May | 2018
MESSAGE FROM THE PRESIDENT JENNIFER STEWART
COMPLIANCE OPTIONS AVAILABLE TO CAP & TRADE PARTICIPANTS BY: CLEARBLUE MARKETS
UPCOMING EVENTS 2018 EVENTS
NEWS UPDATES 2018 NEWS
MEMBER UPDATES NEW MEMBERS
FULL MEMBERS
ASSOCIATE MEMBERS
CONNECTION CONTENTS
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| MESSAGE FROM THE PRESIDENT | Jennifer Stewart
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| COMPLIANCE OPTIONS AVAILABLE TO CAP & TRADE PARTICIPANTS | By: Clearblue Markets
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| UPCOMING EVENTS | 2018 Events
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| ADVOCACY UPDATES
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| NEWS UPDATES | 2018 News
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MEMBER UPDATES | 2018 Members
MISSION CIPMA’s mission is to ensure the sustainability and growth of a healthy and viable independent fuel marketing and distribution sector at both the wholesale and retail levels in Canada. Our specific goals include: Ensuring that independent fuel marketers thrive and have the opportunity to earn a fair and reasonable return that is proportionate to their business risk and capital investment, and ensuring that Canadian consumers and independent fuel marketers have access to a competitively priced and readily available supply of fuel products in all regions of the country.
MESSAGE FROM THE PRESIDENT JENNIFER STEWART | PRESIDENT & CEO
Dear CIPMA Members and Associate Members Earlier this month I traveled to Chicago to participate in the 2018 FUELS Institute annual conference – a unique two-day conference that looks at the future of fuels from all angles and sources. With a diverse mix of opinions provided, one thing was clear: consensus on the future of the petroleum marketplace varies greatly depending on who you speak to, often their own interests based on the sector they represent, and what their data projections take into consideration.
Here, I was joined by founding CIPMA member Allan MacEwen, where we discussed the impact of carbon pricing on our industry. While the government will be moving forward with its carbon pricing backstop, it was clearly a strong opportunity to voice the perspective of our industry, and provide sound, research-based facts on its contributions to the Canadian economy. As we move forward, we remain committed to acting as the voice of the independent petroleum marketing sector and making sure it’s heard.
This is likely not a surprise to anyone, but it reinforces the need for our sector to be abreast of changes, and to not, symbolically of course, take the passenger’s seat as our sector evolves. We must continue to engage in dialogue about our sector with decisionmakers, ensure we are aware of consumer trends and government interventions and behaviours, and be able to realistically apply these to our industry and decision-making capabilities.
Enjoy the month of June and as always, please do not hesitate to reach out directly to me with any questions or concerns.
One opportunity where CIPMA was recently able to do this was as a presenter at a Senate Hearing for the Senate Committee on Energy, the Environment and Natural Resources, on Parliament Hill.
Jennifer Stewart President and CEO Canadian Independent Petroleum Marketers Association
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We want to share the successes of our members. If you want to feature your company’s recent achievements, updates, or simply want to be featured, please reach out to Jennifer Stewart at jstewart@cipma.org
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COMPLIANCE OPTIONS AVAILABLE TO CAP & TRADE PARTICIPANTS BY: CLEARBLUE MARKETS
The Ontario Cap & Trade program was launched in 2017 in order to meet the federal government’s requirement that all provinces and territories must have some form of carbon pricing by 2018. When it comes to carbon pricing, Cap & Trade is the most flexible system as it provides several options for compliance entities to minimize compliance costs while maximizing opportunities. The Ontario, California and Quebec Cap & Trade programs, which are linked through the Western Climate Initiative (WCI), have implemented several methods to comply through the purchase of compliance instruments. This gives compliance entities a significant amount of flexibility on their strategies for meeting their Cap & Trade obligations. The linking of the Ontario market to the California and Quebec programs on January 1, 2018, has made the market larger and more liquid, as both California and Quebec allowances (and offsets) can be used for compliance in Ontario, and vice-versa. Auctions are typically the first option compliance entities consider for purchasing the allowances needed to meet their compliance obligation. However, entities should know that this is not the only way to obtain allowances. Specifically for allowances, a market participant in Ontario has multiple options for purchasing and/or obtaining them such as; primary auctions, the secondary market, as well as internal transfers. Alternative forms of compliance include options such as offset credits and early reduction credits. Knowing that all of these options are available, how do entities begin to form a strategy that is in their best interest? First they might try to determine whether participating in auctions aligns with their compliance positions, and is in their financial interests. The current practice for WCI is that a tentative schedule of auction dates is provided for the upcoming year each December, however, these are not fixed dates and may change. The official date is announced in a notice at least 60 days prior. To place a bid in the auctions, a financial assurance is required 12 days before the date of the auction. This financial guarantee can be cash, a bank guarantee, or a letter of credit, and must cover all bids. At an auction, a participant can bid on either current vintage allowances, which refer to allowances from the current or previous years and/ or future vintage allowances, which are used for the next compliance period. In WCI, auctions are held on a quarterly basis. Once the auction begins, the account representative has a 3-hour window to enter their different bids in the WCI auction platform.
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The auction result is published 5 working days after the date of the auction. After 5 days the financial settlement takes place, then after another 8 days, the allowances are transferred to the holding accounts of the successful bidders.
The Carbon Allowance (CCA) contract on ICE is traded in USD, and sold in denominations of 1,000 allowances – each referred to as a “lot”. The minimum price fluctuation may vary by trade type and is normally USD $0.01.
The sale of future vintage allowances in auctions also contributes to the flexibility of Cap & Trade. In Ontario, the MOECC auctions 10% of the total allowance volume for the year that is three years later than the auction year. In 2018, 10% of the 2021 budget is being auctioned as future vintage, which cannot be used for compliance for the 2017-2020 period.
The other important venue in the secondary market is Over The Counter (OTC), which often occurs via brokers, other intermediaries, or directly with other compliance entities. Trading can be irregular in the OTC market but smaller volumes transactions (<100,000 allowances) are quite frequent. A counterparty or broker may approach compliance entities with a volume and that can require a quick decision on whether or not to transact. Therefore, it is important to be able to determine whether the trading decision is appropriate (buying a certain volume at a certain price), and that the internal due diligence that is required to facilitate trade with new counterparties (i.e. Know Your Client- KYC) is executed in a quick and efficient manner.
The first tripartite auction between Ontario, California and Quebec (WCI Auction #14) took place on February 21, 2018. This auction showed strong results, as current vintage allowances were sold out, and it was also the most allowances sold in an auction historically. This result was interpreted as showing strong market sentiment from participants, especially from California and Quebec, where market certainty has been extended until 2030. See below the results of the February 2018 auction. VINTAGE
CURRENT (V16 & V18)
FUTURE (V21)
Total Allowances Available
98,215,920
12,427,950
Total Allowances Sold
98,215,920
8,576,000
Bid-to-cover Ratio
121%
69%
Auction Reserve Price
USD $14.53 (CAD $18.34)
USD $14.53 (CAD $18.34)
Settlement Price
USD $14.61 (CAD $18.44)
USD $14.53 (CAD $18.34)
Figure 1 WCI Auction #14 Results
*The bid-to-cover ratio indicates how much demand there was for current and future allowances, relative to what was available in the auction. In this case, participants overbid 21% more than the allowances that were available. Auctions are not the only route to compliance For entities with smaller compliance positions, or a limited Cap & Trade budget, entering in the auctions is not necessarily the best route to purchase allowances. As described above, participating in the auction can be a long process and there is no guarantee that entities will receive the volume of units that they require. The secondary market is an alternative that should be considered. It allows entities to purchase or sell allowances from each other, as opposed to auctions where the only seller is the government. This provides entities with another method to obtain allowances outside of the auctions. Auctions are not mandatory, and entities may choose to purchase all their necessary allowances from the secondary market as it often proves to be an easier route, especially for smaller sized market participants. The secondary market also provides these entities the advantage of buying allowances now, and paying upon delivery through forward and future transactions. Allowances are traded in two types of venues in the secondary markets: exchanges, with the Intercontinental Exchange (“ICE”) being the main one, and the Over-the-Counter market (OTC). ICE is the most liquid exchange in North America when it comes to environmental commodities and is the main exchange for WCI allowances. ICE presents the advantage of offering quite a diverse set of instruments to trade, with different vintages and deliveries available. For example, ICE allows trading of current vintage allowances (vintage 2018) and also past vintages (which are all also considered current vintage for compliance purposes). ICE has offered a product for the WCI market since 2011.
Figure 2 WCI Price Allowance History (USD)
Furthermore, an interesting aspect of the Cap & Trade system is the possibility of future and forward contracts. A future contract on an exchange is an agreement to buy or sell an allowance, at a price agreed upon now, but for delivery and payment on a future date. WCI futures on the ICE exchange, for delivery in 2019 and 2020, have typically traded below the expected future auction floor prices. The reason for this is that the required return of some entities (e.g. financial institutions, pension funds) is only 3 or 4%, and they can simply buy spot volume and hold it until delivery (within their holding limits). This means they can forward sell allowances today (for delivery in 2019 or 2020) at price levels below the future auction floor prices, without taking on any price risk. Forward contracts are essentially the same as a future contract, but in the OTC market, which allows for more flexibility in contract terms, including the number of allowances purchased, as it is not necessarily done in lots of 1,000 allowances. The most commonly traded WCI allowance contract is for delivery in December each year - to align with fiscal year end, and to cover certain risks amongst other possible reasons - and depending on the credit rating of counterparties, payment can be before or after delivery. For a compliance entity that has facilities in more than one jurisdiction, the possibility of an internal transfer also facilitates compliance. This allows them to transfer or even sell allowances between the accounts for specific jurisdictions in order to meet their compliance obligation - however the company determines it to be most beneficial. Allowances are not the only Compliance instruments In addition to allowances, compliance entities in the WCI Cap & Trade market also have the option to purchase carbon offset credits. Offsets are emission reduction credits from projects that reduce emissions which are outside the scope of the Cap & Trade program itself.
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The MOECC publishes protocols for specific types of emission reduction projects that outline what constitutes as an eligible offset, so that any project developers interested in offset credits need to adhere to the requirements of a published protocol. Currently there are three offset protocols published in Ontario with ten more being developed. Due to the low supply from Ontario and Quebec, most of the offsets being used in Ontario now come from California. Offset credits are a key component in reducing the costs of compliance obligations, as offsets are a cheaper compliance instrument than allowances. As per the Ontario Cap & Trade regulation, covered entities will be able to meet 8% of their obligations with offsets instead of allowances. It is important to note that this 8% ‘quota’ would expire if it is not used; the quota cannot be banked into the next compliance period. In Quebec for example, during the first compliance period, only 1 entity out of the more than 50 entities used their offset quota. Although it is not mandatory to use offsets for compliance, this was a missed opportunity for Quebec entities to substantially reduce their compliance costs, due to the lower price of offsets. The spread, or price difference, between the price of offsets and allowances normally tightens closer to the compliance deadlines as entities are purchasing offsets to meet their compliance obligations. For example, we are seeing that now with current offset prices. As Quebec and California are currently preparing for the November 1, 2018 compliance deadline, the demand for offsets has increased and the spread between allowances and offsets has been decreasing (less discount when buying offsets). By purchasing offsets before the end of the compliance period, compliance entities can ensure that they will optimize their cost saving opportunities as they will not face the “end of compliance period squeeze”. Historically, WCI offsets have traded between USD$1 and $3 below the price of allowances and are expected to continue to trade at a discount (See Figures 3 & 4).
Figure 3 Historical Offset Prices
Figure 4 Allowance vs. Offset Spread
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For offset purchasing, there is also a primary and secondary market. The primary market refers to purchasing offsets directly from project owners (the entity developing the project) at various stages of project development (which can also affect price levels). The most common method of contracting primary offsets is to forward buy all the offsets that originate from a project. In secondary market purchases, a specified and guaranteed volume of offsets is bought either in a spot or forward contract, and often from an intermediary. Currently, WCI offsets are not traded on any exchange. It is important for compliance entities to take advantage of offsets as the lower cost compliance instrument, by maximizing their (8%) offset quota.
Consider All Options!
Lastly, it is also important to consider the risks associated with purchasing offsets. Invalidation risk essentially refers to the revocation of offset credits due to projects being invalid. With Ontario and Quebec offsets, buyers do not carry the invalidation risk. This is due to the existence of a buffer account, which holds offsets that would replace invalidated ones. For California based offsets, the risk of invalidation is placed on the offset’s buyer (even when based in Ontario or Quebec), who would have to replace the offset credits in the event that a project becomes invalidated. However, this risk can be mitigated, with the purchase of Golden California Offsets (GCCOs), which are backed by an investment grade counterparty and would be replaced entirely by them in the event of invalidation. Naturally, these GCCOs trade at a higher price.
In addition to simply managing the compliance position, CIPMA members could also try to look for emission reduction options, although there are not many low cost opportunities to do so. It is important to consider that the incentive from Cap & Trade may be on top of other incentives or requirements, such as the soon to be introduced Clean Fuel Standard (CFS). For example, the use of biofuels would then have a value under both the CFS and Cap & Trade. This means that the incremental cost of using biofuels would be covered by both the value of CFS credits, and the fact that you would need to purchase less allowances to comply with Cap & Trade.
Although complex, an entity’s position in the Cap & Trade system is better managed when all the options available have been considered. Utilizing options such as auctions, secondary market products, internal transfers of allowances, and offset credits will help minimize the cost of Cap & Trade compliance. For most entities, it does not make sense to have dedicated resources to manage a Cap & Trade position; external management of the compliance position can be considered.
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UPCOMING EVENTS CIPMA CONNECTION | 2018 EVENTS
CIPMA GOLF CHALLENGE
Thursday, September 13, 2018 | Glen Abbey Golf Club, Oakville, ON Mark your calendars! Watch for details, coming soon.
EASTERN MEMBERS MEETING
Tuesday, October 23, 2018 | Halifax More details coming soon.
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ADVOCACY UPDATES Government advocacy is the main priority for the CIPMA team, and having a voice on important issues at the municipal, provincial and federal levels of government is one of the key reasons why members join our organization. CIPMA members receive quarterly updates on the association’s advocacy efforts, which are also posted on the Members Only section of cipma.org.
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NEWS UPDATES CIPMA CONNECTION | 2018 NEWS This section presents a series of media articles of interest to the sector. The headlines included below are taken directly from media sources and are not written by CIPMA or CIPMA team members.
GLOBAL OIL SLIPS AFTER SAUDI-RUSSIAN REVIVAL TALK `POPPED THE BUBBLE’ This news piece analyses the latest trends in international oil, as the market weighs the prospects of rising output from Saudi Arabia and Russia. RENEWABLES IN HEATING WILL TAME OIL MARKET VOLATILITY, EU OFFICIAL SAYS This article focuses on a draft Renewable Energy Directive currently under negotiation at the EU level, in response to oil market volatility caused by the U.S. pulling out of the Iran nuclear deal. ELECTRIC VEHICLES WILL GROW FROM 3 MILLION TO 125 MILLION BY 2030, INTERNATIONAL ENERGY AGENCY FORECASTS This feature presents insights on the global electric vehicle market from an IEA forecast shared on May 29.
UNITED STATES EPA’S OWN SCIENCE ADVISERS TO REBUKE AGENCY OVER AUTO ROLLBACK This article looks into scientists’ scrutiny over the Environmental Protection Agency’s justifications for easing emission rules.
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KEYSTONE XL DEVELOPER SHOWERS NEBRASKA WITH CAMPAIGN CASH
OILPATCH PLEASED FOR PIPELINE PROGRESS BUT CONCERNS ABOUT INVESTMENT CLIMATE PERSIST
This news story targets recent campaign donations made from TransCanada Inc. to Nebraska public officials, amidst the company’s battle for regulatory approval in a state that is one of the last lines of resistance for the $8 billion pipeline project.
This news piece offers a Calgary-based analysis of the recent Trans Mountain pipeline purchase by the federal government, from Senior Producer Western Digital Business Unit, Tony Seskus. TRUDEAU IS NOW ALL-IN ON OIL SANDS EXPANSION
NATIONAL
CANADIAN RETAIL GASOLINE PRICES AVERAGE 137.6 CENTS PER LITRE IN MAY As of May 29, the Canadian average retail regular gasoline price was 137.6 cents per litre, up from 117.2 cents per litre in May 2017, while the average retail diesel price hit 134.2 cents per litre, versus 107.6 for the same time last year, according to Kent Group Ltd. For more information and analytics, click here. LIBERAL GOVERNMENT TO BUY TRANS MOUNTAIN PIPELINE FOR $4.5B This article highlights the May 29 announcement by Finance Minister Bill Morneau on the federal government’s plans to ensure pipeline expansion in Canada proceeds. BILL MORNEAU’S KINDER MORGAN SURPRISE COMES WITH HUGE PRICE TAG, LOTS OF POLITICAL RISK: CHRIS HALL This feature presents CBC National Affairs Editor, Chris Hall’s analysis of the potential financial and political repercussions of the May 29 decision to buy the Trans Mountain pipeline. FIVE THINGS: THE NEXT STEPS FOR GETTING THE TRANS MOUNTAIN PROJECT DONE This story examines the next steps required by the federal government and pipeline funders EDC and the Bank of Canada, in order to run and manage the pipeline during Canada’s ownership period.
This op-ed penned by Columnist, Konrad Yakabuski, gives credit to the Trudeau government for acknowledging the importance of Alberta’s oil sands to the sustainability of federal finances. MORNEAU HAD BETTER OPTIONS FOR CANADA’S ENERGY SECTOR This special feature by Jeff Rubin, Senior Fellow at the Centre for International Governance Innovation, analyses the Trans Mountain pipeline purchase from a financial lens, and presents alternative investment options.
WESTERN REGION ALBERTA OIL, AGRICULTURE NERVOUS AS CP RAIL STRIKE LOOMS This article brings attention to the May 29 deadline for the Canadian Pacific Railway labour dispute, with thousands of train operators and signaling workers poised to strike. OBJECTIVE FACTS ARE KEY TO BALANCING THE PIPELINE DEBATE In this op-ed, Gordon Giffon, former U.S. ambassador to Canada, weighs in on the Trans Mountain pipeline debate, offering objective facts on the strides made by the oil and gas sector to reduce GHG emissions. ‘TURN OFF THE TAPS’ LEGISLATION MAKES NOISE, BUT DETAILS STILL A MYSTERY This news piece looks at Alberta’s Bill 12 and the potential impacts for all sides.
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CANADA STEPS UP TO MAKE A LONGTERM INVESTMENT IN ITS FUTURE AND A COMMITMENT TO BE A GLOBAL ENERGY SUPPLIER This news release by the Canadian Association of Petroleum Producers positions the Government of Canada’s acquisition of the Trans Mountain and Trans Mountain expansion pipeline as a long-term commitment in the future of the country’s oil and natural gas industry.
‘SORRY, NOT SORRY,’ WYNNE SAYS IN TESTY ONTARIO ELECTION DEBATE This feature frames the positions of Ontario leadership candidates as presented during the debate on May 27, including their respective plans to address carbon pricing and climate change.
ATLANTIC REGION
B.C. PREMIER HORGAN CALLS ON OTTAWA TO INVESTIGATE PROVINCE’S HIGH GAS PRICES
SAINT JOHN MAYOR CALLS ON FEDS TO REVIVE ENERGY EAST AFTER $4.5B TRANS MOUNTAIN DEAL
This feature highlights the May 24th announcement from B.C. Premier, John Horgan, that the province is looking into whether British Columbians are being gouged by high gasoline prices and are asking for the federal government to do the same.
This article draws attention to renewed hope for the future prospects of an Energy East pipeline, from Saint John Mayor Don Darling, in light of the federal governments’ decision to purchase the Trans Mountain pipeline.
ONTARIO / QUÉBEC REGION CBC ONTARIO VOTES 2018 POLL TRACKER: NDP LEADING BY SLIM MARGIN This Ontario election poll update, maintained by CBC poll analyst Éric Grenier, placed NDP slightly leading over the Conservatives, according to the latest aggregate of all publicly available polling data on the upcoming June 7th election.
NON-PROFIT CORPORATION TO ADMINISTER NOVA SCOTIA’S CAP-AND-TRADE SYSTEM This news story shines a light on the non-profit corporation chosen by the Nova Scotia government to run the province’s cap-and-trade system. N.S. JOINS WESTERN CLIMATE INITIATIVE This feature highlights the May 14th announcement from Nova Scotia government officials in regard to the province joining the Western Climate Initiative Inc..
CARBON PRICING IS A KEY POLICY TO BUILD A CLEAN, INNOVATIVE ECONOMY This opinion piece by Stewart Elgie, Professor of Law and Economics at the University of Ottawa, argues that climate change and carbon pricing is not a leftwing or right-wing issue, but an environmental and economic reality. FORD WANTS TO FIND $6B WORTH OF ‘EFFICIENCIES’ WITHOUT CUTTING JOBS — IS THAT EVEN POSSIBLE? This article weighs in on the promises and intentions presented by candidates vying to become the next Premier of Ontario, following the final leaders’ debate on May 27.
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MEMBER UPDATES CIPMA CONNECTION | NEW MEMBERS
CIPMA is pleased to welcome new Associate Member, North Atlantic.
ASSOCIATE MEMBERS
NORTH ATLANTIC North Atlantic refines over 130,000 barrels of oil per day. We have one of North America’s largest refinery docks and our location is unbeatable. Perched on Canada’s east coast.
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Jennifer Stewart, President and CEO jstewart@cipma.org | Cell: 613.915.5699
Rita Molinari, CMP, Operations Manager rmolinari@cipma.org | Cell: 416.358.5207
MAILING ADDRESS | 3-1750 The Queensway, Suite 115 - Toronto, ON., M9C 5H5
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