Finance Committee on Feb. 27th, 2007

[Marlo Raynolds]

I guess we're seeing a number of companies work on trying to be more environmentally friendly in their approaches and taking on new approaches to deal with carbon emissions.

For instance, Petrobank Energy and Resources has a toe-to-heel air injection program that does underground partial upgrading and doesn't require natural gas as an energy source. We have other companies that have worked on using carbon dioxide to produce other products, such as oil or gas. For instance, with its Weyburn project, Encana is actually importing carbon dioxide from, I believe, North Dakota to produce oil through a miscible flood program. Similarly, Apache is involved in a miscible flood program at Midale, which also takes carbon dioxide and produces oil from it and sequesters the carbon dioxide in the process.

And to a large degree, some of that has been driven by tax incentives or R and D incentives provided to these companies to be able to experiment with these new technologies.

Other existing oil sands projects have been working on cleaning out the tailings ponds or using less in that regard. So we're seeing a lot of developments in that area.

[Diane Ablonczy, Conservative, Calgary Nose Hill, AB]

You mentioned that some of the projects being contemplated will not be going ahead, in your analysis. If these projects don't go ahead, what will be the impact on the Canadian economy, in your analysis?

[Marlo Raynolds]

We think these projects are key to Alberta's continued growth and development. Again, one thing to keep in mind is that somebody's cost is somebody else's revenue. So if these projects don't proceed, the income normally earned by people working in these projects is not going to be earned by them. Again, if you see the growth in the construction industry and the number of people employed in that field, that economic development is just not going to occur. From the government's perspective, any royalties or taxes gained from that production, or even from the personal income earned by the people working in the industry, is not going to be earned.

[The Vice-Chair, Liberal, Massimo Pacetti]

Thank you, Mr. Roberts.

Thank you, Ms. Ablonczy.

Okay, Mr. Bevington, for six minutes, please.

[Dennis Bevington, NDP, Western Arctic, NT]

Thank you, Mr. Chairman.

I didn't catch the whole story here. Also, I've been involved with the natural resources committee for about three months.

I think, clearly, what you're saying is that you need this tax break to encourage the companies to invest, but when we are looking at the industry, we are looking at projections of an expansion to three and a half million barrels a day by 2015. We are at a million barrels right now.

Within the projects that are going ahead right now, we are experiencing labour shortages throughout western Canada. We have overheated the economy. The goods and services that are being used in the tar sands are taking away from the profit in the projects that are going ahead. So there is a bit of a relationship. As this thing heats up, then, you're making the argument that we can't afford to give back the tax break that was put in in 1995.

At the same time, we are also looking, in the industry, at starting to outsource from offshore some of the major pieces of equipment that are going into the tar sands. From my understanding, we are looking at bringing them down the Mackenzie River and then through the waterway system to Fort McMurray, in 2,000 tonne groups, from offshore, from other countries.

So we may be losing employment and economics as well, if we continue to expand at the same rate and see this sort of buildup of activity in the area.

Is there a reasonable limit in the Canadian economy to what we're doing in the tar sands? That would be my question to all of you. Should we have an industrial strategy, which sets some kind of parameters for the expansion of this area in a logical fashion, that will deliver resource revenue and taxation to government, ensure that costs remain reasonable, and ensure that the rest of the economy is not altered in a negative fashion through this rapid expansion?

[The Vice-Chair, Liberal, Massimo Pacetti]

Mr. Bevington, can you direct the question to one person in particular?

[Dennis Bevington, NDP, Western Arctic, NT]

Everybody can take a shot at it. What's the limit?

[The Vice-Chair, Liberal, Massimo Pacetti]

Does anybody want to go at it first? Yes, Mr. Plexman, go ahead.

[Robert Plexman]

I'm happy to respond to that one.

I guess the first point I want to make is regarding offshore. Most of the large vessels and equipment for these oil sands plants have, for a long time, been built offshore. Korean fabrication shops are highly skilled. They're global. This is a global industry. So that isn't something new that we've gone offshore.

You mentioned floating the stuff down the Mackenzie River. That's highly innovative. That is one way the industry is reacting to these cost pressures. Because for the project you're talking about, the Northern Lights project, the only way they can compete is to come up with a highly innovative strategy to develop their oil sands, and we can talk about that later.

As far as addressing that one, the industry will get there first. You're already seeing changes. I will give you examples. There is Imperial Oil with their Kearl project. Tim Hearn, the CEO of Imperial Oil, was the first one to warn about escalating costs. They have slowed down that project. There is Husky and their Sunrise project. If you went up to Shell's Albian project, Husky's the one right next to it. Their Sunrise project is a fantastic project. That thing has basically been on hold for the past year. It has received regulatory approval and board sanctioning. They're trying to figure out a way to market that oil and still generate a fair return for their shareholders, recognizing the escalation in costs. Fort Hills is the third one I will mention.

What I'm saying is that the people running these projects are not stupid. When they feel the limit is reached, they will back off. So what I'm saying is that Imperial Oil has already hit the limit for Kearl. Husky has hit the limit, and we are seeing modification at Fort Hills, because they realize that they are approaching the limit.

So that process is under way without having to plan for it. That's how the industry is reacting to these pressures.

[The Vice-Chair, Liberal, Massimo Pacetti]

Okay. Thank you, Mr. Plexman.

Mr. Raynolds, I think you had your hand up. Go ahead.

[Marlo Raynolds]

Yes, thank you.

There is no doubt that there will be winners and losers as we choose to work in a market-based economy. We've heard examples of some companies that are losing, but if you look at Canadian Natural Resources Limited, their Horizon project is on budget and on schedule, despite many of these market changes.

Shell Canada and Suncor have just announced new expansion projects in the last two weeks; they have demonstrated confidence in it. We've also heard that 15% of oil reserves are in non-OPEC, an incredible driver to continue investment in Canadian oil sands.

I think the key here is to ask whether it is really the responsibility of the Canadian taxpayers to be subsidizing this now mature and very competitive industry. To set limits on development, the most powerful method will be to ensure that the full cost of production is incorporated.

Right now there's an amazing environmental subsidy in terms of air, land, water, and global warming. If we capture those costs and ensure that the oil sands have to compete on a level playing field, that will be a driver to ensure that we're protecting the environment. It's government's role, in my mind, to set the environmental outcomes that are desirable for all Canadians around air, land, water, and global warming. Let companies compete on how best to achieve those environmental outcomes, but it's a requirement to put forth very clear outcomes that ensure protection of the environment.

[The Vice-Chair, Liberal, Massimo Pacetti]

Thank you, Mr. Bevington.

Mr. Thibault.

[Robert Thibault, Liberal, West Nova, NS]

I have a couple of questions.

Mr. Plexman, in your analysis and in your expert opinion, if we remove the accelerated capital cost depreciation, what would be the return on investment? How would it affect the return on investment—not of the existing Suncors or Syncrudes, but of the ones that are nearing production or would be start-ups now?

[Robert Plexman]

It's a fair question, a great question.

When I first started reading about these possible changes, I started fooling around with the numbers, and here again, as I said at the beginning, the companies don't tell me what their capital cost balances are and actually how much is available for the accelerated capital cost allowance. But playing around with some numbers....

I'll use Suncor as an example. When I add up my numbers on Suncor, I think a fair value for that company's stock is $100 per share. That's our price target. It's my job to set price targets.

If I go through the analysis—and here again, I'm looking at it completely from outside—if we cut that accelerated capital cost allowance down to 25%, so that it's the same as CDE, my net asset value drops from $100 per share to $80 per share. That's the impact on one of the leading companies in the industry.

I don't have the numbers for the other ones—

[Robert Thibault, Liberal, West Nova, NS]

So on Suncor you would calculate a reduction of 20% of value, but you're telling us that you don't have access to the information for the accelerated depreciation. How can you make that calculation without—

[Robert Plexman]

Basically what I do is this. The way the model is set up now, of course, when we talk about these expected returns of $60 oil and the existing fiscal regime, whether royalties or the capital cost allowance, all we do is basically assume that they start paying taxes sooner. The whole point about these oil sands plants is that under the existing fiscal regime, recognizing the 13 years it takes from conception to being in business—

[Robert Thibault, Liberal, West Nova, NS]

But couldn't you calculate it the other way? Couldn't you look at what the replacement of asset costs is in a fiscal year and say that if in 2008 they're going to need 20 trucks, then you could assume they're going to write off those 20 trucks all in that year?

[Robert Plexman]

Yes, but I don't have that detail, so I'll look at the organization. I'll look at the revenue that's generated. Once an oil sands plant returns their capital, then they start paying taxes. If we assume that they start paying taxes sooner, that basically affects their share of the revenue, and that's how I get that drop in the value of the company.

[Robert Thibault, Liberal, West Nova, NS]

Shouldn't your assumptions apply across the board to all companies in that sector?

[Robert Plexman]

Oh, no. I can only.... I don't know it for the others.

[Robert Thibault, Liberal, West Nova, NS]

Here is one final technical question. When I look at the financial statements of a company that's listed on the TSX or any other stock exchange, there are always notes attached that warn the investor what the liabilities are of these companies and what assets they might have that don't appear—the notes of the auditor. Wouldn't those figures for the allowance for accelerated capital cost be included in the notes of the auditor?

[Robert Plexman]

Not that much detail. That's a summary. We scour every document we can get to try to improve the quality of analysis, but we don't have that kind of detail.

[Robert Thibault, Liberal, West Nova, NS]

But even in the audited statements filed with the TSX, we didn't have those.

[Robert Plexman]

No.

[The Vice-Chair, Liberal, Massimo Pacetti]

Thank you, Mr. Thibault.

Mr. Paquette, please go ahead. Then it will be Mr. Wallace's turn.