Refinery Output. There are currently 17 operating refineries in Canada capable of producing a full range of products including gasoline.⁴ This number will shortly be reduced to 16 when Petro-Canada completes its plans to close its Oakville refinery by the end of 2004. These refineries, shown in Table 1, transform a variety of crude oils and other hydrocarbons⁵ to a number of products ranging from very light products (with a low specific gravity) such as butane and propane to heavy fuel oil, and specialty products such as lubricating oil. Although public attention tends to focus on gasoline, all products are important to the economic well being of refiners. On a revenue-per-litre basis the experience of Petro-Canada in 2003 is probably typical, with gasoline, distillates (probably diesel, light fuel oil and jet fuel) and "other" returning 39.6 cents, 36.9 cents and 43.5 cents, respectively.⁶ The higher return from "other" is probably due to lubricating oil being one of its components. But while all products are important contributors to refiners' revenues on a per-unit basis, gasoline is by far the most important single product, contributing 45.7 percent of Petro-Canada's revenue in 2003. This experience is mirrored by the national statistics. In 2003, gasoline output in Canada was about 42 percent, followed by diesel at almost 25 percent. Light fuel oil, which is virtually identical to diesel save for sulphur content, and heavy fuel oil each account for approximately eight percent.⁷

Refinery Processes. Refineries are highly automated chemical complexes that convert crude oil into a number of products. They contain a variety of equipment and processes designed to meet the needs of the marketplace, and in more recent years to deal with the changing characteristics of supplies of crude oil and increasingly stringent environmental requirements. The first and oldest stage of the process consists of the distillation of crude oil, which permits the division of the oil into a range of light and heavy products with different boiling points. No further processing would be required if demand closely matched the outputs from the crude tower. Even without further conversion capability it is possible to make some adjustment to meet varying demand through the use of different crude oils; lighter oils provide more gasoline and heavy oils tilt output more toward distillates and heavy fuel oil. However, there has been declining demand for the heavier ends from the distillation tower relative to that for diesel, and particularly gasoline.

To better meet demand and to deal with increasingly heavier supplies of crude oil refiners use thermal and chemical processes to break down heavier molecules. The heavier ends in most refineries in Canada (and elsewhere) are processed further in a second distillation tower that operates in a vacuum and thus requires less heat than would otherwise be required to break down the heavier molecules. A further conversion of heavier ends is effected in catalytic crackers, which were first introduced in the U.S. specifically to increase the amount of gasoline that could be obtained from crude oil. Cokers and visbreakers, which rely on heat rather than combined heat and catalysts, are another means of breaking down heavier molecules to obtain desired lighter products. Cokers are found primarily in the U.S. and visbreakers, which are used to increase the yield of diesel, in Europe.

The regional distribution of visbreaking capacity in Canada is illustrative of the response of supply to demand, and therefore to prices. As part of placing gasoline in the broader context of other refinery products, average rack prices of regular gasoline and diesel were compared for Saint John, Montreal, Toronto, Edmonton and Vancouver from June 1990 to June 2004. Proceeding from east to west, the difference in average prices are: 0.26 cents/L, 0.11cents/L, 0.53 cents/L, 1.43 cents/L and 2.07 cents/L, respectively in favour of gasoline. (source: Bloomberg Oil Buyers' Guide) As might be expected with the small differences in the eastern part of the country, sometimes the price of gasoline exceeds that of diesel and sometimes the reverse is true, depending in part on seasonal factors. Given that visbreaking technology is used to increase diesel yields, it is to be expected that investments in this process would be less profitable (or unprofitable in the west). In fact, there are no visbreakers shown in the equipment listed for western refineries, while five of the nine refineries in the rest of the country have such equipment.⁸

As refineries have become larger, with a broader range of conversion equipment, they allow for greater flexibility in the type of crude oils and other partially refined materials used. Valero, Ultramar's parent company, provides a good example of the flexibility afforded by various conversion capacities and using different combinations of inputs to change the output mix. In its U.S. Gulf Coast refineries it used 10 percent residual fuel oil and 18 percent other feedstocks and blendstocks along with primarily sour (heavy and high sulphur) crude oil to obtain 53 percent gasoline and 27 percent distillates. On the West Coast it used 30 percent feedstocks along with sour crude to obtain 64 percent gasoline and 19 percent distillates. In the Ultramar refinery and a refinery in New Jersey it used only 7 percent feedstocks and blendstocks with a high percentage of sweet crude oil to produce 42 percent gasoline and 40 percent distillates. Valero and Canadian refiners are able to take advantage of changes in relative values between light and heavy crude oils, the cost of partially finished materials from the refining processes, and the price of gasoline and diesel in arriving at optimal results.

A brief digression on synthetic crude oil and refining capacity is in order at this point. Synthetic crude oil is the product of an upgrading process of bitumen, a viscous hydrocarbon that needs treatment before it can be processed in a refinery. Suncor's upgrading facility allows it to produce various ranges of sour or sweet synthetic oil or diesel depending on the profitability of extracting sulphur and/or of converting part of the oil to diesel. Thus, although its upgrading facilities are not classified among the refineries, they do contribute to the supply of diesel. Furthermore, further tar sand expansion is likely to be an important element in the production of middle distillates. As noted by Suncor, " Margins for diesel fuel are typically higher than the margins for synthetic and conventional crude oil. The above noted expansion [of tar sands projects] plans of Suncor's competitors could result in an increase in the supply of diesel fuel and weaken margins."⁹ Of course such developments would put additional pressure on Western refiners to skew their output even more towards gasoline.

Octane and the Environment. Once the desired product mix has been achieved in a refinery it is necessary to ensure that it has the desired properties. The most important of these relate to the removal of elements in crude oil that are considered contaminants, primarily sulphur. Removal of the latter is done through units called hydrotreaters. Other processes, such as reforming, alkylation and isomerization are used to combine and rearrange atoms. The products of these specific processes are used for blending with light streams from other parts of the refinery to produce gasoline with required octane ratings. Constituent elements of gasoline are available on the market and form an important part of imports that add to gasoline supply in the U.S and also provide Canadian refiners with access to import options in creating gasoline with desirable octane ratings.

Adequate octane has become an issue in recent months as refiners have decided to voluntarily discontinue the use of the additive methylcyclopentadienyl manganese tricarbonyl (MMT) as an octane enhancer.¹⁰

Other available means of boosting the octane content of gasoline either require the addition of various oxygenates such as methyl tertiary-butyl ether (MTBE) or ethanol, or through further refining using the processes mentioned above. Ethanol is used as a blend by Sunoco and by some retailers. According to a report prepared for Environment Canada, MTBE was less than two percent of the Canadian gasoline pool in 2000, having fallen from 10 percent in 1998. A number of refiners and marketers had reported using it but only the two major exporting refineries, Irving and North Atlantic Refining companies, stated that they would continue to use it after 2001. However, the Newfoundland-based refinery was the only one that intended its use for the domestic market. MTBE had been in wide use in the U.S. but it has been found to be present in some groundwater supplies and its continued use is in doubt.

Under the U.S, Clean Energy Act nine metropolitan areas subject to severe smog problems were identified as requiring the use of Reformulated Gasoline (RFG). The principle difference between RFG and regular gas is the addition of oxygenates such as MTBE or ethanol that result in more complete combustion and less smog-causing material such as carbon monoxide and ozone from the exhaust system. States could also opt into the program. However, under the program, it is results that count, and different formulations of gasoline are allowed as long as the seasonal performance requirements are met. According to the most widely quoted figure, there are currently 18 separate gasolines sold in the U.S. As will be discussed subsequently, the proliferation of "boutique gasolines", as the different formulations are referred to, is considered by some to be one of the sources of increased volatility of gasoline prices in the U.S., and consequently in Canada due to the fact that Wholesale prices in Canada cannot diverge to any considerable extent from those in the U.S. There is a free flow of gasoline (and other refined petroleum products) and refiners or non-integrated petroleum marketing firms are able to take advantage of price differentials that exceed the cost of transportation and ancillary costs to ship gasoline from the lower-priced to the higher-priced areas, or for cargoes from Europe or the Caribbean to be diverted to the higher priced markets.

Refinery Capacities and Rates of Utilization. The location and capacities of the 17 refineries in Canada referred to earlier are listed in Table 1. Capacities are measured in terms of the capacity of the distillation towers. But the average output of refineries is lighter than the crude oil and other hydrocarbon inputs, and thus the yield in volume terms is higher than the volume of material used. In 2003 the volume of output of Canadian refineries was about 4.5 percent greater than the volume of inputs. (Source: Statistics Canada, Refined Petroleum Products)

It is unlikely that all of the companies use the same basis of reporting. For those companies for which there is no public information regarding the basis that is used in reporting capacities it is assumed that the capacities reported by the companies refers to the throughputs that could by achieved if the refinery was run continuously for 365 days of the year. This is impossible in practice; shutdowns for maintenance are always required some time during the year. In addition, unanticipated breakdowns in parts of the refinery can affect output throughout the complex. This is one of the factors that Imperial takes into account in its reported refinery capacities and capacity utilization. "Rated capacities are based on definite specifications as to types of crude oil and feedstocks that are processed in the refinery atmospheric distillation units, the products to be obtained and the refinery process, adjusted to include an estimated allowance for normal maintenance shutdowns. Accordingly, actual capacities may be higher or lower than rated capacities due to changes in refinery operation and the type of crude oil available for processing."¹¹ Reported capacities and capacity utilization is also affected by whether the original capacity of the crude tower is used or whether subsequent adjustments that boosted capacity are taken into account when capacity is quoted. If the adjustments to quoted capacity are not made, capacity utilization in excess of 100 percent can occur. Based on reported rates of capacity utilization, this appears to by the case for Petro-Canada, Suncor, and Husky Energy whose annual reports show capacity utilization in excess of 100 percent during part of the year and typically higher average capacity utilization than the other companies. Thus without full information, inter-company comparisons of capacity utilization may be misleading, but intra-company comparisons can be safely undertaken, particularly when made over relatively short periods. However, none of the foregoing detracts from the usefulness of capacity utilization information, including when it relates to system-wide information.

The present configuration of refinery capacities is the result of rationalization that took place in the 1970's and 1980's. Current capacity levels are well adapted to the level of demand and high rates of capacity utilization have been the norm in recent years. In addition to the fact that capacity levels are well adapted to the level of demand, there are also strong economic pressures -- high fixed costs in the form of capital-intensive plants and relatively fixed staff -- to operate refineries intensively. In cases where firms are not concerned about the effect of their additional output on price there is an incentive to increase output as long as variable costs can be covered, of which the principal one is the cost of crude oil. But in general it can be assumed that capacity utilization is sensitive to the level of sales, since aside from preparing for anticipated seasonal variation in demand refiners generally do not produce for inventory.

Reported capacity utilization of the three national companies and Suncor for 2002 and 2003, respectively, are: Imperial – 90 percent and 90 percent; Shell – 87 percent and 90 percent; Petro-Canada – 101 percent and 100 percent; Suncor – 95 percent and 95 percent.¹² Comparing capacity utilization in the first quarter of 2004 with the first quarter in 2003 Petro-Canada reports an increase from 101 percent to 103 percent, Shell an increase from 90 percent to 92 percent, Suncor an increase from 103 percent to 108 percent. Imperial states that capacity utilization was almost six percent higher than in 2002 and represented the highest output level in the last ten years. It is evident from these figures that the refiners were certainly not holding back production. However, capacity utilization in the second quarter fell as refiners undertook their normal spring maintenance, but was even lower than the comparable quarter in 2003. Petro-Canada went from 99 percent to 92 percent, Shell from 84 percent to 78 percent, Imperial from 91 percent to 88 percent and Suncor from 100 percent to 85 percent. In the case of Shell, it had undertaken "the largest shutdown in the Company's history" at the Montreal East refinery. (Quarterly Report, p. 3) Similarly, Petro-Canada had a major turnaround at its Edmonton refinery which included integrating equipment for processing low sulphur gasoline. (Quarterly Report, p. 7) Another major turnaround at its Montreal refinery is planned for the fourth quarter. Suncor experienced both planned and unplanned maintenance, and primarily as a result it went from a 12 million dollar profit in the second quarter of 2003 in its rack back or refinery operations to a 3 million dollar loss in the second quarter of 2004. Any thought that the shutdowns were coordinated should be dispelled by two important considerations. In the first instance the pain of the shutdowns was not evenly spread as each of the companies experienced different percentage impacts. Moreover, the companies replaced the lost output.

In 2004 each of the three national companies either equaled or exceeded first and second quarter sales of all petroleum products relative to 2003. On a combined basis, their sales were 1.5 percent and 4.4 percent higher in the first and second quarters, respectively. Gasoline sales, however, fell by 1.7 percent in the first quarter and 2 percent in the second quarter relative to values in 2003. Petro-Canada accounted for the most of the decline. Shell had a small increase in the first quarter, which was balanced by losses in the second, and Imperial's declines were small in both quarters. Suncor had a decline of 4.6 percent in the first quarter but its sales held even with those in 2003 in the second quarter. The figures for the four companies suggest that there was considerable jockeying for market share by the companies themselves and by their wholesale customers.

In the U.S. significant growth in demand relative to the response in supply is considered to be an important source of the volatility in gasoline prices. Because of the relative size of the U.S. and Canada and the generally close connections between wholesale markets in the two countries, the course of demand in Canada relative to capacity does not play the same role that it does in the U.S. since there is limited scope for prices in Canada to follow a separate path. In any event, the course of demand in Canada in the first half of the year is unclear.¹³

Economies of Scale, Other Barriers to Entry and Concentration. It has long been recognized that there are significant economies of scale in petroleum refining.¹⁴ In the most recent consideration of the issue, minimum efficient scale within the refinery proper is concluded to be exhausted in the range 24,000 to 32,000 m³/d.¹⁵ However, an earlier study noted that interviews had revealed that unit costs might continue "falling beyond the size of the largest modern plant with which any significant amount of construction and operating experience had been accumulated."¹⁶ Moreover, the decline in unit costs resulting from size was found to be just as significant for infrastructure outside the plant, such as roads, jetties etc.¹⁷ In any event there can be no doubt that there has been a drift towards larger refineries, and in situations where refineries have access to low cost transport to serve very large markets, as is the case in the U.S. gulf states of Texas and Louisiana, giant refineries well in excess of the estimated minimum efficient scale have been constructed.

The effect of economies of scale and Canada's relatively small size is a high level of concentration in all regions. There is a single refinery in Newfoundland, two refineries in the Maritime provinces, and Quebec and Ontario have a total of five companies: the three national companies and the Suncor and Ultramar. In the West, the three national companies have the bulk of capacity in the three refineries in Edmonton, and there is a sole independent in Regina, and Chevron and Husky in British Columbia. Although inter-regional product flows and exchange agreements probably reduce the concentration as measured by sales, concentration remains high by any of the standard measures.

Entry barriers into refining are very high. In addition to economies of scale, investments in refineries represent sunk costs. Moreover, obtaining regulatory approvals that all environmental conditions were being met would, at the very least, delay the building of a new refinery for some time. Commentators in the U.S. are very pessimistic about the prospects of overcoming regulatory barriers. Finally, in the present environment of high crude oil costs, the difficulty of predicting demand creates a high risk factor. In the 1970s and 1980s, high energy costs led to reduced sales as the result of the introduction and adoption of more energy efficient vehicles, equipment and other means of economizing on energy use, with the result that there developed extensive excess refining capacity.

In interpreting the size distribution of existing plants it is necessary to bear in mind that estimates of minimum efficient scale are based on plants built de novo. However, existing plants have been expanded over the years and there may be duplication of individual operating units. Petro-Canada's Oakville refinery is a case in point; it has two distillation towers. Thus at least in that part of the operation there are in effect two much smaller refineries than the size of the refinery indicated by the total distillation capacity. Additionally, some of the higher unit costs resulting from smaller size are, in a sense, bygones. Although the unit costs of plant, equipment, control systems and outside facilities decline with size, once the smaller plant is built, the major concern is ensuring that ongoing costs are covered. Thus it is not unusual for different size plants to coexist in the same market. But over time the smaller plants tend to disappear unless they enjoy advantages of location such as low-cost sources of crude oil or there is not easy access to their markets by other competitors.

While Canada does not have the very large refineries found in the U.S. and other parts of the world, on the whole, the size distribution of its refineries is fairly efficient. A little more than a third of total capacity is accounted for by refineries of the estimated minimum efficient scale, and ten (59 percent) of the seventeen refineries have capacity in excess of 16,000 m³/d compared to 42 percent of refineries in the U.S.¹⁸

The Firms and Recent Adjustments in the Industry. Increasingly stringent environmental requirements, particularly a reduction in the acceptable level of sulphur in gasoline and road diesel has necessitated investments in additional equipment. The closure of Petro-Canada's Oakville refinery will coincide with the introduction of a more stringent standard for the sulphur content in gasoline January 2005. A far larger reduction in the sulphur content in diesel will go into effect June 2006.¹⁹ Suncor and Shell, with two of the smaller refineries, are meeting the high investments required for a hydrotreater to meet the sulphur in diesel standard by entering into a 20 year processing agreement. Suncor will build the unit at an estimated cost of $300 million dollars.²⁰ This is an example of economies of scale at work; before entering into the agreement with Shell the estimated cost of meeting solely Suncor's needs was $225 million.²¹

Yet Husky will be investing $73 million to meet the more stringent sulphur requirements for gasoline and diesel in its tiny refinery in Prince George.²² How can it be worthwhile for Husky to make the required investment in the light of the closure of the Oakville refinery. The answer is the same as that which explains the existence and survival of the refinery previously. It has a ready source of (presumably less expensive because relatively nearby) crude oil.²³

The closure of the Oakville refinery will be accompanied by the reversal of the Trans-Northern Pipeline that ran in a west to east direction between Farran's Point (close to Cornwall) and Toronto. The reversal was required in order to allow Petro-Canada to replace lost production through expansion of its Montreal refinery and through imports and purchases from domestic refiners. Currently points east of Cornwall were supplied by Ontario based refineries, who also had access to Ottawa via a loop from Farran's Point to Ottawa. But the line to Farran's Point was only operated at 20 percent capacity, and Ottawa was mainly supplied out of Montreal via the east to west running portion of the line to Farran's Point. The expansion of capacity and the reversal of the line will provide up to 11,500 m³/d of additional supply to Ontario locations west of Farran's Point, which compares to the 9,800 m³/d of light products that were being produced in the Oakville refinery. However, Petro-Canada and Ultramar, the two principal supporters of the application, were only granted priority access to 9,100 m³/d between Montreal and Toronto on a ship-or-pay basis. (7,280 m³/d for Petro-Canada and 1,820 m³/d for Ultramar) In its submission to the NEB, it was anticipated by Petro-Canada that an additional 2,000 m³/d of exchanges (to be added to the 4,000 to 5,000 m³/d already in place) between Ontario and Quebec based refiners might be required to meet the needs of the refiners who supplied mid-points between Toronto and Farran's Point. The exchange agreements would entail the transfer of product to these refiners in Montreal for shipment to locations such as Belleville and Kingston, in return for product provided in Toronto.

Petro-Canada planned to replace supply from the Oakville refinery through an increase in capacity of its Montreal refinery by removing bottlenecking in some processes and through the purchase of imported or domestic supplies. It also planned to increase the terminal capacity at Oakville. But the general effect is a reduction in domestic capacity and any purchases by Petro-Canada from domestic refineries will have the effect of making domestic supplies tighter for independent marketers.

One of the effects of the line reversal will be to increase the presence of Ultramar in Ontario. As can be seen in Table 1, Ultramar operates the largest refinery devoted primarily to domestic markets. In addition, it planned a further increase to 35,771 m³/d by January 2005. (NEB Decision, p.6) The increase in capacity is associated with investments to meet lower sulphur thresholds for gasoline and will result in increased supplies of that product. Ultramar has long sought to expand its limited presence in Ontario. Ultramar addresses local markets south and west of Quebec City via a unit train to Montreal. In September 2002 it inaugurated a terminal in Maitland, Ontario that it acquired and upgraded. Part of the upgrade was the addition of rail that would allow the terminal to accommodate a unit train. The Maitland terminal is intended as a staging area for the supply of eastern Ontario and parts of New England. (Ultramar news release, September 19, 2002) The tank truck loading racks have a capacity of 3,023 m³/d. This capacity, the capacity on the Trans-Northern Pipeline that it has reserved as part of a use or pay agreement, additional pipeline capacity available to it and other shippers on a common carrier basis, and any exchange agreements that it may enter into that would provide it with additional product in Ontario will provide Ultramar with a much greater presence in Ontario than it has been able to achieve until now. The effect of the actions taken by Petro-Canada and Ultramar is to bring a closer connection between Montreal and Toronto and points in between.

This summary of refinery structure ignores the fact that the east and west coasts are available to imports by ocean going vessels, as is much of Ontario and Quebec, either directly or via the Trans-Northern Pipeline. But there are very few independent terminal operators. The relatively thin volume of sales open to them adds to the normal risks of importing product in shipload quantities. In addition, however, many locations are close enough to U.S. terminals so that independents can truck product from the U.S. if the discrepancy in prices covers the cost of transportation. The role of imports is taken up in the discussion of wholesale prices.

Although wholesale markets tend to be regional and retail markets local, it is useful to summarize the relative position of the three national companies from a national perspective since the Atlantic Provinces are the only region in which they do not each have a strong refining presence. Imperial is by far the largest refining company in Canada. It holds at least 26 percent of total refining capacity. In 2003 its capacity of 79,000 m³/d compares to net sales of refined products of 70 400 m³/d. Petro-Canada's current capacity is 49,800 m³/d, well below its sales of 56,800 m³/d. It is particularly short of capacity in Quebec and Ontario and relies on purchases to make up the difference. As a result, unlike Imperial, it is a very minor participant in the wholesale market, particularly in Eastern Canada. Following the closure of the Oakville refinery Petro-Canada's total capacity will fall to 40,600 m³/d, assuming that removing bottlenecks adds 4,000 m³/d to the Montreal refinery. Shell's capacity of 49,000 m³/d compares to its sales of 45,700 m³/d in 2003. The sales of Imperial and Shell have been fairly flat over the last 8 years, Shell's went from 43,500 m³/d in 1996 and 45,400 m³/d in 2000 and Imperial from 72,400m³/d in 1995 and 75,700 m³/d in 1999. The experience of Shell and Imperial are in marked contrast to that of Petro-Canada. It had sales of 41,550 m³/d and 51,200 m³/d in the corresponding periods, thus increasing its sales by about 37 percent between 1995 and 2003. These figures indicate that the national companies pursue different agendas. Similar contrasts will appear when comparing their experience in boosting throughputs per retail outlet.

Irving and North Atlantic Refining are the principal export refineries in Canada. In 2003 they accounted for 79 percent of total Canadian exports of refined petroleum products, of which gasoline and diesel constituted 85.5 percent of the total. Translating their export sales to a daily basis, they represented of the order of 93 percent of the capacity of the Come-by-Chance refinery and 74 percent of the Irving refinery.²⁴ The potential competitive influence of Irving is understated by the amount of capacity devoted to domestic sales since it can divert product used for exports to domestic sales if it becomes profitable to do so with the effect of bringing about a closer correspondence between U.S. and Canadian wholesale prices along the eastern seaboard. North West Refining is in a unique position: prices in Newfoundland are regulated.

Irving's current distillation capacity was reached in 1974. However, major investments in conversion equipment in 1999, at a cost in excess of one billion dollars, allowed it to change the composition of its output. "The upgrade will shift the products from heavy fuels such as bunker to cleaner transportation fuels such as low-sulphur diesel and Irving Supreme gasoline." The capacity to provide a greater volume of lighter, cleaner products is reflected in its export sales, which increased by 57 percent from 1999 to 2003.²⁵ (NEB Appendices to Annual Reports) It is also likely that there were important repercussions in Canada in a more competitive situation in the Maritimes. This possibility is taken up in the discussion of wholesale prices in St. John and Halifax in a later section.

The remaining two regional refineries are Chevron in Vancouver and Consumers' Coop in Regina. The Chevron refinery is a conventional one and there is little to add about it. The Consumers' Coop refinery is more unique. It is located in an area of heavy oil - - oil that is too viscous for processing in a distillation tower. The province of Saskatchewan and Consumers' Coop jointly own an upgrader that provides the synthetic oil for the refinery. The capacity of the refinery was recently expanded by 3182 m³/d to accommodate the refining of synthetic crude supplied by Suncor under a long-term agreement. Based on the list of equipment in the survey by the Oil and Gas Journal referred to previously, the refinery is a sophisticated one and produces a full slate of products²⁶

⁴ The small Parkland refinery, designed to convert natural gas condensates to gasoline, has not been operating since the end of September 2001. The cost of condensates relative to gasoline made the operation unprofitable.

⁵ The inputs used in refining include partially finished materials from refining that are traded among refiners and other hydrocarbons such as natural gas and natural gas liquids. In 2003, 9.5 percent of the inputs of Canadian refiners were other than crude oil. (Statistics Canada, Refined Petroleum Products, February 2004)

⁶ Petro-Canada 2003 Statistical Supplement, March 2004, p. 38. It is recognized that there are different degrees of vertical integration that affect per-unit revenues, but this consideration does not negate the general point.

⁷ Statistics Canada, Refined Petroleum Products, February 2004.

⁸ "2000 Worldwide Refining Survey", Oil and Gas Journal (December 18, 2000)

⁹ Suncor Energy Inc. Annual Information Form, February 26, 2004, p. 2.

¹⁰ Automobile manufacturers have long claimed that MMT adversely affects the effectiveness of exhaust controls and environmentalists oppose its use on the grounds that it results in the release of manganese into the environment.

¹¹ Imperial, Information for Investors (March 2004), footnote 2 to Imperial Oil Refineries.

¹² Ultramar's parent, Valero, one of the largest refining companies in the world, combines the information for Ultramar with another somewhat smaller refinery in New Jersey. Calculating capacity utilization from the throughputs for these refineries with their combined reported capacities provides the average capacity utilization for these refineries; 86.6 percent in 2002 and 91.5 percent in 2003. (Source: Valero 10K for 2003)

¹³ Statistics Canada data shows growth of 3 percent in the first quarter and 1.9 percent in the second compared with 2003. This is in contrast to the results reported by the four companies whose results were discussed in the text and there is no reason to believe that their results were not representative for the industry.

¹⁴ The logic underlying the decline in unit costs is derived from the relationship between the surface and volume of vessels. A doubling of the surface increases the volume by a much larger percentage. Costs would be associated with the surface of the vessel and the volume with its capacity. The same reasoning explains economies of scale in pipelines and storage vessels. Studies of the relationship between the costs and capacities of equipment in a number of process industries have demonstrated the presence, but varying importance, of economies of scale. (C.H. Chilton, ed. Cost Engineering in the Process Industries, New York, 1960)

¹⁵ Federal Trade Commission, Bureau of Economics, The Petroleum Industry: Mergers, Structural Change, and Antitrust Enforcement, (Washington, 2004) p. 179

¹⁶ The same study concluded that minimum efficient scale was exhausted at the outer range of the estimate in the text. Scherer, F.M. et al, The Economies of Multi-Plant Operation, (Cambridge, Harvard University Press, 1975), pp. 79 and 80

¹⁷ C. Pratten and R. M. Dean, "Oil Refining", The Economies of Large Scale Production in British Industry, (Cambridge University Press, 1965), p.92

¹⁸ FTC study, p.7

¹⁹ In its support for the reversal of the Trans-Northern Pipeline, discussed subsequently, Petro-Canada implied that it was cheaper to obtain supplies from alternative sources than to upgrade the Oakville refinery. (NEB Reasons, p.4) Similarly, the Federal Trade Commission reports the closure of two refineries in 2001 and 2002 in the Oakville refinery's size range in response to having to meet fuel specifications. (Op. cit. p.182)

²⁰ The cost to build the hydrotreater is higher than it would be if it was to be used solely to treat diesel since it is planned to use it to reduce sulphur dioxide emissions from the refineries.

²¹ (Op. cit. p.4)

²² The investment also results in a 10 percent increase in the rated capacity of the refinery.

²³ At a distance of 778 kilometres from Vancouver it is fairly remote which might suggest that it is somewhat sheltered from the competition of distant refineries. However, Husky has retail outlets in large parts of Western Canada. It supplies these by exchanging product with other refiners that have outlets in the area of Prince George. Exchange agreements are dealt with later in the text.

²⁴ The figures are necessarily approximate and somewhat overstated because the NEB does not include "propane, butane, lubricants, greases, asphalt, petrochemicals, etc." in the export totals. (NEB 2003 Appendices, Appendix B)

²⁵ There is a minor irony associated with these figures. A recent article in September 6, 2004 Globe and Mail ("Canadian gasoline flows south to thirsty U.S. market", B5) discusses the large increase in exports to the U.S. between 1999 and 2004. It states: "Refinery capacity has barely budged during that time, meaning that a growing proportion of domestic gasoline production is being shipped to the United States amid a time of rising pump prices." In fact 85 percent of the increase in total exports of all products was accounted for by Irving, primarily, and North Atlantic Refining. The author of the article was misled by considering solely distillation capacity and by a reliance on U.S. data which do not identify the companies doing the exporting to the U.S.

²⁶ In contrast, the Husky Energy refinery in Lloydminster, which has not been included in Table 1, produces primarily asphalt.