Natural Resources Committee on Nov. 18th, 2010

[The Chair, Conservative, Leon Benoit]

Good morning, everyone. It's good to be back again.

We have, in the first hour, a witness on our study. In the second hour we will deal with future business of the committee. Some discussion on that started at the last meeting, and we'll continue that.

We have with us today Michael Binnion, who is president of Questerre Energy Corporation. Thank you very much for coming. We had a long list of witnesses who were asked and just couldn't accommodate us right at this time. Many are coming later. So we really do appreciate your being here today.

If you could start with your presentation for up to 10 minutes, we'll then go to questions and comments from the members. I know you've given us a brief, but the presentation is in one language and the other information in another. We have to get them translated before we can circulate them. So they will be circulated later, through the clerk.

Go ahead, please, Mr. Binnion, for up to 10 minutes.

[Michael Binnion, President and Chief Executive Officer, Questerre Energy Corporation]

My name is Michael Binnion and I am the President of Questerre Energy Corporation. I would like to thank you, Mr. Chair and all members of the committee, for inviting me to speak to you today.

Questerre's main focus is our Utica Shale Gas discovery in the St. Lawrence Lowlands of Quebec where we have been working since 1998.

There are various public estimates of the Utica shale gas discovery that suggest that the entire discovery is in the range of 25 to 50 trillion cubic feet of gas, which would put it in the top 10 natural gas discoveries in North America.

For the past 20-plus years I've been an entrepreneur involved in start-up and turnaround ventures in Canada and internationally, primarily in the energy sector. I have the perspective of someone who's been on a rig, at the control panel for a frac operation, at a compressor site, and a meter station, someone who knows the practical application of engineering, geophysics, and geology, and who risks his own money on the outcomes.

Formerly I was president and founder of the first western company in the Republic of Georgia after the civil war, working on their first hydrocarbon legislation, and with the international finance corporation. Now I'm immersed in the politics of shale gas in Quebec.

Today I hope to combine these perspectives to discuss the impact of shale gas on energy security, on the potential for regional economic benefits, and where there is room for the federal government to play a role.

The gas age has begun. The impact of shale gas on world markets has been enormous. In 2008 North America was running out of natural gas, and the price was well over $10 per thousand cubic feet, or $60 per barrel on an energy equivalent basis, and predicted to be much higher.

North America was expected to be competing on world markets to obtain significant quantities of liquid natural gas, or LNG. Several projects were at late stages of approval for LNG import terminals, three in Canada--Rabaska, Cacouna, and Kitimat. European headlines were about Russia's stranglehold on Europe's gas market and the political impacts it might have. China was signing long-term contracts to tie up world LNG supplies.

Only two years later the price of gas is under $4 per Mcf, or less than $25 per barrel on an energy equivalent basis. All LNG import terminal projects have been cancelled. Kitimat has converted to an export terminal for Asian markets. European headlines are about how Russia is worried about maintaining market share. In Europe, China is still tying up world supplies of LNG.

Today shale gas provides close to 10 billion cubic feet per day of North American demand. As a result, North America competes for a minimal amount of LNG on international markets. Prices in Europe and Asia are starting to become linked, due to their competition for the same supplies of LNG. The price in Britain is now about $7 per Mcf, with Asia being somewhat higher.

The inference is the benefit to consumers of shale gas in North America is not only security of supply but also a price at least $3 per Mcf lower than international markets. However, there's an even bigger advantage in international markets, although more difficult to quantify. We can only speculate what the international price would be if North America was competing for as much as 10 Bcf per day of LNG imports, when current total worldwide capacity is only 27 Bcf per day.

While the world was preoccupied with the financial crisis, the natural gas business was creating a new paradigm in world energy. I believe the technological innovations that allow us to extract natural gas from source rock are having as big an impact as that of Rockefeller learning how to refine oil at the turn of the last century.

That change created an oil glut, ironically almost bankrupting Standard Oil at the time. But it led to a century of growth based on a cleaner and more affordable energy, just as coal had done a century before. Shale gas can do the same this century, fueling over a billion people's aspirations to join a western standard of living, without threatening energy security in North America.

What are the opportunities and threats to the emergence of a natural gas age?

In terms of opportunities, one, with its abundant unconventional gas resources, Canada could become a world leader in a natural gas-fuelled economy. There are opportunities to expand natural gas use, such as a trans-Canada green highway, starting with Quebec to Windsor--city fleet and public transportation vehicles fuelled by natural gas; fuel switching for heating, industrial uses, and power generation from higher emission sources; and LNG export terminals to supply world needs for affordable and cleaner fuel. Given that natural gas currently trades at about one-third the price of oil, the capital required can be repaid from energy savings; it's a subsidy-free energy solution.

Two, emerging shale gas developments in eastern Canada bring the possibility for a locally based onshore service sector. The oil and gas service sector is currently concentrated in western Canada and is the main delivery point for technological advances, employment, and widely distributed economic benefits associated with the oil and gas industry. Having a service sector based in eastern Canada could deliver these same types of benefits.

We have provided you a briefing paper focusing on economic benefits that this industry could bring to Quebec.

In terms of threats, one, there is a general lack of public awareness about shale gas development, particularly in provinces without a long history of development of hydrocarbons. The techniques and processes, including hydraulic fracturing, are currently used in essentially all natural gas wells drilled in North America. However, it is still new for some of the regions where we've recently discovered shale gas. Social acceptability hinges on the education of the public at large about the real risks and benefits.

Second, it is our observation that the debate about shale gas has been framed thus far by political lobbies associated with competing fuels--such as coal and subsidized energy--that view natural gas as a direct threat. With new media, a U.S. political debate has permeated the Canadian one. In material respects, we do not believe this has served the interest of familiarizing the public with the natural gas industry.

Third, there is a first-mover disadvantage to funding the cost of new infrastructure required for natural gas. As common carrier pipelines and facilities, they will need to be regulated to allow many parties to use them. But first movers are disproportionately burdened with the costs and risks, and this delays necessary investment to promote adoption of this cleaner fuel.

These are our recommendations for the federal government.

Since the federal government does not have a jurisdiction over provincial resources, there is a role to be played as an honest broker to research and inform the public about technical risks and procedures involved in the shale extraction process. A successful example of this was the participation by Natural Resources Canada at the Munk Centre conference on the impact of shale gas on water resources.

Another recommendation with respect to the federal government’s role in interprovincial and international commerce is to support the construction of natural gas infrastructure. It is unlikely the private sector will be able to advance major projects for public infrastructure on its own.

Finally, we encourage the federal government to take advantage of recent events in the United States and abandon the idea of cap and trade. As seen in Europe, this system will result in political decisions about emissions credits and inevitably favour entrenched industries, which in a North American context means coal. The market has done a good job of delivering consumers the energy they demand, but to the extent that public policy imperatives require it, a carbon tax will be less distorting and more effective in encouraging consumer choices that reduce emissions.

Once again, I thank you for the opportunity to present these ideas. I hope they have been of use to your committee, and I welcome any questions.

[The Chair, Conservative, Leon Benoit]

Thank you very much for an excellent presentation, which gave a good outline I think for us to start from when it comes to dealing with shale gas.

We will go directly to questions.

Monsieur Coderre, for up to seven minutes. Go ahead, please.

[Denis Coderre, Liberal, Bourassa, QC]

Thank you, Mr. Chair.

Mr. Binnion, thank you for taking part in this exercise. You must have certainly attended some of the meetings on the shale gas issue in Quebec. One thing is certain: we are trying to understand and we want to respect the areas of jurisdiction. I would like to thank you for providing us with some solutions. We will talk about them more later.

Could you first tell me whether you are fairly familiar with the British Columbia model?

[Michael Binnion]

The British model for regulations or royalties...?

[Denis Coderre, Liberal, Bourassa, QC]

British Columbia.

[Michael Binnion]

British Columbia, yes. We have a project in northeast British Columbia, so we operate under the British Columbia model.

[Denis Coderre, Liberal, Bourassa, QC]

All right. I imagine those people did their homework on the legislation. Are there similarities between Quebec legislation and legislation in British Columbia? In Quebec, this issue falls under the Mining Act. There is no legislation on hydrocarbons. Is there any in British Columbia?

[Michael Binnion]

Yes. I am going to turn that into two questions, if I might.

The first is that in Quebec, while the law affecting hydrocarbons is part of the Mining Act, there are separate clauses in the legislation and something like 30 pages of regulations specific just to oil and gas.

The model in Quebec has been designed for exploration because there really hasn’t been any production of any note. So it's a system designed just for exploration. It's been extremely effective in Quebec for that purpose, and the proof is that we have been exploring for 30-some years in Quebec and people didn’t even know we were there.

In British Columbia, that industry is much more developed. The system there, the Oil and Gas Commission of British Columbia, was first incorporated sometime around 1980. So they've had quite some time to develop, and it is a more advanced model, because, of course, it's designed for exploration and production. I would agree that it would be a good model for Quebec to follow.

[Denis Coderre, Liberal, Bourassa, QC]

I am a federal MP. If I was a provincial MLA, you and I would probably not be using the same tone this morning. But I will be respectful of provincial policy. Unfortunately, I think that the discussions between the industry and the people were an abysmal failure. Disgraceful actions have been taken. I am not talking about you, but about some drilling companies in particular. We can speculate about international prices, but I don't think we should speculate about people's quality of life, even if there is compensation. But that's a different story.

I would like us to look at the Canadian government's role in more detail. I don't want to talk about funding. Quebec made a social choice and we shouldn't go there. There are already other issues like that. I would rather talk about the role of the National Energy Board.

I did not hear you talk about environmental assessments, which are now part of the board's responsibilities. To your knowledge, have there been environmental assessments on the impact of shale gas in Quebec specifically?

In New Brunswick, the situation is currently the same.

[Michael Binnion]

I know that at the Munk Centre the representative of Natural Resources Canada mentioned that they had done internal studies on the full life-cycle impact of natural gas on CO₂ emissions, as an example. In terms of my personal awareness, that would be the only thing.

[Denis Coderre, Liberal, Bourassa, QC]

Last Sunday, I watched the show Découverte, which was rather disturbing. We still have the Pennsylvania example and Talisman's situation, among others.

You need a huge amount of water to collect the gas. How can you reassure us that the extraction of shale gas, particularly in Quebec, will not cause damage to our water table and contaminate the water? There is some sort of impact. People need to be reassured, but they especially need to understand what is going on.

[Michael Binnion]

Our company has published a fact sheet on water use in shale gas in Quebec. It is on our web page at Questerre.com.

Just to give you a quick summary, we believe that in full-field development at approximately 400 wells per year, which is about the higher end of the range that has been predicted for Quebec, we would be quite a light industrial user of water, using approximately three billion litres of water per year, which would be less than car washes in Quebec, which would be maybe 20% of the water that the city of Quebec loses just through its leaky pipes. It is less than 1% of what agriculture uses. It is less than 1% of what pulp and paper uses.

I understand that when we are talking to people and say we are using 12 million litres of water, people imagine it to be a huge number. It is hard to grasp what the number really is. But in an industrial context, it is actually a small amount of water and will be barely noticed, if at all, on the Quebec water table. MDDEP has already put in regulations restricting us such that if there are local areas of shortage of water, we would be restricted in how much we take. I don’t expect that in the lowlands that would ever be a problem.

In addition, to put it into another context, we have calculated the amount of water it takes for one well and compared it with how many homes the gas from that well would be able to heat or service in one year, if you are on natural gas service. The amount would be less than one litre of water per year per home in Quebec, compared with the current usage in Quebec of 360 litres per home.

[Denis Coderre, Liberal, Bourassa, QC]

You have to recycle the water and treat it. There are two possibilities: you can reach an agreement with those in charge of the treatment wells... As to the existing municipal infrastructures, that's another story, and I am not sure that's the right thing to do.

There is no need to panic. We are talking about exploration and not extraction. Does your company intend to put in place its own water treatment infrastructure? Are you planning on doing that?

[Michael Binnion]

We expect that in full-field development we would recycle an amount approaching 100% of the water in Quebec. Just to help put that into some context, every shale has a different mineralogy and every shale therefore has a flowback water that will have a different mineral and chemical content. When you read, in North American contexts, about the flowback water, it is important to understand that it is local to the shale you are talking about.

I have seen that in northeast B.C. people are looking at treatment facilities, because of the amount of solids that come back in that water. I am not personally familiar with it; I have just read about it.

In Quebec, I am personally familiar with the tests of the flowback water. One of those tests was submitted in the Quebec Oil and Gas Association memoir to the BAPE, as an example. All of them are submitted to treatment facilities and to MDDEP, but the flowback water in Quebec, because of the mineralogy of the Utica shale, is very clean. It would actually meet the standards for storm water, if it weren’t that it is too high in salt. This makes it a very easy water to recycle, because the salt is actually a positive contributor to not damaging the shale formations.

We fully expect that we’ll be very successful in recycling, but I would mention that right now, because we are just in the exploration phase, we are only drilling one well at a time. You can’t recycle the water to the next well, because we are only drilling one. That would apply when we are drilling more than one well at a time.

[The Chair, Conservative, Leon Benoit]

Merci, monsieur Coderre.

We'll go to Madame Brunelle for up to seven minutes.

Go ahead, please.

[Paule Brunelle, Bloc, Trois-Rivières, QC]

Thank you, Mr. Chair. Good morning, gentlemen.

Where are the headquarters of Questerre Energy Corporation?

[Michael Binnion]

It's in Calgary.

[Paule Brunelle, Bloc, Trois-Rivières, QC]

I checked where you operate in Quebec. I believe your largest exploration site is in Saint-Jean, with 181,000 acres close to the U.S. border. In addition, you are partners with Gastem Inc. and your share is about 56%. You are also in the Yamaska region and elsewhere together with Talisman Energy. We can see that you believe in it. In any case, you have a presence in many places.

You surely must know that a great many Quebeckers are opposed to this. The regions that you are in and that I just mentioned are densely populated. It is farmland for the most part and there is not that much in Quebec. If I am not mistaken, it makes up 2% of the land area.

You are telling us that this will create jobs, but it seems to us that they will be low skilled jobs and the highly skilled jobs will go elsewhere in Canada. You are aware that the demand for gas is quite low and that people would much rather use green energy, such as hydroelectricity and wind energy.

We have also just talked about the use of water. We believe that this will cause damage to the environment.

My question stems from the fact that the price of natural gas is low. We are told that stocks are high in North America. They are 8% higher than the average in the past few years. What is your industry's real interest in positioning yourself to extract this gas? At first glance, it seems that you are looking at exporting it.

[Michael Binnion]

I drilled my first well in Quebec in 1989. We were not successful then, and that's when I went to the Republic of Georgia, as I mentioned. I came back in 1998 to try again, with the idea that we could find unconventional resources. So we've been at this now in Quebec for 12 years. We've been through a number of different economic and energy cycles in that time.

The real dream was to be able to find a big discovery of gas in Quebec and do something that would have an impact on energy independence for Quebec.

I would mention that Quebec is Canada's second biggest market for natural gas. It is a very large market, second only to Ontario. The local market is more than a big enough prize for our shareholders, although of course my shareholders are always asking me to do more, so export would be a possibility. I don't think export could happen for at least 10 years, and I think it's going to take us quite a number of years just to satisfy the size of the local market.

Concerning farming, one of the great things about the oil and gas sector in western Canada is just how well it mixes with farming, because we have a very small land print. People continue to farm. It's not as though we turn their farms into a factory and then they have to lose their farm; in fact, just the opposite. There are many examples of people on family farms having been allowed to stay on a family farm and keep farming because an oil and gas operation has come and has supplemented their income.

I think it has been extraordinarily successful as an industry in mixing well with farming, but also in spreading the economic benefits, not just in Calgary but also throughout the regions. That's why we think that in the lowlands it's going to be a very complementary mix to the current use of land there.

I admit that our education of people as to the potential benefits and how well we mix has not been as good as it could be. But I can tell you that when you examine the dozens and dozens of different types of jobs that are involved in oil and gas, there will be people in Quebec who can do those jobs today. We've been in communication with the CEGEP at Thetford Mines about training people. There are many jobs that in a very short period of time local people will be able to do as well.

I can tell you that to be profitable, because shale is a very high capital cost operation, we have to have local service and local employment, because it just won't be competitive to be flying people in from Calgary every two weeks.

[Paule Brunelle, Bloc, Trois-Rivières, QC]

Quebec is definitely seeking energy security, just like everywhere else in the world. That is what we're looking for. But we don't want to be careless about the way we do things and we don't want to move too fast. When we talk about farmland, we talk about water. You said you use a small amount of water, but we must not forget that all sorts of chemicals are used to break up the shale. The people are worried. What is going to happen to our water? We see that there are many water treatment plants in Quebec that are not able to treat the waste water from the industry.

In light of this problem, are you planning on funding water treatment plants in the future or on giving significant compensation to the communities?

[Michael Binnion]

I agree that the biggest challenge we have in Quebec on the public relations front right now is this idea of water contamination. I have been spending a lot of time on the south shore. My objective has been to meet with every mayor on the whole south shore, and I have met probably about 50% of them at this stage.

The conversation in the last six months has changed a lot. The issue of frac chemicals is something that we have published. It has been transparent. All the journalists in Quebec have investigated it and found that we use a very small number of chemicals in shale gas, much less than the number of chemicals we use in conventional fracking. We have 300, 400, or 500 different chemicals that might go into a conventional frac. One thing that makes shale gas inexpensive and competitive is that we use so few chemicals, which is the irony, because people are more worried about it than about conventional fracking. Those kinds of issues don’t seem to be top of mind anymore in Quebec. It is the water contamination from drilling and the potential surface spills that people are concerned about.

The other thing in terms of the water treatment issue--given that we have all the testing, given that we have already treated water at several treatment plants in Quebec--is that in my impression, it is more an issue of municipal-provincial jurisdiction. By not recycling the water, the municipalities are given some local control. That issue of jurisdiction between municipalities and provinces is not necessarily an argument we want to get into too much, but we think the issue of treatment in the lowlands is more about that than it is about the flowback water itself.

[The Chair, Conservative, Leon Benoit]

Thank you, Ms. Brunelle.

Mr. Cullen, you have seven minutes. Go ahead, please.

[Nathan Cullen, NDP, Skeena—Bulkley Valley, BC]

Thanks for being here.

The committee is engaged in a conversation around energy security. We are first of all trying to understand what that means. I think the term is thrown around a lot without necessarily lots of understanding.

As briefly as you can, could you first tell us how critical you think energy security is for Canada, and second, how you would define it?

[Michael Binnion]

I wish I were asking the questions.

I think that in a Canadian context we are part of a North American, or even world, energy security solution, because I just don’t see how Canada has an energy security problem with abundant hydro resources, abundant oil, and abundant natural gas. It's hard to see how we have an energy security problem.