Thank you.
Good morning, Mr. Chair and members of the committee. I'm very pleased to be here today to provide perspectives on the committee's study of pipelines and refining. I'm happy to have Carol Montreuil, vice-president of our eastern Canada division, here with me this morning.
CPPI members play a key role in Canada’s energy value chain. They make a significant contribution to many sectors of Canada’s economy. I think you would all agree that transportation fuels are a vital enabler of Canada’s social and economic activities in that they provide that essential fuel that moves people and goods across our country.
Our submission, along with some other pertinent material, is contained in the packages that have been distributed to you. In my remarks this morning I'll highlight the key points in our submission and focus on four themes. The first is a snapshot of Canada's refining sector, which supplements the information Mr. Corey has provided.
The second is to clarify the distinctions between bitumen operators and product refineries—I think there is some general confusion around that issue. The third is to compare and contrast the market challenges and opportunities for Canada's petroleum product refiners and our oil sands producers. The last is to reinforce the role we think public policy-makers can play in promoting a competitive and viable Canadian refining sector.
First is that snapshot. CPPI members have been providing quality and reliable petroleum products to Canadians for more than one hundred years. The industry today contributes $2.5 billion annually to Canada’s GDP. It employs 17,500 highly educated and well-paid refinery workers. In Canada overall today there are 19 refineries located in eight of our provinces, and they have an aggregate production capacity of about two million barrels per day. CPPI members operate 16 of these 19 refineries. In addition to refinery infrastructure, there are 70 distribution terminals and some 12,000 retail sites across Canada that employ 82,000 workers in total.
Refiners produce gasoline, diesel, and aviation fuels, as well as heating oil, and important feedstocks for the petrochemical industry. Some CPPI members are also significantly involved in the production of biofuels, and certainly virtually all Canadian refineries and petroleum producers are now involved in the distribution of biofuels.
As Mr. Corey pointed out, Canada is self-sufficient in and a net exporter of refined petroleum products. Our sector exports about 20% of its output—about 400,000 barrels a day—mainly to the United States and mostly from Quebec and Atlantic Canada. Geographic proximity to the very large northeast U.S. market and the ability to ship by sea or ship relatively short distances to market are key factors that facilitate these exports.
Now, refining is, again, as Mr. Corey pointed out, a very capital-intensive business. It's one of the most capital-intensive businesses in our economy. A typical new refinery would cost in excess of $7 billion to build today, and that doesn't include the land acquisition costs that would be associated with that. While no new refinery has been built in Canada for some 25 years, more than $40 billion has been invested in Canadian refineries since 1980. That's including the capacity expansion of the kind Mr. Corey has already spoken about. As well, it's directed at continuous improvement initiatives to increase operational efficiency, to enable the refining of heavier crudes, and of course to improve environmental performance.
On that point alone, over the past 10 years, a total of $8 billion has been invested in environmental improvements to Canadian refineries. Currently, CPPI refiners invest close to $3 billion a year in aggregate to sustain their competitiveness in an increasingly challenging global market for refined petroleum products.
Canadian refineries are efficient, but they are not large by international standards. They operate at a size and complexity disadvantage to U.S. refineries and at an even greater disadvantage to some of the new super refineries that are being built in Asia. A good illustration is that we now have one refinery in India, on one location, on one site, that has the capacity to produce 60% of all Canadian refinery output—1.2 million barrels a day from one site, compared to Canada's two million barrels from 19 sites.
Refining economics generally dictate that refineries be located close to consumer markets. Again, as you've heard from Mr. Corey, transporting finished products such as gasoline, diesel, and aviation fuel, especially over great land distances, is more expensive and logistically less efficient than transporting crude oil.
This is a common theme for many commodities that are traded globally. As Canadians, we export a lot of wheat, but we don't export baked goods. Certainly as coffee drinkers we import a lot of coffee beans, but we don't import brewed coffee. So this is consistent with a lot of commodities.
However, the economies of scale of some of those larger refineries that I've talked about, and also the access to ocean shipping, substantially mitigate the economic impediments of transporting finished products to distant markets. So this does pose significant new competitive challenges for Canadian refineries, increasing the importance of refinery efficiency and the requirement to be globally competitive.
A big part of refinery efficiency is operating at or near capacity; optimal capacity utilization is over 90% and preferably close to 95%. Currently there is excess refinery capacity and below optimal utilization across North America. The latest National Energy Board figures show that through 2010 and 2011 the utilization rates in Canada were in the low 80% range.
As we've seen those low utilization rates across North America for the last several years, there has been some continuing consolidation and a number of refinery closures. One has closed in Canada in the last couple of years. Three refineries have recently been closed or idled on the U.S. eastern seaboard. Two weeks ago, a large refinery in the United States Virgin Islands announced that it would cease operations next month. That's indicative of the kind of business environment we operate in right now.
On product refineries versus bitumen upgraders, there is some confusion over the nature and roles of refineries and upgraders. Often the terms are used interchangeably, but let me emphasize that petroleum product refineries and bitumen upgraders are not necessarily the same. Product refineries are built and configured to process crude oil from heavy to light, from sour to sweet—and now synthetic—into products such as gasoline, diesel, aviation fuel, and home heating oil. They're generally much more complex than a bitumen upgrader due to the nature of the multiple products they're designed to produce.
Mr. Corey has already provided a very high-level summary of the refinery process, so I won't repeat that, but I will emphasize that no two refineries are identically designed and engineered. They do share a number of common features and processes—distillation and cracking—and they use similar state-of-the-art technologies, but specific refinery configuration and process units are employed.
The specific refinery configuration and process units employed are generally determined by the crude oil diet that is available to the refinery and the kinds of products they want to produce that are driven by local market demand conditions, and this is obviously something that is not static. Other factors that do affect refinery configuration are the technological requirements, or the technology available at the time of construction, and of course the way the refinery has evolved over a long period of years to adapt to a changing marketplace situation and/or changing environmental regulations in the relevant jurisdiction.
So no two refineries are alike. In fact, they can be quite substantially different.
Bitumen upgraders are specifically built and configured to produce a 100% bitumen feed, or “dilbit”—diluted bitumen. It's a form of crude oil, but it has physical and chemical properties that are generally unsuitable for use as a refinery feedstock. So upgrading is an intermediate process whereby bitumen is transformed into higher-value synthetic crude oils suitable as a feedstock for some but again not all refineries. So while a bitumen upgrader may employ some of the same processes used in a products refinery, it's configured differently to address the specific challenges of the high viscosity and extra-heavy physical and chemical properties of bitumen.
Complicating this distinction, though, is the fact that the operational and process boundaries of a refinery and an upgrader are not clear cut. There's not a clear line to say this is a bitumen upgrader and that is a refinery. Some product refineries can process bitumen and heavy crudes; generally that means they employ a coker. Some upgraders produce limited amounts of finished products, generally diesel. Also, an upgrader and a refinery can be integrated into a single facility. It's not a clear-cut distinction, but in general, upgraders and refineries are different.
Moving on to the differences in market challenges between the refining sector and the oil sands industry, certainly Canada’s refiners and oil sands producers live in very different worlds and face very different market challenges and opportunities. There is no question that the upstream and oil sands industry provides a tremendous catalyst for growth in Canada. Growing demand for crude oil, especially from developing economies, is projected to increase for the next 25 years and beyond. This creates attractive export opportunities for Canada’s upstream sector. On the other hand, North American demand for refined petroleum products over the same period is expected to be essentially flat. This fact and the challenges it creates for Canadian refiners were highlighted in a recent Conference Board of Canada report. That report is included in your package.
The fact that petroleum fuel demand has likely peaked, or has nearly peaked, in North America may come as a surprise to some, but it's a phenomenon that's experienced in virtually all OECD countries, where demographics, mature transportation systems, new vehicle fuel efficiency regulations, and a growing market penetration of alternative fuels—biofuels and natural gas, for example—and electric vehicles combine to offset any growth in overall transportation energy demand as we move forward for the next 25 to 30 years.
In this context, to go back to some earlier discussion, North American product refining capacity now essentially exceeds demand. Furthermore, the North American refined product market is increasingly exposed to imports from new global supply capacity, especially in the developing economies of India and China, where these massive new super-refineries are operating or being built.
Building new refinery capacity in Canada in this context is a tough sell. It’s hard to justify spending $7 billion on a new refinery when there is already more than enough supply on the continent. However, it is understandable that with increasing production from Alberta’s oil sands, there is an expectation, at least in some circles, that Canada’s refining capacity should also grow. However, the economic truths of supply and demand in the North American context often get lost or ignored in the debate, and the realities of declining North American demand, excess refining capacity, and stiff competition from overseas refiners often get overlooked.
These economics get even tougher when the geographic realities are considered. Alberta, home to most of the oil sands, is landlocked, and far from major refined-product markets in the U.S. Similar economic realities apply to the argument that we should be upgrading more, if not all, of our bitumen in Canada. Certainly we are increasing our amount of bitumen upgrading capacity. There are new upgraders online. Canadian refineries have been, over time, changing their configuration to be able to upgrade more synthetic crude, or more diluted bitumen, but there is a limit. The excess U.S. gulf coast capacity that Mr. Corey spoke about is a major investment hurdle for building new capacity in Canada.
Finally, then, there's the role of policy in helping to sustain a viable and competitive Canadian refining sector. Certainly sound economic policies and smart, predictable regulations are key enabling factors for a competitive and viable refining sector in Canada. Success, in our view, demands a sound science-based approach to developing new regulatory requirements that include credible and rigorous economic impact and cost-effectiveness analysis. Regulatory structures that are outcome-driven and provide refiners with flexibility to develop and implement the most cost-effective options to meet regulatory requirements....
I go back to that characterization of our refineries that no two refineries are alike. A one-size-fits-all approach that prescribes how refiners need to do their business really doesn't work for us. We need an outcomes-based regulatory approach that allows those refiners to determine what is the most cost-effective approach to respond to and achieve regulatory compliance given the nature and configuration of their refinery. This is essential if we're going to continue to overcome the scale and competitive disadvantages that we face, particularly from refiners abroad.
Policy-makers can play a significant role in promoting a globally competitive and viable Canadian refining sector: they can contribute to or detract from Canadian refinery competitiveness through the policy choices they make.
In conclusion, the future size and scope of Canada's refining sector will really come down to how well we can stack up competitively in what is a highly competitive and increasingly global market. Can Canadian refiners successfully compete to maintain or grow market share in what is in North America a stable or possibly shrinking fuels market? Can Canadian refiners displace current U.S. domestic supply and imports abroad with more Canadian exports? These are important questions.
In the end, the size of Canada's petroleum products refining sector will be market-driven and will be the sum of many individual business decisions influenced by a myriad of factors, including commercial strategies, crude availability and cost, logistics and labour issues, product demand and market access issues, and of course the Canadian policy and regulatory environment.
Thank you very much. I look forward to your questions.