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UBC Theses and Dissertations

Methodological and cost comparison of alternative analyses of exploiting Canadian and U.S. frontier natural… Weisbeck, Don 1976

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A M e t h o d o l o g i c a l and C o s t C o m p a r i s o n o f A l t e r n a t i v e A n a l y s e s o f E x p l o i t i n g C a n a d i a n and U.S. F r o n t i e r N a t u r a l Gas B e s o u r c e s by Don Weisfceck B.A,, U n i v e r s i t y o f B r i t i s h C o l u m b i a , 1973 A T h e s i s S u b m i t t e d i n P a r t i a l F u l f i l l m e n t o f The R e q u i r e m e n t s f o r t h e D e gree o f M a s t e r o f A r t s i n The F a c u l t y o f G r a d u a t e S t u d i e s D e p a r t m e n t o f E c o n o m i c s U n i v e r s i t y o f B r i t i s h C o l u m b i a Me a c c e p t t h i s t h e s i s a s c o n f o r m i n g t o t h e r e q u i r e d s t a n d a r d The U n i v e r s i t y o f B r i t i s h C o l u m b i a S e p t e m b e r , 1 9 7 6 © Don Weisbeck, 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 Univers i ty of B r i t i s h Columbia, I agree that the L ibrary sha l l make i t f ree l y ava i lab 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 this thes is for f inanc ia l gain sha l l not be allowed without my written permission. Department of The Univers i ty of B r i t i s h Columbia 2075 Wesbrook P l a c e Vancouver, Canada V6T 1W5 Date gJFSr- /f 7 6 i . ABSTBACT The p u r p o s e o f t h i s p a p e r i s t o e x a m i n e t w o o f t h e a l t e r n a t i v e s f o r t r a n s p o r t i n g n a t u r a l gas fcm t h e M a c k e n z i e D e l t a - B e a u f o r t S e a a r e a o f t h e N o r t h w e s t T e r r i t o r i e s i n Canada and f r o m P r u d h o e Bay on t h e A l a s k a n o r t h s l o p e . The f i r s t o f t h e s e i s a M a c k e n z i e V a l l e y p i p e l i n e p r o p o s e d by C a n a d i a n A r c t i c Gas P i p e l i n e L t d t o t r a n s p o r t b o t h A l a s k a n and M a c k e n z i e D e l t a g a s t o s o u t h e r n m a r k e t s . The o t h e r a l t e r n a t i v e a n a l y s e d i s t h e a l l A m e r i c a n E l P a s o p r o p o s a l t o t r a n s p o r t s o l e l y P r u d h o e Bay gas t o U.S. m a r k e t s . I n p a r t i c u l a r t h e c o s t - b e n e f i t a n a l y s e s o f t h e s e p r o p o s a l s a s u n d e r t a k e n by t h e D . 0 . I . - A e r o s p a c e s t u d y a n d by H e l l i w e l l e t a l , , a r e e x a m i n e d . The p a p e r a t t e m p t s t o h i g h l i g h t d i f f e r e n c e s , b o t h m e t h o d o l o g i c a l a n d o t h e r , b e t w e e n two s t u d i e s o f t h e e c o n o m i c r e t u r n s i n e x p l o i t i n g n o r t h e r n n a t u r a l g a s r e s o u r s e s . The D e p a r t m e n t o f t h e I n t e r i o r s t u d y was u n d e r t a k e n t o e x a m i n e two a l t e r n a t i v e m ethods o f t r a n s p o r t i n g P r u d h o e Bay gas f r o m t h e A l a s k a n n o r t h s l o p e ; a p i p e l i n e and l i g u i f i c a t i o n r o u t e { p r o p o s e d by E l P a s o N a t u r a l Gas C o . ) , and t r a n s p o r t a t i o n v i a an a l l p i p e l i n e r o u t e w h i c h w o u l d t r a v e r s e A l a s k a , t h e Yukon T e r r i t o r y , and t h e N o r t h w e s t T e r r i t o r i e s , a n d t h e n c e t h r o u g h s o u t h e r n Canada i n t o t h e c o n t i n e n t a l U.S.A. The m a j o r d i f f e r e n c e s h i g h l i g h t e d i n c l u d e d i f f e r e n t e s t i m a t e s o f c a p i t a l and o p e r a t i n g c o s t s , f o r t h e p r o p o s e d M a c k e n z i e V a l l e y P i p e l i n e , b e t w e e n D.O.I, and CAGPL. A l s o e v a l u a t e d a r e t h e d i f f e r e n t l i f e t i m e a s s u m p t i o n s , e s t i m a t e s f o r t h e s u p p l y p r i c e o f c a p i t a l and t h e d i s c o u n t r a t e , and t h e t r e a t m e n t o f C a n a d i a n t a x e s . i i T a b l e o f C o n t e n t s page A. I n t r o d u c t i o n 1 B. B a c k g r o u n d 3 1. C a p i t a l C o s t s 4 2. O p e r a t i n g C o s t s 6 3. L i f e t i m e 7 4. S u p p l y P r i c e o f C a p i t a l and t h e S o c i a l Time P r e f e r e n c e R a t e 8 5. C a n a d i a n C o r p o r a t i o n T a x e s , S a l e s T a x e s , and I m p o r t D u t i e s 11 C. A r c t i c P i p e l i n e a n d D e l t a Gas P r o d u c t i o n M o d e l s 16 1. P i p e l i n e M o d e l 16 2. M a c k e n z i e D e l t a Gas P r o d u c t i o n 16 3. E c o n o m i c R e n t E g u a t i o n s 17 D. A n a l y s i s o f A l t e r n a t i v e A s s u m p t i o n s 17 1. B a s e C a s e 17 2. A l t e r n a t i v e A s s u m p t i o n s 20 (a) C a p i t a l and O p e r a t i n g C o s t s 20 (b) Gas F l o w 21 (c) L i f e t i m e 23 (d) S u p p l y P r i c e o f C a p i t a l and t h e D i s c o u n t H a t e 26 E. R e n t s t o U.S. P r o d u c e r s and P u r c h a s e r s o f A l a s k a n Gas 30 1. A l l p i p e l i n e r o u t e 35 2. A l a s k a - L . N . G . R o u t e 36 3. A Base C a s e V a l u e f o r KRENTA2S 36 F. C o n c l u s i o n s 41 R e f e r e n c e s 48 A p p e n d i x A. V a r i a b l e s , C o e f f i c i e n t s , and D e f i n i t i o n s 50 1. E n d o g e n o u s V a r i a b l e s 50 2. E x o g e n o u s V a r i a b l e s 52 3. C o e f f i c i e n t s 52 A p p e n d i x B. E g u a t i o n s and Base C a s e V a l u e s f o r E x o g e n o u s V a r i a b l e s 54 1. E g u a t i o n s f o r Endogenous V a r i a b l e s 54 2. B a s e C a s e E x o g e n o u s V a l u e s f o r t h e M a c k e n z i e V a l l e y P i p e l i n e and f o r M a c k e n z i e D e l t a P r o d u c t i o n and P r o c e s s i n g o f N a t u r a l Gas 66 1 A. OTBODUCTION At t h e p r e s e n t t i m e t h e r e a r e s e v e r a l c o m p e t i n g p r o p o s a l s b e f o r e C a n a d i a n and U n i t e d S t a t e s r e g u l a t o r y b o d i e s t o t r a n s p o r t n o r t h e r n n a t u r a l g a s r e s o u r c e s t o s o u t h e r n C a n a d i a n and U.S. m a r k e t s . T h e s e i n c l u d e a p r o p o s a l by C a n a d i a n A r c t i c Gas P i p e l i n e L t d . and i t s a f f i l i a t e , A l a s k a n A r c t i c Gas P i p e l i n e Co., t o t r a n s p o r t some 4.5 b i l l i o n c u b i c f e e t p e r day ( b c f / d ) o f n a t u r a l g a s ( i n t o t a l ) f r o m t h e P r u d h o e Bay a r e a o f n o r t h e r n A l a s k a a n d t h e M a c k e n z i e D e l t a - B e a u f o r t Sea a r e a o f t h e N o r t h w e s t T e r r i t o r i e s . A n o t h e r c o m p e t i n g p r o p o s a l known a s t h e •Maple L e a f 1 p r o j e c t i s t o t r a n s p o r t C a n a d i a n g a s v i a a n a l l C a n a d i a n l i n e f r o m t h e M a c k e n z i e D e l t a t o s o u t h e r n C a n a d a . A s e p e r a t e l i n e -ALCAN- i s a l s o p r o p o s e d t h r o u g h A l a s k a , B.C. and A l b e r t a t o t r a n s p o r t P r u d h o e Bay g a s t o c o n t i n e n t a l U.S. m a r k e t s . I n a d d i t i o n , t h e r e i s a p r o p o s a l by E l P a s o N a t u r a l Gas Co. t o t r a n s p o r t P r u d h o e bay g a s by p i p e l i n e a c r o s s A l a s k a t o ' P o i n t G r a v i n a where, upon l i g u i f i c a t i o n , t h e g a s w i l l be s h i p p e d by t a n k e r t o P o i n t C o n c e p t i o n on t h e west c o a s t o f C a l i f o r n i a . O n g o i n g r e s e a r c h h a s been c o n d u c t e d a t t h e U n i v e r s i t y o f B r i t i s h C o l u m b i a , u n d e r t h e d i r e c t i o n o f J o h n H e l i i w a l l , i n a s s e s s i n g t h e m i c r o and m a c r o e c o n o r a i c c o n s e q u e n c e s o f t h e v a r i o u s a l t e r n a t i v e p r o p o s a l s m e n t i o n e d a b o v e . 1 I n a d d i t i o n t h e 1 The r e s e a r c h began i n a f o u r t h y e a r u n d e r g r a d u a t e c o u r s e i n t h e 1972-73 a c a d e m i c y e a r . I t h a s e v o l v e d c o n s i d e r a b l y s i n c e t h a t t i m e t o i n c l u d e v a r i o u s a s p e c t s o f e n e r g y d e v e l o p m e n t i n c l u d i n g n o n - f r o n t i e r g a s and o i l p r o d u c t i o n , A l b e r t a o i l s a n d s p r o d u c t i o n , e n e r g y demand e s t i m a t e s , and v a r i o u s a l t e r n a t i v e t r a n s p o r t a t i o n s y s t e m s f o r e x p l o i t i n g n o r t h e r n gas r e s o u r c e s . R e f e r e n c e s t o t h i s work a r e i n c l u d e d i n t h e b i b l i o g r a p h y . 2 D e p a r t m e n t o f t h e I n t e r i o r a n d The A e r o s p a c e C o r p o r a t i o n have a p p r o a c h e d a l t e r n a t i v e n a t u r a l g a s d e l i v e r y s y s t e m s i r o n t h e p o i n t o f v i e w o f n e t e c o n o m i c b e n e f i t s a c c r u i n g t o t h e U n i t e d S t a t e s . 2 The p u r p o s e o f t h i s p a p e r i s t o e x a m i n e two o f t h e a l t e r n a t i v e s f o r t r a n s p o r t i n g n a t u r a l gas fjpm t h e M a c k e n z i e D e l t a - B e a u f o r t Sea a r e a o f t h e N o r t h w e s t T e r r i t o r i e s i n Canada and f r o m P r u d h o e Bay on t h e A l a s k a n o r t h s l o p e . The f i r s t o f t h e s e i s a M a c k e n z i e V a l l e y p i p e l i n e p r o p o s e d by C a n a d i a n A r c t i c Gas P i p e l i n e L t d t o t r a n s p o r t b o t h A l a s k a n and M a c k e n z i e D e l t a g a s t o s o u t h e r n m a r k e t s . The o t h e r a l t e r n a t i v e a n a l y s e d i s t h e a l l A m e r i c a n E l P a s o p r o p o s a l t o t r a n s p o r t s o l e l y P r u d h o e Bay g a s t o U.S. m a r k e t s . I n p a r t i c u l a r t h e c o s t - b e n e f i t a n a l y s e s o f t h e s e p r o p o s a l s a s u n d e r t a k e n by t h e D . O . I . - A e r o s p a c e s t u d y and by H e i l i w e l l e t a l . , a r e e x a m i n e d . I n s e c t i o n B ( B a c k g r o u n d ) , t h e b a s i c d i f f e r e n c e s o f t h e D.O.I, and H e i l i w e l l s t u d i e s , w i t h r e s p e c t t o t h e M a c k e n z i e V a l l e y p i p e l i n e , a r e o u t l i n e d . To b e g i n w i t h , H e i l i w e l l i n c o r p o r a t e s t h e c a p i t a l arid o p e r a t i n g c o s t s a s s u b m i t t e d by CAGP1 ( t h e s p o n s e r s o f t h e M a c k e n z i e V a l l e y p i p e l i n e ) . The D.O.I, u n d e r t o o k i n d e p e n d e n t e s t i m a t e s o f t h e s e c o s t p a r a m e t e r s . I n a d d i t i o n d i f f e r e n t l i f e t i m e a s s u m p t i o n s c f t h e p r o j e c t were i n c o r p o r a t e d (31 y e a r s i n t h e H e i l i w e l l s t u d y a nd 20 y e a r s i n t h e D.O.I, s t u d y ) . z A l a s k a n N a t u r a l Gas T r a n s p o r t a t i o n S y s t e m s , E c o n o m i c a nd R i s k A n a l y s i s , J u n e 1975 D r a f t 3 S e c t i o n 4 o f t h e b a c k g r o u n d s e c t i o n d i s c u s s e s t h e d i f f e r e n t i n t e r e s t r a t e s u s e d i n t h e s t u d i e s . Wheras t h e D.O.I, s t u d y was a c a s h f l o w a n a l y s i s , u s i n g a 10 p e r c e n t d i s c o u n t r a t e , t h e H e i l i w e l l s t u d y u s e d two r a t e s ; a b e f o r e t a x s u p p l y p r i c e o f c a p i t a l , o f 10.44%, was c h a r g e d on t h e r e p l a c e m e n t v a l u e o f . t h e c a p i t a l i n v e s t e d and a s o c i a l t i m e p r e f e r e n c e r a t e , o f 7.44%, was u s e d t o d i s c o u n t t h e s t r e a m o f n e t b e n e f i t s . S e c t i o n C c o n t a i n s a b r i e f d e s c r i p t i o n o f the s i m u l a t i o n m odel u s e d , i n t h e p a p e r , t o c a l c u l a t e t h e r e n t s a n d c o s t s o f t h e M a c k e n z i e V a l l e y p i p e l i n e and t h e a s s o c i a t e d p r o d u c i n g s e c t o r . F o l l o w i n g t h i s i n s e c t i o n D t h e s i m u l a t i o n r e s u l t s , i n c o r p o r a t i n g b o t h t h e H e i l i w e l l a n d D.O.I, a s s u m p t i o n s , a r e p r e s e n t e d . F i n a l l y , i n s e c t i o n E, H e i l i w e l l ' s c a l c u l a t i o n o f t h e c o s t s a v i n g s t o t h e U.S. o f u s i n g a M a c k e n z i e V a l l e y p i p e l i n e , a s o p p o s e d t o t h e E l P a s o r o u t e , f o r t r a n s p o r t i n g A l a s k a g a s , i s e x a m i n e d . I n p a r t i c u l a r h i s method o f c a l c u l a t i n g t h e c o s t s a v i n g s i s c r i t i c i z e d and an a l t e r n a t i v e method i s s u g g e s t e d . 4 B. BACKGROUND C a n a d i a n A r c t i c Gas P i p e l i n e L t d . (CAGPL) ana i t s a f f i l i a t e , A l a s k a n A r c t i c Gas P i p e l i n e Co. (AAGPL) a r e p r o p o s i n g t o b u i l d a 48 i n c h d i a m e t e r p i p e l i n e f r o m P r u d h o e Bay i n A l a s k a t h r o u g h t h e Yukon T e r r i t o r y i n C a n a d a i n t o t h e N o r t h w e s t T e r r i t o r i e s where t h i s l i n e w i l l be j o i n e d w i t h a n o t h e r 48 i n c h l i n e c a r r y i n g M a c k e n z i e D e l t a - B e a u f o r t Sea n a t u r a l g a s . From t h i s j u n c t i o n a 48 i n c h d i a m e t e r p i p e l i n e w i l l c a r r y b o t h U.S. and C a n a d i a n g a s t o a s o u t h e r n A l b e r t a j u n c t i o n f r o m whence two s m a l l e r l i n e s w i l l be c o n s t r u c t e d t o U.S. b o r d e r p o i n t s i n B r i t i s h C o l u m b i a and A l b e r t a . CAGPL i n more r e c e n t a p p l i c a t i o n s has i n d i c a t e d t h a t a l l C a n a d i a n gas w i l l be d i v e r t e d t o t h e T r a n s - C a n a d a P i p e l i n e s y s t e m { j u s t s o u t h o f t h e C a r o l i n e j u n c t i o n ) where s u c h g a s w i l l be t r a n s p o r t e d f o r C a n a d i a n c o n s u m p t i o n . 3 As p a r t o f t h e D . 0 . I . - A e r o s p a c e s t u d y , t h e CAGPL ' b a s e c a s e 1 r o u t e o u t l i n e d a b o v e was e x a m i n e d . The m a i n d i f f e r e n c e s b e t w e e n t h e D.O.I, an d CAGPL p r e s e n t a t i o n s a r e w i t h r e s p e c t t o c a p i t a l c o s t s , o p e r a t i n g c o s t s , l i f e t i m e o f t h e p i p e l i n e , U.S. and C a n a d i a n ga s f l o w s , s o c i a l t i m e p r e f e r e n c e r a t e , t h e s u p p l y p r i c e o f c a p i t a l , and t h e t r e a t m e n t o f C a n a d i a n t a x e s and i m p o r t d u t i e s . O u t l i n e d b e l o w i s a b r i e f d o c u m e n t a t i o n o f t h e s e d i f f e r e n c e s . 3 E x h i b i t s i n S u p p o r t o f an A p p l i c a t i o n t o t h e N a t i o n a l E n e r g y B o a r d a n d t h e D e p a r t m e n t o f I n d i a n A f f a i r s and N o r t h e r n D e v e l o p m e n t f o r A C e r t i f i c a t e o f P u b l i c C o n v e n i e n c e and N e c e s s i t y A u t h o r i z i n g t h e C o n s t r u c t i o n o f P i p e l i n e F a c i l i t i e s , M a r c h 1 9 7 4 - J a n u a r y 1976 5 1. C a p i t a l C o s t s The D . O . I . - A e r o s p a c e s t u d y c a l c u l a t e s c o s t s on 4 c o n f i g u r a t i o n s b a s e d on v a r y i n g f l o w r a t e s and methods o f t r a n s p o r t i n g P r u d h o e Bay g a s t o D.S. m a r k e t s . C o n f i g u r a t i o n s 3 and 4 c o r r e s p o n d t o t h e CAGPL a p p l i c a t i o n s i n t e r m s o f r o u t i n g and t h e s i z e o f v a r i o u s p i p e l i n e s e g m e n t s , t h e m a j o r d i f f e r e n c e b e i n g t h a t CAGPL i s a s s u m i n g 2.25 b c f / d w i l l be o b t a i n e d f r o m b o t h s u p p l y s o u r c e s w h e r e a s t h e D . O . I . - A e r o s p a c e s t u d y u s e s two d i f f e r i n g a s s u m p t i o n s . F o r c o n f i g u r a t i o n 3, t h e 0. S. s t u d y a ssumes 2.5 b c f / d f r o m A l a s k a and 1.0 b c f / d f r o m t h e M a c k e n z i e D e l t a . C o n f i g u r a t i o n 4 assumes 3.5 b c f / d i s o b t a i n e d f r o m A l a s k a and a g a i n 1.0 b c f / d f r o m C a n a d i a n s o u r c e s . I n o r d e r t o make a c o n s i s t e n t c o m p a r i s o n between t h e CAGPL a n d D.O.I, e s t i m a t e s , c o n f i g u r a t i o n 4 c o s t s f o r t h e C a n a d i a n l e g were c h o s e n t o g e t h e r w i t h c o n f i g u r a t i o n 3 c o s t s f o r t h e A l a s k a l e g . G i v e n t h e same s i z i n g a n d m i l e a g e , p i p e l i n e c o s t s w i l l d i f f e r f o r v a r y i n g t h r o u g h p u t r a t e s d u e , m a i n l y , t o t h e l a r g e r c o m p r e s s o r f a c i l i t i e s r e g u i r e d f o r h i g h e r r a t e s o f f l o w . F o l l o w i n g i s a y e a r by y e a r c o m p a r i s o n o f t h e c a p i t a l c o s t e s t i m a t e s u s e d . The a s s u m p t i o n s o f b o t h s t u d i e s a r e p r e s e n t e d i n m i l l i o n s o f f i r s t q u a r t e r 1975 d o l l a r s . C o s t s f o r t h e C a n a d i a n p o r t i o n o t t h e p i p e l i n e a r e p r e s e n t e d i n f i r s t q u a r t e r 1975 p r i c e s by b o t h CAGPL a n d t h e D.O.I., a s a r e t h e c o n t i n e n t a l U.S. c o s t s o f t r a n s p o r t i n g P r u d h o e Bay gas f r o m t h e U.S. b o r d e r t o e a s t e r n U n i t e d S t a t e s m a r k e t s . F o r t h e A l a s k a r o u t e , CAGPL c o s t e s t i m a t e s a r e p r e s e n t e d i n a v e r a g e 1974 p r i c e s . An e s c a l a t i o n f a c t o r o f 1.89/1.77, w h i c h r e p r e s e n t s t h e J a n u a r y 1 s t 1975 C a n a d i a n G r o s s N a t i o n a l E x p e n d i t u r e I n d e x d i v i d e d by t h e J u l y 1, 6 1974 I n d e x , i s a p p l i e d t o t h e CAGPL e s t i m a t e s f o r t h e A l a s k a r o u t e t o p r o v i d e a c o n s i s t e n t c o m p a r i s o n . F i r s t q u a r t e r 1974 p r i c e s , a s p r e s e n t e d by CAGPL, a r e shown i n b r a c k e t s * TABLE 1 CAPITAL COST COMPARISON CAGPL APPLICATIONS D.O.I.-AEROSPACE STUDY A l a s k a C a n a d i a n A l a s k a C a n a d i a n C o n t i n e n t a l P o r t i o n P o r t i o n P o r t i o n P o r t i o n U.S. P o r t i o n 1 976 8. 9 108.7 1977 40.3 426.2 1978 10.6( 9.9) 700.9 125.4 1388.8 1979 26. 5 ( 24. 8) 1C82.9 134.4 1812.6 454.3 1980 15. 9 ( 14.9) 1381.0 168. 0 1381.6 1046.2 1981 30 7 . 1 (287.6) 877.7 82.8 501.0 376.7 1982 1 6 9 . 4 ( 1 5 8 . 7 ) 333. 9 1983 168.7 1984 160.9 1985 62,6 TOTAL 529.5 ( 4 9 5 . 9) 4768.6 559. 8 5618.9, 1877.2 As c a n be s e e n t h e m a j o r d i s c r e p a n c y e x i s t s i n t h e e s t i m a t e s f o r t h e C a n a d i a n p o r t i o n o f t i e p i p e l i n e . However, p r o p o r t i o n a l l y , t h e A l a s k a r o u t e c o s t e s t i m a t e s a r e s i g n i f i c a n t l y h i g h e r , i n p r e s e n t v a l u e t e r m s , i n t h e D.O.L c a s e when one e x a m i n e s t h e t i m e p r o f i l e o f e x p e n d i t u r e s . H i g h e r c o s t s o f t h e C a n a d i a n r o u t e w i l l i m p l y l o w e r r e n t s t o C a n a d i a n s i n e x p l o i t i n g t h e M a c k e n z i e D e l t a g a s r e s o u r c e a n d h i g h e r c o s t s o f b o t h t h e A l a s k a a nd C a n a d i a n p o r t i o n s w i l l r e d u c e t h e r e n t s a c c r u i n g t o U.S. p r o d u c e r s a n d / o r c o n s u m e r s i n e x p l o i t i n g t h e A l a s k a g a s r e s o u r c e , T h i s l a t t e r p o i n t w i l l become more e v i d e n t when 4 P r e s u m a b l y a l l c o s t e s t i m a t e s u s e d by t h e D.O.I, a r e i n U.S. d o l l a r s . The g u e s t i o n t h e n i s what e x c h a n g e r a t e was assumed between t h e U.S. and C a n a d i a n d o l l a r . F o r p u r p o s e s o f t h i s p a p e r i t i s assumed t h a t t h e U.S. and C a n a d i a n d o l l a r a r e e x c h a n g e d a t p a r . 7 a l t e r n a t i v e t r a n s p o r t a t i o n r o u t e s f o r P r u d h o e Bay g a s a r e e x a m i n e d v i a t h e E l P a s o o r ALCAN p r o p o s a l s a l l u d e d t o a b o v e . 2. O p e r a t i n g C o s t s As was t h e c a s e w i t h r e s p e c t t o c a p i t a l c o s t s , o p e r a t i n g c o s t s f o r t h e A l a s k a n p o r t i o n o f t h e p i p e l i n e , f o r D.O,I. e s t i m a t e p u r p o s e s , a r e t a k e n f o r t h e c a s e ( c o n f i g u r a t i o n 3) where 2.25 b c f / d t h r o u g h p u t i s assumed t o f l o w f r o m P r u d h o e Bay and f o r t h e C a n a d i a n p o r t i o n ( c o n f i g u r a t i o n 4) where a t o t a l o f 4.5 b c f / d o f C a n a d i a n and U.S. g a s i s assumed t o f l o w f r o m t h e c o m m i n g l i n g p o i n t . A g a i n , a l l c o s t s a r e shown i n m i l l i o n s o f 1 s t g u a r t e r 1975 d o l l a r s . CAGPL o p e r a t i n g c o s t e s t i m a t e s f o r t h e C a n a d i a n r o u t e a r e g i v e n (1974$) i n S e c t i o n 11, S c h e d u l e 2 o f t h e i r a p p l i c a t i o n . O p e r a t i n g c o s t s f o r t h e A l a s k a r o u t e , f o r CAGPL e s t i m a t e p u r p o s e s , were assumed t o be e g u a l (on a p e r m i l e b a s i s ) t o t h o s e f o r t h e C a n a d i a n p o r t i o n o f t h e r o u t e . As was done w i t h r e s p e c t t o c a p i t a l c o s t s , 1974$ o p e r a t i n g c o s t e s t i m a t e s a r e m u l t i p l i e d by 1.89/1.77 t o a r r i v e a t f i r s t g u a r t e r 1975 p r i c e s . 1974$ e s t i m a t e s a r e shown i n b r a c k e t s . TABLE 2 OPERATING COST COMPARISON CAGPL APPLICATIONS D.O.I.-AEROSPACE STUDY A l a s k a P o r t i o n C a n a d i a n P o r t i o n A l a s k a P o r t i o n C a n a d i a n C o n t i n e n t a l P o r t i o n U.S. P o r t i o n 1981 1982 1983 1984 1985 0.77 (0.72) 19.6 (18.4) 1.81 ( 1 . 70) 43. 8 (41.0) 2.07(1.94) 44,7 (41.9) 2. 1 5 ( 2 . 0 1 ) 47. 1 (44.9) 2. 18 (2.04) 47. 9 (44.9) 1.6 3. 2 3. 2 3. 2 3.2 26.2 52.5 52.5 52.5 52.5 6.2 12. 4 12.4 12.4 12.4 I n t h e D . O . I . - A e r o s p a c e s t u d y o p e r a t i n g c o s t s a r e a ssumed t o be c o n s t a n t ( i n 1 s t g u a r t e r 1975 p r i c e s ) commencing i n t h e s e c o n d 8 y e a r o f o p e r a t i o n . I n t h e CAGPL c a s e , a s p r e s e n t l y m o d e l l e d , o p e r a t i n g c o s t s a r e more v a r i a n t f o r two r e a s o n s . F i r s t , w h e r e a s t h e D.O.I, a s s u m e s t h a t f u l l t h r o u g h p u t i s o b t a i n e d i m m e d i a t e l y upon s t a r t u p (mid 1981 i n b o t h c a s e s ) CAGPL assumes t h a t f u l l t h r o u g h p u t w i l l n o t be o b t a i n e d u n t i l l a t e 1985. S e c o n d l y , t h e U.B.C. model d i v i d e s o p e r a t i n g c o s t s i n t o two c o m p o n e n t s ; non wage o p e r a t i n g c o s t s - C E N H E l - w h i c h a r e assumed t o r e m a i n c o n s t a n t a t a b o u t 32.2 m i l l i o n 1 s t g u a r t e r 1975$ ( f o r t h e C a n a d i a n r o u t e ) f r o m 1984 o n w a r d , a nd t h e wage component o f o p e r a t i n g e x p e n s e s NPO*WPO. The a n n u a l wage r a t e -WPQ- r i s e s i n r e a l t e r m s by t h e f a c t o r 1.0208 e a c h y e a r ( t h e a v e r a g e a n n u a l i n c r e a s e i n l a b o u r p r o d u c t i v i t y f r o m 1952-1970 b a s e d on t h e r a t e o f c h a n g e o f t h e l a b o u r e f f i c i e n c y f a c t o r , E L E F F , i n t h e 1974 v e r s i o n o f SDX2- H e l l i w e l l and M a x w e l l 1 9 7 4 ) . T o t a l o p e r a t i o n e x p e n s e s as m o d e l l e d f o r t h e CAGPL a p p l i c a t i o n c a s e , a r e t h u s r i s i n g i n r e a l t e r m s and a c t u a l l y s u r p a s s t h e D.O.I. e s t i m a t e , f o r t h e C a n a d i a n r o u t e , o f 52.5 m i l l i o n ( f i r s t g u a r t e r 1975 d o l l a r s ) by 1993. 3. L i f e t i m e The O.B.C. model assumes a p i p e l i n e o p e r a t i n g l i f e o f 31 y e a r s . T h i s i s b a s e d on t h e a s s u m p t i o n i n c o r p o r a t e d by F o o t h i l l s i n t o t h e i r c o s t - b e n e f i t a n a l y s i s . 5 The D.O.I, s t u d y a s s u m e s a l i f e t i m e o f 20 y e a r s . T h e s e d i f f e r i n g a s s u m p t i o n s w i l l h a v e a m a j o r e f f e c t on r e n t s due t o t h e h i g h net b e n e f i t s t r e a m i n t h e l a t t e r y e a r s o f p i p e l i n e o p e r a t i o n when no p i p e l i n e c a p i t a l e x p e n d i t u r e s a r e i n c u r r e d . 5 F o o t h i l l s P i p e l i n e s L t d . , A p p l i c a t i o n t o The N a t i o n a l E n e r g y B o a r d a n d t o The D e p a r t m e n t o f I n d i a n A f f a i r s and N o r t h e r n D e v e l o p m e n t , P a r t 5 - P u b l i c I n t e r e s t , a p r i l 1975. 9 4. S u p p l y P r i c e o f C a p i t a l and The S o c i a l Time P r e f e r e n c e R a t e The D.O.I.- A e r o s p a c e s t u d y c a l c u l a t e s r e n t s on a c a s h f l o w b a s i s . The b a s e c a s e d i s c o u n t r a t e c h o s e n was 10 p e r c e n t a n d was c a l c u l a t e d i n t h e f o l l o w i n g m a n n e r : 6 R=Wd*Id+He*Ke/(1.-T)=.10 VARIABLE DEFINITION AVERAGE VALi 1926-1973 Wd s h a r e o f d e b t f i n a n c i n g i n t o t a l c a p i t a l i z a t i o n 0.30 We s h a r e o f e q u i t y f i n a n c i n g i n t o t a l c a p i t a l i z a t i o n 0.70 I d r e a l i n t e r e s t r a t e o f c o r p o r a t e b o n d s 0.016 Ke r e a l r e t u r n on s t o c k h o l d e r s e q u i t y 0.073 T c o r p o r a t e t a x r a t e ( a s s u m e d v a l u e ) 0.46 A l l c o s t s a r e d i s c o u n t e d when t h e y o c c u r a t t h e r a t e o f 10 p e r c e n t . Thus t h e D.O.I.- A e r o s p a c e s t u d y i s u s i n g a d i s c o u n t r a t e e q u a l t o t h e i r e s t i m a t i o n o f t h e m a r g i n a l s u p p l y p r i c e o f c a p i t a l ( b e f o r e t a x ) . I n t h e U.B.C. model t h e b e f o r e t a x s u p p l y p r i c e o f c a p i t a l i s e g u a l t o 10,44 p e r c e n t and i s made up o f two c o m p o n e n t s ; t h e a f t e r t a x r e a l s u p p l y p r i c e o f c a p i t a l t o b u s i n e s s o f 7.44 p e r c e n t and t h e a v e r a g e r e a l a n n u a l t a x r e t u r n on i n d u s t r i a l c a p i t a l o f 3.0 p e r c e n t . The a v e r a g e b e f o r e t a x s u p p l y p r i c e o f c a p i t a l c f 7.44 p e r c e n t i s e g u a l t o t h e a n n u a l v a l u e o f RHOS, where RHOR i s t h e 1956-70 a v e r a g e o f t h e RDX2 m a r g i n a l s u p p l y p r i c e o f c a p i t a l i n r e a l t e r m s . The a v e r a g e t a x 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 s t h e a n n u a l v a l u e o f c o r p o r a t i o n t a x e s ( f e d e r a l and p r o v i n c i a l ) d i v i d e d by t o t a l c a p i t a l i n v e s t e d . The RDX2 v a r i a b l e KB$ i s u s e d f o r c a p i t a l i n v e s t e d . I n a p e r f e c t l y c o m p e t i t i v e m a r k e t economy w i t h no t a x e s , t h e s o c i a l t i m e p r e f e r e n c e r a t e and t h e o p p o r t u n i t y c o s t o f Op C i t , Pg. 2-11 10 i n v e s t m e n t ( s u p p l y p r i c e o f c a p i t a l ) w o u l d be e q u a l ( i g n o r i n g r i s k ) . The c h o i c e f o r s o c i e t y i s e i t h e r p r e s e n t c o n s u m p t i o n o r i n v e s t m e n t i n a p a r t i c u l a r p r o j e c t . I f t h e r e t u r n on i n v e s t m e n t i s h i g h e r t h a n t h e s o c i a l t i m e p r e f e r e n c e r a t e ( t h e r e t u r n n e c e s s a r y t o i n d u c e s o c i e t y t o f o r g o p r e s e n t c o n s u m p t i o n f o r f u t u r e c o n s u m p t i o n ) i n v e s t m e n t w i l l c o n t i n u e u n t i l t h e s u p p l y p r i c e o f c a p i t a l i s a g u a l t o t h e s o c i a l t i m e p r e f e r e n c e r a t e . I n g e n e r a l , s o c i e t y c a n be t r e a t e d a s i f i t x s r i s k n e u t r a l , t h e r e a s o n b e i n g t h a t i f a s u f f i c i e n t l y l a r g e number o f r i s k i n d e p e n d e n t p r o j e c t s a r e u n d e r t a k e n t h e e x p e c t e d o u t c o m e o f s u c h p r o j e c t s w i l l a l w a y s be c l o s e t o t h e a c t u a l o u t c o m e . I n o t h e r w o r d s , w i t h an i n f i n i t e number o f i n d e p e n d e n t p r o j e c t s t h e r e c a n be no d i f f e r e n c e b e t w e e n t h e e x p e c t e d v a l u e a n d t h e a c t u a l o u t c o m e ( o f a l l p r o j e c t s i n t o t a l ) t h u s m aking s o c i e t y ' s u n d e r l y i n g p r e f e r e n c e t o w a r d s r i s k i r r e l e v a n t . However i n d i v i d u a l s a v e r s and i n v e s t o r s may n o t be r i s k n e u t r a l a nd i n s e a r c h i n g f o r a s o c i a l t i m e p r e f e r e n c e r a t e i t i s common t o l o o k f o r t h e i n t e r e s t r a t e on a r i s k f r e e a s s e t s u c h a s g o v e r n m e n t b o n d s . However, e v e n a g o v e r n m e n t bond i s n o t w i t h o u t r i s k due t o t h e p o s s i b i l i t y o f u n e x p e c t e d c h a n g e s i n t h e p r i c e l e v e l . A n o t h e r p o s s i b i l i t y w o u l d be t h e n o n - c h e g u i n g s a v i n g s r a t e o f c h a r t e r e d bank o r t r u s t company d e p o s i t s w h i c h , due t o b o t h l i q u i d i t y a n d g o v e r n m e n t g u a r a n t e e s c o u l d be c o n s i d e r e d r i s k f r e e . R e g a r d l e s s o f w h i c h y i e l d on ' r i s k f r e e ' a s s e t s i s c h o s e n , i t i s c l e a r t h a t s u c h y i e l d s a r e much l o w e r t h a n v a r i o u s e s t i m a t e s o f t h e s u p p l y p r i c e o f c a p i t a l . The m a j o r d i f f e r e n c e , a s c a n be s e e n f o r t h e a b o v e D.O.I, c a l c u l a t i o n , i s t h e v a r y i n g r a t e s b e t w e e n d e b t a n d e g u i t y c a p i t a l . T h i s d i f f e r e n c e i s 11 s o m e t i m e s e x p l a i n e d i n t e r m s o f r i s k a n d t h u s i m p l i c i t l y a ssumes t h a t e q u i t y i n v e s t o r s a r e r i s k a v e r s e o r t h a t d e b t h o l d e r s a r e r i s k t a k e r s , t h e f o r m e r s e e m i n g more l i k e l y . However s o c i e t y i s p r e s u m a b l y r i s k n e u t r a l and t h u s t h e s o c i a l t i m e p r e f e r e n c e r a t e i s p r o b a b l y c l o s e r t o t h e y i e l d on d e b t c a p i t a l t h a n c h a t o f e q u i t y c a p i t a l . What H e i l i w e l l e t a l h a v e done i s t o c h o o s e a r a t e t h a t e m b o d i e s b o t h r a t e s o f r e t u r n w e i g h t e d by t h e r e s p e c t i v e h i s t o r i c a l mix o f b o t h s o u r c e s . They h a v e gone a s t e p f u r t h e r by r e c o g n i z i n g t h e c o r p o r a t e t a x wedge and a d j u s t i n g t h e s o c i a l t i m e p r e f e r e n c e r a t e downward (from 10.44% t o 7.44%) t o t a k e t h i s i n t o a c c o u n t . The b e f o r e t a x s u p p l y p r i c e o f c a p i t a l i s i n c o r p o r a t e d i n t o h i s a n a l y s i s by c h a r g i n g an o p p o r t u n i t y c o s t o f c a p i t a l o f 10.445? on t h e u n d e p r e c i a t e d s t o c k o f c a p i t a l (an e s t i m a t e o f e c o n o m i c d e p r e c i a t i o n o r l o s s i n m a r k e t v a l u e i s used) and t h e n d i s c o u n t i n g t h e n e t b e n e f i t s t r e a m by t h e l o w e r t i m e p r e f e r e n c e r a t e . The q u e s t i o n t h e n i s w h e t h e r t h i s i s an a p p r o p r i a t e method o f t r e a t i n g t h e d i s c r e p a n c y b e t w e e n t h e s u p p l y p r i c e o f c a p i t a l and s o c i a l t i m e p r e f e r e n c e r a t e i n i n v e s t m e n t c r i t e r i a t e r m s . E v en i n an o t h e r w i s e p e r f e c t c a p i t a l m a r k e t , t h e i n t r o d u c t i o n o f a c o r p o r a t e t a x on c a p i t a l w i l l i m p l y a d i v e r g e n c e b e t w e e n t h e s u p p l y p r i c e o f c a p i t a l and t h e s o c i a l t i m e p r e f e r e n c e r a t e f o r t h e o b v i o u s r e a s o n t h a t i n v e s t o r s w i l l h ave t o i n c o r p o r a t e t h i s t a x i n t o t h e i m p l i c i t r e n t a l v a l u e o f c a p i t a l . The wedge becomes e v e n l a r g e r i f one r e c o g n i z e s t h e f a c t t h a t s a v e r s a r e a l s o t a x e d on t h e i r r e t u r n and t h u s r e c e i v e a l o w e r n e t y i e l d t h a n t h a t p a i d by b o r r o w e r s . G i v e n t h e t a x wedge what a r e t h e a p p r o p r i a t e d i s c o u n t r a t e ( s ) ? The q u e s t i o n 12 o b v i o u s l y must be a n s w e r e d i n t e r m s o f t h e o p p o r t u n i t y c o s t o r n e x t b e s t a l t e r n a t i v e t o w h i c h t h e f u n d s c o u l d be p u t . I f t h e n e x t b e s t a l t e r n a t i v e i s p r i v a t e i n v e s t m e n t t h e n t h e b e f o r e t a x r a t e o f r e t u r n on c a p i t a l s h o u l d be u s e d . I f t h e a l t e r n a t i v e i s c o n s u m p t i o n r a t h e r t h a n i n v e s t m e n t t h e n t h e s o c i a l t i m e p r e f e r e n c e r a t e i s t h e a p p r o p r i a t e d i s c o u n t r a t e t o u s e . 7 What H e l l i w e l l e t a l a r e i m p l i c i t l y a s s u m i n g i s t h a t t h e n e x t b e s t a l t e r n a t i v e i n any g i v e n y e a r w o u l d y i e l d 10.44 p e r c e n t b u t t h a t t h e r e i s n o t a r e i n v e s t m e n t o p p o r t u n i t y o f 10.44 p e r c e n t f o r any r e n t s o r p r i m a r y b e n e f i t s t h a t a c c r u e . I n o t h e r words a n e t b e n e f i t i n any y e a r c o u l d (would) n o t be r e i n v e s t e d a t 10.44 p e r c e n t b u t c o u l d o n l y be consumed. C o n v e r s e l y t h e D.O.I.-A e r o s p a c e s t u d y a s sumes e i t h e r t h a t t h e s o c i a l t i m e p r e f e r e n c e r a t e i s e g u a l t o t h e s u p p l y p r i c e o f c a p i t a l o r , more l i k e l y , t h a t p r i m a r y b e n e f i t s w o u l d be r e i n v e s t e d and y i e l d a r e t u r n e g u a l t o t h e b e f o r e t a x s u p p l y p r i c e o f c a p i t a l . 5. C a n a d i a n C o r p o r a t i o n T a x e s , S a l e s T a x e s and I m p o r t D u t i e s The D . O . I . - A e r o s p a c e s t u d y e s t i m a t e s C a n a d i a n t a x e s a s a p e r c e n t a g e o f c a p i t a l c o s t s , b a s e d on t h e CAGPL e s t i m a t e o f t a x e s , s c a l e d up i n a c c o r d a n c e w i t h t h e h i g h e r D.Q.I, c a p i t a l c o s t e s t i m a t e s ( t h i s a p p e a r s t o be a r e a s o n a b l e a s s u m p t i o n w h i c h i m p l i c i t y r e c o g n i z e s t h e d e b t - e g u i t y r a t i o p l a n n e d by C A G P L ) . C a n a d i a n s a l e s o r i m p o r t t a x e s on m a t e r i a l s u s e d i n c o n s t r u c t i o n 7 U s i n g t h e s o c i a l o p p o r t u n i t y c o s t c o n c e p t as an i n v e s t m e n t c r i t e r i o n h a s been p r o p o s e d by numerous a u t h o r s i n c l u d i n g : E c k s t e i n 0, I n v e s t m e n t C r i t e r i a f o r E c o n o m i c D e v e l o p m e n t , Q u a r t e r l y J o u r n a l o f E c o n o m i c s , 1957 F e l d s t e i n M., Net S o c i a l B e n e ' f i t C a l c u l a t i o n a n d t h e P u b l i c I n v e s t m e n t D e c i s i o n , O x f o r d E c o n o m i c P a p e r s , 1964 M a r g l i n S., The O p p o r t u n i t y C o s t s o f P u b l i c I n v e s t m e n t , Q u a r t e r l y J o u r n a l o f E c o n o m i c s , 19 63 13 a r e i n c l u d e d , i n t h e D.G.I, s t u d y , i n t h e c a p i t a l c o s t s u s e d . D.O.I, t r e a t s t a x e s a nd i m p o r t d u t i e s a s a r e s o u r c e c o s t t o t h e U.S. " s i n c e t h e s e f u n d s w i l l e v e n t u a l l y be u s e d t o buy U.S. p r o d u c t s . " 8 H e l l i w e l l ' s t r e a t m e n t d i f f e r s i n two r e s p e c t s . F i r s t , C a n a d i a n c o r p o r a t e t a x a t i o n p r o v i s i o n s a r e e x p l i c i t y m o d e l l e d and t h e r e f o r e a more a c c u r a t e e s t i m a t e o f t a x e s i s made. More i m p o r t a n t l y H e i l i w e l l c h a r g e s an o p p o r t u n i t y c o s t t o t h e C a n a d i a n g o v e r n m e n t on t a x e s r e c e i v e d ( s e e above s e c t i o n on t h e o p p o r t u n i t y c o s t o f c a p i t a l ) . I m p o r t d u t i e s and s a l e s t a x e s a r e n o t e x p l i c i t l y m o d e l l e d by H e i l i w e l l b u t a r e i n c l u d e d i n t h e c a p i t a l and o p e r a t i n g c o s t s a s p r e s e n t e d by CAGPL. T h i s i m p l i c i t l y a s s u m e s an o p p o r t u n i t y c o s t e g u a l t o t h e amount o f t h e d u t i e s and s a l e s t a x e s c h a r g e d and i s c o n s i s t e n t w i t h t h e t r e a t m e n t o f c o r p o r a t i o n t a x e s on w h i c h an e x p l i c i t o p p o r t u n i t y c o s t i s c h a r g e d . The D.O.I, t h u s assumes t h e r e i s no o p p o r t u n i t y c o s t t o t h e C a n a d i a n g o v e r n m e n t i n r e s p e c t t o c o r p o r a t i o n , i m p o r t a n d s a l e s t a x e s . T h i s a s s u m p t i o n , t h e e x a c t o p p o s i t e o f H e l l i w e l l ' s , i m p l i e s t h a t t h e p i p e l i n e w o u l d n o t d i s p l a c e a n y c a p i t a l i n v e s t m e n t t h a t w o u l d o t h e r w i s e a c c r u e i n Canada o r a t l e a s t t h a t i n c r e m e n t a l f a c i l i t i e s b u i l t i n Canada t o t r a n s p o r t P r u d h o e Bay g a s w o u l d n o t d i s p l a c e o t h e r U.S. I n v e s t m e n t i n C a n a d a . U s i n g a b e f o r e t a x r a t e o f r e t u r n a s a d i s c o u n t r a t e , t h e U.S. s t u d y assumes t h a t t h e d i s p l a c e m e n t t h a t t a k e s p l a c e i s e i t h e r i n t h e U n i t e d S t a t e s where t h e b e f o r e t a x r a t e o f r e t u r n i s 10% o r a b r o a d , where t h e a f t e r t a x r a t e o f r e t u r n i s » Op C i t , pg. 2-31 14 10% ( t a x e s i n t h i s c a s e b e i n g f o r e i g n t a x e s ) . B h i c h c a s e i s t h e more r e a l i s t i c ? 9 The answer t o t h i s g u e s t i o n i s t h e o r e t i c a l l y s i m p l e . I t d e p e n d s on t h e a c t u a l d i s p l a c e m e n t t h a t t a k e s p l a c e . S u p p o s e f o r example t h a t one c o u l d s e p a r a t e a l l p i p e l i n e s e g m e n t s ( i n Canada) i n t o t w o c o m p o n e n t s , one segment c a r r y i n g A m e r i c a n g a s and t h e o t h e r c a r r y i n g C a n a d i a n g a s . Suppose f u r t h e r t h a t t h e U.S. p o r t i o n i s t o be f i n a n c e d e n t i r e l y ( d e b t and e q u i t y ) by A m e r i c a n s a n d a l l g o o d s u s e d i n t h i s p o r t i o n a r e t o be i m p o r t e d i n t o C a n a d a , 1 0 F u r t h e r assume t h a t C a n a d i a n r e g u l a t o r y b o d i e s a l l o w them an a f t e r t a x r e t u r n o f 1% and t h e r a t e o f r e t u r n b e f o r e t a x i s *\0%. The q u e s t i o n now i s t h e o p p o r t u n i t y c o s t on s u c h i n v e s t m e n t . I f t h e A m e r i c a n i n v e s t o r s w o u l d o t h e r w i s e have i n v e s t e d i n t h e U.S. where a b e f o r e t a x r a t e o f r e t u r n o f 10% w o u l d h a v e a c c r u e d t h e n t h e D.O.I, p o i n t o f v i e w i s c o r r e c t a n d Canada s h o u l d t r e a t any c o r p o r a t i o n t a x e s c o l l e c t e d as a w i n d f a l l g a i n ( i . e . t h e r e i s no o p p o r t u n i t y c o s t t o t h e t a x e s c o l l e c t e d ) . I f on t h e o t h e r h a n d t h e i n v e s t m e n t w o u l d o t h e r w i s e h a v e t a k e n p l a c e i n Canada y i e l d i n g an a f t e r t a x r e t u r n o f 1%, t h e n t a x e s s h o u l d n o t have been c o u n t e d a s a " r e s o u r c e c o s t " t o t h e U n i t e d s t a t e s o r , w h i c h amounts t o t h e same t h i n g , i n v e s t m e n t p l u s C a n a d i a n t a x e s s h o u l d be d i s c o u n t e d a t 1%, T h e r e i s a n o t h e r a s p e c t t o t h e o p p o r t u n i t y c o s t a r g u m e n t t h a t s h o u l d be n o t e d . S u p p o s e t h e t a x l e v y by g o v e r n m e n t s ( C a n a d i a n and U n i t e d S t a t e s ) on i n d u s t r i e s d o e s n o t , i n n e t , 9 The f o l l o w i n g a r g u m e n t i s c o u c h e d i n t e r m s o f t h e c o r p o r a t i o n t a x . I t s h o u l d be r e c o g n i z e d t h a t t h e same argument a p p l i e s t o s a l e s t a x e s and i m p o r t d u t i e s . 1 0 T h e s e q u a l i f i c a t i o n s a r e n e c e s s a r y t o e q u a t e t h e p a r t i a l e q u i l i b r i u m w i t h t h e g e n e r a l e q u i l i b r i u m r e s u l t . 15 e n r i c h g o v e r n m e n t t r e a s u r i e s b u t j u s t o f f s e t s g o v e r n m e n t o u t l a y s f o r new s c h o o l s , r o a d s , h o s p i t a l s , e t c . w h i c h a r e t h e d i r e c t r e s u l t o f s u c h i n v e s t m e n t s . I n t h i s c a s e t h e t a x l e v y by g o v e r n m e n t s i s m e r e l y a method o f i n t e r n a l i z i n g c o s t s t h a t p r i v a t e i n v e s t o r s w o u l d n o t o t h e r w i s e f a c e . T h i s b e i n g s o , H e l l i w e l l ' s t r e a t m e n t i s t h e more a p p r o p r i a t e , e v e n i f i t i s assumed t h a t i n v e s t m e n t i n Canada w o u l d o t h e r w i s e n o t t a k e p l a c e and i n f a c t w o u l d h a v e o c c u r r e d i n t h e U n i t e d S t a t e s . The c a l c u l a t i o n o f U.S. b e n e f i t s w o u l d h a v e t o i n c o r p o r a t e t h e c o s t s a v i n g s t o t h e U.S. g o v e r n m e n t i n t o t h e a n a l y s i s . I n t h e a b s e n c e o f e x p l i c i t y c a l c u l a t i n g t h e r e s u l t a n t s a v i n g s , C a n a d i a n t a x e s s h o u l d n o t e n t e r as a c o s t o r a l o w e r d i s c o u n t r a t e s n o u l d be u s e d . To s u m m a r i z e , i t i s i n t u i t i v e l y p l e a s i n g t o c a l c u l a t e an o p p o r t u n i t y c o s t on c a p i t a l e g u a l t o what t h e i n v e s t m e n t w o u l d o t h e r w i s e have e a r n e d . As i n d i c a t e d i n t h e p r e c e d i n g s e c t o n , a d i f f i c u l t y a r i s e s when t h e r e t u r n on an a l t e r n a t e i n v e s t m e n t d i f f e r s f r o m t h e t i m e p r e f e r e n c e r a t e d i c t a t e d by s a v e r s . C a l c u l a t i n g an o p p o r t u n i t y c o s t e q u a l t o t h e r e t u r n on an a l t e r n a t e i n v e s t m e n t i m p l i e s a f i x e d c a p i t a l s t o c k . 1 1 I f i n c r e m e n t s t o t h e c a p i t a l s t o c k a r e a l l o w e d t h e n t h e o p p o r t u n i t y r e t u r n w o u l d have t o a p p l y t o a s m a l l e r s t o c k t h a n t h a t b e i n g u s e d i n t h e p a r t i c u l a r p r o j e c t b e i n g c o n s i d e r e d . The a s s u m p t i o n o f a f i x e d c a p i t a l s t o c k d o es n o t p r e s e n t a c o n c e p t u a l 1 1 One c o u l d o f c o u r s e assume t h a t some o r a l l t h e i n v e s t m e n t came v i a r e d u c e d c o n s u m p t i o n . T h i s w o u l d o f c o u r s e s t i l l i m p l y an o p p o r t u n i t y r e t u r n on t h e t o t a l i n v e s t m e n t b e i n g c o n s i d e r e d . The a r g u m e n t w o u l d more c o r r e c t l y s t a t e t h a t t h e u n d e r l y i n g a s s u m p t i o n i s t h a t t h e r e a r e no i n c r e m e n t a l a d d i t i o n s t o r e s o u r c e s be t h e y f r o m a n o t h e r c o u n t r y o r t h r o u g h t h e u s e o f u n e m p l o y e d f a c t o r s . 16 d i f f i c u l t y i n t e r m s o f a n a t i o n a l p r o j e c t . However when an i n t e r n a t i o n a l p r o j e c t i s b e i n g c o n s i d e r e d t h e a s s u m p t i o n o f a f i x e d c a p i t a l s t o c k w i l l n o t s u f f i c e p a r t i c u l a r l y when one a t t e m p t s t o ' d i v i d e t h e p i e ' . N T h e c o m p a r a b l e a s s u m p t i o n i n an i n t e r n a t i o n a l p r o j e c t e v a l u a t i o n i s t h a t t h e t o t a l c a p i t a l s t o c k o f a l l n a t i o n s i n v o l v e d i s f i x e d . I t may be n e c e s s a r y t o go one s t e p f u r t h e r t o a s c e r t a i n t h e d i s t r i b u t i o n a l o u t c o m e o f an i n v e s t m e n t p r o j e c t . Do t h e s e p a r a t e c a p i t a l s t o c k s o f n a t i o n s r e m a i n f i x e d o r do we a l l o w f o r some f l o w s between c o u n t r i e s k e e p i n g t h e a g g r e g a t e s t o c k f i x e d ? T h i s i s an e m p i r i c a l q u e s t i o n w h i c h , t o a n s w e r , w o u l d r e q u i r e a g e n e r a l e q u i l i b r i u m m o d e l t o u n f o l d b e f o r e us t w o s c e n a r i o s , one c f w h i c h w h o u i d i n c o r p o r a t e t h e p r o p o s e d p r o j e c t . The a n a l y s t w o u l d i n t h i s c a s e , h o w e v e r , have t o p r e p a r e h i m s e l f f o r t h e s h o c k t h a t e v e n t h e p r e v i o u s l y c o m f o r t a b l e a s s u m p t i o n o f a f i x e d a g g r e g a t e c a p i t a l s t o c k o f t h e n a t i o n s i n v o l v e d may be j e o p a r d i z e d by t h e t r u t h . Q u a s i g e n e r a l e q u i l i b r i u m m o d e l s , more com c o u l d be u s e d i n an a t t e m p t w i l l be made i n t h i s p a p e r t u n d e r t a k e n t o d e t e r m i n e t h e a s s u m p t i o n s . C. A r c t i c P i p e l i n e a n d D e l t a The s i m u l a t i o n m o d e l us d e s c r i p t i o n o f w h i c h i s c o n t t e r m s a nd i s u s e d p r i m a r i l y b e n e f i t s f o r up t o 35 y e a r s T h e r e a r e t h r e e main se main q r o u p s o f e q u a t i o n s i n monly known a s m a c r o e c o n o m i c m o d e l s , t o s o l v e t h i s d i f f i c u l t y . No a t t e m p t o do s o , b u t s i m u l a t i o n s w i l l be s e n s i t i v i t y o f t h e v a r y i n g Gas P r o d u c t i o n M o d e l s ed i n t h i s p a p e r , a more d e t a i l e d a i n e d i n A p p e n d i x A, i s i n a n n u a l f o r t h e a s s e s s m e n t o f c o s t s and i n t h e f u t u r e . c t i o n s c o r r e s p o n d i n g t o t h e t h r e e t h e m o d e l . They c o v e r r e s p e c t i v e l y , 17 t h e c o n s t r u c t i o n and o p e r a t i o n o f t h e p i p e l i n e (s) (and i n t h e c a s e o f E l P a s o t h e l i g u i f i c a t i o n , s h i p p i n g and g a s i f i c a t i o n p r o c e s s e s ) , t h e p r o d u c t i o n o f n a t u r a l gas i n t h e M a c k e n z i e D e l t a - B e a u f o r t S e a , and t h e c a l c u l a t i o n o f e c o n o m i c r e n t s a c c r u i n g t o t h e v a r i o u s p a r t i c i p a n t s . 1. P i p e l i n e M o d e l The model u s e s e x o g e n o u s d a t a f o r t h e employment, e x p e n d i t u r e , and f i n a n c i n g p r o p o r t i o n s a s p r e s e n t e d by CAGPL and t h e D.O.I. The e q u a t i o n s o f t h e model s e r v e t o b u i l d up t h e v a r i o u s a s s e t s a n d l i a b i l i t i e s o f t h e p i p e l i n e , t o d e t e r m i n e t h e f i n a n c i n g f l o w s , and t o s e t up t h e p i p e l i n e t a r i f f f o l l o w i n g t h e a c c o u n t i n g methods u s e d by t h e N a t i o n a l E n e r g y B o a r d . The m o d e l h a s been d e s i g n e d w i t h f l e x i b i l i t y i n mind so t h a t t h e s e n s i t i v i t y o f v a r i o u s key p a r a m e t e r s c a n be t e s t e d w i t h e a s e . T h i s has bean a c c o m p l i s h e d t h r o u g h t h e use o f c o e f f i c i e n t s . F o r e x a m p l e , when t h e model was o r i g i n a l l y d e v e l o p e d , c o n s t r u c t i o n by CAGPL was t o b e g i n i n 1976 and g a s was t o come o n s t r e a m i n 1979. However, a s i s m e n t i o n e d a b o v e , i t now a p p e a r s t h a t c o n s t r u c t i o n a n d o p e r a t i o n w i l l be d e f e r r e d a t l e a s t two y e a r s . By s e t t i n g c o e f f i c i e n t A (1905) e q u a l t o 2, c o n s t r u c t i o n and o p e r a t i o n i s d e f e r r e d by two y e a r s w i t h a l l c o s t s a u t o m a t i c a l l y e s c a l a t e d by t h e p r o j e c t e d r a t e o f i n f l a t i o n . E x a m p l e s o f o t h e r k e y p a r a m e t e r s i n c l u d e t h e r a t e o f i n f l a t i o n , t h e s u p p l y p r i c e o f c a p i t a l , a n d t h e s o c i a l t i m e p r e f e r e n c e r a t e . A p p e n d i x A i n c l u d e s a c o m p l e t e l i s t i n g o f t h e c o e f f i c i e n t s u s e d . 2. M a c k e n z i e D e l t a Gas P r o d u c t i o n The D e l t a g a s p r o d u c t i o n e q u a t i o n s use e x o g e n o u s d a t a f o r t h e g a s p r o d u c t i o n a n d i n v e s t m e n t o u t l a y s a s a b a s i s f o r t h e 18 c a l c u l a t i o n o f s t o c k s o f c a p i t a l , t a x a b l e p r o f i t s , i n c o m e t a x e s and r o y a l t i e s , t h i s s e c t o r r e l a t e s o n l y t o M a c k e n z i e D e l t a B e a u f o r t Sea p r o d u c t i o n . T h e r e i s no a t t e m p t made i n t h i s p a p e r t o m o d e l , f o r e x a m p l e , P r u d h o e Bay Gas p r o d u c t i o n . 3. E c o n o m i c Rent E q u a t i o n s T h e r e a r e e l e v e n r e n t e q u a t i o n s , e a c h o f w h i c h k e e p s t r a c k o f one q r o u p o f p a r t i c i p a n t s i n t h e p i p e l i n e a n d g a s p r o d u c t i o n s e c t o r s , b o t h i n d i v i d u a l l y and c o m b i n e d . P a r t i c i p a n t s i n c l u d e c o n s u m e r s , C a n a d i a n g o v e r n m e n t s , p r i v a t e e q u i t y p a r t i c i p a n t s , and U.S. p r o d u c e r s a n d c o n s u m e r s . E a c h r e n t e q u a t i o n a c c u m u l a t e s n e t r e t u r n s a f t e r d e d u c t i n g an o p p o r t u n i t y c o s t on t h e d e p r e c i a t e d b a l a n c e o f t h e c a p i t a l s t o c k . The r e n t s a r e a c c u m u l a t e d u s i n g a s o c i a l t i m e p r e f e r e n c e r a t e o f 7.44 p e r c e n t i n t h e b a s e c a s e . A t t h e end o f e a c h s i m u l a t i o n e v e r y r e n t t o t a l i s d i s c o u n t e d b a c k a t t h e same d i s c o u n t r a t e t o y i e l d a n e t p r e s e n t v a l u e i n m i l l i o n s o f 1976 C a n a d i a n d o l l a r s . D. A n a l y s i s o f A l t e r n a t i v e A s s u m p t i o n s 1. Base Case The base c a s e i n c o r p o r a t e s t h e e x o g e n o u s a s s u m p t i o n s o f CAGPL ( c o n t a i n e d i n A p p e n d i x B) and t h e p a r a m e t e r s i n c o r p o r a t e d i n t o t h e U.B.C. M o d e l (see b a c k g r o u n d s e c t i o n a b ove) t h e more i m p o r t a n t o f w h i c h a r e t h e f o l l o w i n g c o e f f i c i e n t v a l u e s ; no, v a l u e d e s c r i p t i o n 1890 .0744 a v e r a g e r e a l s u p p l y p r i c e o f c a p i t a l t o b u s i n e s s , a f t e r t a x 1894 . 0744 a n n u a l r e a l s o c i a l t i m e p r e f e r e n c e r a t e 1895 .03 a v e r a g e a n n u a l t a x r e t u r n on i n d u s t r i a l c a p i t a l 1900 108.0 c o s t o f a l t e r n a t e r o u t e f o r P r u d h o e g a s (1975 c e n t s / M c f ) 1972 .04 a n t i c i p a t e d a v e r a g e a n n u a l i n f l a t i o n r a t e a f t e r 1976 1 9 F o l l o w i n g i s a summary o f b a s e c a s e v a l u e s f o r p i p e l i n e and d e l t a c o s t s and r e n t s . A l l f i g u r e s a r e i n 1976 p r e s e n t v a l u e s . The f i r s t two ro w s a r e e x p r e s s e d i n m i l l i o n s o f 19 76 C a n a d i a n d o l l a r s . The t h i r d row i s e x p r e s s e d i n 1976 c e n t s p e r t h o u s a n d c u b i c f e e t ( m . c . f . ) o f g a s . TABLE 3 EASE CASE ECONOMIC BENTS AND COSTS KRENTPS KBENTG$ KRNTPBOD KBENTA2 $ BENTSUM 2113 2319 443 2 3017 7449 RENTCAN$ KSTPIPGS K B T P I P P I KBTPIPE$ KRENTTGT 2805 -2 39 26 -213 4219 P VTAEIFF TOTCST PMCFCOST PMCFCST1 BPMCFG fiPUCFP 48.830 150.648 148.868 50.610 41.647 3 7.941 The v a l u e s f o r t h e f i r s t s i x v a r i a b l e s , w i t h t h e e x c e p t i o n o f KBENTA2$, p e r t a i n t o t h e D e l t a g a s p r o d u c t i o n s e c t o r w i t h KBENTP$ r e p r e s e n t i n g r e n t s t o C a n a d i a n g o v e r n m e n t s , 1 2 KBNTPBOD t o t a l r e n t s f r o m D e l t a g as p r o d u c t i o n , KRENTA2$ r e n t s t o U.S. p r o d u c e r s and p u r c h a s e r s o f A l a s k a g a s , a n d BENTSUM b e i n g i 2 The opportunity cost cn taxes received(3% of capital) includes corporate tax returns to both federal and p r o v i n c i a l governments. If the cost was separated between the two l e v e l s of government, federal government rents would be much higher than those shown for KBENTG$ and KRENTPIPG$, the reason being that north of 60 degrees, the federal government i s the sole corporate tax c o l l e c t o r . 20 t h e t o t a l o f t h e f i r s t t h r e e v a l u e s . 1 3 RENTCANl i s e q u a l t o KRENTG$ p l u s 23 p e r c e n t o f KRENTPI; 23 p e r c e n t r e p r e s e n t i n g t h e p r e s e n t C a n a d i a n e q u i t y o w n e r s h i p o f t h e t h r e e m a j o r p r o d u c e r s i n t h e D e l t a ( I m p e r i a l , G u l f , and S h e l l ) . 1 * t h e n e x t t h r e e v a l u e s r e p r e s e n t r e n t s f r o m p i p e l i n e c o n s t r u c t i o n and o p e r a t i o n a n d a r e r e s p e c t i v e l y r e n t s t o C a n a d i a n g o v e r n m e n t s ( s e e f o o t n o t e 1 1 ) , r e n t s t o e q u i t y p a r t i c i p a n t s i n t h e p i p e l i n e , and t o t a l p i p e l i n e r e n t s . KRENTTOT i s m e r e l y t h e s u m m a t i o n o f KRNTPROD and KRTPIPES. The f i n a l s i x v a l u e s a r e e x p r e s s e d i n t e r m s o f c o s t s p e r u n i t o f o u t p u t ( t h o u s a n d s o f c u b i c f e e t o f gas) w i t h P V T A R I F F r e p r e s e n t i n g t h e p r e s e n t v a l u e o f t h e t a r i f f o r t r a n s p o r t a t i o n c h a r g e a s p e r m i t t e d by t h e N a t i o n a l E n e r g y B o a r d . As c a n be s e e n P13CFCST1 ( e c o n o m i c c o s t o f t h e p i p e l i n e / m c f ) i s l a r g e r t h a n P VTARIFF ( p i p e l i n e r s v e n u e s / m c f ) and a c c o u n t s f o r t h e n e g a t i v e r e n t s t o t h e p i p e l i n e o f 213 m i l l i o n d o l l a r s . S i m i l a r l y , KRENTTOT i s 213 m i l l i o n d o l l a r s l e s s t h a n KRENTPROD, t h e r e a s o n b e i n g t h a t p r o d u c t i o n r e n t s i n c o r p o r a t e t h e t a r i f f r a t h e r t h a n t h e e c o n o m i c c o s t o f t h e p i p e l i n e . PHCFCOST r e p r e s e n t s p r o d u c t i o n c o s t s on a p e r mcf b a s i s , a n d t h e l a s t two v a l u e s 1 3 RENTSUM and KRENT PROD i n c l u d e KRENTDC1 w h i c h r e p r e s e n t s r e n t s t o C a n a d i a n g a s u s e r s . KRENTDC1 w i l l show a p o s i t i v e v a l u e o n l y t o t h e e x t e n t t h a t PGASREG ( t h e r e g u l a t e d p r i c e o f n a t u r a l gas) i s l o w e r t h a n PGAS ( t h e commodity v a l u e o f gas b a s e d on t h e w o r l d o i l p r i c e ) . PGASREG i s 85$ o f i t s b t u w o r l d o i l p r i c e e q u i v a l e n t i n 1976 a n d i s assumed t o qrow i n r e a l t e r m s a t 3% p e r y e a r ( r e a l p r i c e o f o i l c o n s t a n t ) s o t h a t by 1981 PGASREG i s e q u a l t o PGAS and i s assumed t o r e m a i n s o i n t h e f u t u r e . W i t h an o n s t r e a m d a t e o f 1981 o r l a t e r , KRENTDC1 assumes a v a l u e o f 0 f o r t h e e n t i r e p r o j e c t l i f e . 1 4 The new r o y a l t y r e g u l a t i o n s p r o p o s e d by t h e f e d e r a l g o v e r n m e n t ( s e e f o o t n o t e 22) r e q u i r e a 25% C a n a d i a n o w n e r s h i p f o r p r o d u c i n g c o m p a n i e s a c t i v e i n n o r t h e r n C a n a d a . Thus t h e r e i s a q u e s t i o n a s t o w h e t h e r BENTCAN$ s h o u l d i n c o r p o r a t e t h e 25% r a t e o r w h e t h e r i t c a n be assumed t h a t r e n t s w i l l be c a p i t a l i z e d b e f o r e a n y s a l e o f s h a r e s t a k e s p l a c e . The l a t t e r h a s b e e n assumed i n t h i s p a p e r . 21 r e p r e s e n t r e s p e c t i v e l y p e r mcf r e n t s t o C a n a d i a n g o v e r n m e n t s a n d D e l t a g a s p r o d u c e r s . The r e a d e r i s r e f e r r e d t o A p p e n d i x B f o r t h e e q u a t i o n s d e f i n i n g t h e v a r i a b l e s , 2. A l t e r n a t e A s s u m p t i o n s (a) C a p i t a l and O p e r a t i n g C o s t s S u b s t i t u t i n g t h e h i g h e r D.O.I,- A e r o s p a c e c o s t e s t i m a t e s ( s e e b a c k g r o u n d s e c t i o n ) f o r t h e C a n a d i a n l e g o f t h e p i p e l i n e r e s u l t s i n t h e f o l l o w i n g r e n t s and c o s t s : TABLE 4 ECONOMIC EENTS AND COSTS DSING D.G.I. CAPITAL COST ESTIMATES KRENTPS KSENTG$ KB NTPEGD KBENTA2$ BENTSUM 1807 2135 394 2 2521 6463 BENTCANS KBTPIPG$ K B T P I P P $ KBTPIPES KBENTTOT 2551 -623 ' -19 9 -822 3120 PVTABIFF TOTCST PMCFCOST PMCFCST1 BPMCFG BPMCFP 57.617 164.536 157.656 64,498 38.347 32.454 By c o m p a r i n g t h e v a l u e o f PMCFCST 1 w i t h t h a t f o r t h e base c a s e shows t h a t t h e D.O.I, c o s t e s t i m a t e s a r e 13.89 c e n t s / m c f o r a p p r o x i m a t e l y 21% h i g h e r t h a n t h e CAGPL e s t i m a t e s . The o b v i o u s q u e s t i o n t o a s k a t t h i s s t a g e i s t o what l e v e l do c o s t s have t o r i s e i n o r d e r t o e l i m i n a t e a l l r e n t s . A d d i n g BPMCFG and BPMCFP t o PMCFCOST y i e l d s a p p o x i m a t a l y $ 2 . 2 8 . A p e r mcf c o s t o f t h i s l e v e l w o u l d r e d u c e KRNTPBOD t o 0 and a l o w e r c o s t ( $ 2 . 2 1 / m c f ) w o u l d b r i n g KBENTTOT, w h i c h s u b t r a c t s P V T A B I F F and adds K B T P I P E , t o 0. G i v e n t h e p r o d u c t i o n c o s t s u s e d , CAGPL c o s t e s t i m a t e s w o u l d have t o be 70 c e n t s / m c f ( 1 3 9 % ) o r 22 D.O.I, c o s t s 56 c e n t s (88%) h i g h e r t o e l i m i n a t e a l l r e n t s . 1 5 (b) Gas F l o w The D.O.I, s t u d y assumes a f l o w r a t e o f 4.5 b c f / d ( u p s t r e a m end) f r o m t h e s t a r t o f t h r o u g h p u t ( m i d 1981) w i t h c o n s t a n t p r o p o r t i o n s o f C a n a d i a n and U.S. gas t h r o u g h o u t t h e p i p e l i n e l i f e . CAGPL a s s u m p t i o n s d i f f e r f o r t h e f i r s t 5 y e a r s o f o p e r a t i o n w i t h l o w e r f l o w r a t e s and d i f f e r i n g p r o p o r t i o n s o f D e l t a a n d P r u d h o e Bay g a s (see e x o g e n o u s v a r i a b l e s EGASFLOW and EGASD i n A p p e n d i x B ) . TABLE 5 HENTS AND COSTS WITH D.O.I. GAS FLOW ASSUMPTIONS KBENTPI KRENTGl KRNTPROD KRENTA2S RENTSUM 2491 2923 5414 3139 8553 RENTCAN$ K R T P I P G l KRTPIPP$ KRTPIPES KRENTTOT 3496 -721 -191 . -912 4502 PVTARIFF TOTCST PMCFCOST PMCFCST1 RPMCFG RPMCFP 50.023 151.654 144.053 57.624 45.564 3 8 . 8 4 1 U s i n g t h e D.O. I . f l o w a s s u m p t i o n s , i n c o n j u n c t i o n w i t h 1 5 (1) Of m a j o r i m p o r t a n c e i s t h e a s s u m p t i o n o f how t h e g a s w i l l be u s e d . I f f o r e x a m p l e D e l t a g a s d i s p l a c e s s o u t h e r n o r A l b e r t a g a s , t h e n t h e r e i s an a d d i t i o n a l o p p o r t u n i t y c o s t w h i c h i s t h e r e n t s t h a t w o u l d o t h e r w i s e a c c r u e t h r o u g h e x p l o i t a t i o n o f n o n -f r o n t i e r g a s r e s o u r c e s . Thus t h e r e n t s shown above s h o u l d be v i e w e d a s r e n t s t o p a r t i c i p a n t s i n v o l v e d i n M a c k e n z i e D e l t a -B e a u f o r t Sea g a s d e v e l o p m e n t . F o r an a s s e s s m e n t of t o t a l C a n a d i a n r e n t s s e e , f o r e x a m p l e , J . H e i l i w e l l , e t a l . , WHERE DOES CANADA'S NATIONAL INTEREST L I E ? , c h a p t e r 10., THE MACKENZIE P I P E L I N E , A r c t i c Gas and C a n a d i a n E n e r g y P o l i c y , P. P e a r s e e d . (2) By a d d i n g t h e v a r i o u s component r e n t s t o o b t a i n t o t a l r e n t s , a d i s t r i b u t i o n a l w e i g h t o f 1 i s i m p l i c i t l y a t t a c h e d t o t h e v a r i o u s c o m p o n e n t s . I f t h e d i s t r i b u t i o n a l s h a r e s a r e c o n s i d e r e d t o be s o c i a l l y s u b - o p t i m a l amongst t h e p a r t i c i p a n t s v a r y i n g w e i g h t s s h o u l d be a t t a c h e d . T h i s i s of p a r t i c u l a r i m p o r t a n c e i n t h e c a s e where a l l p a r t i c i p a n t s a r e n o t made b e t t e r o f f ( i . e . Where one o r more o f t h e i n d i v i d u a l r e n t s a r e n e g a t i v e ) . 23 h i g h e r c o s t s a b o v e .{Table 5) , h i g h l i g h t s t h e s e n s i t i v i t y o f some o f t h e more b a s i c a s s u m p t i o n s . The r e s u l t s r e f l e c t t h e r e l a t i v e l y h i g h v a l u e a t t a c h e d t o b e n e f i t s n e a r t h e b e g i n n i n g o f t h e p r o j e c t . The t o t a l t h r o u g h p u t o f t h e p i p e l i n e has o n l y i n c r e a s e d f r o m 42.45 t o 44.53 t r i l l i o n c u b i c f e e t o r 5%. However t h e d i f f e r e n c e o f 2.08 t r i l l i o n c u b i c f e a t i s c o n c e n t r a t e d i n t h e f i r s t f i v e y e a r s where i t h a s i n c r e a s e d f r o m 4.49 t o 6.57 t c f { 4 6 % ) . The i n c r e a s e i n t h r o u g h p u t v a r i e s f o r e a c h o f t h e 5 y e a r s . I n t h e f i r s t y e a r t h e f l o w i s i n c r e a s e d f r o m an a v e r a g e o f 0.556 b c f / d t o 2.0 b c f / d w h e r e a s i n t h e f i f t h y e a r t h e f l o w i s i n c r e a s e d f r o m 3. 635 t o 4.0 b c f / d ( downstream a n d ) . The i n c r e a s e i n KENTPHOD o f 1472 m i l l i o n d o l l a r s ( 3 7 % ) c a n be a c c o u n t e d f o r by two f a c t o r s ; f i r s t by t h e l o w e r t a r i f f w h i c h r e s u l t s i n a h i g h e r w a l l h e a d p r i c e 1 6 and s e c o n d l y by t h e g a s f l o w w h i c h , when m u l t i p l i e d by t h e w e l l h e a d p r i c e , g i v e s p r o o d u c t i o n r e v e n u e s . W i t h t h e h i g h e r f l o w , KfiNTPfiOD i s some $982 m i l l i o n a b o v e t h e b a s e c a s e v a l u e b u t t h i s i s l a r g e l y o f f s e t by t h e s u b s t a n t i a l l y more n e g a t i v a p i p e l i n e r e n t s (KRNTPIPES) t h a n i n t h e ba s e c a s e s o t h a t t o t a l p i p e l i n e a n d p r o d u c e r r e n t s (KRENTPEOD) a r e s l i g h t l y h i g h e r ( $ 2 8 3 m i l l i o n ) t h a n t h e c o r r e s p o n d i n g t a s e c a s e v a l u e . P i p e l i n e r e n t s a r e s i g n i f i c a n t l y r e d u c e d whan D.Q.I, c o s t s a r e u s ed b e c a u s e o f t h e t i m e p r o f i l e o f p i p e l i n e c a p i t a l e x p e n d i t u r e s . The N.E.B. s y s t e m o f t a r i f f c a l c u l a t i o n u s e s a ' r a t e b a s e ' c o n c e p t . P r i o r t o t h r o u g h p u t c a p i t a l e x p e n d i t u r e s ( i n 1 6 As c a n be s e e n f r o m a p p e n d i x B, PGASD i s c a l c u l a t e d on a n e t ba c k b a s i s s t a r t i n g w i t h t h e T o r o n t o c i t y g a t e p r x c e a n d s u b t r a c t i n g t h e T r a n s C a n a d a p i p e l i n e t a r i f f t o A l b e r t a and t h e M a c k e n z i e V a l l e y p i p e l i n e t a r i f f , h i s t o r i c d o l l a r s ) a r e a c c u m u l a t e d . I n a d d i t i o n i n t e r e s t p a y m e n t s on d e b t a r e a l s o c a p i t a l i z e d i n t o t h e r a t e b a s e . However t h e r e i s no p r o v i s i o n f o r an e q u i t y r e t u r n t o be i n c o r p o r a t e d i n t o t h e b a s e . Once p i p e l i n e o p e r a t i o n s h a v e commenced, a t a r i f f i s l e v i e d w h i c h i n c o r p o r a t e s a r e t u r n on t h e e q u i t y p o r t i o n o f t h e u n d e p r e c i a t e d r a t e b a s e p l u s i n t e r e s t p a y m e n t s , d e p r e c i a t i o n and o p e r a t i n q c o s t s . By c o m p a r i n g t h e CAGPL c o s t e s t i m a t e s w i t h t h o s e o f t h e D.O.I, ( s e e T a b l e 1) i t c a n be s e e n t h a t a much h i g h e r p r o p o r t i o n o f t h e D.O.I, c o s t s o c c u r p r i o r t o t h r o u g h p u t w h i c h r e s u l t s i n s u b s t a n t i a l n e g a t i v e r e n t s b e i n g i n c u r r e d p r i o r t o o p e r a t i o n , (c) L i f e t i m e The D.O.I, s t u d y assumes a l i f e t i m e o f 20 y e a r s c o m p a r e d t o t h e b a s e c a s e v a l u e o f 51 y e a r s . A r e d u c t i o n i n o p e r a t i n g l i f e w i l l i n c r e a s e p i p e l i n e c o s t s , on a p e r mcf b a s i s , i f t a e r e i s no o f f s e t t i n g r e d u c t i o n i n c a p i t a l c o s t s , as c a p i t a l c o s t s w i l l be a l l o c a t e d o v e r a s m a l l e r t h r o u g h p u t . A r e d u c t i o n i n e c o n o m i c r e n t s w o u l d a l s o be e x p e c t e d due t o t h e h i g h e r u n i t c o s t s ( p i p e l i n e and p r o d u c t i o n ) and t h e l o w e r t h r o u g h p u t . However a r e d u c t i o n i n l i f e t i m e o f 3 5 ^ ( 1 1 / 3 1 ) w i l l n o t h a v e a c o r r e s p o n d i n g e f f e c t on c o s t s and r e n t s due t o t h e d i s c o u n t i n g p r o c e s s . The r e s u l t s shewn i n T a b l e 6 a r e o b t a i n e d f r o m s i m u l a t i n g t h e b a s e c a s e a s s u m p t i o n s w i t h a 20 y e a r o p e r a t i n g l i f e . The e c o n o m i c c o s t o f t h e p i p e l i n e (PMCFCST1) h a s b e e n i n c r e a s e d by 1 3 % o v e r t h e base c a s e v a l u e a s a r e s u l t o f t h e 35% r e d u c t i o n i n t h e o p e r a t i n g l i f e . T h i s c o m p a r e s w i t h a r e d u c t i o n i n p r o d u c e r r e n t s -KRNTEEOC- o f 30$ where t h e i n c r e a s e d c o s t s o f 25 p r o d u c t i o n roust a l s o be t a k e n i n t o a c c o u n t . 1 7 I n a d d i t i o n t h e p r e s e n t v a l u e o f t h e t a r i f f (PVTARIFF) has i n c r e a s e d by 19% a n d i t i s t h i s c o s t , r a t h e r t h a n PMCFCST1, t h a t e n t e r s t h e p r o d u c e r r e n t e q u a t i o n s . On a p e r mcf b a s i s r e n t s t o C a n a d i a n g o v e r n m e n t s , f r o m g a s p r o d u c t i o n , a r e . r e d u c e d by a b o u t 7.4 c e n t s and r e n t s t o p r i v a t e p a r t i c i p a n t s by 5.6 c e n t s . , TABLE 6 RENTS AND COSTS WITH 20 YEAR LIFET I M E KRENIPS KRENTG$ KRNTPBOD KRENTA2 $ RENTSUM 1501 1590 3091 2063 5154 RENTCAN$ KHTPIPGS KRTPIPP$ KRTPIPES KRENTTOT 1935 34 17 51 3142 PVTARIFF TOTCST PMCFCOST PMCFCST1 RPMCFG RPMCFP 58.174 161.213 161.960 57.427 34.210 3 2 . 2 8 7 The e f f e c t o f t h e s h o r t e r l i f e on p i p e l i n e r e n t s may, on t h e s u r f a c e , be s u r p r i s i n g . T o t a l p i p e l i n e r e n t s h a v e a c t u a l l y i n c r e a s e d o v e r t h e b a s e c a s e ($51 m i l l i o n c ompared t o $-213) w i t h t h e m a j o r c h a n g e o c c u r r i n g i n g o v e r n m e n t r e n t s w h i c h h a v e a p o s i t i v e v a l u e o f 34 m i l l i o n d o l l a r s w i t h t h e 20 y e a r l i f e p r o f i l e c o m p a r e d t o a n e g a t i v e v a l u e o f 239 m i l l i o n d o l l a r s i n t h e b a s e c a s e . The i n c r e a s e i n t o t a l p i p e l i n e r e n t s c a n be s e e n by c o m p a r i n g t h e d i v e r g e n c e b e t ween c o s t s and t h e a c t u a l t r a n s p o r t a t i o n c h a r g e . I n t h e l a s e c a s e t h e t r a n s p o r t a t i o n c h a r g e ( P V T A R I F F ) , i s a b o u t 2 c e n t s l e s s t h a n t h e e c o n o m i c c o s t 1 7 P r o d u c t i o n e x p e n s e s a r e p r o b a b l y o v e r e s t i m a t e d f o r a 20 y e a r p r o d u c t i o n p r o f i l e . F o r e x a m p l e e x p l o r a t i o n e x p e n d i t u r e s a r e i n c u r r e d i n t h e f i n a l y e a r o f p r o d u c t i o n ( s e e A p p e n d i x B) w h e r e a s i n t h e b a s e c a s e e x p l o r a t i o n e x p e n d i t u r e s a r e c u r t a i l e d 7 y e a r s b e f o r e t h e end o f p r o d u c t i o n . 26 (PMCFCST1). I n t h e 20 y e a r l i f e t i m e c a s e , t h e t r a n s p o r t a t i o n c h a r g e i s a c t u a l l y h i g h e r t h a n t h e e c o n o m i c c o s t . T h i s d i v e r g e n c e , c o u p l e d w i t h t h e l o w e r t h r o u g h p u t , makes p i p e l i n e p a r t i c i p a n t s b e t t e r o f f w i t h t h e m a j o r b e n e f i c i a r y b e i n g t h e f e d e r a l g o v e r n m e n t , What r e m a i n s t o be a n s w e r e d i s why t h e g o v e r n m e n t h a s come o u t a h e a d i n t h i s c a s e . Two f a c t o r s a c c o u n t f o r t h i s , t h e f i r s t b e i n g t h e c a p i t a l c o s t a l l o w a n c e s f o r i n c o m e t a x p u r p o s e s . C a p i t a l c o s t a l l o w a n c e s , f o r p i p e l i n e s , a r e c a l c u l a t e d on t h e g r e a t e r c f a 6% d e c l i n i n g c o s t o r s t r a i g h t l i n e b a s i s o v e r t h e l i f e t i m e o f t h e p r o j e c t . T h e r e f o r e i n t h e l a s t 16 y e a r s , o f a p i p e l i n e ' s o p e r a t i n g l i f e , t h e s t r a i g h t l i n e method w i l l be e m p l o y e d w i t h t h e d e c l i n i n g c o s t method u s e d i n e a r l i e r y e a r s . F o r p u r p o s e s o f c a l c u l a t i n g t h e t a r i f f a s t r a i g h t l i n e m ethod i s e m p l o y e d . T h e r e f o r e w i t h a s h o r t e r l i f e t i m e t h e d i f f e r e n c e b e t w e e n t h e c a p i t a l c o s t a l l o w a n c e and book d e p r e c i a t i o n i s n a r r o w e d e n a b l i n g t h e g o v e r n m e n t t o c o l l e c t a h i g h e r p e r c e n t a g e o f t a r i f f r e v e n u e s . I n t h e b a s e c a s e t h e e x c e s s a l l o w a n c e s t a r t s o u t h i g h e r and l a s t s f o r a l o n g e r p e r i o d . 1 8 The s e c o n d r e a s o n f o r i n c r e a s e d g o v e r n m e n t r e n t s f r o m t h e p i p e l i n e i s t h e l o w e r o p p o r t u n i t y c o s t l e v i e d on g o v e r n m e n t t a x r e v e n u e s . K P I P E , t h e c a p i t a l s t o c k upon w h i c h t h e o p p o r t u n i t y 1 8 Book d e p r e c i a t i o n i n t h e b a s e c a s e , f o r t h e f i r s t y e a r o f o p e r a t i o n i s 1/31 o f c a p i t a l e x p e n d i t u r e s i n c u r r e d . T h i s c o m p a r e s t o a c a p i t a l c o s t a l l o w a n c e o f 6%. C a p i t a l e x p e n d i t u r e s f o r b o t h book and i n c o m e t a x p u r p o s e s a r e t h e sum o f h i s t o r i c d c l l a r e x p e n d i t u r e s . F o r t h e 20 y e a r c a s e book d e p r e c i a t i o n i s 5%. I n a d d i t i o n , an e x c e s s a l l o w a n c e o c c u r s f r o m 1981-1995 i n t h e b a s e c a s e w h e r e a s i n t h e s h o r t e r s c e n a r i o an e x c e s s a l l o w a n c e i s d e d u c t e d f r o m 1981-1984. When t h e r e a r e 16 y e a r s o r l e s s r e m a i n i n g i n t h e p r o j e c t l i f e a s t r a i g h t l i n e method a l l o w s f o r a f a s t e r w r i t e o f f ( 1 / 1 6 > . 0 6 ) . 27 c o s t o f 2% i s l e v i e d , i s d e p r e c i a t e d o v e r a s h o r t e r t i m e p e r i o d r e s u l t i n g t h e r e b y l o w e r i n g t h e p r e s e n t v a l u e o f K P I P 2 c a l c u l a t e d o v e r t h e l i f e t i m e o f t h e p i p e l i n e . (d) The S u p p l y P r i c e o f C a p i t a l and The D i s c o u n t H a t e As i n d i c a t e d i n t h e b a c k g r o u n d s e c t i o n , t h e D.O.I. S t u d y u s e d an e s t i m a t e o f t h e s u p p l y p r i c e o f c a p i t a l (10$) a s t h e d i s c o u n t r a t e . The H e l l i w e l l s t u d y i n c o r p o r a t e s an e s t i m a t e o f t h e C a n a d i a n s u p p l y p r i c e o f c a p i t a l (10.44%) a s an o p p o r t u n i t y c o s t on t h e r e p l a c e m e n t v a l u e o f i n v e s t m e n t b u t t h e n d i s c o u n t s t h e s t r e a m o f r e n t s by an e s t i m a t e o f t h e s o c i a l t i m e p r e f e r e n c e r a t e ( 7 . 4 4 % ) . To a s c e r t a i n t h e s e n s i t i v i t y o f t h e s e a l t e r n a t e a s s u m p t i o n s , t h e b a s e c a s e v a l u e o f / t h e s o c i a l t i m e p r e f e r e n c e r a t e was r a i s e d t o 10.4 4.%, a l l o t h e r b a s e c a s e v a l u e s h e l d c o n s t a n t . The r e s u l t i s a s u b s t a n t i a l r e d u c t i o n i n r e n t s and an i n c r e a s e i n c o s t s . P r o d u c t i o n r e n t s , shown b e l o w , a r e 1784 m i l l i o n d o l l a r s o r 3856 l o w e r t h a n i n t h e b a s e c a s e w i t h g o v e r n m e n t r e n t s r e d u c e d by $986 m i l l i o n c o m p a r e d t o a r e d u c t i o n o f $800 m i l l i o n i n p r o d u c e r r a n t s . R e n t s t o p i p e l i n e e q u i t y p a r t i c i p a n t s a r e r e d u c e d s l i g h t l y w i t h g o v e r n m e n t r e n t s f r o m p i p e l i n e c o n s t r u c t i o n and o p e r a t i o n r e d u c e d by 63 m i l l i o n d o l l a r s (21%) . I n a d d i t i o n t h e t a r i f f i s i n c r e a s e d , i n p r e s e n t v a l u e t e r m s , by a b o u t 3 c e n t s p e r mcf. T h i s c o m p a r e s t o an i n c r e a s e i n p i p e l i n e c o s t s o f a l m o s t 6 c e n t s / m c f and an i n c r e a s e i n t h e t o t a l p e r mcf c o s t o f b o t h t h e p i p e l i n e and p r o d u c i n g s e c t o r s o f a b o u t 8.5 c e n t s / m c f (6^) , 28 TABLE 7 EASE CASE RENTS AND COSTS USING A 10.44 % DISCOUNT BATE K B E N T P l KRSNTG$ KRNTPBOD KRENTA2 $ BENTSUM 1305 1327 263 2 1837 4469 RENTCANl KRTPIPGS K R T P I P P I K B T P I P E I KBENTTOT 1628 -299 -9 -308 2 324 PVTARIFF TOTCST PMCFCOST PMCFCST1 BPMCFG RPMCFP 51.902 159.170 155.151 55.920 36.969 36.337 An e x p l a n a t i o n o f c h a n g e s f r o m t h e b a s e c a s e v a l u e s r e g u i r e s an a n a l y s i s o f t h e t i m e s t r e a m o f b e n e f i t s a n d c o s t s . I n b o t h t h e p i p e l i n e and p r o d u c t i o n s e c t o r s a s u b t a n t i a l p o r t i o n o f c o s t s o c c u r b e f o r e r e v e n u e s ( b e n e f i t s ) a r e g e n e r a t e d . C a p i t a l c o s t s f o r t h e p i p e l i n e a r e i n c u r r e d i n 1978 (1976 i n t h e D.O.I, s t u d y ) , some 3 y e a r s b e f o r e t a r i f f r e v e n u e s commence. The same i s t r u e i n t h e p r o d u c t i o n s e c t o r where e x p l o r a t i o n e x p e n d i t u r e s b e g i n i n 1S78 a t h o u g h , p r o p o r t i o n a l l y , p i p e l i n e c o s t s a r e i n c u r r e d e a r l i e r t h a n p r o d u c t i o n c o s t s . P i p e l i n e c a p i t a l c o s t s a r e t e r m i n a t e d i n 1965 (1981 i n t h e D.O.I, s t u d y ) w h e r e a s c a p i t a l c o s t s i n t h e p r o d u c t i o n s e c t o r a r e i n c u r r e d r i g h t t h r o u g h t o t h e l a s t s i m u l a t i o n p e r i o d (see A p p e n d i x B ) . 1 9 A h i g h e r d i s c o u n t r a t e would t h u s d e c r e a s e t h e p r e s e n t v a l u e o f b e n e f i t s t o a g r e a t e r d e g r e e t h a n c o s t s . The e f f e c t on g o v e r n m e n t r e n t s i s s i g n i f i c a n t l y l a r g e r t h a n f o r p r i v a t e p a r t i c i p a n t s . R e v e n u e s t o p r i v a t e p a r t i c i p a n t s b e g i n i n 1981 i n b o t h t h e p i p e l i n e a n d p r o d u c t i o n s e c t o r s . However, g o v e r n m e n t r e v e n u e s ( c o r p o r a t i o n t a x e s ) f r o m t h e p i p e l i n e do n o t commence u n t i l 1987. I n t h e p r o d u c t i o n s e c t o r , a l t h o u g h c o r p o r a t e t a x e s commence e a r l i e r (1982) and r o y a l t i e s b e g i n i n 1981, n e g a t i v e t a x e s a r e i n c u r r e d f r o m 1978-1981 b e c a u s e o f t h e p r o d u c i n g c o m p a n i e s * c o n s o r t i u m s t a t u s . The c o m p a n i e s i n v o l v e d i n p r o d u c i n g n a t u r a l g a s m a i n t a i n t h e i r s e p a r a t e s t a t u s f o r i n c o m e t a x p u r p o s e s , w h i c h i m p l i e s t h a t t a x l o s s e s i n c u r r e d i n a 1 9 A s i g n i f i c a n t s h o r t f a l l e x i s t s i n t h e t r e a t m e n t o f e x o g e n o u s d a t a f o r t h e gas p r o d u c t i o n s e c t o r . A l l e x o g e n o u s d a t a f o r t h i s s e c t o r w e r e o b t a i n e d f r o m t h e F o o t h i l l s a p p l i c a t i o n t o t h e N.E.B. a n d t h e D.I.A.N.D. (see f o o t n o t e 4 ) , a d j u s t e d f o r t h e d i f f e r e n c e i n t h e t h r o u g h p u t a s s u m p t i o n s o f F o o t h x l l s a n d CAGPL. No e x p e n d i t u r e s were g i v e n p r i o r t o 1976, p r e s u m a b l y b e c a u s e •sunk c o s t s ' were g i v e n a 0 v a l u e . I t w o u l d be d e s i r a b l e t o be a b l e t o a c c o u n t f o r sunk c o s t s o r g u a s i - r e n t s i n t e r m s , f o r e x a m p l e , o f a n a l y s i n g t h e e f f i c i e n c y o f t h e t a x and r o y a l t y s y s t e m i n c o l l e c t i n g p u r e r e n t s f r o m g a s p r o d u c t i o n and t r a n s p o r t a t i o n . The s e c o n d and p r o b a b l y t h e more s e r i o u s s h o r t f a l l i s t h e method by w h i c h t h e m o d el a u t o m a t i c a l l y d e f e r s a l l e x p e n d i t u r e s f o r t h e p i p e l i n e and p r o d u c t i o n s e c t o r s i n l i n e w i t h t h e commencement o f t h r o u g h p u t a s s u m p t i o n . The F o o t h i l l s d a t a u s e d was b a s e d on a 1979 s t a r t u p d a t e f o r p i p e l i n e t h r o u g h p u t . The e a r l i e s t d a t e now p o s s i b l e i s 1981 and t h u s a d e f e r r a l o f 2 y e a r s h a s been i n c o r p o r a t e d i n t o t h e b a s e c a s e r e s u l t i n g i n a l l e x p e n d i t u r e s t a k i n g p l a c e two y e a r s l a t e r t h a n t h e y w o u l d h a v e o c u r r e d g i v e n a 1979 s t a r t u p . T h i s i s r e a l i s t i c i s t e r m s o f t h e p i p e l i n e , where r e l a t i v e l y few e x p e n d i t u r e s have been i n c u r r e d t o d a t e a n d i s c o n s i s t e n t w i t h t h e r e c e n t u p d a t e d i n f o r m a t i o n p r e s e n t e d by t h e a p p l i c a n t s . However, f o r t h e g a s p r o d u c t i o n s e c t o r , i t i s w e l l known n o t o n l y t h a t e x p l o r a t i o n e x p e n d i t u r e s were i n c u r r e d b e f o r e 1976, b u t a l s o t h a t t h e two y e a r d e f e r r a l h a s n o t meant t h a t a l l p l a n n e d e x p e n d i t u r e s f o r 1976 and 1977 have been c u r t a i l e d . Thus t h e model u n d o u b t e d l y u n d e r e s t i m a t e s p r o d u c t i o n c o s t s f i r s t b e c a u s e a l l e x p e n d i t u r e s a r e n o t a c c o u n t e d f o r and s e c o n d l y b e c a u s e o f t h e t i m e p r o f i l e o f t h o s e e x p e n d i t u r e s t h a t a r e u s e d i n t h e m o d e l . 30 p a r t i c u l a r v e n t u r e ( e . g . M a c k e n z i e D e l t a g a s p r o d u c t i o n ) c a n be w r i t t e n o f f a g a i n s t o t h e r t a x a b l e i n c o m e ( e . g . From I m p e r i a l o i l ' s o p e r a t i o n s i n A l b e r t a ) , T h i s d i f f e r s f rom t h e p i p e l i n e s e c t o r where CAGPL a n d F o o t h i l l s a r e s e p a r a t e c o r p o r a t i o n s a n d , a s s u c h , must c a r r y f o r w a r d t a x l o s s e s r a t h e r t h a n c o l l e c t i n g them a t t h e t i m e t h e y a r e i n c u r r e d . What may seem s u r p r i s i n g i s t h e h i g h e r p r e s e n t v a l u e o f t h e t a r i f f a n d e c o n o m i c c o s t s on a p e r mcf b a s i s , .The a c t u a l t a r i f f l e v i e d a t any g i v e n t i m e d o e s n o t c h a n g e a s a r e s u l t o f c h a n g e s i n t h e d i s c o u n t r a t e , a s t h e t a r i f f i s c a l c u l a t e d i n d e p e n d e n t l y a c c o r d i n g t o t h e a c c o u n t i n g p r i n c i p l e s u s e d by t h e N.E.B. S i m i l a r i l y t h e t i m e s t r e a m s o f b e n e f i t s a n d c o s t s r e m a i n u n a l t e r e d . T h e r e f o r e t h e h i g h e r d i s c o u n t r a t e w i l l l o w e r t h e p r e s e n t v a l u e o f t o t a l p i p e l i n e r e v e n u e s a nd a l s o l o w e r t h e t o t a l e c o n o m i c c o s t s o f t h e p i p e l i n e a n d p r o d u c t i o n o f n a t u r a l g a s . H owever, t h e s e a r e t o t a l r e v e n u e s and c o s t s s h i c h a r e t h e n p u t i n p e r mcf t e r m s . The p r e s e n t v a l u e o f t h e t a r i f f i s t h e p r e s e n t ( d i s c o u n t e d ) v a l u e o f c a p i t a l a n d o p e r a t i n g c o s t s , a s c h a r g e d by t h e p i p e l i n e o p e r a t o r s , d i v i d e d by t h e p r e s e n t v a l u e o f t h e sum o f g a s f l o w i n g t h r o u g h t h e p i p e l i n e ( i n t h o u s a n d s o f c u b i c f e e t ) . I n e c o n o m i c t e r m s , i t i s an a v e r a g e c h a r g e p e r mcf w h i c h , i f l e v i e d , w o u l d y i e l d t h e same r e v e n u e , i n p r e s e n t v a l u e t e r m s , a s t h e a c t u a l t a r i f f w h i c h v a r i e s o v e r t h e l i f e t i m e o f t h e p i p e l i n e . S i m i l a r i l y , p e r mcf c o s t s a r e c a l c u l a t e d a s t h e p r e s e n t v a l u e o f a l l c o s t s d i v i d e d by t h e p r e s e n t v a l u e o f t h r o u g h p u t o r p r o d u c t i o n . The p e r mcf c o s t s ( e c o n o m i c c o s t s ) a r e t h e a v e r a g e c o s t s w h i c h , i f c h a r g e d by t h e p i p e l i n e o r r e c e i v e d by p r o d u c e r s , w o u l d make t h e p r e s e n t v a l u e o f r e v e n u e s j u s t 31 e q u a l t o t h e p r e s e n t v a l u e o f c a p i t a l and o p e r a t i n g c o s t s i n c u r r e d . S i m i l a r t o t h e r e n t d i s c u s s i o n a b o v e , t h e t i m e s t r e a m o f c o s t s and t h r o u g h p u t ( o r p r o d u c t i o n ) o f gas must be a n a l y s e d . As was i n d i c a t e d a b o v e , t h e m a j o r p o r t i o n o f p i p e l i n e and p r o d u c t i o n c o s t s t a k e s p l a c e i n t h e f i r s t few y e a r s ox t h e s i m u l a t i o n p e r i o d . P r o d u c t i o n and t h r o u g h p u t , h o w e v e r , do n o t commence u n t i l 1.981. F u r t h e r m o r e f u l l t h r o u g h p u t a n d p r o d u c t i o n a r e n o t a c h i e v e d u n t i l 1986, T h u s , a l t h o u g h t h e p r e s e n t v a l u e o f p i p e l i n e r e v e n u e s and t h e p r e s e n t v a l u e o f p i p e l i n e and p r o d u c t i o n c o s t s a r e l o w e r e d when a h i g h e r d i s c o u n t r a t e i s u s e d , t h e p r e s e n t v a l u e c f g a s p r o d u c t i o n and t h r o u g h p u t , i n p r o p o r t i o n a l t e r m s , i s r e d u c e d e v e n more, w i t h t h e r e s u l t t h a t P VTA B I F F , PMCFCOST, PMCICST1, and TOTCOST a r e h i g h e r . E. R e n t s t o U.S. P r o d u c e r s and P u r c h a s e r s o f A l a s k a n G a s Two a l t e r n a t i v e s , t o a M a c k e n z i e V a l l e y P i p e l i n e , f o r t r a n s p o r t i n g P r u d h o e Bay g a s a r e c u r r e n t l y u n d e r c o n s i d e r a t i o n . The most d e v e l o p e d a t t h i s s t a g e i s t h e E l Paso p r o p o s a l whereby P r u d h o e Bay g a s i s t r a n s p o r t e d by p i p e l i n e t o t h e A l a s k a s o u t h s h o r e , l i q u i f i e d , and t h e n s h i p p e d by t a n k e r t o t h e west c o a s t o f C a l i f o r n i a . The o t h e r a l t e r n a t i v e i s t h e ALCAN p r o p o s a l w h i c h w o u l d i n v o l v e a p i p e l i n e , t h o u g h A l a s k a , t h e Y u k o n , B.C. and A l b e r t a , t r a n p o r t i n g o n l y U.S. g a s . The r e n t s o r c o s t s a v i n g s t o A m e r i c a n s o f u s i n g t h e M a c k e n z i e V a l l e y P i p e l i n e r o u t e as o p p o s e d t o t h e E l P a s o r o u t e , w i l l be t h e s u b j e c t o f t h i s s e c t i o n . T h i s c o s t s a v i n g s has a l r e a d y b een e s t i m a t e d i n t h e U.B.C. M o d e l by t h e e n d o g e n o u s v a r i a b l e KBENTA2$, t h e v a l u e s o f w h i c h 32 h a v e a p p e a r e d i n s e v e r a l p l a c e s a b o v e . The f o l l o w i n g e q u a t i o n s ( a l s o c o n t a i n e d i n A p p e n d i x B) d e f i n i n g t h e c o s t s a v i n g s a r e r e p r o d u c e d b e l o w : 2 0 KRENTA2I RENTS TO U.S. PRODUCERS AND PURCHASERS OF ALASKAN GAS-CALCULATION I S EASED SOLELY CN TRANSPORT COST SAVINGS KRENTA2$= (STBNOM)*J1L*KRENTA2$ +((-26.0*PEXOG/1.89 -TARIFF+.076*(PGASD-8.3*PEXOG/1.89) + A(19O0) * (PEXOG/1.89) ) * (EGASFLOiJ- 12 5) *EGASD) *3 . 65 -A (1899) * 3 . 6 5 * (EGASFLOW-1./1. 125*EGASD) *PGAS) *(STENCH**.5) I F K7=M9 THEN KRENTA2$=KRENTA2$/ ( (STPNOM) ** (K7-3) ) The e x p r e s s i o n (STfNCM) * J 1 l * K E E N T A 2 $ c a r r i e s f o r w a r d t h e p r e v i o u s p e r i o d ' s r e n t s (J 1L*KRENTA2$) m u l t i p l i e d by t h e n o m i n a l s o c i a l t i m e p r e f e r e n c e r a t e (STPNOM). The r e s t o f t h e e g u a t i o n d e f i n e s t h e f l o w o f r e n t s i n a p a r t i c u l a r y e a r . 26.Q*PEXOG/1.89 r e p r e s e n t s t h e A l a s k a and C o n t i n e n t a l U.S. p i p e l i n e c o s t s i n f i r s t q u a r t e r 1975 c a n t s p e r mcf. T h i s i s t h e n m u l t i p l i e d by PEXOG ( t h e p r i c e i n d e x i n t h e y e a r b e i n g c o n s i d e r e d ) a n d d i v i d e d by 1 . 8 9 ( t h e p r i c e i n d e x f o r t h e f i r s t q u a r t e r o f 1975;1961=1.00) t o c a l c u l a t e t h e c u r r e n t c o s t . The M a c k e n z i e V a l l e y P i p e l i n e t a r i f f (TARIFF) i s t h a n s u b t r a c t e d . The n e x t e x p r e s s i o n , .076*(PGASD-8.3*PEXOG/1.89), a c c o u n t s f o r t h e h i g h e r s h r i n k a g e o r t r a n s m i s s i o n l o s s o f t h e E l P a s o s y s t e m compared t o t h e a l l p i p e l i n e s y s t e m . The s h r i n k a g e o f t h e E l P a s o s y s t e m i s 1.6% more t h a n t h e a l l p i p e l i n e r o u t e and t h u s t h i s s a v i n g s , g i v e n a v a l u e e g u a l t o t h e D e l t a w e l l h e a d p r i c e (PGASD) minus t h e t r a n s p o r t a t i o n c o s t t h r o u g h A l a s k a , must be a c c o u n t e d f o r . A (1900) r e p r e s e n t s t h e c o s t i n c e n t s p e r mcf ( 1 s t g u a r t e r 1975 2 0 The p a r a m e t e r s o f t h i s e q u a t i o n were d e v e l o p e d by E c k a r d S c h m i d t a s a member o f a g r o u p o f 4 t h y e a r e c o n o m i c s m a j o r s a t U.B.C. d u r i n g t h e 1975-76 a c a d e m i c y e a r . 33 c e n t s ) , o f t h a E l P a s o r o u t e . The f o l l o w i n g e x p r e s s i o n -(EGASFLOW- (1/1.125)*EGAS.O- m u l t i p l i e s t h e p r e c e d i n g p o s i t i v e a n d n e g a t i v e f l o w c o m p o n e n t s by t h e amount o f dow n s t r e a m P r u d h o e Bay gas b e i n g t r a n s p o r t e d . T h i s i s a g a i n m u l t i p l i e d by 3.65 w h i c h c o n v e r t s c e n t s / m c f t i m e s b i l l i o n s o f c u b i c f e e t p e r d a y , t o m i l l i o n s o f d o l l a r s p e r y e a r . A (1899) r e p r e s e n t s a t h r o u g h p u t t a x r a t e w h i c h i s c u r r e n t l y s e t e g u a l t o 0. The e x p r e s s i o n on t h e l a s t l i n e o f t h e e q u a t i o n - (STENOM)**.5)- m u l t i p l i e s a l l t h e f l o w s by t h e s q u a r e r o o t o f one p l u s t h e n o m i n a l s o c i a l t i m e p r e f e r e n c e r a t e . The f l o w s u s e d , b e i n g a v e r a g e f l o w s t h r o u g h o u t t h e y e a r , a r e m u l t i p l i e d by t h i s e x p r e s s i o n t o e x p r e s s r e n t s i n end o f y e a r t e r m s . The s e c o n d e g u a t i o n d i s c o u n t s a l l a c c u m u l a t e d r a n t s t o t h e end o f 1976. K7 r e p r e s e n t s t h e c u r r e n t s i m u l a t i o n p e r i o d . As t h e s i m u l a t i o n b e g i n s i n 1974, K7 i s e g u a l t o one i n 1974 a n d 38 i n t h e l a s t s i m u l a t i o n p e r i o d ( 2 0 1 1 ) . M9, w h i c h r e p r e s e n t s t h e t o t a l number o f s i m u l a t i o n p e r i o d s , i s e g u a l t o 38. A c c u m u l a t e d r e n t s a r e d i s c o u n t e d by t h e n o m i n a l s o c i a l t i m e p r e f e r n c e r a t e t o t h e power 35 (= K 7 - 3 ) , t h u s y i e l d i n g an end o f 1976 ( b e g i n n i n g o f 1977) p r e s e n t v a l u e . The a c c u m u l a t i o n and d i s c o u n t i n g p r o c e d u r e s a r e s i m i l a r f o r a l l r e n t a g u a t i o n s . > What r e m a i n s t o be e x p l a i n e d , w i t h r e s p e c t to t h e KRENTA2$ e g u a t i o n , i s how t h e v a r i o u s p e r mcf c o s t s were o b t a i n e d . The D.O.I. S t u d y g i v e s an e s t i m a t e o f t h e t o t a l i n i t i a l t a r i f f c h a r g e , e x c l u d i n g A m e r i c a n t a x e s , o f t r a n s p o r t i n g P r u d h o e Bay ga s t o m i d - w e s t e r n U.S. m a r k e t s ( $ 1 . 2 9 / m c f ) and an a v e r a g e 34 economic cost of the system($1.Q6 cents/mcf), 2 1 In addition the economic cost i s broken down into the Alaska and continental U.S. segments (10.1 cents and 21.7 cents, r e s p e c t i v e l y ) . By applying the r a t i o of the economic cost to the t a r i f f charge and then multiplying t h i s r a t i o by the t o t a l economic cost, an estimate of the economic costs of the two segments was obtained (10. 1/129.6) * 106=8. 3; (21.7/129.6) * 106= 17. 7; 8.3+17.7=26.0). A ( 1 9 0 0 ) , which has a value of 108, i s the D.O.I, estimate of the costs, in cents per mcf, of the E l Paso route. What can be said about the accuracy of thi s equation? F i r s t , i t i s assumed that the r a t i o of costs to the t a r i f f i s the same for a l l segments. The treatment of Canadian and U.S. taxes (U.S. taxes are excluded from the D.O.I, t a r i f f estimate and Canadian taxes included) alone would suggest that the r a t i o of costs to the transportation charge would not be the same of a l l segments. Another weakness i s the inconsistency in various parameters 2 1 there are several reasons why the i n i t i a l t a r i f f charge w i l l d i f f e r , and in almost a l l cases w i l l be larger than, from the economic cost per mcf. F i r s t i t i s l i k e l y that the present value of the t a r i f f , calculated over the l i f e t i m e of the project, w i l l d i f f e r from the economic cost per mcf. This i s due to the conventional method of calcul a t i n g the rate base and the allowed rate of return on the ratebase. In addition, the t a r i f f declines i n r e a l terms over the l i f e t i m e of the pipeline, with no net c a p i t a l expansion (investment- depreciation) and a constant throughput, the regulated returns to the declining c a p i t a l base w i l l decrease and thus, with depreciation and operating costs generally constant i n r e a l terms, the real t a r i f f w i l l decrease over the l i f e t i m e of the pipeline. For a f u l l y documented discussion of t h i s aspect and an alternate proposal for t a r i f f setting see John H e l l i w e l l and John Lestor, a New Approach to Price Setting f o r Regulated U t i l i t i e s , The Lo g i s t i c s and Transportation Review, Faculty of Commerce and Business Administration, U.B.C., 1976 35 u s e d i n t h e e q u a t i o n . F o r e x a m p l e , by u s i n g t h e D.O.I, c o s t e s t i m a t e s , t h e i r d i s c o u n t r a t e , e q u a l t o t h e s u p p l y p r i c e o f c a p i t a l , i s i m p l i c i t l y a c c e p t e d a s b e i n g t h e c o r r e c t r a t e t o be u s i n g , a t l e a s t f o r U.S. r e n t p u r p o s e s . However t h e e q u a t i o n d e f i n i n g KRENTA2I d i s c o u n t s t h e f l o w o f r e n t s by t h e C a n a d i a n s o c i a l t i m e p r e f e r e n c e r a t e . A n o t h e r m a j o r w e a k n e s s i s t h a t t h e e q u a t i o n i n c o r p o r a t e s d i f f e r e n t e s t i m a t e s o f i n v e s t m e n t and o p e r a t i n g c o s t o u t l a y s . The c o s t s f o r t h e U.S. p o r t i o n s s e r e b a s e d on t h e D.O.I, e s t i m a t e s w h e r e a s t h e t a r i f f f o r t h e C a n a d i a n p o r t i o n o f t h e p i p e l i n e s y s t e m i n c o r p o r a t e s t h e CAGPL c o s t e s t i m a t e s . Thus a l t h o u g h t h e D.O.I, e s t i m a t e s a r e a c c e p t e d f o r U.S. s e g m e n t s , t h e y a r e r e j e c t e d f o r t h e C a n a d i a n segment where t h e l o w e r CAGPL e s t i m a t e s a r e u s e d . T h i s u n d o u b t e d l y b i a s e s t h e U.S. r e n t s f r o m a M a c k e n z i e V a l l e y P i p e l i n e i n an upward d i r e c t i o n . I t i s w o r t h n o t i n g t h a t t h e D.O.I, e s t i m a t e s f o r t h e E l P a s o r o u t e a r e s i g n i f i c a n t l y h i g h e r t h a t t h o s e s u b m i t t e d by E I P a s o N a t u r a l Gas Co. T h e r e a r e o t h e r m e t h o d o l o g i c a l d i f f i c u l t i e s w h i c h , a l t h o u g h m e n t i o n e d h e r e , w i l l n o t be q u a n t i f i e d . One i s t h e t r e a t m e n t o f f o r e i q n t a x e s f r o m t h e U.S. p o i n t o f v i e w . I f t h e e q u a t i o n d e f i n i n g KRENTA2$ p u r p o r t s t o c a l c u l a t e a l l r e m a i n i n g U.S. r e n t s (most o f t h e C S . r e n t s c a n be c a l c u l a t e d by s u b t r a c t i n g RENTCAN$ f r o m KRNTPROD), t h e n a c e r t a i n amount c f f o r e i g n t a x e s , t h a t w o u l d o t h e r w i s e h a v e been p a i d , s h o u l d be i n c l u d e d (added i n ) i n t h e r e n t e g u a t i o n . I n o t h e r w o r d s , t h e t a r i f f , w h i c h i n c l u d e d C a n a d i a n t a x e s , i s c o r r e c t l y a n e g a t i v e c o m p o n ent o f t h e e g u a t i o n b u t i n t h e a b s e n s e o f t h e p i p e l i n e . 36 o t h e r f o r e i g n t a x e s w o u l d have b e e n p a i d . Such t a x e s s h o u l d be added i n t o t h e e g u a t i o n . G i v e n t h e s i z e o f t h e U.S. c a p i t a l m a r k e t , h o w e v e r , s u c h an a d j u s t m e n t w o u l d l i k e l y be s m a l l . I n a d d i t i o n , as t h e t i t l e o f t h e v a r i a b l e i n d i c a t e s , t h i s e q u a t i o n i s o n l y i n t e n d e d t o c a l c u l a t e r e n t s t o U.S. p r o d u c e r s and p u r c h a s e r s o f A l a s k a g a s . As s u c h , t h e C a n a d i a n t a r i f f i s what u s e r s pay and t h e t a x o p p o r t u n i t y b e n e f i t , w h i c h a f f e c t s U.S. g o v e r n m e n t s , n e e d n o t be c o n s i d e r e d . A n o t h e r g e n e r a l e q u i l i b r i u m c o n s i d e r a t i o n w h i c h h a s been i g n o r e d i s , o f c o u r s e , any e f f e c t t h e p i p e l i n e (and r e l a t e d i n v e s t m e n t ) w o u l d h a v e on t h e U.S. s u p p l y p r i c e o t c a p i t a l . N o t w i t h s t a n d i n g t h e a b o v e , f o r b e t t e r c o m p a r a b i l i t y , e s t i m a t e s o f b o t h t h e E l P a s o r o u t e c o s t s a n d t h e U.S. s e g m e n t s o f t h e a l l p i p e l i n e r o u t e s h o u l d be made i n a more c o n s i s t e n t f a s h i o n . I s h a l l a t t e m p t t o do s o . 1. A l l P i p e l i n e R o u t e S i m u l a t i o n s were r u n f o r t h e A l a s k a segment o f t h e a l l p i p e l i n e r o u t e , one o f w h i c h i n c o r p o r a t e d t h e CAGPL c o s t e s t i m a t e s and a n o t h e r t h e D.O.I, e s t i m a t e s (see p a g es 5 and 6 ) , l e a v i n g t h e base c a s e f l o w r a t e s i n t a c t . I n a d d i t i o n t h e h i g h e r D.O.I, f l o w r a t e s , i n t h e f i r s t 5 y e a r s o f o p e r a t i o n , w e r e s i m u l a t e d w i t h t h e D.O.I, c o s t e s t i m a t e s . A l l o t h e r b a s e c a s e a s s u m p t i o n s were u s e d ( e . g . S u p p l y p r i c e o f c a p i t a l , s o c i a l t i m e p r e f e r e n c e r a t e , l i f e t i m e ) . The c o s t s o b t a i n e d f o r t h e t h r e e s i m u l a t i o n s , i n 1976 c e n t s / m c f a r e shown i n T a b l e 8 b e l o w . U s i n g t h e c o s t s s u p p l i e d by t h e D.O.I, s t u d y , p a r mcf c o s t s were a l s o o b t a i n e d f o r t h e c o n t i n e n t a l U.S. segment o f t h e a l l p i p e l i n e r o u t e . When t h e D.O.I, f l o w r a t e s were u s e d (1.0 b c f / d 37 i n 1981 and 2.0 b c f / d t h e r e a f t e r ) a p e r mcf c o s t o f 34.826 c e n t s was o b t a i n e d , and a c o s t o f 38.696 c e n t s when t h e l o w e r CAGPL f l o w s were u s e d { 0 i n 1981 r i s i n g t o 2.0 i n 1 9 8 6 ) . TABLE 8 ALASKA SEGMENT COSTS Gas F l o w s CAGPL D.O.I. C o s t e s t i m a t e s D.O.I. 12.227 11.003 CAGPL 9.541 n/a 2. A l a s k a - L . N . G . B o u t e Two s i m u l a t i o n s o f t h e p i p e l i n e - t a n k e r r o u t e f o r A l a s k a g a s , were u n d e r t a k e n . The f i r s t u s e d t h e f l o w s ( 1 . 0 b c f / d i n 1981 and 2.0 b c f / d t h e r e a f t e r ) g i v e n i n t h e D.O.I, s t u d y a n d t h e D.O.I, i n v e s t m e n t a n d o p e r a t i n g c o s t e s t i m a t e s . A l l o t h e r b a s e c a s e a s s u m p t i o n s were u s e d . The s e c o n d s i m u l a t i o n u s e d t h e l o w e r b a s e c a s e A l a s k a f l o w s { 0 i n 1981 and r i s i n g t o 2.0 i n 1 9 8 6 ) . The p e r mcf c o s t , o f t h e t o t a l A l a s k a - L . N . G . r o u t e , was 122.64 1976 c e n t s p e r mcf u s i n g t h e D.O.I, f l o w s a n d a n d 135.5 c e n t s p e r mcf u s i n g t h e l o w e r f l o w s . These compare w i t h t h e 108 c e n t s / m c f e s t i m a t e d by t h e D.O.I. The f i r s t d i f f e r e n c e t h a t s h o u l d be r e c o g n i z e d i s t h a t t h e l a t t e r e s t i m a t e i s a f i r s t g u a r t e r 1975 f i g u r e w h e r e a s t h e p r e v i o u s f i g u r e s a r e p r e s e n t e d i n e n d o f 1976 c e n t s a n d p r e s e n t v a l u e s . O t h e r d i f f e r e n c e s i n t h e D.O;.I. c a l c u l a t i o n i n c l u d e t h e i r u s e o f a 10% d i s c o u n t r a t e c o m p a r e d t o t h e base c a s e s u p p l y p r i c e o f c a p i t a l o f 10.44% and a d i s c o u n t r a t e o f 7.44% t o g e t h e r w i t h a p i p e l i n e o p e r a t i n g l i f e o f 20 y e a r s . 3. A B a s e C a s e V a l u e f o r KBENTA2$ G i v e n t h a t t h e base c a s e u s e s t h e CAGPL d a t a i n c a l c u l a t i n g 38 c o s t s and r e n t s and t h e C a n a d i a n t a r i f f , w h i c h i s b a s e d on t h e same e x p e n d i t u r e s , i n t h e KRENTA2I e q u a t i o n c o n s i s t e n c y would r e q u i r e t h a t t h e e x p e n d i t u r e e s t i m a t e s g i v e n by CAGPL, a l s o be u s e d f o r t h e A l a s k a seqment o f t h e a l l p i p e l i n e r o u t e . The d i f f i c u l t y now a r i s e s a s t o how t o h a n d l e t h e c o s t s o f t h e c o n t i n e n t a l U.S. Seqment o f t h e a l l p i p e l i n e r o u t e a n d , i n a d d i t i o n , t h e l i q u i f i c a t i o n r o u t e . I f one u s e d t h e D.O.I, e s t i m a t e f o r t h e t h e s e and t h e CAGPL e s t i m a t e s f o r t h e A l a s k a a n d C a n a d i a n s e g m e n t s o f t h e p i p e l i n e r o u t e an u p w a r d b i a s , l a r g e r t h a n t h a t w h i c h p r e s e n t l y e x i s t s , i n t h e t r a n s p o r t a t i o n s a v i n g s t o t h e U.S. w o u l d r e s u l t . U s i n g t h e D.O.I, e s t i m a t e s i n a l l c a s e s w o u l d be i n c o n s i s t e n t w i t h t h e use o f CAGPL d a t a i n o t h e r r e n t a n d c o s t c a l c u l a t i o n s . S e v e r a l a l t e r n a t i v e s a r e p o s s i b l e , one o f w h i c h i s t o use t h e d a t a p r e s e n t e d by E l P a s o N a t u r a l G a s , w h i c h a r e l o w e r t h a n t h o s e p r e p a r e d by t h e D.O.I. However t h e r e i s no way o f k n o w i n g t h e r e l a t i v e downward b i a s i n e x p e n d i t u r e s between E l P a s o and CAGPL. What i s known i s t h e d i f f e r e n c e i n t h e c o s e e s t i m a t e s b e t w e e n CAGPL and t h a D.O.I, f o r t h e M a c k e n z i e V a l l e y P i p e l i n e . I s u g g e s t u s i n g t h e CAGPL d a t a f o r t h e A l a s k a s egment i n c o n j u n c t i o n w i t h t h e same company's d a t a f o r t h e C a n a d i a n s e g m e n t . The c o n t i n e n t a l U.S. Segment o f t h e a l l p i p e l i n e r o u t e a n d t h e l i q u i f i c a t i c n r o u t e c o s t s , b o t h b a s e d on t h e D.O.I, s t u d y , s h o u l d be s c a l e d downward, by t h e r a t i o o f t h e c o s t s b a s e d on D.O.I. D a t a t o t h o s e b a s e d on D.O.I, d a t a f o r t h e C a n a d i a n seqment. T h i s w o u l d r e s u l t i n t h e f o l l o w i n g e q u a t i o n s d e f i n i n g KRENTA2S: 39 KRENIA2S RENTS TO U.S. PRODUCERS AND PURCHASERS OF ALASKAN GAS-CALCULATION IS EASED SOLELY ON TRANSPORT COST SAVINGS KRENTA2$= (STPNOM)*J 1L*KRENTA2$ + <(-9.541*PEXOG/2. 15- (34. 826*PEX0G/2. 1 5 ) * 5 0 . 6 1 0 / 5 7 . 6 2 4 - T A R I F F * . 0 7 6 * (PGASD-9.541*PEXGG/1.89) + (122.64*PEXOG/2.15) *50 . 610 / 5 7 . 624) * (EG AS FLOW - ( 1 . / 1 . 125) *EGASD) *3.65 -A (1899) * 3 . 6 5 * (EGASFLOW-1./1. 125*EGASD) *PGAS) * (STPNOM**. 5) where 9.541 r e p r e s e n t s t h e c o s t o f t h e A l a s k a r o u t e and 34.826 r e p r e s e n t s t h e c o s t o f t h e c o n t i n e n t a l U.S. Segment o f t h e a l l p i p e l i n e r o u t e ( s e e page 3 4 ) . 50.610/57.624 r e p r e s e n t s t h e r a t i o o f t h e p e r mcf c o s t s o f t h e C a n a d i a n p o r t i o n o f t h e a l l p i p e l i n e r o u t e u s i n g CAGPL v e r s u s D.O.I, c o s t d a t a ( s e e t a b l e s 3 and 5 ) . The e x p r e s s i o n PEX0G/2.15, r e p r e s e n t s t h e p r i c e i n d e x o f t h e c u r r e n t p e r i o d d i v i d e d by t h e end o f 1976 p r i c e i n d e x . T h i s i s n e c e s s a r y t o c o n v e r t end o f 1976 d o l l a r s i n t o c u r r e n t d o l l a r m a g n i t u d e s . A ( 1 9 0 0 ) * (PEXOG/1.89), w h i c h r e p r e s e n t s t h e c o s t o f t h e E l P a s o r o u t e ( 1 0 8 1 s t g u a r t e r 1975 c e n t s p e r m c f ) , h a s b e e n c h a n g e d t o (122.64*PEXOG/2.15) w h i c h i s t h e E l p a s o r o u t e c o s t ( 1 2 2 . 6 4 end o f 1976 c e n t s p e r mcf) u s i n g t h e b a s e c a s e a s s u m p t i o n s ( e . g , s u p p l y p r i c e o f c a p i t a l , s o c i a l t i m e p r e f e r e n c e r a t e , l i f e t i m e ) . S i m u l a t i n g t h e a b o v e e q u a t i o n s y i e l d s an end o f 19 76 p r e s e n t v a l u e o f o f 155 4 m i l l i o n d o l l a r s f o r KRENTA2$ c o m p a r e d t o t h e b a s e c a s e v a l u e o f $3017 m i l l i o n . The r e d u c t i o n i s due b o t h t o a l o w e r v a l u e f o r t h e p o s i t i v e component o f t h e r e n t e q u a t i o n and l a r g e r n e g a t i v e c o m p o n e n t s . On t h e p o s i t i v e s i d e , 108*PEXOG/1.89 h a s b e e n r e p l a c e d by ( 1 2 2 . 6 4 * P E X 0 G / 2 . 1 5 ) * 5 0 . 6 1 0 / 5 7 . 6 2 4 . E x p r e s s i n g b o t h i n e n d o f 1976 d o l l a r s (PEX0G=2.15 a t t h e end o f 1976) y i e l d s 122.86 and 40 107.71 r e s p e c t i v e l y . T h e r e f o r e on t h e p o s i t i v e s i d e , r e n t s have d e c r e a s e d by a b o u t 15 c e n t s p e r mcf. On t h e n e g a t i v e s i d e 26*PEX0G/1.89 h a s b e e n r e p l a c e d by ( (9.541+34.826) *PEX0G/2. 15) *50 .6 10/57. 624 and .076*8.3*PEXOG/1.89 by .076*9.541*PEXOG/2.15. E x p r e s s i n g t h e s e v a l u e s i n end o f 1 9 7 6 . c e n t s y i e l d s 30.29 i n t h e f o r m e r c a s e a n d 39.69 f o r t h e new r e n t e g u a t i o n , a d i f f e r e n c e o f o v e r 9 c e n t s p e r mcf. Thus t h e t o t a l r e d u c t i o n i n r e n t s i s a b o u t 24.5 c e n t s p e r mcf. What may be p u z z l i n g t o t h e r e a d e r i s t h e s i m i l a r i t y i n t h e c o s t s o f t h e E l P a s o r o u t e u s i n g D.O.I, a s s u m p t i o n s c o m p a r e d t o u s i n g t h e base c a s e a s s u m p t i o n s . As c a n be se e n a b o v e , t h e D.O.I, e s t i m a t e o f 108 c e n t s p e r mcf c o n v e r t s t o 122.86 c e n t s i n end o f 1976 t e r m s . T h i s c o m p a r e s w i t h a n a l m o s t i d e n t i c a l c o s t o f 122.64 c e n t s p e r mcf when t h e b a s e c a s e a s s u m p t i o n s a r e u s e d . 2 2 The d i f f e r e n c e s i n t h e d i s c o u n t r a t e s u s e d by t h e D.O.I, and t h o s e u s e d by t h e D.B.C. model a r e n o t as l a r g e as may a t f i r s t be a p p a r e n t . I t i s i n d i c a t e d i n p r e v i o u s s e c t i o n s t h a t t h e b a s e c a s e u s e s a b e f o r e t a x s u p p l y p r i c e o f c a p i t a l o f 1 0 . 4 4 1 ( 7 . 4 4 % a f t e r t a x s u p p l y p r i c e p l u s a 3% t a x r e t u r n ) . I n a d d i t i o n t h e e s t i m a t e f o r t h e s o c i a l t i m e p r e f e r e n c e r a t e i s 7. 44%. , I n t h e a n n u a l m o d e l u s e d , t h e s e o p p o r t u n i t y c o s t s a r e c a l c u l a t e d a s mid y e a r c o s t s w h i c h a r e t h e n b r o u g h t f o r w a r d by t h e t e r m STPNOM**.5 ( t h e s g u a r e r o o t o f 1 p l u s t h e s o c i a l t i m e p r e f e r e n c e r a t e ) t o a r r i v e a t end o f y e a r v a l u e s . Thus t h e s o c i a l t i m e p r e f e r e n c e r a t e , a p p l i e d t o end o f y e a r v a l u e s , and e g u i v a l e n t t o t h e t h e 7.44% mid y e a r a f t e r t a x s u p p l y p r i c e o f c a p i t a l , i s e g u a l t o . 0 7 4 4 * ( t h e s g u a r e r o o t o f 1 p l u s t h e s o c i a l t i m e p r e f e r e n c e r a t e ) . I n t h e ba s e c a s e , t h e end o f y e a r r e a l d i s c o u n t r a t e i s a p p r o x i m a t e l y 7,72% and t h e end o f y e a r b e f o r e t a x s u p p l y p r i c e o f c a p i t a l i s a b o u t 10.84%. I n v e r s e l y , when s i m u l a t i n g t h e D.O.I, a s s u m p t i o n s , w i t h t h e D.B.C. m o d e l a mid y e a r b e f o r e t a x s u p p l y p r i c e or c a p i t a l , c o n s i s t e n t w i t h an end o f y e a r d i s c o u n t r a t e o f 10%, must be o b t a i n e d and c a n be c a l c u l a t e d a s : A (1890) = A (1894) / ( 1 . +A (1894) **. 5) o r A (18 S 0 ) = 0 . 1 0 / ( 1 . 10**.5)=.09 5346 where A (1890) r e p r e s e n t s t h e mid y e a r b e f o r e t a x s u p p l y p r i c e o f c a p i t a l a n d A {1894) i s t h e end o f y e a r d i s c o u n t r a t e . 41 G i v e n t h e h i g h e r d i s c o u n t r a t e u s e d by t h e D . O . I . 2 2 and t h e l o n g e r d i s c o u n t i n g p e r i o d ( t o t h e b e g i n n i n g o f 1975 c o m p a r e d t o t h e e nd o f 1 9 7 6 ) , one m i g h t e x p e c t l o w e r c o s t s i n t h e D.O.I, s t u d y . However r e c a l l i n g t h e d i s c u s s i o n on page 2 7 , t h e e f f e c t on t h e d i s c o u n t e d v a l u e c f t h e g a s f l o w must a l s o be t a k e n i n t o a c c o u n t . I n a d d i t i o n , t h e D.O.I, s t u d y a s s u m e s a l i f e t i m e o f 20 y e a r s ( b a s e c a s e i s 31 y e a r s ) . These l a t t e r a s s u m p t i o n s w i l l i n c r e a s e c o s t s r e l a t i v e t o t h e b a s e c a s e . The e f f e c t o f t h e a l t e r n a t e r e n t e g u a t i o n i m p l i e s a r e d u c t i o n i n r e n t s o f 1463 m i l l i o n d o l l a r s (3017-1554) i n t h e b a s e c a s e (see T a b l e 3) and r e d u c e s EENTSOM f r o m $7449 m i l l i o n t o $5986 m i l l i o n , a r e d u c t i o n o f a l m o s t 2 0 % i n t h e l a t t e r v a l u e and a r e d u c t i o n o f 4 8 % i n t h e 1976 p r e s e n t v a l u e f o r KRENTA2$. 42 D. CONCLUSIONS T h i s p a p e r h a s a t t e m p t e d t o h i g h l i g h t d i f f e r e n c e s , b o t h m e t h o d o l o g i c a l a n d o t h e r , b e t w e e n two s t u d i e s o f t h e e c o n o m i c r e t u r n s i n e x p l o i t i n g n o r t h e r n n a t u r a l gas r e s o u r s e s . The D e p a r t m e n t o f t h e I n t e r i o r s t u d y was u n d e r t a k e n t o e x a m i n e two a l t e r n a t i v e m ethods o f t r a n s p o r t i n g P r u d h o e Bay g a s f r o m t h e A l a s k a n n o r t h s l o p e ; a p i p e l i n e and l i g u i f i c a t i o n r o u t e ( p r o p o s e d by E l P a s o N a t u r a l Gas C o . ) , and t r a n s p o r t a t i o n v i a an a l l p i p e l i n e r o u t e w h i c h w o u l d t r a v e r s e A l a s k a , t h e Yukon T e r r i t o r y , a nd t h e N o r t h w e s t T e r r i t o r i e s , and t h e n c e t h r o u g h s o u t h e r n C a n ada i n t o t h e c o n t i n e n t a l U.S.A. The m a j o r d i f f e r e n c e s t h a t were h i g h l i g h t e d a b o v e i n c l u d e d d i f f e r e n t e s t i m a t e s o f c a p i t a l and o p e r a t i n g c o s t s , f o r t h e p r o p o s e d M a c k e n z i e V a l l e y P i p e l i n e , b e t w e e n D.O.I, and CAGPL. A l s o e v a l u a t e d were t h e d i f f e r e n t l i f e t i m e a s s u m p t i o n s , e s t i m a t e s f o r t h e s u p p l y p r i c e o f c a p i t a l and t h e d i s c o u n t r a t e , and t h e t r e a t m e n t o f C a n a d i a n t a x e s . I n t h e l a s t s e c t i o n t h e U.B.C. m o d e l ' s c a l c u l a t i o n o f t r a n s p o r t c o s t s a v i n g s , t o t h e U.S.A. , i n u s i n g t h e M a c k e n z i e V a l l e y P i p e l i n e was e x a m i n e d . As was shown, t h a D.O.I, e s t i m a t e o f c a p t i t a l and o p e r a t i n g c o s t s a r e s u b s t a n t i a l l y h i g h e r t h a n t h o s e p r e s e n t e d by CAGPL. Even when t h e h i g h e r f l o w a s s u m p t i o n s o f t h e D.O.I, s t u d y a r e u s e d , a c o s t d i f f e r e n c e o f a l m o s t 14% e x i s t s , r e l a t i v e t o CAGPL's c o s t s . A l t h o u g h I am n o t i n a p o s i t i o n t o p a s s j u d g e m e n t on t h e a c t u a l e n g i n e e r i n g c o s t e s t i m a t e s u s e d by e i t h e r CAGPL o r t h e C.O.I., i t i s c l e a r t h a t an u n d e r e s t i m a t e o f t h e M a c k e n z i e V a l l e y P i p e l i n e r o u t e c o s t s i s i n CAGPL's f a v o u r ( t h e i n c e n t i v e t o u n d e r e s t i m a t e c o s t s e x i s t s , o b v i o u s l y , f o r E l P a s o N a t u r a l 43 Gas Co. as w e l l ) . As an a p p l i c a n t b e f o r e t h e N a t i o n a l E n e r g y B o a r d and t h e U.S. F e d e r a l Power C o m m i s s i o n , CAGPL (or i t s a f f i l i a t e , AAGPL) must a t t e m p t t o show t h a t t h e i r p r o p o s a l i s p r e f e r a b l e b o t h t o t h e E l P a s o p r o p o s a l f o r t r a n s p o r t i n g A l a s k a n g a s , and t o t h e F o o t h i l l s p r o p o s a l t o t r a n s p o r t M a c k e n z i e D e l t a -B e a u f o r t Sea g a s . I n a d d i t i o n t h e c o s t s must be l o w e n o u g h t o e n s u r e t h a t o t h e r a l t e r n a t i v e s a r e n o t s e r i o u s l y c o n s i d e r e d , s u c h a s i m p o r t i n g o r p r o d u c i n g n a t u r a l gas s u b s t i t u t e s o r i n c r e a s e d d e v e l o p m e n t o f C a n a d i a n n o n - f r o n t i e r gas s o u r c e s . On t h e o t h e r s i d e t h e r e seem t o be f e w , i f a n y , d i s a d v a n t a g e s a s s o c i a t e d w i t h u n d e r e s t i m a t i n g c o s t s . S u b m i s s i o n s t o t h e N.E.B. t o c o v e r a c t u a l c o s t s i n c u r r e d , t h r o u g h t h e t a r i f f l e v y , w o u l d u n q u e s t i o n a b l y be a p p r o v e d . As f o r t h e l i f e t i m e a s s u m p t i o n s , i t i s c l e a r t h a t a p i p e l i n e has a p h y s i c a l l i f e f a r g r e a t e r t h a n t h e D.O.I. 20 y e a r a s s u m p t i o n . H owever, b o t h t h e U.B.C. and D.O.I, s t u d i e s assume a l m o s t c o n s t a n t o p e r a t i n q c o s t s ( t h e U.B.C. model does assume r e a l i n c r e a s e s f o r t h e wage component o f o p e r a t i o n c o s t s ) a f t e r t h e i n i t i a l p h a s e i n p e r i o d . T h e r e may be some j u s t i f i c a t i o n f o r i n c r e a s e d m a i n t e n a n c e o r f u r t h e r c a p i t a l e x p e n d i t u r e s i n t h e f u t u r e t o m a i n t a i n a p i p e l i n e ' s o p e r a t i n g a f f i c e n c y . The need f o r s u c h e x p e n d i t u r e s w o u l d u n d o u b t e d l y i n c r e a s e a s t h e o p e r a t i n g l i f e i s e x t e n d e d . The m a j o r c o n s t r a i n t i s , o f c o u r s e , t h e a v a i l a b i l i t y o f n o r t h e r n C a n a d i a n and A l a s k a n g a s r e s o u r c e s . I t s h o u l d a l s o be r e c o g n i z e d t h a t as t h e l i f e t i m e o f a g i v e n p r o j e c t i n i n c r e a s e d t h e r e s u l t s o v e r p r e v i o u s v a l u e s o b t a i n e d , become i n c r e a s i n g l y l e s s i n m a g n i t u d e due t o d i s c o u n t i n g . A r e l a t i v e l y d e t a i l e d t h e o r e t i c a l d i s c u s s i o n o f t h e use o f 44 t h e s u p p l y p r i c e o f c a p i t a l , t h e s o c i a l t i m e p r e f e r e n c e r a t e and d i s c c u n t r a t e s i n g e n e r a l , i n i n v e s t m e n t c r i t e r i a i s g i v e n i n t h e b a c k g r o u n d s e c t i o n . The D.O.I, s t u d y , i n u n d e r t a k i n g a d i s c o u n t e d c a s h f l o w a n a l y s i s , u s e s a 10 p e r c e n t d i s c o u n t r a t e d e t e r m i n e d by an e s t i m a t e c f t h e U.S. b e f o r e t a x s u p p l y p r i c e o f c a p i t a l . The D.B.C. s t u d y i n c o r p o r a t e s a b e f o r e t a x s u p p l y p r i c e o f c a p i t a l (a mid y e a r r a t e o f 10.44%) a p p l i e d t o t h e u n d e p r e c i a t e d ( r e p l a c e m e n t v a l u e ) o f t h e e x i s t i n g c a p i t a l s t o c k . A l l g e n e r a t e d r e n t s and c o s t s a r e t h e n d i s c o u n t e d by a n e s t i m a t e o f t h e s o c i a l t i m e p r e f e r e n c e r a t e (a m i d y e a r r a t e o f 7.44% e g u a l t o t h e e s t i m a t e o f t h e a f t e r t a x s u p p l y p r i c e o f c a p i t a l ) . G i v e n t h e a s s u m p t i o n o f a f i x e d c a p i t a l s t o c k , i t i s a p p r o p r i a t e t o c h a r g e an o p p o r t u n i t y c o s t , e g u a l t o t h e b e f o r e t a x s u p p l y p r i c e o f c a p i t a l , on i n v e s t m e n t . However, c o n t r a r y t o what i s i m p l i c i t y assumed i n t h e D.O.I, s t u d y , i t i s n o t r e a l i s t i c t o use t h e same r a t e i n d i s c o u n t i n g any p r i m a r y r e n t s t h a t a c c r u e . Some o f t h e s e r e n t s w o u l d u n d o u b t e d l y be consumed and t h u s a w e i g h t e d r a t e c o n s i s t i n g o f some f r a c t i o n o f b o t h t h e s o c i a l t i m e p r e f e r e n c e r a t e and t h e s u p p l y p r i c e o f c a p i t a l , w o u l d seem a p p r o p r i a t e . W h ether 7.44% i s t h e a p p r o p r i a t e w e i g h t e d f a c t o r i s c e r t a i n l y open t o g u e s t i o n . I t i s c l e a r , h o w e v e r , t h a t i f r e t u r n s on s a v i n g s i s t o be t h e d e t e r m i n a n t , t h a t t h e r e a l s o c i a l t i m e p r e f e r e n c e r a t e i s c o n s i d e r a b l y l e s s t h a n 7.44%. On t h e o t h e r hand t h e b e f o r e t a x s u p p l y p r i c e o f c a p i t a i - a s e s t i m a t e d i n t h e RDX2 m o d e l - i s a b o u t 3% a b o v e t h e base c a s e d i s c o u n t r a t e . I n t h e f i n a l s e c t i o n , t h e i n c o n s i s t e n c i e s i n t h e c a l c u l a t i o n o f s a v i n g s t o t h e U.S. i n t r a n s p o r t i n g P r u d h o e Bay 45 g a s v i a a M a c k e n z i e V a l l e y P i p e l i n e , a s o p p o s e d t o u s i n g t h e E l P a s o r o u t e , i s e x a m i n e d . As i s i n d i c a t e d , t h e U.B.C. m o d e l e s t i m a t e s t h i s s a v i n g s by u s i n g t h e c o s t s , as c a l c u l a t e d by t h e D.O.I., f o r t h e A l a s k a segment and t h e c o n t i n e n t a l U.S. segment o f t h e M a c k e n z i e V a l l e y p i p e l i n e r o u t e . On t h e o t h e r h a n d , t h e c o s t s u s i n g CAGPL c a p i t a l and o p e r a t i n g e s t i m a t e s , and o t h e r b a s e c a s e p a r a m e t e r s , were u s e d f o r t h e C a n a d i a n p o r t i o n o f t h e r o u t e . A more r e a l i s t i c r e n t e s t i m a t e w h i c h u s e s CAGPL a n d AAGPL d a t a f o r t h e A l a s k a and C a n a d i a n s e g m e n t s , c o n s i s t e n t l y i n c o r p o r a t e s o t h e r p a r a m e t e r s , and t h e n a d j u s t s downward t h e E l P a s o r o u t e c o s t s and t h e c o n t i n e n t a l U.S. c o s t s o r t h e M a c k e n z i e V a l l e y p i p e l i n e r o u t e ( w h i c h u s e D.O.I, e s t i m a t e s o f c a p i t a l a n d o p e r a t i n g c o s t s ) , i s a l m o s t h a l f t h e e s t i m a t e c a l c u l a t e d i n t h e b a s e c a s e . One m a j o r a r e a t h a t i s n o t a n a l y s e d i n d e t a i l i s p r o d u c t i o n c o s t s . As m e n t i o n e d , t h e e x o g e n o u s d a t a f o r t h i s s e c t o r i s o b t a i n e d f r o m t h e F o o t h i l l s a p p l i c a t i o n t o t h e N.E.B. To t h e e x t e n t t h a t t h e s e c o s t s have been u n d e r e s t i m a t e d , t h e r e r e m a i n s some g u e s t i o n a s t o w h e t h e r t h e y w i l l r e c e i v e much s c r u t i n y a t t h e N.E.B. h e a r i n g c u r r e n t l y i n p r o g r e s s . I t would a p p e a r i n b o t h CAGPL and F o o t h i l l s 1 ( t h e two a p p l i c a n t s b e f o r e t h e N.E.B. M a c k e n z i e V a l l e y P i p e l i n e h e a r i n g s ) i n t e r e s t t o keep t h e e s t i m a t e s o f p r o d u c t i o n c o s t s as low a s p o s s i b l e . The f o l l o w i n g r e n t s ( i n 1976 p r s e n t v a l u e s - S m i l l i o n s ) a r e o b t a i n e d by i n c r e a s i n g ' a l l p r o d u c t i o n c o s t s by 5035, 100%, and 200%: 46 TABLE 9 E f f e c t s o f I n c r e a s i n g P r o d u c t i o n C o s t s KRENIPS KRENTGl KRNTPRQD Base C a s e 2113 2319 4 432 5 0 % I n c r e a s e 1623 1699 3322 100% I n c r e a s e 100 8 1204 2212 200% I n c r e a s e -256 248 -8 A t r e b l i n g o f p r o d u c t i o n c o s t s , r e l a t i v e t o t h e F o o t h i l l s ' e s t i m a t e , w o u l d t h u s e l i m i n a t e a l l p r o d u c t i o n r e n t s , w i t h p r i v a t e p a r t i c i p a n t s * r e n t s b e i n g n e g a t i v e . I t i s h oped t h a t t h e above has n o t o n l y p i n p o i n t e d some o f t h e s e n s i t i v e and q u e s t i o n a b l e a s s u m p t i o n s t h a t a r e o f t e n made when u n d e r t a k i n g c o s t - b e n e f i t a n a l y s i s b u t , p e r h a p s more i m p o r t a n t l y , h a s r e v e a l e d some o f t h e u n c e r t a i n t i e s s u r r o u n d i n g t h e p r o p o s e d M a c k e n z i e V a l l e y P i p e l i n e and t h e a s s o c i a t e d p r o d u c i n g s e c t o r . T h e s e u n c e r t a i n t i e s , o b v i o u s l y , r e q u i r e f u r t h e r a n a l y s i s . F o r e x a m p l e t h e F e d e r a l G overnment h a s r e c e n t l y p r e p a r e d new r o y a l t y p r o p o s a l s f o r f r o n t i e r o i l and g a s r e s o u r c e s w h i c h were d e s i g n e d t c " p r o v i d e f o r a f a i r s h a r e t o C anada o f t h e e c o n o m i c r e n t g e n e r a t e d f r o m o i l and gas p r o d u c t i o n i n C a n a d a ' s f r o n t i e r a r e a s " . 2 3 The b a s e c a s e r e s u l t s ( T a b l e 3 ) , w h i c h i n c o r p o r a t e t h e new r o y a l t y p r o p o s a l s , i n d i c a t e t h e t h e F e d e r a l g o v e r n m e n t w i l l c o l l e c t b a r e l y h a l f o f t h e r e n t s g e n e r a t e d . On t h e o t h e r hand i f p r o d u c t i o n c o s t s a r e c l o s e t o 200% a b o v e t h o s e u s e d i n t h e m o d e l ( s e e T a b l e 9 ) , c o r p o r a t e t a x and r o y a l t y r a t e s may be e x c e s s i v e . 2 3 E n e r g y , M i n e s , and R e s o u r s e s C a n a d a ; S t a t e m e n t o f P o l i c y , P r o p o s e d P e t r o l e u m and N a t u r a l Gas A c t and New Canada O i l and Gas L a n d R e g u l a t i o n s , may 1976, Pg. 2 47 Many f a c e t s o f n o r t h e r n gas e x p l o i t a t i o n have n o t been a d d r e s s e d i n t h i s p a p e r . One o f t h e s e i s t h e q u e s t i o n o f how t h e f e d e r a l g o v e r n m e n t ' s p r e s e n t p o l i c y o f c u r t a i l i n g e n e r g y e x p o r t s r e l a t e s t o t h e e c o n o m i c s o f n o r t h e r n e n e r g y r e s o u r c e s . To t h e e x t e n t t h a t t h i s p o l i c y c r e a t e s ' s h u t i n ' c a p a c i t y o f n o n -f r o n t i e r r e s o u r c e s , r e n t s t h a t w o u l d o t h e r w i s e have a c c r u e d i n s o u t h e r n Canada b e l o n g i n any f u l l y i n t e g r a t e d c o s t - b e n e f i t a n a l y s i s o f d e v e l o p i n g n o r t h e r n r e s o u r c e s . Some a l t e r n a t i v e d e v e l o p m e n t o p t i o n s f o r A r c t i c p e t r o l e u m r e s o u r c e s , t h a t h a v e n o t b e e n a n a l y s e d i n t h i s p a p e r , i n c l u d e t h e F o o t h i l l s p r o p o s a l t o t r a n s p o r t M a c k e n z i e D e l t a - B e a u f o r t Sea g a s t o s o u t h e r n C a n a d i a n m a r k e t s a n d t h e a s s o c i a t e d , t h o u g h s e p a r a t e , ALCAN p r o p o s a l t o t r a n s p o r t P r u d h o e Bay gas t o U.S. m a r k e t s . A n o t h e r p r o p o s a l , w h i c h w i l l l i k e l y be p r e s e n t e d t o t h e N.E.B. n e x t s p r i n g , i s t h e P o l a r Gas P r o j e c t w h i c h w o u l d e n t a i l t h e t r a n s p o r t o f C a n a d i a n A r c t i c I s l a n d s g a s t o e a s t e r n C a n a d a . I n a d d i t i o n t o t h e v a r i o u s p r o p o s a l s r e l a t i n g t o n a t u r a l g a s d e v e l o p m e n t , a number o f o i l p r o d u c t i o n and t r a n s p o r t a t i o n s chemes a r e c u r r e n t l y i n p r e l i m i n a r y s t a g e s . I n l i g h t o f p e n d i n g d e c i s i o n s by r e g u l a t o r y a u t h o r i t i e s , w i t h r e s p e c t t o p r o p o s a l s now b e i n g c o n s i d e r e d , i t i s e s s e n t i a l t h a t a f u l l y i n t e g r a t e d e n e r g y a n a l y s i s be u n d e r t a k e n q u i c k l y . R e f e r e n c e s 48 Canadian A r c t i c Gas P i p e l i n e l i m i t e d E x h i b i t s i n Support of an Ap p l i c a t i o n t o the N a t i o n a l Energy. Board a-n-d t h e Department of I n d i a n and N o r t h e r n Development- f o r a C e r t i f i c a t e of P u b l i c Convenience and Necessity. A u t h o r i z i n g the C o n s t r u c t i o n o f P i p e l i n e F a c i l i t i e s , March 1974- January""? 976 ~ ~ - -Department o f t h e I n t e r i o r and The Aerospace C o r p o r a t i o n A l a s k a N a t u r a l Gas T r a n s p o r t a t i o n Systems^ Economic and Ri s k A n a l y s i s ^ (Washington D.C.) June 197 5 D r a f t E c k s t e i n , 0 . "Investment c r i t e r i a f o r economic development and the t h e o r y o f i n t e r t e m p o r a l w e l f a r e e c o n o m i c s . " 2M£i®£2l J o u r n a l o f E c o n c a i c s £ 1957, v o l . ,71, pp. 56-85 Canada, Department of Energy, Mines and Resources Statement of P o l i c y . : Proposed P e t r o l e u m and N a t u r a l Gas Act and New Canada O i l and Gas Laad Regulations.*. (Ottawa) May 1976 F e l d s t e i n , M.S. "Net s o c i a l b e n e f i t c a l c u l a t i o n and t h e p u b l i c i n v e s t m e n t d e c i s i o n . " O x f o r d Economic Papers,. 1964, v o l . 16, no. 1, pp. 114-"l31 F o o t h i l l s P i p e L i n e s L t d . A p p l i c a t i o n s b e f o r e the- N a t i o n a l Energy. Board and t o The Department of I n a i a a A f f a i r s and N o r t h e r n Development. A p r i l 1975-January 1976 H e i l i w e l l , John "A model f o r c a l c u l a t i n g c o s t s and b e n e f i t s o f a l t e r n a t i v e uses of Canada's A r c t i c gas." D i s c u s s i o n Paper 74-02, Department of Economics, U n i v e r s i t y o f B r i t i s h C o lumbia, January 1974 H e i l i w e l l , John "Impact o f a Mackenzie p i p e l i n e on the n a t i o n a l economy." I n P e t e r H. P e a r s e , ed.. The Mackenzie P i p e l i n e ^ A r c t i c Gag and Canadian Enejcgy. P o l i c y f ( T o r o n t o : M c C l e l l a n d and Stewart L i m i t e d ) 1974, pp7~143-182 H e i l i w e l l , John and John L e s t e r "A new approach t o p r i c e s e t t i n g f o r r e g u l a t e d p i p e l i n e s . " The L o g i s t i c s and T r a n s p o r t a t i o n R e view x (Vancouver: F a c u l t y of Commerce and B u s i n e s s A d m i n i s t r a t i o n , U n i v e r s i t y o f B r i t i s h Columbia) 1975, v o l . 11, no. 4, pp. 320-337 H e i l i w e l l , J o hn, P e t e r H. P e a r s e , C h r i s Sanderson, and Anthony S c o t t "Where does Canada's n a t i o n a l i n t e r e s t l i e ? - A g u a n t i t a t i v e a p p r a i s a l . " I n P e t e r H. P e a r s e , ed., pp. 197-227 H e i l i w e l l , John e t a l . "An i n t e g r a t e d model f o r energy p o l i c y a n a l y s i s . " Forthcoming i n the N a t u r a l Resource Programme d i s c u s s i o n paper s e r i e s , Department o f Economics, U n i v e r s i t y o f B r i t i s h Columbia, 1976 M a r g l i n , S. A. "The o p p o r t u n i t y c o s t o f p u b i x c i n v e s t m e n t . " Q u a r t e r l y J o u r n a l o f l c o n c r a i c s x 1963, v o l . 7 7 , pp. 95-111 " W e i s b e c k , D. " T a x a t i o n a s p e c t s r e l a t i n g t o t h e C a n a d i a n o i l and g a s i n d u s t r y . " E c o n o m i c s 551 t e r m p a p e r , U n i v e r s i t y o f B r i t i s h C o l u m b i a , 1975-1976 50 A p p e n d i x A V a r i a b l e s , C o e f f i c i e n t s , and D e f i n i t i o n s 1. e n d o g e n o u s v a r i a b l e s name d e s c r i p t i o n ABLP1 ACCAPIB APL CGASP$ CENSES FBALPSG F I N I P B 1 2 FINREQ F I P V P F I B E T P 1 2 I P C $ K06 DG$H K10 P I B K30DG$H KDEVEIOP KDGP1 KGAS KGPJBB K P I P E KPLBASE KPL$H KBECOV KB£NTA2$ KBENTDC1 KBENTD2$ KBENTG$ KBEN1P$ KBENTTOT KBNT5E0D K B T P I P E $ KfiTPIPG$ KBTPIPPS KTABIOSS LPB12 LPDB LPDS I PES LPS 12 MDIVPI p i p e l i n e i n t e c a p i t a l a l l o w a c c u m u l a t e d p o p e r a t i n g exp p i p e l i n e c u r r d i r e c t c a p i t a d e l t a g a s p p i p e l i n e bond p i p e l i n e c a s h c a p i t a l i n f l o c a p i t a l f l o w p i p e l i n e c o n s s t o c k o f 6% d s t o c k o f d e p r s t o c k o f d e l t 3 0 % ( d e e l i n i s t o c k o f d e v e s t o c k o f c a p i s t o c k o f c a p i s t o c k o f a l l a t book v a l s t o c k o f c a p i v a l u e o f p i p e v a l u e , f o r i n p i p e l i n e i n p i p e l i n e r e v e c a p i t a l r e c r e n t s t o U.S. t h i s c a l c u l r e n t s t o Cana r e n t s t o U.S. r e n t s t o Cana r e n t s t o p r o d t o t a l r e n t s f o f d e l t a ga t o t a l r e n t s a t o t a l r e n t s a r e n t s t o Cana r e n t s a c c r u i n r e m a i n i n g t a r U.S. bond l i a d o m e s t i c bond d o m e s t i c e g u i e a r n a d s u r p l u f o r e i g n e g u i t p i p e l i n e f o r e r i m bank l o a n s o u t s t a n d i n g a n c e s c a r r i e d f o r w a r d f o r P I B i p e l i n e l o s s e s , f o r income t a x p e n d i t u r e s i n d e l t a g a s p r o d u c t i o e n t nonwage o p e r a t i n g e x p e n d i t u r 1 a c c o u n t i m p a c t s o f p i p e l i n e a n r o d u c t i c n i s s u e s i n t h e U.S. f l o w b e f o r e e x t e r n a l f i n a n c i n g w f r o m p i p e l i n e e q u i t y f i n a n c i n g f r om r e t i r e m e n t o f U . S . - h e l d p i p t r u c t i o n e x p e n d i t u r e e p r e c i a b l e a s s e t s i n d e l t a gas p e c i a t e d i n v e s t m e n t f o r c a l c u l a t e a g as p r o d u c t i o n e q u i p m e n t d e p r e ng b a l a n c e ) f o r t a x p u r p o s e s l o p m e n t e x p e n d i t u r e s , v a l u e d f o r t a i i n v e s t e d i n p r o c e s s i n g e q u i p t a i i n v e s t e d i n d e l t a , i n m i l l , f i x e d a s s e t s i n d e l t a g a s p r o d u c ue t a i i n v e s t e d i n p i p e l i n e , i n m i l l i n e f o r t a r i f f s e t t i n g p u r p o s e s coma t a x p u r p o s e s , o f c a p i t a l i z e v e s t m e n t e x p e n d i t u r e s n u es a v a i l a b l e t o c o n t r i b u t e t o o v e r y p r o d u c e r s and p u r c h a s e r s o f A l a a t i o n i s b a s e d s o l e l y on t r a n s p o d i a n c o n s u m e r s o f d e l t a gas p u r c h a s e r s o f d e l t a g as d i a n g o v e r n m e n t s f r o m d e l t a g a s u c e r s o f d e l t a g a s rom p r o d u c t i o n and t r a n s p o r t a t i o s c c r u i n g f r o m d e l t a g a s p r o d u c t i o c c r u i n g f r o m p i p e l i n e d i a n g o v e r n m e n t s f r o m p i p a l i n e g t o e q u i t y p a r t i c i p a n t s i n p i p e l o s s b a l a n c e b i l i t i e s o f p i p e l i n e l i a b i l i t i e s o f p i p e l i n e t y i n p i p e l i n e , a t book v a l u e s o f p i p e l i n e , a t book v a l u e y i n p i p e l i n e , a t b o c k v a l u e i g n d i v i d e n d s , a f t e r w i t h h o l d i n g u r p o s e s n e s d i n t h e U.S. e l i n e b o n d s r o d u c t i o n ng p i r c i a b l e a t t a x p u r p o s e s ment 1961$ t i o n , 1. 1961$ d s k a n g a s -r t c o s t s a v i n g s p r o d u c t i o n n n l i n e t a x 51 MINTP$ p i p e l i n e f o r e i g n i n t e r e s t p a y m e n t s , a f t e PGASD w e l l h e a d p r i c e o f d e l t a g a s , i n c e n t s pe PGAS DEL d e l i v e r e d p r i c e o f g a s a t a s o u t h e r n t e r M a c k e n z i e V a l l e y p i p e l i n e , i n c e n t s pe PMCFCOST a v e r a g e c o s t , i n 1S76 c e n t s / m c f , o f D e l t g a s d e l i v e r e d t o s o u t h e r A l b e r t a PMCFCST1 a v e r a g e p i p e l i n e c o s t s , i n 1976 c e n t s pe o f t h r o u g h p u t PVBCFDD p r e s e n t v a l u e , i n b i l l i o n s o f c u b i c f e e t o f p i p e l i n e t h r o u g h p u t o f d e l t a g as PVBCFDP p r e s e n t v a l u e , i n b i l l i o n s o f c u b i c f e e t o f t o t a l p i p e l i n e t h r o u g h p u t PVTAEIFF p r e s e n t v a l u e o f t a r i f f , i n 1976 c e n t s p PVTAEIFFT p r e s e n t v a l u e o f t o t a l t a r i f f i n c l u d i n g gas i n 1976 c e n t s p e r Mcf PVTAX p r e s e n t v a l u e o f p i p e l i n e c o r p o r a t i o n t a BENTCAN$ t o t a l r e n t s t o C a n a d i a n s f r o m d e l t a g a s BENTCANT t o t a l r e n t s a c c r u i n g t o C a n a d i a n s f r o m f n o n - f r o n t i e r g as and t h e M a c k e n z i e V a l BENTSUM t o t a l r e n t s a c c r u i n g f r o m p i p e l i n e a n d d EPMCFC1 r e n t s t o C a n a d i a n gas u s e r s , i n c e n t s pe BPMCFG r e n t s t o C a n a d i a n g o v e r n m e n t s i n c e n t s p BPMCFP r e n t s t o p r o d u c e r s o f d e l t a g a s , i n c e n t T A B I F F p i p e l i n e t a r i f f r a t e , e x c l u d i n g g a s used m e a s u r e d i n c e n t s p e r Mcf o f d e l i v e r e d T A B I F F T p i p e l i n e t a r i f f p l u s c o s t o f gas u s e d i n i n c e n t s p e r Mcf TAB I F $ 7 6 t a r i f f i n 1976 c a n t s p e r Mcf TABLOSS t a r i f f d e f i c i e n c y i n e a r l y y e a r s due t o TCGAS c o r p o r a t i o n t a x on d e l t a g as p r o d u c t i o n -a s e a r l y l o s s e s c a n be w r i t t e n o f f aga TCP c o r p o r a t i o n t a x e s p a i d by p i p e l i n e TOTCST t o t a l c o s t o f p i p e l i n e and g a s p r o d u c t i o i n c e n t s p e r Mcf T P I B p r o g r e s s i v e i n c r e m e n t a l r o y a l t y (PIE) on as p r o p o s e d i n May 1976. TBOYAL t o t a l f e d e r a l r o y a l t i e s f r o m d e l t a g a s p UNFV u n r e c o v e r e d i n v e s t m e n t i n p i p e l i n e a s s e t UBET r e t i r e m e n t o f d o m e s t i c a l l y - h e l d p i p e l i n e XBALP&GS d i r e c t t r a d e a c c o u n t i m p a c t s o f p i p e l i n e g a s p r o d u c t i o n YDIVP p i p e l i n e d o m e s t i c d i v i d e n d s YGAS i n c o m e f r o m s a l e s o f d e l t a g a s , g a t h e r e d YGASE book p r o f i t s f r o m d e l t a g as p r o d u c t i o n , i n c l u d i n g r o y a l t i e s and i n c o m e t a x e s YGASI t a x a b l e p r o f i t s f r o m d e l t a g a s p r o d u c t i o YINTP p i p e l i n e d o m e s t i c i n t e r e s t p a y m e n t s YPBOCK p i p e l i n e book p r o f i t s Y P I P E p i p e l i n e t a r i f f r a v e n u e s , i n m i l l . . $ YPIB g a s p r o d u c t i o n p r o f i t s f o r c a l c u l a t i n g p YPT p i p e l i n e t a x a b l e p r o f i t s r w i t h h o l d i n g t a x r Mcf minus o f t h e r Mcf a r mcf p s r d a y , pe r d a y , e r M cf t r a n s m i s s i o n x e s p r o d u c t i o n r o n t i e r and l e y p i p e l i n e e l t a g a s p r o d u c t i o n r Mcf e r Mcf s p e r Mcf i n t r a n s m i s s i o n , gas t r a n s m i s s i o n l o w e r t h r o u g h p u t c a n be n e g a t i v e , i n s t o t h e r i n c o m e n, d e l t a g a s , r o d u c t i o n s d e b t and d e l t a and p r o c e s s e d a f t e r a l l e x p e n s e s . n i r 52 2. e x o g e n o u s v a r i a b l e s name d e s c r i p t i o n CPNWE74$ 1974$ v a l u e o f p i p e l i n e non-wage o p e r a t i n g e x p e n d i t u r e s DEVEL74$ d e l t a g a s d e v e l o p m e n t e x p e n d i t u r e s , f o r t a x p u r p o s e s , i n m i l l i o n s o f 1974$ EGASD t h r o u g h p u t o f d e l t a g a s i n B c f p e r d a y EGASFLOSJ t h r o u g h p u t o f M a c k e n z i e p i p e l i n e i n B c f per d a y a t d o w n s t r e a m end EGASXD d e l t a g a s s o l d f o r e x p o r t , i n B c f / d a t u p s t r e a m e n d o f p i p e l i n e EXPL74$ e x p l o r a t i o n e x p e n s e s i n t h e M a c k e n z i e D e l t a , f o r t a x p u r p o s e s , i n m i l l . 1974$ IDGGL74$ i n v e s t m e n t i n d e l t a gas g a t h e r i n g l i n e s , i n m i l l . 1974$ IGWE74$ i n v e s t m e n t i n gas w e l l e q u i p m e n t , i n m i l l i o n s o f 1974$ I P N I c o n s t r u c t i o n e x p e n d i t u r e f o r M a c k e n z i e p i p e l i n e , I P E 7 4 $ i n v e s t m e n t i n d e l t a g a s p r o c e s s i n g e q u i p m e n t , " i n m i l l . 1974$ NPC number e m p l o y e d i n p i p e l i n e c o n s t r u c t i o n , i n m i l l i o n s o f p e r s o n s , a v e r a q e o v e r t h e y e a r NPO number e m p l o y e d i n p i p e l i n e o p e r a t i o n , i n m i l l i o n s o f p e r s o n s , a v e r a q e o v e r t h e y e a r 0PER74$ o p e r a t i n q e x p e n d i t u r e s i n d e l t a gas p r o d u c t i o n , i n m i l l . 1974$ PEXOG p r i c e i n d e x e q u a l t o 2.11 i n 1976, r i s i n g a t 4% t h e r e a f t e r P I P C p r i c e i n d e x f o r p i p e l i n e c o n s t r u c t i o n e x p e n d i t u r e s QSTART v a r i a b l e e g u a l t o 1. i f p i p e l i n e i s i n o p e r a t i o n WPC p i p e l i n e c o n s t r u c t i o n wage, i n $ p e r e m p l o y e e p e r y e a r IPO wage f o r p i p e l i n e o p e r a t i o n , i n $ p e r e m p l o y e e p e r y e a r 3. c o e f f i c i e n t s n o . v a l u e d e s c r i p t i o n 1856 v a r i e s p r o p o r t i o n o f r e t u r n on r a t e b a s e a n d d e p r e c i a t i o n w h i c h i s p r o r a t e d by t h r o u g h p u t t o n o r m a l i s e t a r i f f o v e r p r o j e c t l i f e 1858 v a r i e s u s e d f o r n o r t h / s o u t h s p l i t t o g e t h e r w i t h A (1859) 1859 v a r i e s t o t a l p r o j e c t i s b e i n g s i m u l a t e d i f A { 1 8 5 8 ) = 1 . and A (1859) =0.; i f A{1658) = 0. and A (18 59) —- 1. t h e n n o r t h o n l y ; i f b o t h A (1658) and & (1859) = 1. . t h e n s o u t h o n l y 1861 .625 r a t i o o f e q u i t y t o ( d e b t + e g u i t y ) i n g a s p r o d u c t i o n 1862 .06 a n n u a l CCA r a t e f o r p i p e l i n e a nd g a s p l a n t s 1863 1.0 p a y - o u t r a t i o f o r a f t e r - t a x book p r o f i t s 1864 4.598 when m u l t i p l i e d by EGASD g i v e s c o n s t a n t d o l l a r (1961$) d e p r e c i a t i o n o f KDGPE - e q u a l s t h e sum o v e r a l l y e a r s o f ( I P E 7 4 $ /1.77) d i v i d e d by t h e sum o f EGASD 1865 .75 r a t i o o f d e b t / ( d e b t + e g u i t y ) f o r new l o n q t e r m f i n a n c i n g 1866 .7927 r a t i o o f D.S. t o t o t a l new p i p e l i n e b o n d i s s u e s 1867 .49 f o r e i g n (U.S.) o w n e r s h i p r a t i o f o r p i p e l i n e e q u i t y 1868 .1075 a n n u a l i n t e r e s t r a t e on U.S. bonds 53 186 9 1870 1872 1873 1874 1875 1876 1877 1879 1881 1882 1883 1884 1885 1886 1887 1888 1890 1891 1892 1893 1894 1895 1896 1897 1898 189 9 1900 1901 190 3 1905 1911 1972 . 1 5 .1075 . 0 1 .09 .0659 . 2637 v a r i e s 2.0 .09 4.0 . 1 .15 . 46 v a r i e s .40 . 10 v a r i e s .0744 . 3333 .03375 v a r i e s .0744 . 03 16.411 .118 .95 0.0 10 8,0 4 2.0 v a r i e s v a r i e s . 0 .04 r a t e o f w i t h h o l d i n g t a x on i n t e r e s t p a y m e n t s a b r o a d a n n u a l i n t e r e s t r a t e on C a n a d i a n bonds i m p o r t c o n t e n t (non U.S.) o f p i p e l i n e non-wage o p e r a t i n g e x p e n d i t u r e s , e g u a l t o 0. i n 'Maple L e a f p r o j e c t i m p o r t c o n t e n t (O.S.) o f p i p e l i n e non-wage o p e r a t i n g e x p e n d i t u r e s , e g u a l t o .05 i n 'Maple L e a f p r o j e c t i m p o r t c o n t e n t (non U.S.) o f p i p e l i n e c o n s t r u c t i o n e x p e n d i t u r e s , e q u a l t o .0362 i n 'Maple L e a f p r o j e c t i m p o r t c o n t e n t (U.S.) o f p i p e l i n e c o n s t r u c t i o n e x p e n d i t u r e s , e q u a l t o .1471 i n 'Maple L e a f p r o j e c t e q u a l t o c o n s t a n t t a r i f f i f r u n n i n g , o t h e r w i s e s e t t o 0. n o n - i n t e r e s t b e a r i n g a s s e t s o f p i p e l i n e e q u i t y p a r t i c i p a n t s a n n u a l i n t e r e s t r a t e on i n t e r i m bank, l o a n s p i p e l i n e t h r o u g h p u t i n b i l l . c u . i t . d e l i v e r e d p e r d a y , e g u a l t o 2.0 f o r A l a s k a a n d / o r Yukon s e g m e n t s o r E l P a s o r o u t e w i t h h o l d i n g t a x r a t e on p i p e l i n e f o r e i g n d i v i d e n d s a f t e r - t a x r e t u r n on p i p e l i n e e g u i t y c o r p o r a t i o n i n c o m e t a x r a t e on t a x a b l e p i p e l i n e p r o f i t s u s e d f o r s w i t c h i n g c r o s s - d e l t a l i n e on o r o f f i n c r e m e n t a l r o y a l t y r a t e on g a s p r o d u c t i o n p r o f i t s i n e x c e s s o f 25%, as p r o p o s e d i n May 1976. g a s p r o d u c t i o n r o y a l t y p r o p o s e d May 1976 w e i g h t e d m a r g i n a l c o r p o r a t i o n i n c o m e t a x r a t e on g a s p r o d u c t i o n p r o f i t s a v e r a g e mid y e a r r e a l s u p p l y p r i c e o f c a p i t a l t o b u s i n e s s , a f t e r t a x ; .95346 f o r t h e D.O.I, c a s e r a t e o f d e p l e t i o n a l l o w a n c e f o r t a x p u r p o s e s i n t e r e s t on g a s p r o d u c e r s ' d e b t , a s p r o p , o f a s s e t s u s e d t o r u n p i p e l i n e w i t h A l a s k a n d e l i v e r y l i n e f r o m P r u d h o e Bay a n n u a l r e a l s o c i a l t i m e p r e f e r e n c e r a t e ; .10 f o r t h e D.O.I, c a s e a v e r a g e a n n u a l t a x r e t u r n on i n d u s t r i a l c a p i t a l , c a l c u l a t e d a s a mid y e a r v a l u e ; 0 f o r t h e D.O.I, c a s e a n n u a l $61 d e p r e c i a t i o n i n gas p r o d u c t i o n a l l o w e d r a t e o f r e t u r n on TARL05S ; ( 1 8 6 8 * 1 8 6 5 ) + ( ( 1 . -1868) *1883) r a t i o o f M a c k e n z i e D e l t a g a s p r o d u c t i o n u n d e r A r c t i c • Gas p r o p o s a l t o p r o d u c t i o n u n d e r F o o t h i l l s p r o p o s a l t h r o u g h p u t t a x r a t e b a s e c a s e c o s t o f a l t e r n a t e r o u t e f o r P r u d h o e g a s ( 1 9 7 5 c e n t s / M c f ) d e l i v e r y c o s t f r o m A l b e r t a b o r d e r t o T o r o n t o (1975 c e n t s / M c f ) P r u d h o e t h r o u g h p u t a s f r a c t i o n o f t o t a l number o f y e a r s o f d e f e r r a l p r o p o r t i o n o f d e l t a g a s e x p o r t e d b a s e c a s e a n t i c i p a t e d a v e r a g e a n n u a l i n f l a t i o n r a t e a f t e r 1976 54 A p p e n d i x B E q u a t i o n s and Base Case V a l u e s f o r E x o g e n o u s V a r i a b l e s 1. EQUATIONS FOR ENDOGENOUS VARIABLES NTIME=ID-1901+K7 MD=IFIX (A (1905) ) NTIMD=NTIME-MD S T P 1 = 1 . + A ( 1 8 9 0 ) * ( ( 1 . + A ( 1 8 9 0 ) ) * * . 5 ) STP2=1. + A (1890) * ( S T P 1 * * . 5) A (189 4) =A (1890) * (STP2**.5) I F NTIME=74 THEN STINOM=(1.+A(1894))*(1.77/1.56) I F NTIME=75 THEN ST E N 0 H = ( 1 , + A ( 1 8 9 4 ) ) * ( 1 . 9 5 / 1 . 7 7 ) I F NTIME=76 THEN ST ENC M=(1. + A ( 1 8 9 4 ) ) * ( 2 . 1 1 / 1 . 9 5) I F NTIME>76 THEN STPNCM=(1.+A(1894))*(1 .+A(1972) ) I I F E = 3 1 NSTAR=A (2132) +MD NFIN=NSTAR+LIFE-1 .BLIFE=LIFE BSTAR=NSTAR RTI«E=NTIME QCOR I S ADJUSTMENT FACTOR TO ALLOW FOR P I P E L I N E STARTUP I N MID-YEAR I F NTIME=NSTAR THEN QCOR=.5 I F NTIME>NSTAR THEN QCOB=1. EQUATIONS FOR P I P E L I N E CONSTRUCTION AND OPERATION KPI$H VALUE, FOR INCOME TAX PUEFOSES, OF CAPITALIZED P I P E L I N E INVESTMENT EXPENDITURES I F Q S T A R K 1 . THEN KE1$H=IPC$+J 1 L*KPL$H I F ( 1 . / ( B L I F E - (RTIM E-RSTAR) ) ) >= A (1 862) ) THEN A (1862)= ( 1 . / ( R L I F E - (RTIME-RSTAR) ) ) I F QSTART=1. THEN K P L $ B = ( 1 . - A ( 1 8 6 2 ) ) * ( J 1 L * K P L $ H + IPC$) I F NTIME>NFIN THEN KPL$H=0. YPT P I P E L I N E TAXABLE PROFITS I F QSTART<1. THEN YPT=0. I F QSTART= 1. THEN YPT=-A (1 862) * (J1L*KPL$H-HPC$ ) -QCOR* (QST ART) * ( H I N T P l ) * ( 1 . / ( 1 . - A {186 9) ) ) -J 1 L * A P L - ( Q START)*YINTP*QC0R-CPNIE$-NE0*iP0 +YPIPE I F YPT<0 THEN GO TO 10 TCP CORPORATION TAXES PAID BY P I P E L I N E TCP=A (1884)*YPT API ACCUMULATED PIPELINE LOSSES, FOB INCOME TAX PURPOSES APL=0. GO TO 11 10 APL=-YPT LPES EARNED SURPLUS OF PIPELINE, AT BOOK VALUE 11 LPES=J1L*LPES + YPBOOK - YDIVP - (MDIVPS) * ( 1 . / ( 1 . - A ( 1 8 8 2 ) ) ) MDIVPl PIPELINE FOREIGN DIVIDENDS, AFTER WITHHOLDING TAX I E J1L*LPES>0. AND YPEOOK>0. TEEN MDIVP$=A (18b3) *. 5* A (1867) *( (J11*LPES)+ (0.5) * (YPBOOK) ) * (1.-A (188 2)) I F NTIME=NFIN THEN MDIVP$=(A(1867))*(YPBOOK+ J1L*LPES) * (1.-A (1882) ) SL=J1L*LPS12+J1L*LPDS I F J1L*LPES>(SL THEN AND NTIME=NFIN) MDIVP$= A (1867) * (1. -A (1882) ) * (YPBOOK+J1L*LPS12+J1L*LPDS) I F NTIME>NFIN THEN MDIVP$=0. YDIVP PIPELINE DOMESTIC DIVIDENDS I F J1L*LPES>0. AND YPBOOK>0. TEEN YDIVP=A(1863)*.5* (1.-A (1867) ) *( (J1L*1PES) + (0.5) * (YPBOOK) ) IF NTIME^NFIN THEN YDIVP= (1. - A (1867) ) * (YPBOOK*• J1L*LPES) IF J1L*LPES>(SL THEN AND N11ME=NF IN) 1YDIVP= (1. -A (1867) ) *(YPB00K+J1L*LPS12+J1L*LPDS) IF NTIME>NFIN THEN YDIVP=0. FINREQ PIPELINE CASH FLOW BEFOEE EXTERNAL FINANCING FINREQ= -YPIPE+ NPO*WEC+CPNWE$+ (1./(1.-A (1869) ) ) *MINTP$* (QSTABT) +IPC$ + (MDIVPS) * (1./(1.-A (1882) ) ) +YINTP* (QSTABT) +YDIVP+TCP I F NTIMEXNFIN THEN FINSEQ=0. LPE12 U.S. BOND L I A B I L I T I E S OF PIPELINE LPB12=J1L*LPB12+FINIPB12+FIBETP12 LPS12 FOBEIGN EQUITY IN PIPELINE, AT BOOK VALUE 56 IPS12=J1L*LPS12+FIPVP+A (1867) * ( L P E S - J 1L*LPES) I F NTIME>NFIN THEN I P S 12=0. S1 I S THE AMOUNT OF NEW LONG-TERM FINANCING I N THE CURRENT PERIOD S1=.5* (FINREQ+J1L*FINREQ) I F FINREQ<=0 AND J1L*FINBEQ>=0 THEN S1=2.+.5*J1L*FINREQ I F S K O . THEN S1 = 0. I F NTIME>NFIN THEN S1=0. F I N I P B 1 2 P I P E L I N E BOND ISSUES IN THE U.S. FINIPB12=A (1865) *A(18 66) *S1 LPDB DOMESTIC BOND L I A B I L I T I E S OF P I P E L I N E IPDB=A (1865) * ( 1 . - A(1866) ) *S1+J1L*LPDB -URET F I P V P CAPITAL INFLOW FROM P I P E L I N E EQUITY FINANCING I N THE U.S. FIPVP= (1.-A (1865) ) *A (1867) *S1 I F LPB12=0 AND QSTABT =1 THEN FIPVP= A (1 867) *QSTART* (FINREQ+URET-FIRETP12) LPDS DOMESTIC EQUITY IN P I P E L I N E , AT BOOK VALUE LPDS= (1.-A (1865) ) * (1.-A (1867) ) *S1 + J1L*LPDS + ( 1 . 0 - A ( 1 8 6 7 ) ) * ( L P E S - J 1 L * L P E S ) I F LPB12=0 AND QSTART=1 THEN LPDS= J 1 L * L P D S + ( 1 . - A ( 1 8 6 7 ) ) * QSTART*(FINREQ+URET-FIRETP12) + ( 1 . 0 - A ( 1 8 6 7 ) ) * ( L P E S - J 1 L * L P E S ) I F NTIME>NFIN THEN LPDS=0. ABLPL P I P E L I N E INTERIM BANK LOANS OUTSTANDING ABLPL=FINBEQ-S1+J11*ABLPI I F (FINBEQ+J1L*ABLPL TBEN <-2) ABLPL=-2. I F FINBEQ<0 AND (FINBEQ + J 1 I * A B L 5 L THEN >-2) 1ABLPL=J1L*ABLPL+FINBEQ I F NTIME>NFIN THEN ABLPL=0. I P C S P I P E L I N E CONSTRUCTION EXEENDITUBE I F NTIME<=NSTAB THEN I P C $ = I P N I * P I P C + (YINTP+ ( 1 . / ( 1 . -A (186 9) ) ) *MINTP$) * ( 1 . - 1. 1 *QCOR) I F NTIME>NSTAB THEN 1 I P C $ = I F N I * P I P C I F NTIME>NFIN THEN IPC$=0. YINTP P I P E L I N E DOMESTIC INTEREST PAYMENTS YINTP=A{1870) * (LPDB+J1L*LPEB) *. 5 + A ( 1 8 7 9 ) * ( A B L P L + J 1 L * A E L P L ) * . 5 MINTP$ P I P E L I N E FOREIGN INTEREST PAYMENTS, AFTER WITHHOLDING TAX i5INTP$=A (1868) * (LPB12+J1L*LPB1 2) *. 5* (1.-A (1869) ) CPNWE$ P I P E L I N E CURRENT NONWAGE OPERATING EXPENDITURES I F NTIMECNSTAR THEN CPNWE$=0.0 I F NTIME>=NSTAR THEN CSNSE$ = CPNWE74$*PEXOG/1.77 KPLBASE VALUE OF P I P E L I N E FOR T A R I F F SETTING PURPOSES I F NTIMECNSTAR THEN KPLEASE=J1L*KPLBASE+IPC$ I F NTIME>=NSTAR THEN K P L B A S E - ( 1 . -(QCOR/ ( R L I F E - (RTIHE-RSTAR))) * ( (1.-A (1856) ) + (A (1856) *EGASFLGW/A (1881) ) ) ) * (J1L*KPLBASE+IPC$) I F NTIME>=NSTAR + 5 THEN KPLEASE= (1 . - (1 . / ( R L I F E -( R T I M E - R S T A E ) ) ) ) * ( J 1 L * K P L E A S E + I P C $ ) I F NTIME>NFIN THEN KPLBASE= 0. TABLOSS TARIFF DEFICIENCY IN EARLY YEARS DUE TO LOWER THROUGHPUT I F NTIME<NSTAR THEN TARLOSS=0 I F NTIME>=NSTAR THEN TARLOSS=( {1.-(EGASFLOW/A{1881) ) ) *A (1856) * (YINTP+MINTP$* ( 1 . / (1.-A (1869) ) ) + A ( 1 8 8 3 ) * . 5*{ (KPLBASE-LPDB-LPB12-ABLPL) + { J 1 L * K P L B A S E - J 1 L * I P D B - J 1 . L * L P B 1 2 - J 1 L * A B L P L ) )) *QCQR) I F NIIME>NFIN THEN TABIOSS=0. KTARLOSS REMAINING TAELOSS BALANCE I F NTIME<NSTAR THEN KTAELOSS=0. I F NTIME>=NSTAR THEN KTARLOSS= ( 1 . - ( ( 1 . / ( R L I F E -( R T I M E - R S T A R ) ) ) * 1 G A S F L 0 W / A ( 1 8 8 1 ) ) ) *J1L*KTARL0SS+TABIGSS T A R I F F P I P E L I N E T A R I F F RATE, EXCLUDING GAS USED IN TSANSMISSON, MEASURED I N /MCF OF DELIVERED GAS I F NTIME<NSTAR THEN TARIFF=0. I F NTIME>=NSTAR THEN TARIFF=(TCP+CPNWES +NPO*WPO+(YINTP + MINTP$* ( 1 . / { 1 . - A ( 1 8 6 9) )) + A(1883) *. 5 * ( ( K P L E A S E - L P D E - L P B 1 2 - A B L P L ) + ( J 1 L * K P L B A S E - J 1 L * I P D E - J 1 L * L F B 1 2 - J 1 L * A B L P L ) ) ) *QCOR -T A R L O S S + ( 1 . / ( R L I F E - ( R T I M E - R S T A R ) ) ) * J 1 L * K T A B L O S S *EGASFLOW/A(1881))/(3.65*EGASFLOW) + ( ( Q C O R / ( B L I F E - ( R T I M E - R S T A B ) ) ) * ( J T L * K P L B A S E + IPC$) * ( (1.-A ( 1 8 5 6 ) ) + (A (1856) * E G A S F L O W / A ( 1 8 8 1 ) ) ) ) / ( 3. 6 5*EG ASFLOW) + A(1897) *.5*(J1L*KTARLOSS + KTABLOSS)/(3.65*EGASFLOH) I F NTIHE>=NSTAS + 5 TEEN TAR IFF= (YINTP+(1 . / ( 1.-A (1869) ) ) * <MINTP$)+TCP+NPO*(WPO)+CPNWES+A(1883)*.5* (KPLBASE-LPDB-L PB12-ABLPL) + ( 1 . / ( R L I F E - ( R T I M E - R S T A R ) ) ) * (J1 L*KPLBASE+IPC$) ) / (3. 6 5* EGAS FLOW) + ( ( 1./ ( R L I F E - (R TIME-RS! AR) )) * J 1 L * K T A B L 0 S S ) / (3.65*EGASFLOW) + ( A ( 1 8 8 3 ) * . 5 * ( J 1 L * K P L B A S E - J 1 L * L P B B - J 1 L * L P B 1 2 - J 1 L * A B L P L ) ) / (3.65*EGASFLOW) , + (A (1897) * . 5 * ( J 1 L*KTARLOSS + KTARLOSS) ) / (3. 65*EGASFLOW) I F A ( 1 8 7 6 ) > 0 TABIFF=PEXOG* (A (1876) ). I F NTIME>NFIN THEN TARIFF=0. Y P I P E P I P E L I N E T A R I F F REVENUES, I N M I L L . I YPIPE=3.65*TARIFF*EGASFLOW YPBOOK P I P E L I N E BOOK PROFITS YPBOGK=QSTART*(YPIPE- (QCOR/ ( R L I F E - (RTIME-SSTAS))) * ( J 1 L * K P L B A S E + I P C $ ) - (NPO)* (WPO) -CPNWE$-TCP)-QCOR*YINTP - (QCOR/ ( 1 . - A (1869) ) ) *MINTP$ I F NTIME>NFIN THEN YPBOOK=0. URET RETIREMENT OF DCMESTICALLY-BELD P I P E L I N E DEBT I F FINREQ<0. THEN U R E T = ( A ( 1 8 6 6 ) - 1 . ) * F I N R E Q F I R E I P 1 2 C A P I T A L FLOW FBCM RETIREMENT OF U.S.-HELD P I P E L I N E BONDS (0 OR -) I F FINSEQ<0 THEN F I R E T P 1 2 = A ( 1 8 6 6 ) * F I N R E Q I F ABLPL>0. THEN UBIT=0. . I F ABLPL>0. THEN FIRETP12=0. I F URET>J1L*LPDB THEN UREI=J1L*LPDB I F - F I R E T P 1 2 > J 1 L * L P B 1 2 THEN FI R E T P 1 2 = - J 1 L * L P B 1 2 I F FINREQ>0. THEN URET=0. 59 I F FINBEQ>0. THEN P I R E T P 1 2 = 0 . KPIPE STOCK.OF CAPITAL INVESTED I N P I P E L I N E , I N MILL. 1961$ KPIPE=J1L*KPIPE+IPHI -QC0H* ( ( 1 . / ( R L I F E - (RTIME-BSIAB) ) ) * ( J 1L*KPIPE+. 5*IPN I) ) I F NTIMEXNFIN THEN KPIPE=0 . EQUATIONS FOR DELTA GAS PRODUCTION NOV./74-JUNE/7 5 BUDGET K30DG$H STOCK OF DELTA GAS PBCDUCTION EQUIPMENT DEPRECIABLE AT 30 % ( D E C L I N I N G BALANCE) FOR TAX PURPOSES K30DG$H=(0.70)*(J1L*K30DG$H+ (IGWE74$ • PEX0G/1.77) ) I F NTIME>=NFIN THEN K3ODG$H=0. KDEVELOP STOCK OF DEVELOPMENT EXPENDITURES, VALUED FOR TAX PURPOSES K D E V E L 0 P = ( 0 . 7 0 ) * (J1L*KBEVELOP+(BEVEL74$*PEXOG/1.77) ) I F K7>=NFIN THEN KDEVFLOP=0. I F K7>=NFIN THEN K3 0DG$H=0. YGAST TAXABLE PROFITS FBOM DELTA GAS PRODUCTION YGAST=YGAS- (.30) * { J 1L*K 30DG$H + (IGWE74$ *PEXOG/1.77))-CGASP$-A (1892)*KGP$HB - ( E X P L 7 4 $ * P E X 0 G / 1 . 7 7 ) - ( A ( 1 8 9 1 ) * P E X 0 G / 1 . 7 7 * {IGWE74$+EXPL74$))-.06*(J1L*K06DG$H+(IDGGL74$*PEXOG / 1 . 77) ) - (A (1 891) *PEXOG/1.77* DEVEL74S) - ( (. 5 * J 1 L * I P E 7 4 $ + (. 5*IPE74$) ) *PEXOG/1. 77) - . 3 0 * (J1L*KDEVEL0P+ (DEVEL74$*PEX0G/1.77)) I F NTIME>-=76 THEN YGAST=YGAS- (.30) * ( J 1L*K30DG$H+ (IGHE74$ *PEX0G/1.77))-CGASP$-A (189 2)*KGP$HB - ( E X P L 7 4 $ * P E X O G / 1 . 7 7 ) - ( A ( 1 8 9 1 ) * P E X O G / 1 . 7 7 * (IGWE74$ + E X P L 7 4 $ ) ) - . 0 6 * (J1L*K06DG$H+(IDGGL74$ *P£XQG / 1 . 77) ) - (A (1 891) *PEX0G/1.77* D E V E L 7 4 $ ) - ( ( . 5 * J 1 L * I P E 7 4 $ + ( • 5 * I P E 7 4 $ ) ) * P E X Q G / 1 . 7 7 ) - . 3 0 * (J1L*KDEVEL0P+(DEVEL74$*PEX0G/1.77) ) - . 2 5 * (YGAST-,06*(J1L*K06DG$H+(IDGGL74$*P£X0G/1.77) ) - . 3 0 * (J1L*K30DG$H+(IGS£74$*PEX0G/1.77) ) - . 5 * ( J 1 L * I P E 7 4 $ * P E X O G / 1 . 7 7 ) - . 5 * ( I P E 7 4 $ . *PEX0G/1.77)-CGASP$) I F K7=M9 THEN YGAS1-YGAS- (01L*K30DG$H+(IGWE74$ •PEX0 G / 1 . 7 7 ) ) - C G A S P $ - A ( 1 8 9 2 ) * K G P $ H B - ( E X P L 7 4 $ * P E X 0 G / 1 . 7 7 ) - ( A ( 1 8 9 1 ) * P E X O G / 1 . 7 7 * (IGWE74$ + EXPL74$) ) - (J1L*K06DG$H+ (IDGGL74$ . * P E X 0 G / 1 . 7 7 ) ) - ( . 5 * J 1 1 * I P E 7 4 $ * P E X 0 G / 1 . 7 7 ) - ( I P E 7 4 $ * P E X 0 G / 1 . 7 7 ) - ( A ( 1 8 9 1 ) * D E V E L 7 4 $ * P E X O G / 1 . 7 7 ) 60 -(J1L*KDEVEL0P+(DEVEL74$*PEXOG/1.77)) -.25*(YGAS- (J1L*K30DG$H+(IGWE74S * P E X 0 G / 1 . 7 7 ) ) - C G A S P l - (EXPL74$*PEXOG/1.77) - (J1L*K06DG$H+(IDGGL74$ * P E X O G / 1 . 7 7 ) ) - { . 5 * J 1 L * I P E 7 4 $ * P E X 0 G / 1 . 7 7 ) - ( I P E 7 4 $ *PEXOG/1,77)) I F NTIMEXNFIN THEM YGAST=0. YGASB BOOK PROFITS FROM DELTA GAS PRODUCTION, AFTER A L L EXPENSES, INCLUDING ROYALTIES AND INCOME TAXES YGASB=YGAS-CGASP$-A(189 2)*KGP$HB -TROYAL- (EXPL74$*PEX0G/1.77) - ( Q C O R / ( R L I F E - ( R T I M E - R S T A B ) ) ) * ( J 1 L * K G P $ H B + (IGaE74$+IDGGL74$+DEVEL74$+IPE74$)*PEXGG/1.77) I F NTIME>NFIN THEN YGASB=0. TCGAS CORPORATION TAX ON DELTA GAS PRODUCTION-CAN BE NEGATIVE, AS EARLY LOSSES CAN BE WRITTEN OFF AGAINST OTHER INCOME ICGAS=A (1888) *YGAST THESE EQUATIONS MODEL THE FEDERAL PETBOLEUM ACT AND REGULATIONS PROPOSED IN MAY 1976. S1=0. DO 12 1=1,5 J1=LG (I) 12 S1=S1+JIL*(IGWE74$+EXPL74$ + DEVEL74$-HDGGL74S+IPS74$) •PEXOG/1.77 CCAPIR= (S1+ (IGWE74$ + EXPL74$ + DEVEL74$+IDGGL74$+IPE74$) * P E X 0 G / 1 . 7 7 ) / 6 . YPIR ANNUAL PROFITS USED I N CALCULATING PIR YPIR=YGAS-CCAPIR-CG?.SP$-TCGAS-A (1887) * YGAS I F NTIME<NSTAR THEN YPIR=0. K10PIR STOCK OF DEPRECIATED INVESTMENT USED I N CALCULATING PIR K10PIR= (1.-.1*QSTARI)*JIL*K10PIR+(IGWE74$+£XPL74$ + DEVEL74$ +IDGGL74$+IPE74$)*PEXOG/1.77 TPIR PROGRESSIVE INCREMENTAL ROYALTY PROPOSED IN MAY 1976 T P I R = A ( 1 8 8 6 ) * ( y P I R - . 2 5 * K 1 0 P I R - J l L * A C C A P I R ) I F (TPIR. LT. 0) TPIR=0. ACCAPIR ACCUMULATED CAP I T A L ALLOWANCES CARRIED FORWARD FOR PIR I F ( Y P I R . I T . ( . 2 5 * K 1 0 P I R + J 1 L * A C C A P I E ) ) ACCAPIR=CCAPIR+.25*K1OPIS - Y P I B I F (YP.IB.LT, . 25*K1OPIB) ACCAPIR=J1l*ACCAPIR+CCAPIfl S2=0. BO 20 1=6,10 J1 = LC (I) 20 S2= ( S 2 + J I L * (IGWE7 4$+EXPL74$ + DEV£L74$+IDGGL74$+IPE74$) *FEXOG/1.77)*1.10* (1-5) S3=Q. CO 30 1=11,19 J1=LQ (I) 30 S3=S3+1,50*JIL*(IG«E74$+EXPL74$+DEVEL74$+IDGGL74$+IPE74$) *PEX0G/1.77 IF(NTIME.EQ,NSTAR-1) ACCAPIR=CCAPIB*6.+S2+S3 TROYAL PRODUCTION ROYALTY + PBOGBESSIVE INCREMENTAL ROYALTY IBOYAL=A(1887)*YGAS+TPIR YGAS=PGASD*EGASD*3.65 KGP$HB STOCK OF ALL FIXED ASSETS I N DELTA GAS PRODUCT ION, AT BOOK VALUE KGP$HB= (J1L*KGP$HB+ (IDGGL74$+IGSE74$+DEVEL74$+ I P E 7 4 $ ) * P E X O G / 1 . 7 7 ) * ( 1 . - Q C O B / ( B L I F E - (RTIME-ESTAR) ) ) I F NTIME>NFIN THEN KGP$HB=0. KGAS STOCK OF C A P I T A L INVESTED IN DELTA, IN MILL. 196 1$ KGAS=J1L*KGAS+(IG»E74$+rDGGL74$)/1.77-A(1896)* EGASD+DEVEL74$/1.77+ ( I P E 7 4 $ / 1 . 7 7 ) I F NTIME>NFIN THEN KGAS=0. K06DG$H STOCK OF 6% DEPRECIABLE ASSETS IN DELTA GAS PRODUCTION, FOR TAX PURPOSES K06DG$H=(0.94)*(J1L*K06DG$H+(IDGGL74$*PEXOG/1. 77) ) I F K7=K9 THEN K06DG$H=0. , PGASBEL DELIVERED PRICE OF GAS AT A SOUTHERN TERMINUS OF THE P I P E L I N E , I N CENTS PES THOUSAND CUBIC FEET PGAS DEL=TARIFF+1 . 125*.PGASD I F QSTABT<=0. THEN PGASDEL= 0. CGASPS OPERATING EXPENDITURES I N DELTA GAS PRODUCTION CGASP$=0PER74$/1.77*PEX0G+0.05*EGASFLOW*1.125 *365.*PEX0G/1.77 XBALPSGS DIRECT TRADE ACCOUNT IMPACTS OF P I P E L I N E AND DELTA GAS PRODUCTION I F NTIME<= NSTAR THEN XEALP&G$=YPIPE *(1.-{1.-EGASXD)*.889*EGASD/EGASFL0W) +3.65*EGASD*PGASD*EGASXD - (A (1874) +A (1875) ) * (IPC$-NFC *HPC-MINTP$* (1 ./ (1 .-A (186 9) ) ) - YINTP) - (A (1872) +A (1873) ) *CPNWE$- (.35* (IG»E74$ +IDGGL74$+IPE74$)*PEXOG/1.77) -HINIP$-MDIVP$ I F NTIME>NSTAR THEN XEALPSG$=YPIPE * (1 .- (1.-EGASXD) *.889*EGASD/EGASFLOW) +3.65*EGASD*PGASD*EGASXD - (A (1874) +A (1875) ) * (IPC$-NPC *WPC) - (A (1872) + A (1873) ) *CENWE$- (. 3 5 * (IGWE74$+IDGGL74$ +IPE74S)*PEX0G/1.77) -MINIP$-MDIVP$ FBALPSG DIRECT C A P I T A L ACCOUNT IMPACTS OF P I P E L I N E AND DELTA GAS PRODUCTION FBALF&G=FIRETP12+FINIPB12+FIPVP KDGPE STOCK OF CAPITAL INVESTED I N PROCESSING EQUIPMENT FOR DELTA GAS PRODUCTION, IN 1961$ KDGPE=J1L*KDGPE + I P E 7 4 $ / 1 . 7 7 - (A (1864) *EGASD) PGASD WELLHEAD PRICE OF DELTA GAS, I N CENTS PER M.C.F. PGASD= (PGASREG-(A ( 1 9 0 1 ) * P E X O G / 1 . 9 5 ) - T A R I F F ) *QSTAET/1.125 ECONOMIC RENT EQUATIONS KRENTG$ RENTS TO CANADIAN GOVERNMENTS FROM DELTA GAS PRODUCTION KRENTG$=(STPNOM) *J1L*KRENTG$+ (TCGAS+TROYAL-A(1 895) * ( (KGAS+J1L*KGAS)*.5*PEXOG) +A(1899)*PGAS*3.65*(FGASFLCW-1./1.125*EGASD) +3.65*.8889*EGASD*EGASXD*(PGAS-PGASREG)) * (STE NOM**. 5) KRENTP$ RENTS TO PRODUCERS OF DELTA GAS KfiENTP$= (STPNOM) * J 1 L*KRENTP$+ (YGAS-CGASP$-A (1890) * (KGAS*PEXOG*.5)-(EXPI74$*PEX0G/1.77) -TCGAS-TROYAL-(A (1896)*EGASD*PEXOG) -A ( 1 8 9 0 ) * ( J 1 L * K G A S * . 5 * P E X O G ) ) * (STPNOM**.5) KRENTDC1 RENTS TO CANADIAN USERS OF DELTA GAS KRENTDC1=((PGAS-PGASDEL-A(1901)*PEXOG/1.85) *EGASD* ( 1 . - EGASXD) *3.65*. 8889) * (STPNOM**. 5) +J1L*KRENTDC1*(STPNOM) KRENTA2$ RENTS TO U.S. PRODUCERS AND PURCHASERS OF ALASKAN GAS-CALCULATION I S EASED SOLELY ON TRANSPORT COST SAVINGS KRENTA2$= (STPNOM)*J1L*KRENTA2$ + ( (-26.0*PEXOG/1.89 -TARIFF + .0 76* (PGASD-8.3*PEXOG/1.89) + A (1900) * (PEXOG/1. 89) ) *(EGASFLOW- ( 1 . / 1 . 125) *EGASD) * 3 . 65 -A (1899) * 3 . 6 5 * (EGASFLOW-1./1. 125*EGASD) *PGAS) * (STPNOM**.5) KRENTD2I RENTS TO U.S. PURCHASERS OF DELTA GAS KRENTD2$=J1L*KRENTD2$* (STPNOM) + ( (PGAS—PGAS DEL) *EGASD*EGASXD*3.65*.8889 -3.65*.8889*EGASD*EGASXD*18.*PEXOG/1.95) * (STPNOM**.5) KRNTPROD TOTAL RENTS ACCRUING FROM DELTA GAS PRODUCTION KRNTPROD=(J1L*KRNTPEOD* (STPNOM)) + ( (PGAS*EGASD*3. 65*.8889) - ( (A(1 8 9 5 ) + A ( 1 8 90))*(KGAS+J1I*KGAS)*.5*PEXOG) -CGASP$- (A(1896) *EGASD*PEXOG) - (EXPL74$*PEXOG/1.77) - ( T A R I F F * E G A S D * 3 . 6 5 * . 8 8 8 9 ) - ( A (1901)*EGASD*.8889 *3.65*PEXOG/1.95)) * (STPNOM**.5) I F K7=M9 THEN KRENTP$= KRENTPS/ ( (STPNOM) ** (K7-3) ) I F K7=M9 THEN KRENTG$= KRENTG3/ ( (STPNOM) ** (K7-3) ) I F K7=M9 THEN KRENTA2$=KRENTA2$/{ (STPNOM) ** (K7-3) ) I F K7=M9 THEN KRENTD2$=KRENTD2$/ ( (STPNOM) ** (K7-3) ) I F K7=M9 THEN KRENT DC 1 = KRENTDC 1/( (STPNOM) ** (K7-3) ) -A(1 9 1 5 ) RENTSUM TOTAL RENTS ACCRUING FRCM P I P E L I N E AND DELTA GAS PRODUCTION I F K7=M9 THEN RENTSUM= KRENTA2$+KRENTD2$+KRENTDC1 +KRENTP$+KRENTG$ RENTCAN$ TOTAL RENTS TO CANADIANS FROM DELTA GAS PRODUCTION I F K7=M9 THEN RENTCAN$= KRENTG$+.23*KRENTP$ I F K7=M9 THEN KRNTPEGD=KRNTP£OD/ ( (STPNOM) ** (K7-3) ) P I P E L I N E RENTS KRTPIPGS RENTS TO CANADIAN GOVERNMENTS FROM P I P E L I N E KRTPIPG$=(STPNOM)*J11*KHTPIPG$+ (TCP- (A ( 1 8 9 5 ) * ( K P I P E + J 1 1 * K P I P E ) * , 5 *PIPC) ) * (STPNOM**. 5) I F K7=M9 THEN KRTPIPG$=KRTPIPG$/(STPNOM**(K7-3)) KBTPIPP$ RENTS ACCRUING TO EQUITY PARTICIPANTS I N P I P E L I N E KRTPIPP$=(STPNOM)*J1L*KRTPIPP$+ (YPIPE-CPNWE$ -NPO*WPO-TCP-(A(1890)* (KPIPE + J 1 L * K P I P E ) * . 5 * P I P C ) - Q C O R * ( ( 1 . / ( R L I F E - ( R T I M E - R S T A R ) ) ) * ( J 1 L * K P I P E + . 5 * I P N I ) *PIPC) ) * (STPNOM**. 5) I F K7=M9 THEN KBTPIPP$=KRTPIPP$/(STPNOM**(K7-3) ) KRTPIPE$ TOTAL RENTS ACCRUING FROM P I P E L I N E KRTPIPE$=KRTPIPG$+KETPIPP$ PER MCF COST AND RENTS PRODUCER SECTOR PVBCFDD PRESENT VALUE, IN B I L L I O N S OF CUBIC FEET PER DAY, OF P I P E L I N E THROUGHPUT OF DELTA GAS PVBCFDD=J1L*PVBCFDD* (1.+ A ( 1 8 9 4 ) ) +EGASD*.8889 * ( (1.+A ( 1 8 9 4 ) ) * * . 5 ) I F K7=M9 THEN PVBCFDE=PVBCFDD/( ( 1 . + A ( 1 8 9 4 ) ) * * ( K 7 - 3 ) ) RPMCFG RENTS TO CANADIAN GOVERNMENTS IN CENTS PER M.C.F. FROM DELTA GAS PRODUCTION I F K7=M9 THEN RPMCFG-=KHENTG$/ ( 3 . 65*PVBCFDD) BPHCPP RENTS TO PRODUCERS OF DELTA GAS, IN CENTS PER M.C.F. I F K7=M9 THEN BPMCFP=KRENTP$/(3.65*PVBCFDD) RPMCFC1 RENTS TO CANADIAN GAS USERS, IN CENTS PER M.C.F. I F K7=M9 THEN RPMCFC1=KRENTDC1/(3.65*PVBCFDD) PMCFCOST COST, PER M.C.F. OF DELTA GAS PRODUCTION PMCFCOST= ( ( (A (1895)+ A ( 1 8 9 0 ) ) * ( K G A S +J1L*KGAS)*.5*PEXOG) +CGASP$+(A(1896)*EGASD*PEXOG)+(EXPL74$*PEXOG /1.77) + (TARIFF*EGASD*3.65*.8889)+ (A (1901)*EGASD* .8889*3.65*PEXOG/1.95) ) * (STPNOM**. 5) +JlL*PMCf COST* (STPNOM) I F K7=M9 THEN PMCFCGSI=PMCFCOST/ ( (STPNOM) ** (K7-3) ) I F K7=M9 THEN PMCFCOST=PMCFCCST/(3.65*PVBCFDD) RENICANT TOTAL RENTS ACCRUING TO CANADIANS FROM FRONTIER AND 65 NON-FBONTIES GAS AND P I P E L I N E I F K7<M9 THEN .RENIC ANT=Q. I F K7 = M9 THEN RENTCANT=BENTCAN S+KRENTG AS-.7 85* KBENTNF$-KRENTC2$ PER MCF COSTS AND RENTS P I P E L I N E SECTOR PVBCFDP PRESENT VALUE, I N B I L L I O N S OF CUBIC FEET PER DAY, OF TOTAL P I P E L I N E THROUGHPUT EVBCFDP=J1L*PVBCFDP* (1.+A(1894))+EGASFLOW * ( ( 1 . + A ( 1 8 9 4 ) ) * * . 5 ) I F K7=H9 THEN PVBCF DP=P VBCFDP/( (1.+A ( 1 894) ) * * ( K 7 - 3 ) ) TARIFFT P I P E L I N E T A R I F F PLUS COST OF GAS USED IN TRANSMISSION IN CENTS PER M.C.F. TARIFFT=TARIFF+(.125)*PGASD PVTARIFFT PRESENT VAIUE OF TOTAL T A R I F F INCLUDING TRANSMISSION GAS IN 1976 CENTS PER M.C.F. PVTARTFFT=STF NOM * J 1 L * P V T A B I F F T +TARIFFT*EGASFLOW*3.65 * (STENOM**.5) I F K7=M9 THEN PVTARIF Fl-PVTA B I F F T / { (STP NOM**(K 7-3)) *3.6 5*PVBCFDP) PMCFCST1 COST OF P I P E L I N E , PER MCF OF THROUGHPUT PMCFCST1= ( (A (1895) +A (1890) ) * ( K P I P E + J 1 L * K P I P E ) * . 5 * P I P C +CPNWE$+NPO*SPO + Q C O R * ( ( 1 . / ( R L I F E - ( R T I M E - R S T A R ) ) ) * ( J 1 L * K P I P E + . 5 * I P N I ) * P I P C ) ) * (STPNOM**. 5) + J 1 L * EMCFCST1*(STE NOM) I F K7=M9 THEN PMCFCST1=PMCFCST1/(STPNOM**(K7-3) ) I F K7=M9 THEN PMCFCST 1= PMCFCST 1/ (3. 65*PVBCFDP) TOTAL P I P E L I N E AND PRODUCER COSTS AND RENTS KBENTTOT TOTAL RENTS FROM PBODUCTIGN AND TRANSPORTATION OF DELTA GAS I F K7=M9 THEN KRENTTOT-KRNTPROD+KRTPIPE$ P V T A R I F F PRESENT VALUE OF T A R I F F , IN CENTS PER M.C.F. P V T A R I F F - J 1 L * P V T A R I F F * (STPNOM) + (TABIFF*EGASD*3.65*. 8889) * (STPNOM**.5) I F K7=M9 THEN PVTABIFF=PVTAfiIFF/(STPNOM**(K7-3)) 66 I F K7=M9 THEN PVTARIFF=PVTARIFF/ (3.65*PVBCFDD) TOTCST TOTAL COST OF P I P E L I N E AND GAS PRODUCTION, IN CENTS PER M.C.F. I F K7=M9 THEN TOTCST=PMCFCCST+EMCFCST1-PVTARIFF KRECOV P I P E L I N E REVENUES AVAILABLE TO CONTRIBUTE TO CAPITAL RECOVERY KRECOV=YPIPE-NPO*WPG -CPNWE$-TCP-IPC$ UNFV UNRECOVERED INVESTMENT IN P I P E L I N E ASSETS I F NTIME=NSTAR THEN UNFV=KPLBASE+KTARLOSS I F NTIME>NSTAR THEN UNFV=J11*UNFV* {1.+A (1897)) -KRECOV* ( (1. + A (189 7) ) **. 5) I F K7=M9 THEN UNFV= (UNFV-A (1877) ) / ( (A (1897) +1.) ** (K7-3) ) TA R I F $ 7 6 TARIFF IN 1976 CENTS PER MCF TA R I F $ 7 6 = ( T A R I F F / P E X O G ) * 1 . 9 5 PVTAX PRESENT VALUE OF ACCUMULATED CORPORATION TAXES PVTAX=J1L*PVTAX* (STPNOM)+TCP I F K7=M9 THEN PVT AX=PVTAX/ (STFNCM** (K7-3) ) 2. EASE CASE EXOGENOUS VARIABLES TEE MACKENZIE VALLEY P I P E L I N E AND FOB MACKENZIE DELTA PRODUCTION AND PROCESSING OF NATURAL GAS THESE DEVICES KEY TEE P I P E L I N E DEFERRAL D=A (1905) MD=IFIX(D) NTIME=ID-1901+K7 I I F E = 3 1 NTIMD=NTIME-M D NSTAR=79+MD NFIN=NSTAH+LIFE-1 P I P E L I N E EXOGENOUS START HERE I F NTIME=NSTAR THEN A (1856) = .7 I F NTIME>NSTAR THEN A (1856) = .8 PEXOG PRICE INDEX EQUAL TO 1.77 IN 1974, 1.95 IN 1 9 7 5 , 2.11 IN 1976, R I S I N G AT THE RATE INFLATCN-A(1972)-THEREAFTER I F NTIME=74 THEN PEXGG=1.7 7 I F NTIME=75 THEN PEXOG=1.95 I F NTIME=76 THEN PEXOG=2.11 I F NTIME>76 THEN PEXOG=J1L*PEXOG*(1.•A(1972) ) CPNHE74I 1974$ VALUE OF P I P E L I N E NON-HAGE OPERATING EXPENDITURES I F N T I H 0 O 7 8 THEN CF NWE74$= A (1 € 58) *0. 0-A (1 859) * 0 . 0 I F NTIMD=79 THEN CFN1E74$=A (1 858) *9.5-A (1859) * 6 . 0 + A ( 1 8 9 3 ) * 0 . 4 9 I F NTIMD=80 THEN CPN8E74$= A {1858) *29. 2-A (1859) *14. 2 + 1 ( 1 8 9 3 ) * 1 . 26 I F NTIMD=81 THEN CP NWE74$= A (18 58) *28. 6-A {1 859) * 14. 1 + A(1893) * 1 . 23 I F NTIMD=82 THEN CENWE74$= A (1858) *30. 2-A (1 859) * 14. 7 + A (1893) *1.29 I F NTIMD=83 THEN CP NWE74$= A (1858) *30. 2-A (1859) * 15. Q + A (1893) *1.30 I F NTIMO>=84 THEN CPNWE74$=A ( 1 8 5 8 ) * 3 0 . 2 - A { 1 8 5 9 ) * 1 5 . 0 + A (1893) * 1 . 30 I F NTIME>NFIN THEN CPNWE74$=0. PI P C P R I C E INDEX FOR P I P E L I N E CONSTRUCTION EXPENDITURES I F NTIJ3E=74 THEN PIPC=1.77 I F NTIME=75 THEN PIPC=1.95 I F NTIME-=76 THEN PIPC= 1. 0 6 * J TL*PIPC I F NTIME=77 THEN PIPO= 1 . 0 5 * J 1 L * P I P C I F NTIME>=78 THEN P I P C = 1 . 0 4 * J 1 L * P I P C QSTART VARIABLE EQUAL TO 1. I F P I P E L I N E I S I N OPERATION I F NTIME<NSTAR THEN QSTART=0. I F NTIME>=NSTAR THEN QSTART=1.0 I F NTIME>NFIN THEN QSTART= 0. NPO NUMBER EMPLOYED IN P I P E L I N E OPERATION, IN MILLIONS OF PERSONS, AVERAGE OVER THE YEAR I F NTIME<NSTAR THEN NPO=0.0 I F NTIMD=79 THEN NPO=A (18 5 8 ) * 0 . 0 0 0 3 1 - A ( 1 8 5 9 ) * 0 . 0 0 0 1 5 + A(1893) *0. 0001 I F NTIMD=80 THEN NPO= A (1858) *0 .00053-A (1859) *0 . 0002 9 + A (1893) *0.0002 I F NTIMD=81 THEN NPO=A(1858)*0.0006-A ( 1 8 5 9 ) * 0 . 00031 + A (1893) *0.0003 I F NTIMD=82 THEN NPO=A(1858)*0.00063-A ( 1 8 5 9 ) * 0 . 0 0 0 3 3 + A (1893) * 0 . 0003 I F NTIMD>=83 THEN NPO= A (1858) *0.00067-A (1859) * 0.00034 + A(1893) *0.0003 I F NTIME>NFIN THEN NPO=0. WPG WAGE FOR P I P E L I N E OPERATION, IN $ PER EMPLOYEE PER YEAR I F NTIME>=75 THEN WPO=2200O.*(PEXOG/1.95)* 1.0208**{NTIME-75) EGASFLOW THROUGHPUT CF MACKENZIE P I P E L I N E IN BCF PER DAY AT DOWNSTREAM END I F NTIME<NSTAR THEN EGASFLOW=0.0 I F NTIMD=79 THEN EGASFLOW^O.556 I F NTIMD=80 THEN EGASFLOW=2.002 I F NTIMD=81 THEN EGASFLOW= 2.9 29 I F NTIMD=82 THEN EGASFLOW=3.190 I F NTIMD=83 THEN EGASFLOW=3.€35 I F NTIMD>=84 THEN EGASFLOW-4.000 I F NTIME>NFIN THEN EGASFLOS=0. HPC P I P E L I N E CONSTRUCTION SAGE, IN $ PER EMPLOYEE PER YEAR I F NTIME>=74 THEN WPC=40,800.* (PEXOG/1.77) *1.0208** (NTIME-74) IPHI CONSTRUCTION EXPENDITURE FOR MACKENZIE P I P E L I N E , I N MILL. OF 1 9 6 1 $ , NET OF INTEREST DURING CONSTRUCTION I F NTIMD<=75 THEN I I N I = 0 . 0 I F NTIMD=76 THEN I P N I = ( 1 . / 1 . 89) * (A (1858) *700.9-A (1 8 59) *538.7 -A (1885) * 2 0 . 1) + (1 ./1.7 7) *A (1893) *9.9 I F NTIMD=77 THEN IPNI= ( 1 , / 1 . 89) * (A (1858) *1 082. 9-A (1 859) *467.5 -A(1885) *25.7) + ( 1 . / 1 . 7 7 ) * A ( 1 8 9 3 ) * 2 4 . 8 I F NTIHD=78 THEN I P N I = ( 1 . / 1 . 89) * (A (1858) *1 381. 0-A (1 859) *782. 8 -A (1885) * 5 3 . 8) + (1./1.77) *A (1893) *14. 9 I F NTIMD=79 THEN I P N I = ( 1 . / 1 . 8 9 ) * ( A ( 1 8 5 8 ) * 8 7 7 . 7 - A ( 1 8 5 9 ) * 6 2 2 . 3 -A (1885) *162.7) + (1 ./1.77) *A (1893) *287.6 I F NTIMD=80 THEN I P N I = { 1 . / 1 . 89) * (A (1858) *333. 9-A (1 6 59) *23 8. 8 -A (1885) *74. 0) + ( 1 . / 1 . 77) *A (1893) *158.7 I F NTIMD=81 THEN IPNI= ( 1 . / 1 . 89) * (A (1858) *1 6 8. 7-A (1 8 59) * 147. 0) + (1./1.77) *A (1893) *147. 0 I F NTIMD=32 THEN IP NI= ( 1 . / 1 . 89) * (A (18 58) * 160.9 - A (18 59) *43 . 8) + (1./1.77) *A (1893) *43. 8 I F NTIMD=83 THEN I P N I = ( 1 . / 1 . 89) * (A (1858) *62. 6-A (185 9) *0 .0) I F NTIMD>=84 THEN I I N I - 0 . NPC NUMBER EMPLOYED IN P I P E L I N E CONSTRUCTION, IN MILLIONS OF PERSONS, AVERAGE OVER THE YEAR I F N T I M D 0 7 5 THEN NPC=0.0 I F NTIMD=76 THEN NPC=A (1858) * . 0 0 1 7 - A ( 1 8 5 9 ) * . 0 0 1 1 I F NTIMD=77 THEN NPC=A (1858) *. 0062-A (1 859) *, 0024 I F NTIMD=78 THEN NPC= A (1858) *. 0047-A (1859) *. 00 24 I F NTIMD=79 THEN NPC=A (1858) *. 0022-A (1 859) *.00 14 I F NTIMD=80 THEN NPC= A ( 18 58) *. 00 1 2 - A (1 859) *. 00 08 I F NTIMD=81 THEN NPC=A ( 1 8 5 8 ) * . 0 0 1 6 - A ( 1 8 5 9 ) * . 0 0 0 7 I F NTIMD=82 THEN NPC= A (1858) * . 0011 - A (1 859) * . 00 05 I F NTIMD=83 THEN NPC=A (1858) *. 0 0 0 5 - A ( 1 859) *Q.O I F NTIMD>=84 THEN NPC=0. THESE ARE EXOGENOUS VARIABLES FOR DELTA GAS SECTOR EXPL74$ EXPLORATION EXPENSES IN THE MACKENZIE DELTA, FOR TAX PURPOSES, IN MILL. 1974$ I F NTIMD<=75 THE* EXPL14$= A(1898) * 0 . I F NTIMD= 76 THEN EXPL74$=A (1898) *65.2 I F NTIMD= 77 THEN EXPL74$=A (1898) *65.2 I F NTIMD= 78 THEN EXPL74$=A (1898) *6 5. 3 I F NTIMD= 79 THEN EXPI74$=A (1898) *65.3 I F NTIMD= 80 THEN EXPL74$=A (189 8) *63.3 I F NTIMD= 81 THEN EXPL74$=A (1898) *63.5 I F NTIMD= 82 THEN EXEL74$=A (1898) *63.5 I F NTIMD= 83 THEN EXPL74$=A (1898) *63.5 I F NTIMD= 84 THEN EXPL74$=A (1898) *63.5 I F NTIMD= 85 THEN EXEL74$=A (189 8) *63.5 I F NTIMD= 86 THEN EXEL74$=A (189 8) *58.7 I F NTIMD= 87 THEN EXPL74$=A (189 8) *58.3 I F NTIMD= 88 THEN EXPI74$=A (1898) *57.9 I F N.TIMD= 89 THEN EXPL74$=A (1898) *57.4 I F NTIMD= 90 THEN EXEL74$=A (1898) *57.0 69 I F NTIMD= I F NTIMD= I F NTIMD= I F NTIMD= I F NIIMD= I F NTIMD= I F NTIMD= I F NTIMD= I F NTIMD= I F NTIMD= I F NTIMD= I F NTIMD= I F NTIMD= I F NTIMD= I F NTIMD> 91 THEN EXP174$=A 92 THEN EXPL74$=A 93 THEN EXPL74$=A 94 THEN EXPL74$=A 95 THEN EXFL74$=A 96 THEN EXPL74$=A 97 THEN EXFL74$=A 98 THEN EXFL74$=A 99 THEN £XFL74$=A 100 THEN EXPL74$= 101 THEN EXPL74$= 102 THEN EXP174$= 103 THEN EXPL74$= 104 THEN EXPL74$= =105 THEN F X P I 7 4 $ (1898) *56.6 (1898) *56.2 ( 1 8 9 8 ) * 5 5 . 8 (1898) *55.3 (1898) *52.9 (1898) *50.5 (1898) *48.5 (1898) *38.5 (1898) *38.5 A(1898) *17.3 A (1898) *17,3 A (1898) *15. 3 A (1898) *13. 3 A (1898) *13.3 = A(18.98).*0. I D G G I 7 4 I INVESTMENT I N DELTA GAS GATHERING L I N E S , IN MILL. 1974$ IDGGL74$=0. I G S E 7 4 $ I F NTIMD<=76 THEN I F NTIMD=77 THEN I F NTIMD=78 THEN I F NTIMD=79 THEN I F NTIMD=80 THEN I F NTIMD=81 THEN I F NTIMD=82 THEN I F NTIMD=83 THEN I F NTIMD=84 THEN I F NTIMD=85 THEN I F NTIMD=86 THEN I F NTIMD=87 THEN I F NTIMD=88 THEN I F NTIMD=89 THEN I F NTIMD=90 THEN I F NTIMD=91 THEN I F NTIMD=92 THEN I F NTIMD=93 THEN I F NTIMD=94 THEN I F NTIMD=95 THEN I F NTIMD-96 THEN I F NTIMD=97 THEN I F NTIMD=9 8 THEN I F NTIMD=99 THEN I F NTIMD=100 THEN I F NTIMD=101 THEN I F NIIHD=102 THEN I F NTIMD=103 THEN I F NTIMD=104 THEN I F NTIMD=105 THEN I F NTIMD=106 THEN I F NTIMD=107 THEN I F NTIMD=108 THEN I F NTIMD=109 THEN IGWE74$=A IGWE74$=A IGHE74$=A IGME74$=A IG8E74$=A IGWE74$=A IGHE74$=A IG8E74$=A IGWE74$=A IG8E74$=A IGSE74$=A IGaE74$=A IG8E74$=A IGWE74$=A IGHE74$=A IGWE74$=A IGWE74$=A IGSE74$=A IGWF74$=A IG8E74$=A IG«E74$=A IGWE74$=A IGWE74$=A IGWE74$=A IG«E74$=A IGWE7 4$=A IGWE74$=A IG8E74$=A IGWE74$=A IGWE74$=A IGWE74$=A IGWI74$=A IG»E74$=A I G i E 7 4 $ = A (1898) * 0 . 189 8) * i 1.3 1 8 9 8 ) * 2 8 . 5 1 8 9 8 ) * 5 1 . 8 1898) *28.9 189 8) *24.0 1 8 9 8 ) * 4 7 . 1 189 8) *22.Q 1898) *13.6 1 8 9 8 ) * 3 0 . 6 1898) *40.4 1898) *20.Q 1898) * 0 . 8 1898) * 7 . 5 1 8 9 8 ) * 2 7 . 8 1 8 9 8 ) * 2 4 . 7 1898) *10.0 1898) *42.4 189 8) *3 0.8 1898) *9.7 1898) *14.4 189 8) *21,3 1 8 9 8 ) * 2 . 7 1898) *29.3 (189 8) * 5 6 . 2 (189 8) *21.9 (1898) * 1 1 . 5 (189 8) *41.5 (1898) * 2 9 . 8 (1898) *10. 0 (1898) *28.2 (1898) *21.3 (189 8) *2.3 (1898) *6.9 I F NT.IME>NFIN THEN IG«E74$=0. DEVEL74$ INVESTMENT IN DELTA GAS DEVELOPMENT EXPENDITURES, FOR INCOME TAX PURPOSES, IN MI L L . 1974$ I F NTIMD<=76 THEN DE V E L 7 4 $ = A ( 1 8 9 8 ) * 0 . I F NTIMD=77 THEN I F NTIMD=78 THEN I F NTIMD=79 THEN I F NTIMD=80 THEN I F NTIMD=81 THEN I F NTIMD=82 THEN I F NTIMD=83 THEN I F NTIMD=84 THEN I F NTIMD=85 THEN I F NTIMD=86 THEN I F NTIMD=87 THEN I F NTIMD=88 THEN I F NTIMD=89 THEN I F NTIMD=90 THEN I F NTIMD=91 THEN I F NTIMD=92 THEN I F NTIMD=93 THEN I F NTIMD=94 THEN I F NTIMD=95 THEN I F NTIMD=96 THEN I F NTIMD=97 THEN I F NTIMD=98 THEN DEVEL74$=A I F NTIMD=99 THEN DEVEL74$=A I F NTIMD-100 THEN DEVEL74$= A (1 898) *9. 1 I F NTIMD=101 THEN DEVEL74$=A ( 1 8 9 8 ) * 1 8 . 2 I F NTIMD-102 THEN DEVEL74$= A (1 89 8) *36. 5 I F NTIMD=103 THEN DEVEL74$=A(1898)*36.5 I F NTIMD=104 THEN DEVEL74$=A(189 8 ) * 18.2 I F NTIMD=105 THEN DEVEL74$-=A(1898) *18.2 I F NTIMD=106 THEN DEVEL74$=A(1898)*18.2 I F NTIMD=107 THEN DEV EL74$= A (1 898) * 18 . 2 I F NTIMD>=108 THEN DEVEL74$=A(1898)*0. DEVEL74$=A DEVEL74$=A DEVEL74$=A DEVEL74$=A DEVEL74$=A DEVEI74$=A DEVEL74$=A DEVEL74$=A DEVEL74$=A DEVEL74$=A DEVE174$=A DEVEL74$=A DEVEL74$=A DEVEL74$=A DEVEL74$=A DEVEL74$=A DEVEL74$=A DEVEL74$=A DEVEL74$=A DEVE174$=A DEVEL74$=A (1898 (1898 (1898 (1898 (1888 (1898 (1898 (18S8 (1898 (1898 (1898 (1898 (1898 (1898 (1898 (1898 (1898 (18S8 (189 8 (1898 (1898 (1898 (1898 *30. 3 *55.5 *45.5 *42. 5 *54.7 *54.7 *27.4 * 0 . * 0 . * 0 . * 0 . *18.2 *18.2 *27. 4 *9.1 *27.4 *18. 2 *18.2 * 1 8. 2 *18.2 *18.2 *9.1 *9.1 EGASXD DELTA GAS SOLD FOR EXPORT, I N B.C.F./D A l UPSTREAM END OF P I P E L I N E EGASXD=A (1911) I P E 7 4 $ INVESTMENT I N DELTA GAS PROCESSING EQUIPMENT, I N MILL, I F NTIMD<=76 THEN IPE74$=A(1898)*0» I F NTIMD=77 THEN IPE74$=A ( 1 8 9 8 ) * 3 3 . 8 I F NTIMD=78 THEN I P E 7 4 $ = A { 1 8 9 8 ) * 9 5 . 7 I F NTIMD=79 THEN I P E 7 4 $ = A { 1 8 9 8 ) * 7 8 . 7 I F NTIMD=80 THEN IPE74$=A ( 1 8 9 8 ) * 3 3 . 8 I F NTIMD=81 THEN IPE74$= A (189 8) *58.2 I F NTIMD=82 THEN I P E 7 4 $ = A ( 1 8 9 8 ) * 8 4 . 4 I F NTIMD=83 THEN I P F 7 4 $ = A ( 1 8 9 8 ) * 3 0 . 1 I F NTIMD=84 THEN I P E 7 4 $ = A ( 1 8 9 8 ) * 7 . 5 I F NTIMD=85 THEN IPE74$= A ( 189 8) * 16. 9 I F NTIMD=86 THEN IPE74$= A (1898) * 11. 3 I F NTIMD=87 THEN I P E 7 4 $ = A ( 1 8 9 8 ) * 1 1 . 3 I F NTIHD=88 THEN I P 1 7 4 $ = A ( 1 8 9 8 ) * 2 8 . 1 I F NTIMD=89 THEN I P E 7 4 $ = A ( 1 8 S 8 ) * 1 6 . 9 I F NTIMD=90 THEN I P E 7 4 $= A ( 1 8 9 8 ) * 1.9 I F NTIMD=91 THEN IP£74$= A (1898) * 5 . 6 I F NTIMD=92 THEN I P E 7 4 $ = A ( 1 8 9 8 ) * 11.3 I F NTIMD>=94 THEN IPE74$=A (1 898) * 0 . OPER74$ OPERATING EXPENDITURES IN DELTA GAS PRODUCTION, IN MILL. 1974$ I F NTIMD<=78 THEN OPER74$=A(1898)*0. I F NTIMD=79 THEN QPER74$=A I F NTIMD=80 THEN OPEB74$=A I F NTIMD=81 THEN OP£R74$=A I F NTIMD=82 THEN OPER74$=A I F NTIMD=83 THEN OPER74$=A I F NTIMD=84 THEN OPER74$=A I F NTIMD=85 THEN OPER74$=A I F NTIMD=86 THEN OPER74$=A I F NTIMD=87 THEN OPER74$=A I F NTIMD=88 THEN OPER74$=A I F NTIMD=89 THEN OPER74$=A I F NTIMD=90 THEN OPER74$=A I F NTIMD=91 THEN OPER74$=A I F NTIMD=92 THEN OPER74$=A I F NTIMD=93 THEN OPER74$=A I F NTIMD=94 THEN OPER74$=A I F NTIMD=95 THEN OPEB74$=A I F NTIMD=96 THEN OPER74$=A I F NTIMD=97 THEN OPER74$=A I F NTIMD=98 THEN OPER74$=A I F NTIMD=99 THEN OPER74$=A I F NTIMD=100 THEN 0PER74$=A(1898)*50.4 I F NTIMD=101 THEN QPER74$=A ( 1 8 9 8 ) * 5 3 . 6 1898) *0.6 1898) *10.8 1898) *15.8 1898) *19.8 1898) *24.8 1898) *28.4 1898) *28.8 1 8 9 8 ) * 2 8 . 8 1898) *29.2 1898) *29.9 1898) *30.6 189 8) *34. 2 189 8) *35.3' 1 8 9 8 ) * 3 6 . 7 1898) *39.6 1898) *42.1 189 8) *43.2 1898) *44. 3 1898) *47.5 1898) *48.2 1898) *49.3 I F NTIMD=102 THEN OPER74$=A(1898)*54.7 I F NTIMD=103 THEN OPER74$= A (1898) *57. 2 I F NTIMD=104 THEN OPER74$=A ( 1 8 9 8 ) * 5 0 . 4 I F NIIMD=105 THEN Q P E R 7 4 $= A ( 1 8 9 8 ) * 53.6 I F NTIMD=106 THEN GPER74$=A(189 8 ) * 5 4 . 7 I F NTIMD=107 THEN OPER74$=A ( 1 8 9 8 ) * 4 5 . 0 I F NTIMD=108 THEN OPER74$=A(1898)*48.6 I F NTIMD=109 THEN OPER74$=A (189 8) *49. 7 I F NTIME>NFIN THEN DEVEL74$=0. I F NTIME<=72 THEN A (1888)=0.5 I F NTIME=73 THEN A (1888)=0.49 I F NTIME=7 4 THEN A(188 8)=0.43 I F NTIME=75 THEN A(1888) = 0. 38 I F NTIME>=76 THEN A(1888) = 0. 46 B= (YGAST-A(1890)*KDGPE*PEXOG*A(1861)) /¥GAST I F »>=1. THEN W=1. I F »<=0. THEN H=0. I F QSTART=1. THEN A (1888) = W* (. 46) + (1 . -W) * (. 40) A (1897) =A (186 5) * A (1868) + (1.-A (1 865) }*A (1883) I F NTIMD=79 THEN A (1903) =0. I F NTIMD=80 THEN A ( 1 9 0 3 ) = 0 . 4 4 I F NTIMD=81 THEN A(1 9 0 3 ) = 0 . 6 1 I F NTIMD=82 THEN A (1903)=0.57 72 I F NTIMD=83 THEN A (1903) =0.56 I F NTIMD>=84 THEN A{1903) = 0.50 EGASD THBODGHP0T OF DELTA GAS I N B. C F . PEE DM EGASD=1. 125*EGASFLO»* (1.-A (1903) ) I F NTIME>NFIN THEN EGASD=0. 

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