Methodological and cost comparison of alternative analyses of exploiting Canadian and U.S. frontier natural gas resources

Weisbeck, Don

doi:10.14288/1.0093890

UBC Theses and Dissertations

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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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Title	Methodological and cost comparison of alternative analyses of exploiting Canadian and U.S. frontier natural gas resources
Creator	Weisbeck, Don
Date Issued	1976
Description	The purpose of this paper is to examine two of the alternatives for transporting natural gas from the Mackenzie Delta-Beaufort Sea area of the Northwest Territories in Canada and from Prudhoe Bay on the Alaska north slope. The first of these is a Mackenzie Valley pipeline proposed by Canadian Arctic Gas Pipeline Ltd to transport both Alaskan and Mackenzie Delta gas to southern markets. The other alternative analysed is the all American El Paso proposal to transport solely Prudhoe Bay gas to U.S. markets. In particular the cost-benefit analyses of these proposals as undertaken by the D.0.I.-Aerospace study and by Helliwell et al., are examined. The paper attempts to highlight differences, both methodological and other, between two studies of the economic returns in exploiting northern natural gas resourses. The Department of the Interior study was undertaken to examine two alternative methods of transporting Prudhoe Bay gas from the Alaskan north slope; a pipeline and liquification route (proposed by El Paso Natural Gas Co.), and transportation via an all pipeline route which would traverse Alaska, the Yukon Territory, and the Northwest Territories, and thence through southern Canada into the continental U.S.A. The major differences highlighted include different estimates of capital and operating costs, for the proposed Mackenzie Valley Pipeline, between D.O.I, and CAGPL. Also evaluated are the different lifetime assumptions, estimates for the supply price of capital and the discount rate, and the treatment of Canadian taxes.
Subject	Natural gas -- Canada Natural gas -- United States
Genre	Thesis/Dissertation
Type	Text
Language	eng
Date Available	2010-02-10
Provider	Vancouver : University of British Columbia Library
Rights	For non-commercial purposes only, such as research, private study and education. Additional conditions apply, see Terms of Use https://open.library.ubc.ca/terms_of_use.
DOI	10.14288/1.0093890
URI	http://hdl.handle.net/2429/20026
Degree	Master of Arts - MA
Program	Economics
Affiliation	Arts, Faculty of Vancouver School of Economics
Degree Grantor	University of British Columbia
Campus	UBCV
Scholarly Level	Graduate
AggregatedSourceRepository	DSpace

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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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UBC Theses and Dissertations

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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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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