Industry Committee on July 20th, 2010

[The Chair, Conservative, Michael Chong]

Monsieur Bouchard, there's no requirement in a parliamentary committee to release anybody from any obligation they may have, in terms of witness testimony, because witnesses here are afforded the same immunity from civil or other suits that may be brought to them in a court of law. Everything that is given as testimony here in front of our committee has the same protections afforded to you as to a member of the House of Commons in the House. Witnesses and members are free to express their opinions here without fear of lawsuits in the courts.

I reiterate that to all members so that they understand that you're free to discuss and to divulge whatever information you wish to. I also, as chair, indicated that to our witnesses before they came today.

I think Mr. Oblath has answered your questions and divulged information regarding the offer that was reported in Radio-Canada, and he's clarified that.

Go ahead.

[Dan McTeague, Liberal, Pickering—Scarborough East, ON]

Point of order.

[Robert Bouchard, Bloc, Chicoutimi—Le Fjord, QC]

As I understand it, I cannot touch that point.

I would like to ask Mr. Oblath a question.

[The Chair, Conservative, Michael Chong]

Just a moment, please.

Mr. McTeague.

[Dan McTeague, Liberal, Pickering—Scarborough East, ON]

Chair, on a point of order, I just want to make sure, in the interest of time... You took two minutes to make that point, and it's a very good one, but I think we should attach that at the end. In other words, give an additional two minutes for the purpose of some of the members on the committee, Chair. Thank you.

[The Chair, Conservative, Michael Chong]

We've already extended it by 15 minutes, so I think—

[Dan McTeague, Liberal, Pickering—Scarborough East, ON]

You just eliminated two minutes of that 15, and I'm now getting another 30 seconds.

[The Chair, Conservative, Michael Chong]

I have, but it was a clarification of what was going on.

Mr. Bouchard, you have already used your five minutes.

Mr. Van Kesteren, the floor is yours now.

[Dave Van Kesteren, Conservative, Chatham-Kent—Essex, ON]

Thank you, Mr. Chair.

Thank you, witnesses, for appearing before us.

I wonder if you could take us through a little bit of a description as to what is happening in the oil industry. I speak specifically. When I look at the number of refineries that have closed in the past, I think since 1954 there were quite a number of these refineries throughout Canada. I would assume that would be the case in the United States too. There seems to have been an enormous number that have been closed. I wonder if you could maybe just explain to the committee why that is and how that's happened.

Maybe you could tell the committee as well how the oil industry has changed. I understand we have a common grid with the United States.

Finally, if you could, talk to us about capacity, the capacity for refinement here in Canada and what the consumption is. Are we getting our share of the market?

Maybe you could just elaborate on those few things first.

[Richard Oblath]

I'd find it very difficult to give you the exact numbers for Canada itself, but I can give you an overall picture of what's happening. If you start from the global situation, clearly global demand for refined products is going up. Refineries are being built in various parts of the world. There have been no new refineries built in the United States for about 37 years, and I believe in Canada for 25 or 30 years. In fact, I think our refinery at Scotford was probably the last refinery built here.

The newer refineries are very large, and therefore some smaller, older refineries are being shut down in various parts of the world, particularly in western Europe and North America. So that's the overall trend that's happening.

The liquidity of the global market is such that consumers all over the world are still capable of being supplied. It's relatively easy to move refined products via vessels. It's done every day all over the world. Therefore the optimum use of refined products from the most efficient refineries in the world is the trend that's going on.

Within Canada, the Montreal East refinery is the least competitive refinery in Canada and has been for the last ten years, in terms of profitability. Unfortunately, the refinery has come to the end of its life. I think that is just the realization we've come to. Over a hundred other companies have apparently have looked at this, of which 17 have looked in great detail at the refinery, and have come to the same conclusion. Without significant help from sources outside of private industry, this refinery cannot continue to operate.

[Dave Van Kesteren, Conservative, Chatham-Kent—Essex, ON]

I understand that you produce aviation fuel at your refinery. Who is going to fill in that gap? Obviously Montreal has a strong aviation presence. Who is going to fill in the gap?

[Richard Oblath]

I'll make a general statement, and then on the specific issue around aviation fuel I'll let Monsieur Houle answer.

There's a presumption in some of the questions, Mr. Chair, that we don't care about our customers. We didn't want to sell the refinery. The best thing we saw as a choice back in 2009 was to sell the refinery as a going refinery. If someone had found a way to run that refinery we would have been a very, very happy customer of that refinery and then passed those products on to our customers. Shell's intention is to retain its customer base. They are the reason for our being in business. We will do everything we can to make sure our customers are supplied, wherever they are in the world.

On the specific issue with aviation gas, I'll pass over to Monsieur Houle.

[Christian Houle]

To make it simple, most of the imports we're going to do will be gasoline, about 65% of the volume we're going to import. Europe is very long on gasoline, and our own refineries in Europe are long on gasoline, so the volume will be fairly easy to buy, even on the spot market, to bring the ships to Montreal.

The aviation fuel, the av-gas as we call it, for the small airplanes would be taken from either our Pernis refinery in the Netherlands or in the Gulf Coast.

The low-sulphur distillate--it's a small volume--will be taken out of the Puget Sound refinery, or in a better place if we can find a better place. At least we have that secured.

And the jet fuel will be domestic from other refiners and a blend of import, but the import will be a very small volume, which will be fairly easy to get from South America and the Gulf Coast, which would be brought in by ships.

[The Chair, Conservative, Michael Chong]

Thank you, Mr. Houle and Mr. Van Kesteren.

Monsieur Godin.

[Yvon Godin, NDP, Acadie—Bathurst, NB]

It costs money to buy the refinery. Do you agree, Mr. Houle? It also costs money to dismantle it. How much is that going to cost you?

[Christian Houle]

Mr. Chair, I am sure that you understand that that is sensitive information in competition terms. I cannot reveal the full and exact cost of all the components. But I can say that there are costs associated with what are called employee severance payments. Several million dollars are set aside for that. There are costs associated with decommissioning the units, and the decontamination, restoration and characterization of the soil so that it will meet Quebec government standards. These is also a cost for the conversion project I mentioned earlier, such as for pumps and pipes.

I am describing things in fairly simple terms, but Mr. Oblath may know more about those details. All those costs were considered when the time came to assess the value of the refinery compared to the value of the terminal. People have to understand that. We are not talking about the physical cost of the refinery. We are talking about the value of the terminal for Shell as opposed to the value of the refinery for someone else. As Mr. Oblath explained, the refinery as a terminal has some value. Unfortunately, there was no agreements on what that value is.

[Yvon Godin, NDP, Acadie—Bathurst, NB]

I am having a hard time understanding. It seems a little complicated.

Mr. Houle, you told us earlier that this stage was over and that stage was over. It is as if you saw this coming a long time ago. That means that you did not start thinking about it in 2009, but you let things go to such an extent that, according to you, your refinery is done for. So you are really telling us that that was your intention for a long time.

[Christian Houle]

Mr. Chair, the refinery has 20 to 30 units. So there are always some that are not in use. As part of our strategic study, of course, decisions were made from the point of view of safety. By that I mean Shell's variance formulae and technical inspection staff. Some decisions were postponed for safety reasons pending the final response that would determine if we were going to continue our activities, look for buyers, or convert the refinery into a terminal.

For a conversion process and a strategic study, it was normal to wait as long as possible and not to incur expenses. September is now the final deadline. That is when the units must absolutely cease operations. We gave ourselves as much time as we could in order to push back the final decision and to increase the chances of selling the refinery. Once again, I repeat that Shell's preferred option was definitely to sell the refinery. Clearly, we wanted to sell it, but, for the shareholders, the price had to be higher than the value of a terminal.

[Yvon Godin, NDP, Acadie—Bathurst, NB]

As you said, refineries are no longer being built in Canada, and it looks like that situation will continue. You mentioned the shareholders. It seems that it is better to deal with countries where labour costs less. Welcome to free trade and all it entails; this is what it costs. Is that your position?

[Christian Houle]

I am going to let Mr. Oblath answer that question, Mr. Chair.

[Richard Oblath]

I don't consider Singapore or the gulf coast of Texas to be low labour rate areas of the world. We're making an enormous investment in Port Arthur, Texas, to double that refinery, and we've made a very, very large investment in Singapore as well.

[Yvon Godin, NDP, Acadie—Bathurst, NB]

Fine. But Texas is in the United States, and now gets the upper hand over us in eastern and Atlantic Canada because the petroleum we buy from Shell will come from Texas, and the Americans will make the money.

[Richard Oblath]

Mr. Chair, we have a responsibility to make our products in the places in the world where it makes the most sense. Unfortunately, this refinery has not been competitive for many years. It's the least competitive refinery in Canada. That's not our analysis; that's an industry benchmarking analysis. The refinery now is too old, too small, and cannot be made competitive, and that's not--

[Yvon Godin, NDP, Acadie—Bathurst, NB]

Okay. Excuse me.

Mr. Rocheleau, you…

[The Chair, Conservative, Michael Chong]

Monsieur Godin, let Mr. Oblath finish, please.