t o r s of RDX2, the r e l a t i v e l y l a r g e o p e r a t i n g work f o r c e of o i l sands p l a n t s j u s t i f i e s separate treatment. - Wages -YW, aggregate wage income, has been augmented by CCWEXPS, o i l sands c o n s t r u c t i o n wage expenditure, measured i n MM c u r r e n t d o l l a r s . Wages during the o p e r a t i o n s phase are accounted f o r i n d i r e c t l y i n RDX2, as o i l sands development i s not t r e a t e d as a separate value-added s e c t o r of the economy. - P r i c e s -To the demonlnator of PGNE, the i m p l i c i t p r i c e d e f l a t o r f o r g r o s s n a t i o n a l expenditure, I have added CCEXP$/PEXOG. T h i s assumes that c u r r e n t c a p i t a l expenditures f o r o i l sands plan t s i n c r e a s e i n nominal terms at the ge n e r a l r a t e of i n f l a t i o n ( i . e . : PEXOG i s the general p r i c e l e v e l . ) The adjustment of PGNE i s necessary, s i n c e YGNE (the numerator of PGNE) i s augmented by CCEXP$ i n the •income* s e c t o r . - Income -In the 'income* s e c t o r , o i l sands c u r r e n t c a p i t a l investment, CCEXPl, has been added t o YGNE, the c u r r e n t d o l l a r l e v e l of g r o s s n a t i o n a l expenditure. - F o r e i g n Exchange -In t h i s s e c t o r I have taken account of the d i r e c t balance of payments e f f e c t s that r e s u l t from o i l sands development. To UBAL12, the net balance of payments with the U.S. (on c u r r e n t and c a p i t a l a c c o u n t ) , I have added: A (1855) * (KUPDSHT - J1L*KUPD$HT) T h i s keeps t r a c k of the c a p i t a l flows, as A (1855) r e p r e s e n t s the f o r e i g n f i n a n c i n g p r o p o r t i o n and (KUPD$HT - J1L*KUPD$HT) t r a c e s the change i n the stock of debt f o r o i l sands p l a n t s . The impact on c u r r e n t account e n t e r s the f o r e i g n exchange sector a u t o m a t i c a l l y through the v a r i o u s trade v a r i a b l e s , which have been e x p l i c i t l y changed i n the trade s e c t o r . 4, a l p h a b e t i c L i s t of Endogenous and Exogenous V a r i a b l e s A l l v a r i a b l e names s t a r t i n g with Y or ending with $ are measured i n m i l l i o n s of c u r r e n t d o l l a r s . The u n i t s f o r other v a r i a b l e s are i n c l u d e d with the d e f i n i t i o n s . The endogenous v a r i a b l e s are l i s t e d f i r s t followed by the exogenous. Where a v a r i a b l e i s not d e f i n e d as s p e c i f i c t o a p a r t i c u l a r p l a n t i t a p p l i e s t o a l l o i l sands development i n c o r p o r a t e d i n the modal. Fo l l o w i n g the l i s t of v a r i a b l e s used to simulate o i l sands p r o j e c t s are the macroeconomic v a r i a b l e s of RDX2, r e f e r r e d to i n s e c t i o n s 3 and 4 of the t e x t . 129 (i) endogenous v a r i a b l e s name d e s c r i p t i o n f o r tax purposes with 7.5% gross CCEXP$ c u r r e n t c a p i t a l expenditure i n o i l s a n d s CCWEXPl c u r r e n t c o n s t r u c t i o n wage expenditure i n o i l s a n d s COEXP$ c u r r e n t o p e r a t i n g expenditure i n o i l s a n d s COWSXPl c u r r e n t o p e r a t i n g wage expenditure i n o i l s a n d s CPBOSUM sum of c u r r e n t o i l s a n d s production CTOTEMP t o t a l c u r r e n t employment i n o i l s a n d s GROYALA 7.5% gr o s s revenue r o y a l t y as provided f o r i n o r i g i n a l Syncrude agreement K3GS$H year-end stock of a l l c a p i t a l d e p r e c i a b l e a t 30% . RARSlHI year-end stock of c a p i t a l f o r c a l c u l a t i n g A l b e r t a p r o f i t -s h a r i n g r o y a l t y as per Syncrude l e t t e r agreement of September,1973 KARS$H2 same f o r second o i l s a n d s p l a n t KARS$H3 same f o r t h i r d o i l s a n d s p l a n t KARS$H4 same f o r f o u r t h o i l s a n d s plant KDEVEL$H year-and stock of development expenditure KRA7.5%$ r e n t s to A l b e r t a government from Syncrude r o y a l t y system KRAEQNS$ r e n t s to A l b e r t a government from Syncrude with A l b e r t a ' s maximum e g u i t y o p t i o n and p r o f i t - s h a r i n g r o y a l t y KRAFIN$ r e n t s to A l b e r t a government from Syncrude as d e f i n e d by A l b e r t a ' s f i n a l ' c h o i c e of opt i o n s KRENSAG$ r e n t s to A l b e r t a government from Syncrude with A l b e r t a ' s c u r r e n t e g u i t y p a r t i c i p a t i o n and p r o f i t - s h a r i n g r o y a l t y KRENSFGS r e n t s to f e d e r a l government from Syncrude with c u r r e n t e q u i t y p a r t i c i p a t i o n and p r o f i t - s h a r i n g r o y a l t y KRENS0G$ r e n t s to Onta r i o government from Syncrude with c u r r e n t e q u i t y p a r t i c i p a t i o n and p r o f i t - s h a r i n g r o y a l t y KRENSPPS r e n t s to p r i v a t e p a r t i c i p a n t s i n Syncrude consortium from c u r r e n t e g u i t y arrangement and p r o f i t - s h a r i n g r o y a l t y KRF7.5%$ r e n t s to f e d e r a l government from Syncrude with 7.5% gross r o y a l t y system KRFSQNR$ r e n t s to f e d e r a l government from Syncrude with A l b e r t a ' s maximum e g u i t y o p t i o n and p r o f i t - s h a r i n g r o y a l t y KRFFINl ' r e n t s to f e d e r a l government from Syncrude as d e f i n e d by A l b e r t a ' s f i n a l c h o i ce of opt i o n s KR07.5%$ r e n t s to On t a r i o government from Syncrude with 7.5% gross r o y a l t y system KSOEQNRl r e n t s to Onta r i o government from Syncrude with A l b e r t a ' s maximum eg u i t y o p t i o n and p r o f i t - s h a r i n g r o y a l t y KROFINS r e n t s to Ontario government from Syncrude as d e f i n e d by A l b e r t a ' s f i n a l choice of opt i o n s KRP7.5%$ r e n t s to p r i v a t e p a r t i c i p a n t s i n Syncrude consortium from 7.5% gross r o y a l t y system KRPEQKRS r e n t s to p r i v a t e p a r t i c i p a n t s i n Syncrude consortium from A l b e r t a ' s maximum e g u i t y o p t i o n and p r o f i t - s h a r i n g r o y a l t y KRPFINS r a n t s to p r i v a t e p a r t i c i p a n t s i n Syncrude consortium as d e f i n e d by A l b e r t a ' s f i n a l choice of o p t i o n s KRSUM75I sum of r e n t s a c c r u i n g to Canadian governments and p r i v a t e p a r t i c i p a n t s i n Syncrude consortium and l a t e r o i l s a n d s 130 KSAND KUPD$HT KUPD$H1 K0PD$H2 KUPDIH3 K0PDSH4 PBBLCOST SANDMS12 SANDM$13 SUMPROS TCOII TROYALA TOIL YOILAR 1 YOILAR2 YOILAR3 YOILAR4 YOILT YOILTRND p l a n t s s t o c k of stock stock stock stock stock of of of of of c a p i t a l i n o i l s a n d s i n MM 196 1 d o l l a r s unpaid debt f o r a l l o i l s a n d s p l a n t s unpaid debt f o r Syncrude unpaid debt f o r second o i l s a n d s p l a n t unpaid debt f o r t h i r d o i l s a n d s p l a n t unpaid debt f o r f o u r t h o i l s a n d s p l a n t discounted per b a r r e l cost of s y n t h e t i c crude o i l , expressed i n 1975 present value d o l l a r s import content ( from the U.S. ) of c a p i t a l investment and f i n a n c i n g f o r Syncrude and l a t e r o i l s a n d s p l a n t s import content { from t h i r d c o u n t r i e s ) of c a p i t a l investment and f i n a n c i n g f o r Syncrude and l a t e r p l a n t s cumulative o i l production from Syncrude p r o j e c t and l a t e r o i l s a n d s p l a n t s c o r p o r a t i o n tax on o i l s a n d s producers - can be negative as l o s s e s are w r i t t e n o f f ag a i n s t other b u s i n e s s of consortium p a r t i c i p a n t s A l b e r t a r o y a l t y - 50% of p r o f i t s as determined i n Syncrude l a t t e r agreement of September,1973 income from s a l e of s y n t h e t i c crude o i l income f o r the purpose of c a l c u l a t i n g A l b e r t a r o y a l t y as determined i n Syncrude l e t t e r agreement of September,1973 same f o r second o i l s a n d s plant same f o r t h i r d o i l s a n d s p l a n t same f o r f o u r t h o i l s a n d s p l a n t t a x a b l e income f o r o i l s a n d s producers with p r o f i t - s h a r i n g r o y a l t y d e d u c t i b l e f o r f e d e r a l tax purposes t a x a b l e income with r o y a l t y non-deductible ( i i ) exogenous v a r i a b l e s name d e s c r i p t i o n DEVEL1$ Syncrude development expenditure f o r tax purposes DEVEL2$ second p l a n t development expenditure f o r tax purposes DEVEL3S t h i r d p l a n t development expenditure f o r tax purposes DEVEL4$ f o u r t h p l a n t development expenditure f o r tax purposes ISC1$ investment i n m i n i n g , e x t r a c t i o n and p r o c e s s i n g eguipment f o r Syncrude ISC2S investment i n m i n i n g , e x t r a c t i o n and p r o c e s s i n g equipment f o r second p l a n t ISC3$ investment i n raining,extraction and pr o c e s s i n g eguipment f o r t h i r d p l a n t ISC4$ investment i n m i n i n g , e x t r a c t i o n and p r o c e s s i n g eguipment f o r f o u r t h p l a n t IS01$ replacement investment during Syncrude o p e r a t i n g l i f e IS02$ replacement investment during o p e r a t i n g l i f e of second p l a n t IS03$ replacement investment during o p e r a t i n g l i f e of t h i r d p l a n t IS04$ replacement investment during o p e r a t i n g l i f e of f o u r t h p l a n t 131 H OIL DISSS NESC1 NESC2 NESC3 NESC4 NES01 NES02 HES03 NES04 OILPROS1 OILPROS2 OILPROS3 OILPROS4 OPCOST1$ OPCOST2$ OPCOST3$ OPCOST4S PEXOG PFX PO.OFF POILSYN REALIDC1 REALIDC2 REALIDC3 REALIDC4 WSC1$ WSC2$ WSC3$ WSC4$ HS01 $ »S02$ 1S03$ WS04$ of o i l sands production assumed to d i s p l a c e eastern Canada, equal t o 1. in o i l s a n d s c o n s t r u c t i o n , annual average, p r o p o r t i o n imports to number employed Syncrude number employed i n o i l s a n d s c o n s t r u c t i o n , annual average, second p l a n t number employed i n o i l s a n d s c o n s t r u c t i o n , annual average, t h i r d p l a n t number employed i n o i l s a n d s c o n s t r u c t i o n , annual average, f o u r t h p l a n t number employed i n o i l s a n d s o p e r a t i o n , annual average, Syncrude number employed i n o i l s a n d s o p e r a t i o n , annual average, second p l a n t number employed i n o i l s a n d s o p e r a t i o n , annual average, t h i r d p l a n t number employed i n o i l s a n d s o p e r a t i o n , annual average, f o u r t h p l a n t Syncrude o i l production i n thousand b a r r e l s per day second p l a n t o i l production i n thousand b a r r e l s per day t h i r d p l a n t o i l production i n thousand b a r r e l s per day f o u r t h p l a n t o i l production i n thousand b a r r e l s per day o p e r a t i n g expenditures f o r Syncrude i n m i l l i o n c u r r e n t d o l l a r s per year same f o r second p l a n t same f o r t h i r d p l a n t same f o r f o u r t h p l a n t p r i c e index, egual to 1, 67 i n 1974, 1. 85 i n 1975, and annuall y t h e r e a f t e r ; base year r i s i n g at U% (base case) f o r index i s 1961 p r i c e of f o r e i g n exchange - RDX2 v a r i a b l e used i n e v a l u a t i n g o i l sands' trade impact on aggregate economy p r i c e of o f f s h o r e crude o i l landed i n e a s t e r n Canada world l e v e l e q u i v a l e n t p l a n t - g a t e p r i c e of s y n t h e t i c crude o i l i n d o l l a r s per b a r r e l , e g u a l to 11.28 i n 1975 (base case) i n t e r e s t i n t e r e s t p i an t i n t e r e s t p l a n t i n t e r e s t p l a n t c u r r e n t c u r r e n t c u r r e n t c u r r e n t c u r r e n t c u r r e n t c u r r e n t c u r r e n t remaining constant i n during during during during c o n s t r u c t i o n c o n s t r u c t i o n r e a l terms t h e r e a f t e r i n constant 1961 $, Syncrude i n constant 1961 $, second c o n s t r u c t i o n i n constant 19 61 $, t h i r d c o n s t r u c t i o n i n constant 1961 $, f o u r t h c o n s t r u c t i o n wage b i l l , c o n s t r u c t i o n wage b i l l , c o n s t r u c t i o n wage b i l l , c o n s t r u c t i o n wage b i l l , o p e r a t i n g o p e r a t i n g o p e r a t i n g o p e r a t i n g wage wage wage wage b i l l , b i l l , b i l l , b i l l , Syncrude second p l a n t t h i r d p l a n t f o u r t h p l a n t Syncrude second p l a n t t h i r d p l a n t f o u r t h p l a n t 132 ( i i i ) EDX2 variables name description ABBC.D Bank of Canada deposits held by chartered banks GBALF federal national accounts balance (+ i f surplus) IIB change i n nonfarm business inventories IME business investment i n machinery and eguipment INfiC business investment in non-residential construction M imports of goods and services (constant 1961 $) M$12 imports of goods and services from the U.S. (current dollars) M$13 imports of goods and services from other countries (current dollars) NE t o t a l employed persons (excluding armed forces) NPOPT t o t a l population PCPI the consumer price index PFX spot exchange rate (CDN $ per U.S. $) PGNE price deflator for gross national expenditure EABEL earning l i q u i d asset r a t i o of chartered banks EHO approximation of the nominal supply price of c a p i t a l RNU the unemployment rate ES averaqe y i e l d on Government of Canada bonds, 1-3 years UBAL net balance of payments with a l l countries on current and long-term c a p i t a l account (MM $ CDN) UGNE gross national expenditure {MM 1961 $) UGPP gross private business product (excluding agricu l t u r e and non-commercial services) (MM 1961 $) UGPPA UGPP adjusted to remove unintended inventory changes UGPPD desired output based on production function with actual c a p i t a l stock, average employment rate and trended weekly hours X exports of goods and services (constant 1961 $) X$12 exports of goods and services to the U.S. (current dollars) X$13 exports of goods and services to other countries (current dollars) XBAL$ net balance on current account, balance of payments basis (current dollars) YC corporate p r o f i t s before tax YDP disposable personal income YGNE gross national expenditure (current dollars) YP personal income YS aggregate wage b i l l 5. Values f o r Exogenous V a r i a b l e s PEXOG IF NTIME=74 THEN PEX0G=1.67 IF NTIHE=75 THEN PEXOG=1.85 IF NTIHE>75 THEN PEXOG=J1L+PEXOG* (1.+ A (1972)) POILSYN IF NTIME=75 THEN POILSYN=A (1974)-.72+A(1962) IF NTIME>75 THEN FOILSYN=J1L*PGILSYN* (EXP (ALOG (1. +A {197 2)) + AL0G (1. +A (1973)) ) ) SWITCHING FEDERAL TAX RATE IF NTIME>=74 AND NTIME<=75 THEN A (1964)=. 25 IF NTIME>=76 THEN A (1964) = .36 SWITCH GOV. EQUITY OFF WHEN # OF PLANTS > 1 IF A(1980)>1. THEN A(1966)=0.0 IF A(1980)>1. THEN A(1967)=0.0 IF A{1980)>1. THEN A (1968) =0.0 - EXOGENOOS SERIES FOR PLANT #1 -ISC1$ IF RTIME=RSTARl-6. THEN IF RTIME=RSTARl-5. THEN IF RTIM.E = RSTAR1-4. THEN IF RTIME= RSTAR1-3. THEN IF RTIME=RSTAR 1-2. THEN IF RT.IME= RSTAR 1 -1 . THEN IF RTIME-RSTAR1 THEN I IF RTIME>RSTAR1 THEN I ISC1$=4.*PEXOG*A (1975) ISC1$=85. 63*PEXOG*A (1975) ISC1$=211.89*PEXOG*A(1975) ISC1$=335.42*PEX0G*A(1975) ISC1$=256. 0*PEXOG*A (1 975) ISC1$=138.94*PEXOG*A(1975) 1$=43.06*PEXOG*A(1975) 1$=0. BEALIDC1 IF RTIME = RSTAS 1-5. THEN REALIDC1=2.78 IF RTIME= RSTAR1-4. THEN RIALIDC 1=11.19 IF RT.IME=RSTAR 1 -3 . THEN RE ALIDC 1 = 26 . 9 3 IF RTIME=RSTAR1~2. THEN REALIDC1=43.25 IF RTIME = RSTAR1- 1. THEN REALIDC1 = 53. 1 4 IF RT.I ME>= RSTA R1 THEN SEAL IDC 1 = 0. I S01 $ IF RTIWE<RSTAR1 THEN IS01$=0. IF RTIME= RSTAR1 THEN IS01$=6.0*PEXOG*A (1975) IF RTIME>=RSTAR1 + 1 . AND RTIMEORST AR1 + 9 . THEN IS01$=12.*PEXOG*A(1975) IF RTIME> = RSTAR1 + 10. THEN ISO 1$=J1L*IS01$* (EXP ( A I O G < 1. + A { 197 2) ) +A.LOG (. 961 5) ) ) I F BTIME>= R S T A R 1 + R L I F E THEN I S 0 1 $ = 0 . DEV EL 1 $ DEVEL1$= A (1979)*.45*ISC1$ NESC1 IF RTIME= R S T A R 1 - 6. THEN IF RTIME=RSTAS1-5. THEN IF RTIME=RSTAR1-4. THEN IF RTIME=RSTARl-3. THEN IF RTIBE=RSTAR1-2. THEN IF RTIME= RSTAR1-1. THEN IF RTIME= RSTAR1 THEN IF RTIME>RSTAR1 THEN NES01 N E S C 1 = 1 9 6 . N E S C 1 = 1 2 4 3 . N E S C 1 = 3 3 6 7 . N E S C 1 = 5 9 2 3 . N E S C 1 = 5 6 4 6 . N E S C 1 = 3 0 2 8 . NESC 1 = 44. NESC1=0. I F RTIME=RSTAR1 THEN N E S 0 1 = 2 4 0 0 . I F RTIME>RSTA.E1 THEN N E S 0 1 = 2 4 4 1 . I F RT:IME> = ESTAR1 + R L I F E THEN NESO1 = 0. O I L P B O S 1 I F RTIME<RSTAR1 THEN O I L P B O S 1 = 0 . I F RTIME>=BSTAR1 THEN O I L P R G S 1 = 5 1 . 5 I F RTIHE>=BSTAH1+1. THEN O I L P B O S 1 = 9 2 . 8 IF RTIME>=RSTAR1+2. THEN IF RTIME>=RSTAR1+3. THEN IF RTIME>= BSTAR1+4. THEN IF RTIME>=RSTAR1+5. THEN IF RT.IME>=BSTARl+6. THEN 0 I L P R Q S 1 = 1 Q 8 . 3 0 I L P E 0 S 1 = 1 0 8 . 3 0 I L P R 0 S 1 = 1 1 8 . 5 O I L P E O S 1 = 1 2 3 . 7 0 I L P R 0 S 1 = 1 2 8 . 9 I F R T I M E > = R S T A B 1 + R L I F E THEN 0 I L P B 0 S 1 = 0 . 0 P C 0 S T 1 $ I F R TIHE<RSTAR1 THEN O P C O S T 1 $ = 0 . . I F RTIME>=BSTAR1 THEN O P C G S T 1 $ = 1 0 6 . 1 1 * P E X O G * A (1976) IF RTIME>= RSTAR1 + 1. THEN IF RTIME>= RSTAE1 +2 . THEN IF ST.IME>=ESTARl+3. THEN I F RTIME>=ESTAR1+4. THEN IF RTIME>=RSTAR1+ 5. THEN IF RTIME>= BSTAR1+6. THEN IF HTIHE>=RSTABl+7. THEN I F R T I M E > = R S T A R 1 + R L I F E THEN O P C O S T 1 $ = 0 . O P C O S T 1 $ = 1 1 0 . 9 * P E X 0 G * A ( 1 976) 0 P C 0 S T 1 $ = 1 1 5 . 1 6 * P E X 0 G * A ( 1 9 7 6 ) 0 P C 0 S T 1 $ = 1 1 8 . 9 4 * P E X O G * A ( 1 9 7 6 ) 0 P C 0 S T 1 $ = 1 1 8 . 3 3 *PEXOG*A{1976) O P C O S T 1 $ = 1 1 7 . 5 7 * P E X 0 G * A ( 1 9 7 6 ) 0 P C 0 S T 1 $ = 1 1 8 . 4 8 * P E X 0 G * A ( 1 9 7 6 ) 0 P C 0 S T 1 $ = J 1 L * 0 P C 0 S T 1 $ * (1 . +A (1 9 7 2 ) ) WSC1$ I F R T T M E=RSTAR1-6. T H E N I F R T I M E = R S T A R 1 - 5 . T H E N I F R T I M E = R S T A R 1 - 4 . T H E N I F R T I M E = R S T A R 1 - 3 . THEN I F ST I ME = R ST A R1 - 2. T H E N WSC1$=1.33*PEX0G*A (1975) WSC1$=22. 16*PEXOG*A (1 975) WSC1$=58. 38*PEXOG*A (1 975) W S C 1 $ = 1 0 7 . 2 9 * P E X O G * A ( 1 9 7 5 ) WSC1$=108. 5*PEX0G*A (1 975) IF RTI ME=RSTA.R 1- 1 . THEN 8SC1$=40. 87*PEXOG*A (1 975) IF RTIME= RSTAR 1 THEN WSC 1$=. 93*PEX0G*A (1 975) IF RTIME>RSTAR1 THEN WSC1$=0. WS01$ IF RTIME>= RSTAR1 THEN WS01$= .025*PEXOG/1.85*NES01*A(1976) - EXOGENOUS S E R I E S FOR PLANT #2 -ISC2$ IF RTIME=RSTAR2-IF RTIME= RSTAR2-IF RT.IME=EST AR2-IF RTIME= ESTAR2-IF RTIME= RSTAR2-IF RTIME=RSTAR2-IF RT.IHE=RSTAR2 IF RTIME>RSTAR2 REALIDC2 -6. THEN ISC2$= •5. THEN ISC2$= 4. THEN ISC2$= •3. THEN ISC 2$= •2. THEN ISC2$ = 1. THEN ISC2$= THEN ISC2$=43. THEN ISC2$=0. 4.*PEXOG*A (1975) 85. 63*PEXOG*A (1 975) 211.89*PEXOG*A(1975) 335.42*PEXOG*A (1975) 256.0*PEXOG*A (1 975) 138.94*PEXOG*A(1975) 06*PEXOG*A (1975) IF RTIME= RSTAR2-5. THEN IF RTIME=RSTAR2-4. THEN IF RTIME=RSTAR2-3. THEN REALIDC2=2.78 REALIDC2=11.19 EEALIDC2=26.93 BEALIDC2=43.25 REALIDC2=53.14 IF RTIME=RSTAS2-2. THEN IF RTIME=RSTAR2-1. THEN IF ETIHE>=HSTAR2 THEN BEALIDC2=0. IS02$ IF RTIME=RSTAR2 THEN ISC2$=6. 0*PEXOG*A (1 975) IF RTIME>=R3TAB2+1. AND RTIME<= RSTAR2 + 9. THEN IS02$=12.*PEXOG*A(1975) IF RTIME>=BSTAR2+10. THEN IS02$=J1L*IS02$* (EXP(ALOG (1. + A (1972) ) +ALOG (. 9615) ) ) IF RTIME> = RSTAR2+ RLIFE THEN ISC2$=0. DEVEL2I DEVEL2$= A(197 9) *.45*ISC2$ NESC2 IF RTIME— RSTAR2-6. THEN NESC2=196. IF RTIME=RSTAR2-5. THEN NESC2=1243. IF BTIME= ESTAR2-4. THEN NESC2=3367. IF RTIflE=RSTAR2-3. THEN NESC2=5923. IF RTIME=RSTAR2-2. THEN NESC2=5646. IF RTIME= RSTAR2-1. THEN NESC2=3028. IF RTIME=BSTAS2 THEN NESC2=44. IF ETIME>BSTAR2 THEN NESC2=0. N H H H H H H 1 H £3 H H H M H H H H £3 HJ Hd Hd Hd SC td i-r) SO Hd Hd --d d^ SC 50 SO so CO to to Co X to to to to to to to to to to to t-3 KI 1-5 t-3 1-3 (-3 t » o 1-9 KI t-3 H3 i-3 H3 KI H H H H H H cn H H H H H (—1 H H H 3! 3! tS ES td 3 3 3 3 E2 3 3 3 3 td w td ta td td bd td td td td td bd td td li n H ii II II o • V V II il il II il II il Ed to to to to to a o ii to to ttf to to to so to co to CO CO CO CO CO tO tO CO to to to CO CO to to Ki K) Ki t-3 1-3 . u i to i-3 Ki K) t-3 t-3 t-3 KI t-3 !» Jc s» it* Us. 3 * CO * 1-3 3 * if if if if if CO to PO to to PO ed 13 if to to to to to to to to to Ui I t CO 1 Co 1 Co CO 1 1 to H td to x to to to to 1 to 1 to 1 to 1 to t to t -» tO Co cn os td a t-3 t-3 _ i to CO Ul cn « • • • • * to a KI \ EC HE HE HI KI t-3 Ki KI Ki _»td 25 S3 t-3 KI t-3 t-3 1-3 t-3 EC CE EC EC EE EC o . S3 EC EC EC EC EC EC td W td td td to CD td td td Ki bd td 25 25 25 i2! 25 S3 PL Ul # S3 25 co £ CO o £3 to n 25 25 ta S3 M H H H H H if td O to to £3 £3 S3 £3 £3 CO CO CO CO CO CO 23 to to w w w CO CO CO to to n n n n n n O t» II H n o o n n n CO Co co CO co co to II o • to to to to to to i» 4*.- * * m t» w II it II II il II CO CO ii II H li II il —k Iv) Co (V) 00 4= * —k cn to co cn Co _» cn • 1 13o o o 00 to • oo as cn • # U3 td * « * CO • • * « a\ us -O X CD • • co CO U3 O co td 0s o Ul to 00 # 4=r # tO *• X cn # # * # »t) # 13 # * 13 O * * t) td 13 td 13 13 bd O if w bd bd td X W X td td X * X X td X X O X o X X O > o o X o o cn o cn o o Q »-» cn o cn cn * Q * cn cn * -» -J * * cn * # * if •* * > 03 Ul if # if is* >• —* — i (J1 —A —* vX) a —* V43"" <D vD <J Ui •^1 Ul -J Ul Ul Ul U) Ul Ul —' Ui Ui Ui H H H H H H H M M "d Hd Hd Hd Hj Hd Hd to to to to to to Pd to to Ki Ki KI KI t-3 t-3 t-3 Ki Ki H H H H H H H H H 3 3 3 3 3 3 3 3 3 td td td td bd td td td td V V V V V V V V V II II II il 11 II il II li Sd to to to to to to to to to CO CO to CO to to to to t-3 t-3 Ki t-3 t-3 t-3 KI t-3 t-3 if 3> if if if to if to to to W to to to to to so to to to to to to to to + + + + + + + + to Ul Co to K) tr* H td d^ t-3 Ki t-3 KI t-3 KI t-3 25 td EC EC EC EC EC EC EC bd bd bd Rj bd td bd KI 25 ts 25 25 23 25 25 O EC 13 td n O o o o O O O o 13 Hd 13 13 13 13 to n n n n n O t-3 o o o o o o o o IO to to CO to to to to •6» o t-3 Ki Ki Ki t-3 Ki Ki li o to to to IO to to to _» to fa* m O t-3 II II II il il II ii Os tO Cj ««• Ii t-1 00 00 oo Ul o o * • • • • • • * • o Ul Co _» 'XI 13 00 -J CO cr\ # td o # # *• * «• 13 X o Id 13 rid 13 13 td o to bd bd td td td X cn Ki X X X X X o # to o O o o o cn o Q a a Q * * * * # > i i» tf if U3 «^». _» —1 v£> CJs >x> U3 U3 VD N! if - j -J -s4 Oi a> a. OS Ch to o H H M H M H H 13 H3 •D Hd Hj H3 HJ Hd n o to to to to to to so to t-3 t-3 t-3 t-3 t-3 Ki KI KI H H HI H H H M to 3 3 3 3 3 3 3 m td td td td td td td V V V V V V V li II il il il II II to to so ta to ta to to CO CO to CO CO CO Ki Ki Ki t-3 t-3 Ki KI if if if >' > if > to to to to to to to to to to to to so to + + + + + 4-to OS Ul Co to — l f hH KI t-3 t-3 t-3 KI Ki td EC Ed EC EC EC EC btl bd bd m bd KI 25 25 s: 25 ts 25 EC bd 2S O o o O o O H H H H H H t-< fc"» t-< t-" o 13 13 13 13 13 13 H Si bs to to to nil lr< O O O O O O U CO to to to CO CO to to to to to to to O ii li li li il II to to to to I o o to il 00 CO 00 00 00 • o * • • • • 03 • -J Ul CO Co H o M H H 23 •-d IT Hj id "-d td CO to 13 to to to o Ki KO KI t-3 Ki to H O H H H 3 CO 3 3 3 bd to td td bd V il V il V to II ta to to to CO to CO KI KI Ki t-3 if if if [ j c to to to to to to to to + + Co t-3 KI to * EC EC t-t td td H KI 25 S3 bd HEN S3 O t-3 t« H EC to tr1 bd S3 O 13 S3 td to 50 CO il o o to to S3 to 4= to td II o li to to o Ul O •Br * _k to -P-• il i Ul o * co OS IF RTIME=BSTAR3 THEN ISC3$=43.06*PEX0G*A (1975) IF RTIME>RSTAR3 THEN ISC3$=0. REALIDC3 IF RTIME= RSTAR3-5. THEN BE A LIDC 3= 2.78 IF RTTME=RSTAR3-4. THEN REALIDC3=11.19 IF RT.IME= RSTAR 3- 3. THEN RE ALIDC3=26. 93 IF RTI.ME= RSTAR3-2 . THEN BEALIDC3=4 3. 25 IF RTIME=RSTAR3-1. THEN REALIDC3=53.14 IF RTIME> = BSTA R3 THEN EEALIDC3=0. IS03$ IF RTIME'=RSTAR3 THEN IS03$=6. 0*PEXOG*A (1 975) IF RTIME>=BSTAR3+1. AND ETIME<=RSTAR3+9. THEN IS03$=12.*PEX0G*A(1975) IF BTIME>=RSTAS3+10. THEN IS03$=J1L*IS03$* (EXP(AL0G(1. +A ( 1972) ) +ALOG {. 9615)) ) IF BTIME>=BSTAR3+BLIFE THEN IS03$=0. BEVEL3$ DEVEL3$=A(1979)*.45*ISC3$ NESC3 IF RTIME= RST AS 3-IF RTIHE=RSTAR3-IF BTIME= RSTAR3-IF RT.IME=RSTAS3-IF BTI.ME-=RSTAR3-IF RTIME=BSTAR3-IF RTIME=BSTAR3 IF RTIME>RSTAR3 •6. THEN NESC3=196. . •5. THEN NESC3=1243. 4. THEN NESC3=3367. 3. THEN NESC3=592 3. 2. THEN NESC3=5646. 1. THEN NESC3=3028. THEN NESC3=44, THEN NESC3=0. NES03 IF RTIHE=RSTAR3 THEN NESO3=2400. IF RTIME> EST AR3 + 3, THEN NES03=2441. IF RTIHE>=RSTAR3 +RLIFE THEN NESO3=0. 0ILPR0S3 =RSTAR3 THEN CILPB0S3=51.5 IF RTIME> IF RTIME> IF RTIME> IF RT.IME> IF RTIME> IF RTIME> IF RTIHE> IF RTIME>= RSTAR3 + RLIFE THEN OILPROS3=0. =BSTAR3+1. THEN 'BSTAR3 + 2. THEN BSTAB3+3. THEN :RSTAB3+4. THEN : ESTAR3 + 5. THEN 'BSTAR3+6. THEN OILPBOS3=92.8 OILPBOS3=108.3 OrLPBOS3=108. 3 0ILPE0S3=118.5 0ILPE0S3=123.7 OILPBOS3=128. 9 OPCOST3$ IF RTIME>= ESTAR3 THEN OPCOST3$=106.11*PEXOG*A (1976) IF RTIME>=RSTAR3+1. THEN 0PC0ST3$=110.9*PEXOG*A {1976) IF RTIHE>=ESTAR3+2. THEN 0PC0ST3$=115.16*PEX0G*A(1976) IF RTIHE>=RSTAR3+3. THEN 0PC0ST3$=118.94*PEX0G*A{1976) IF STIME>=BSTAH3+4. THEN 0PC0ST3$=118.33*PEXOG*A(1976) IF RTIME>=RSTA.R3 + 5. THEN 0PC0ST3$=117.57*PEX0G*A(1976) IF RT.IHE>=HSTAB3 + 6. THEN 0PC0ST3$= 11 8. 48*PEXOG*A ( 1 976) IF RTI.ME>= RSTAR3+7. THEN OPCOST3$=J1L*OPCOST3$*(1.+A{1 972)) IF RTIME>= RSTAR3 +R.L.I FE THEN OPCOST3$=0. WSC3$ IF RTIME=RSTAR3-6. THEN WSC3$= 1. 33*PEXOG*A (1975) IF RTIME=RSTAS3-5. THEN WSC3$=22.16*PEX0G*A(1975) IF RTIME=RSTAR3-4. THEN SSC3$=58. 38*PEXOG*A (1975) IF RTIME=8STAR3-3. THEN WSC3$=107.29*PEXOG*A(1975) IF RTIME=RSTAR3-2. THEN WSC3$=1 08. 5*PEX0G*A (1 975) IF RTIME=RSTAS3-1, THEN WSC3$=40. 87*PEXOG*A (1 975) IF RTIME=RSTAR3 THEN iSC3$=.93*PEXOG*A (1975) I F RTIHE>RSTAR3 THEN WSC3$=0. WS03$ IF R TI ME >= R ST A R3 THEN 5iS03$= .025*PEXOG/1.85*NES03*A(1976) - EXOGENOUS SERIES FOR PLANT #4 -ISC4$ IF RTIME= RSTAR4-IF RTIME=RSTAR4-IF RTIME=RSTAR4-IF RT.IME= RSTAR4' IF RTIME=RSTAR4-IF RTIHE= RSTAR4' IF RTIME= RSTAR4 IF RTIME>RSTAR4 •6. THEN ISC4$= •5. THEN ISC4$= •4. THEN ISC4$= •3. THEN ISC4$= •2. THEN ISC4$= •1. THEN ISC4$= THEN ISC4$=43, THEN ISC4$=0. 4.*PEXQG*A(1975) 85. 63*PEXOG*A (1 975) 211.89*PEXOG*A(1975) 335. 42*PEX0G*A (1975) 256. 0*PEXOG*A (1 975) 138.94*PEX0G*A(1975) 06*PEXOG*A(1975) REALIDC4 IF RTIME = RSTAR4-5. IF R TIM E = R S T A R 4 - 4. IF RTIME=RSTAR4-3. IF 'RTIME= RSTAR4-2. IF RTIME=RSTAR4-1. IF RT.IME>= RSTA 84 T THEN REALIDC4=2.78 THEN REALIDC4=11.19 THEN REALIDC4=26.93 THEN REALIDC4=4 3.2 5 THEN REALIDC4=53.14 EN REALIDC4=0. IS04$ IF RTIME= RSTAR4 THEN IS04$=6.0*PEXOG*A (1975) IF RTIME>= RSTAR4 +1. AND RTIME<=SSTAR4 + 9. THEN IS04$=12.*PEXQG*A (1975) IF RTIME>=BSTAR4+10. THEN IS04$=J1L*IS04$* (EXP (ALOG (1 . + A (197 2) ) +ALOG (. 9615) ) ) IF RTIME>=RSTAR4 +R.LI FE THEN IS04$=0. DEVEI4S DEVEL4$=A (1979) *.45*ISC4$ NESC4 IF RTIME= RSTAR4' IF RTIME=SSTAR4 IF RIIME= RSTAR4 IF RTIME= RSTAR4-IF RTIME = SS'TAR4 IF RTIME=ESTA R4 IF RTIME=BSTAR4 IF RTIME>RSTAR4 •6. THEM -5. THEN -4, THEN -3. THEN •2. THEN -1. THEN THEN THEN NESC4; NESCft= NESC4--NESC4= NESC4= NSSC4^ NESC4=44, NESC4=Q, 196, 124 3. 3367. 5923. 5646. 3028. NES04 IF RTI ME= RST A P. 4 THEN NESO4=2400. IF RTIME>RSTAR4+3. THEN NSS04=2441, IF RTIME>= RSTAR4 +RLT.FE THEN NESO4=0. OILPROS4 IF IF IF IF IF IF IF IF :RSTAR4 THEN 0"ILPROS4=51. 5 RTIME> RTIHE>=RSTAR4+1. THEN STIME>=BSTAR4+2. THEN RIIME>=RSTAR4+3. THEN RTIME>= BSTAR4 + 4. THEN RTIME>=RSTA14+5. THEN RTIME>= ESTAR4+6. THIN RTIME>=RSTAR4+RLIFE THEN OILPHOS4=0. 0ILPBOS4=92.8 OILPROS4=108.3 0ILPB0S4=108.3 OILPROS4=118. 5 GILPB0S4=123.7 QILPB0S4=128. 9 0PC0ST4I IF ETIME>=BSTAR4 THEN 0PC0ST4$=10 6.11*PSXOG*A (1976) IF RTI ME > = R S T A R 4 •»• 1 . THEN 0PC0ST4$= IF RTIME>= BSTAR4 +2. THEN OPCOST4$= I F RTIME>=ESTAR4 + 3 . THEN 0PC0ST4$^ IF RTIME>=8STAR4+4. THEN OPCOSTft$= IF BTIME>=SSTAR4 + 5. THEN OPCOSTft$= IF ETlME>=SSTAR4+6. THEN OPCOST4$; IF STIME>=ESTAR4+7. THEN OPCOSTU$= IF RTIME>=BSTAR4 + RLT FE THEN OPCOST4$=0. 110.9*PEXOG*A(1976) 115.16*PEXGG*A(1976) 118.94*PEXOG*A(1976) 118.33*PEXGG*A(1976) 117.57*PEXOG*A{1976) 118.48*PEXGG*A(1976) JlL*0PC0ST4$* (1 ,+A(1972) ) WSC4$ IF RTIME= RSTAR4 IF RTIME= RSTAR4 IF :STIME=SSTAH4 IF RTIME=ESTAH4 IF RTIHE=RSTARft IF RTIME=RSTAR4 IF RTIME=RSTAR4 IF RTIHE>BSTARft -6. THEN WSC4$=1.33*PEXOG*A (1975) -5. THEN «SC4$=22. 16*PEX0G*A (1 975) -4. THEN WSC4$=58. 38*PEXOG*A (1 975) -3. THEN WSC4$=107.29*PEXOG*A(1975) -2. THEN WSC4$=108. 5*PEX0G*A (1975) -1. THEN WSC4$=40. 87*PEXOG*A (1 975) THEN WSC4$=. 93*PEX0G*A (1975) THEN WSC4$=0. 140 WS04$ IF HTIHE>=RSTARU THEN «S04$= .025*PEXOG/1.85*NES04*A (1976) 6. C o e f f i c i e n t Values and D e f i n i t i o n s no. value d e s c r i p t i o n t h i r d , and 1850 83. on-stream date of second o i l s a n d s p l a n t , 1983 1851 .18 D.S. import content of o i l s a n d s non-wage c a p i t a l expendit ure 1852 .12 non-U.S. import content of o i l s a n d s non-wage c a p i t a l expenditure 1853 .04 U.S. import content of o i l s a n d s non-wage o p e r a t i n g expenditure 1854 .01 non-U.S. import content of o i l s a n d s non-wage o p e r a t i n g expenditure 1855 .35 import content c f o i l s a n d s debt f i n a n c i n g , assumed to be e n t i r e l y from the U.S. 1890 .0744 average annual supply p r i c e of c a p i t a l to business i n r e a l terms a f t e r tax 1891 .3333 d e p l e t i o n allowance as p r o p o r t i o n of e l i g i b l e e xpenditures 1894 .0744 annual s o c i a l time preference r a t a i n r e a l terms 1895 .03 average annual tax r e t u r n on i n d u s t r i a l c a p i t a l ( f e d e r a l and p r o v i n c i a l ) 1912 3. i n t e r v a l between on-stream dates of second, f o u r t h o i l s a n d s p l a n t s 1961 .08 annual i n t e r e s t r a t e on long-term debt 1962 .00 premium on s y n t h e t i c crude o i l i n $ / b a r r e l 1963 . 75 debt/ (debt + eguity) r a t i o on a l l investment 1964 .36 net f e d e r a l c o r p o r a t i o n tax rate a p p l i c a b l e o i l s a n d s p l a n t s , egual to 25% before January and 36% t h e r e a f t e r 1965 .11 A l b e r t a c o r p o r a t i o n tax r a t e 1966 .15 f e d e r a l government e g u i t y i n t o t a l investment 1967 .10 A l b e r t a government e g u i t y i n t o t a l investment 196 8 .05 O n t a r i o government e g u i t y i n t o t a l investment 196 9 .3882 annual 1961 $ d e p r e c i a t i o n per u n i t of production 1970 .7376 f e d e r a l share of average annual tax r e t u r n on i n d u s t r i a l c a p i t a l 1971 .2624 p r o v i n c i a l share of average annual tax r e t u r n on i n d u s t r i a l c a p i t a l as an approximation f o r A l b e r t a and O n t a r i o 1972 .04 a n t i c i p a t e d average g e n e r a l i n f l a t i o n r a t e , r a t e of i n c r e a s e of PEXOG a f t e r 1975 1973 .00 growth r a t e of POIISYN r e l a t i v e to growth r a t e of PEXOG , egual to .00 i f POILSYN remains constant i n to 1, 1976 Syncrude as percentage of Syncrude as percentage of Syncrude as percentage o f 14 1 1974 1975 1976 1978 1979 12. 00 1.0 1.0 . 25 .5 1980 v a r i e s r e a l terms world o i l p r i c e used to determine i n i t i a l value of POILSYN i n 1975 (year-end) a l t e r n a t i v e c a p i t a l c o s t m u l t i p l i e r a l t e r n a t i v e o p e r a t i n g c o s t m u l t i p l i e r f e d e r a l resource allowance r e p r e s e n t i n g 25% of production income, equal to .0 i f s i m u l a t i o n i s run with 1974 budget p r o p o r t i o n o f i n i t i a l c a p i t a l expenditure assumed to be c l a s s i f i e d as development expenditure f o r tax purposes number of p l a n t s being simulated 14 2 APPENDIX C A D i s c u s s i o n of Data Sources and Assumptions T h i s appendix i s d i v i d e d i n t o three p a r t s . They d e a l , r e s p e c t i v e l y , with the values of exogenous v a r i a b l e s , the values of c o e f f i c i e n t s , and data sources t h a t were used i n m o d e l l i n g A l b e r t a ' s options and the t a x a t i o n of Syncrude. (i) Exogenous Data PEXOG, the g e n e r a l p r i c e index, i s egual t o 1.67 (on a base with 1961=1.0) i n 1974 and 1.85 i n 1975, r i s i n g annually at the r a t e of A (1972) t h e r e a f t e r . The base value of A (1972) i s .04, with s e n s i t i v i t y a n a l y s i s c a r r i e d out over the range from .00 t o .12. The values f o r ISC$, IS0$, OILPROS and OPCOSTS were a l l obtained from a r e p o r t prepared for the A l b e r t a government by F o s t e r Research L i m i t e d , Calgary. The r e p o r t was t a b l e d before the A l b e r t a L e g i s l a t u r e on February 4, 1975. A part of i t may a l s o be found as an appendix to the 'Minutes of Proceedings and Evidence of the House of Commons Standing Committee on N a t i o n a l Resources and P u b l i c works' of March 4, 1975. R e v i s i o n s to ISC$ and a breakdown with r e s p e c t to the t i m i n g of investment expenditures were obtained d i r e c t l y from Syncrude' i n December of 1975. Current o p e r a t i n g c o s t s f o l l o w the F o s t e r r e p o r t very c l o s e l y , the only exception being t h a t I apply a c o n s t a n t i n f l a t i o n r a t e once c a p a c i t y commercial production has been achieved. F i g u r e s f o r annual output are taken d i r e c t l y from the F o s t e r r e p o r t . REALIDC was c a l c u l a t e d within the model i t s e l f and DEVEL$ i s simply an approximation, as Syncrude could not provide d e t a i l e d f a x c l a s s i f i c a t i o n of f o r e c a s t e x p e n d i t u r e s . The v a l u e s of NESC, NESO and WSC$ were d e r i v e d from estimates obtained d i r e c t l y from Syncrude. The value of WSQ$ was estimated using a r e a l (1975) p r o j e c t average annual wage and the employment v a r i a b l e NESO. Fo s t e r Research p l a n t - g a t e o i l p r i c e estimates are $13.70 per b a r r e l i n 1979, 1980, and 1981, r i s i n g at an average annual nominal r a t e of approximately 4% t h e r e a f t e r . I apply a constant 4% i n f l a t i o n r a t e throughout, using a base p r i c e of $11.28 per b a r r e l at the end of 1975. The reader may have n o t i c e d that s e n s i t i v i t y a n a l y s i s with r e s p e c t to o i l p r i c e s i s c a r r i e d out by a l t e r i n g the 1974 base p r i c e . I do, however, a l s o have the o p p o r t u n i t y of s i m u l a t i n g a l t e r n a t i v e r e a l r a t e s of change i n the p r i c e of o i l by using c o e f f i c i e n t A (1973), which r e l a t e s changes i n o i l p r i c e s to the general i n f l a t i o n r a t e . My e s t i m a t e s are f o r p l a n t gate s y n t h e t i c crude p r i c e s , which w i l l , as a consequence of the Winnipeg meetings of February 3, 1975, bear a d i r e c t r e l a t i o n t o world o i l p r i c e s . I am not sure.what l o c a t i o n and q u a l i t y benchmarks, i f any, have been used to e s t a b l i s h the equivalence between f o r e c a s t p l a n t - g a t e s y n t h e t i c and world crude p r i c e s . I have Ignored the p o s s i b i l i t y of a d d i t i o n a l government subsidy should the f u t u r e world o i l p r i c e once again f a l l below the domestic Canadian p r i c e . ( i i ) C o e f f i c i e n t s Values f o r the t r a d e c o e f f i c i e n t s , 1851-1855, are rough e s t i m a t e s 143 based on v a r i o u s i n t e r n a l Syncrude p u b l i c a t i o n s . 1890 i s equal to the annual value of RHOR , where RHOR i s the 1956-70 average of the RDX2 supply p r i c e of c a p i t a l i n r e a l terras. 1895 i s c a l c u l a t e d as the average annual value of ' c o r p o r a t i o n taxes / t o t a l c a p i t a l i n v e s t e d ' . 1961-73 data are employed and the RDX2 v a r i a b l e KB$ i s used f o r ' c a p i t a l i n v e s t e d ' , thus p r o v i d i n g a conce p t u a l p a r a l l e l with (KSAND) (PEXOG) . 1961, the annual i n t e r e s t r a t e on long-term debt, i s egual to the ra t e used by F o s t e r Research L t d . , Calgary. 1963, the debt p o r t i o n of t o t a l investment, i s taken d i r e c t l y from F o s t e r Research. 1969, annual 1961 $ d e p r e c i a t i o n per unit of p r o d u c t i o n , i s a r r i v e d at by d i v i d i n g u l t i m a t e c a p i t a l ( i n 1961 $) i n v e s t e d i n the p r o j e c t by u l t i m a t e p r o d u c t i o n . The r e s u l t i n g f i g u r e i s then expressed i n terms of d e p r e c i a t i o n per d a i l y output on an annual b a s i s . 1970 and 1971 a r e , r e s p e c t i v e l y , the f e d e r a l and p r o v i n c i a l shares of c o e f f i c i e n t 1895. RDX2 v a r i a b l e s TCA, TCAF, and TCAPM were used over the period 1965-73. The f e d e r a l share i s the average annual value of TCAF/TCA ( f e d e r a l c o r p o r a t i o n tax a c c r u a l s / t o t a l c o r p o r a t i o n tax a c c r u a l s ) , the p r o v i n c i a l share i s the average annual value of TCAPM/TCA ( p r o v i n c i a l c o r p o r a t i o n tax a c c r u a l s / t o t a l c o r p o r a t i o n tax a c c r u a l s ) . P r o v i n c i a l shares are assumed to reasonably approximate the shares of A l b e r t a and Ontario. C o e f f i c i e n t s 1891, 1964, and 1965 are curr e n t d e p l e t i o n and tax ra t e s of the f e d e r a l and A l b e r t a governments. ( i i i ) T a x a t i o n , R o y a l t y , and E q u i t y Arrangements The'basis f o r Syncrude's f i s c a l arrangements i s the September 14,1973 l e t t e r agreement between the o r i g i n a l Syncrude e q u i t y h o l d e r s and the A l b e r t a government, t a b l e d before the A l b e r t a L e g i s l a t u r e on December 13,1973. I t provided f o r a 50% p r o f i t - s h a r i n g r o y a l t y or, a l t e r n a t i v e l y , allowed the A l b e r t a government to e x e r c i s e a once and f o r a l l option of t a k i n g a 7.5% l e v y on gross p r o d u c t i o n from the pl a n t . The province a l s o had the o p t i o n of a c q u i r i n g , through the A l b e r t a Energy Company, 20% of the o p e r a t i n g p l a n t and 80% of the p i p e l i n e needed to t r a n s p o r t the o i l t o Edmonton. The new agreement, a r r i v e d at i n Winnipeg on February 3,1975, however, has changed the o r i g i n a l arrangement c o n s i d e r a b l y . The 30% e g u i t y abandoned by A t l a n t i c R i c h f i e l d i n December, 1974, has been repl a c e d by f e d e r a l , A l b e r t a , and Ontario e g u i t y p a r t i c i p a t i o n of 15%, 10%, and 5% r e s p e c t i v e l y . In a d d i t i o n t o A l b e r t a ' s c u r r e n t 10% e q u i t y i n t e r e s t , the province has put up $200 m i l l i o n (101 of t o t a l estimated costs) i n the form of a c o n v e r t i b l e debenture to Gulf Canada and C i t i e s S e r v i c e L t d . , maintains i t s o p t i o n of a c q u i r i n g 20% of t o t a l e q u i t y through the A l b e r t a Energy Company, and has i n c r e a s e d the Energy Company's i n t e r e s t i n the p i p e l i n e from 80% t o 100%. The d i s t i n c t o p t i o n s f o r A l b e r t a are f i r s t , t o keep the 50% p r o f i t - s h a r i n g 144 r o y a l t y and 10% e q u i t y p a r t i c i p a t i o n ; second, to maintain the c u r r e n t e g u i t y of 10% and l e v y a gross production r o y a l t y of 7.5% o r , t h i r d , to a c q u i r e a maximum e q u i t y of 36% and keep the 50% p r o f i t - s h a r i n g r o y a l t y . While a l l of the p a r t n e r s must pay the A l b e r t a r o y a l t y , the p r i v a t e p a r t i c i p a n t s alone bear the brunt of f e d e r a l and p r o v i n c i a l t a x a t i o n . Taxable income i s d e f i n e d net of r o y a l t i e s , be they a share of the p r o f i t s or a gross production l e v y . In the c a l c u l a t i o n of t a x a b l e income, c a p i t a l cost allowances are t r e a t e d as i f the p r o j e c t were a mine r a t h e r than a petroleum producer. F i n a l l y , Syncrude i s a consortium and not a seperate c o r p o r a t i o n , thus a l l o w i n g expenses to be claimed a g a i n s t income from the p r i v a t e p a r t i c i p a n t s 1 other Canadian o p e r a t i o n s . 

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