Industry Committee on July 20th, 2010

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

Mr. Boles, thank you, et les témoins, M. Delage et M. Fortier.

I'll go very much to the question.

Mr. Boles, you made the case that there was in fact a business case for purchasing the refinery. If by chance the committee were successful in doing in Canada what is often done in the United States, and makes an order to maintain the supply.... If you had been here earlier, you would know that the question I asked was about when the process of inputs of feedstock actually comes to an end. Shell detailed when that was going happen. But if there were an order to maintain that feedstock sufficient to keep that refinery open at normal business terms, do you believe that would be enough to continue the interest of your company in purchasing the refinery? In other words, the transformation process would not take place.

[Jim Boles]

What I understood you to say was that they would continue to operate the way it's being operated now.

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

Correct.

[Jim Boles]

We would be willing to re-establish discussions and negotiations for the purchase of the refinery if that were to happen.

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

Mr. Boles, in 2007-2008, and again this year, Natural Resources Canada's oil division, in its annual survey of refiners, made the following comment:

Refinery utilization rates close to 100 per cent, along with growth in demand for petroleum products, have created a need for significant additions to refinery capacity in Canada. Without investment in new refining capacity, supply interruptions could become more frequent and increasingly difficult to manage.

They further stated:

Due to the high demand for petroleum products in the Northeastern United States, refiners in Atlantic Canada export considerable volumes of petroleum products to that region.

If Shell Canada, representing 13% of all eastern Canada's capacity, were taken out of the matrix, what would that do in terms of creating vulnerability and access to supply, not just in Canada but also in the northeastern parts of the United States? Could you comment on that?

[Jim Boles]

I would find it difficult to comment on that in general. I don't know how to comment on what you said.

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

Then let me go back to the business side of it. I'm looking at crude oil today at about 50¢ a litre, which you would call about $2 a gallon, and I'm looking at the exchange rate of crude making it about $80 a barrel, both Brent and WTI at Cushing. And considering of course the refineries along Port Arthur and Beaumont, which are a hell of a lot older than our refinery here in east Montreal, at $15 or $16 a barrel, which is what this current transaction turns out to be in terms of the margin available to that refinery, is that still pretty competitive, considering the market today?

[Jim Boles]

You're saying $15 to $16 of gross profit per barrel?

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

Well, it would be the net profit after converting the crude into gasoline.

[Jim Boles]

Yes, if you're talking about any kind of gross profit per barrel at $15, that's very competitive.

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

In your experience and that of your company, could you give us an example or perhaps an idea of... Well, a statement has been made by Shell that there has been a compression, obviously, in the profits they're making at the refinery level, including as a result of a glut in crude. Is there quite a substantial availability of crude around the world right now that you can get access to—saving except of course if the longshoremen in Montreal are on strike, as I believe they are today, adding further to the increase and the vulnerability—do you think there is enough crude to get around that you can continue to make a business case?

[Jim Boles]

Yes.

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

Then let me ask the final question, because I think it's important to address this in terms of the capacity issue here in Canada.

The normal business terms that one would see for refined product across the country are in decline. It would appear that Shell has moved out of eastern Canada in large part; with the exception of Sarnia, it closed its refinery some time ago in Burlington, Ontario, and in Bronte and Oakville, Ontario, coupled with a decline in a number of other refineries. Would you say that the number of refineries exiting the market in Canada is at a pace that is far greater than that in the United States, our nearest partner from which we would get supply?

[Jim Boles]

I would guess, and it would just be a guess, because I've seen nothing and have not studied it, that the way to characterize it is that those who are exiting the market in Canada are probably not greater than those who need to exit in the U.S.

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

How much pressure is placed on a country or region or environment when they must resort to the import option? Are there discounts, or do we often see a situation where prices are higher? If a country like Canada and its eastern market decide to get out of the refinery business, which of course this closure will do substantially, will we ultimately see an import option at boutique or premium prices, which only Canadians in eastern Canada will have to pay?

[Jim Boles]

Supply and demand says that the less you control your own destiny the more subject you are to those periods of time when supply is not readily available, and while there could be price implications, the bigger problem is going to be supply implications.

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

Mr. Boles, in September 2008, two years ago, we wound up in a situation where, as a result of the closure of the refinery in Port Arthur and several refineries on the Texas gulf coast, Americans faced about a 6¢-a-gallon increase and Canadians were treated to a 60¢-a-gallon increase. So my question again is, is it conceivable that what is a proverbial cold in the United States could turn out to be pneumonia for most Canadians right where they least expect it, in their pocketbook?

[The Chair, Conservative, Michael Chong]

Thank you, Mr. McTeague.

Mr. Boles, perhaps you could answer that and then we'll go to Mr. Allen.

[Jim Boles]

That's such a cosmic question. It would seem to me that from an end-product standpoint, gasoline and diesel, the absence of being in control of your refining situation is not good in terms of the obvious part of what you were saying, and I don't think you could replace that on a spot basis.

[The Chair, Conservative, Michael Chong]

Thank you, Mr. Boles.

Mr. Allen.

[Mike Allen, Conservative, Tobique—Mactaquac, NB]

Thank you, Chair, and thank you to our witnesses.

Mr. Boles, I find it interesting that you said $800 million over ten years if you get an acceptable return on investment, if that's leveraged. Of the $800 million that you figure you would have to spend over the next ten years, how much would be directed right at the turnaround period, which would be the short-term period?

[Jim Boles]

You heard the numbers that Mr. Oblath gave earlier. That would be included in that.

My recollection is that the turnaround costs in the first three years—I'm going from memory, and I don't have a great one—is somewhere in the neighbourhood of $80 million, for the turnaround portion. Then, of course, you don't have a large expenditure for turnaround for some number of years—I believe that is four years—but you do have ongoing capital expenditure requirements in those periods.

[Mike Allen, Conservative, Tobique—Mactaquac, NB]

So it would take you somewhere in the order of $80 million, roughly, to get up and running.

[Jim Boles]

We have a schedule that we can provide.

[Mike Allen, Conservative, Tobique—Mactaquac, NB]

I just wanted to get that clarified, because I thought the number might be bigger. I am just wondering how quickly you could actually do a refurbishment project like that if it were several hundreds of millions of dollars, and could you reasonably even get it done by next spring?