Evidence of meeting #18 for Natural Resources in the 41st Parliament, 2nd Session. (The original version is on Parliament’s site, as are the minutes.) The winning word was construction.
A recording is available from Parliament.
9:30 a.m.
Conservative
The Chair Conservative Leon Benoit
Thank you, Mr. Smillie.
Thank you, Ms. Block.
Mr. Julian, go ahead, please, for up to seven minutes.
9:30 a.m.
NDP
Peter Julian NDP Burnaby—New Westminster, BC
Thanks to all our witnesses. It's very interesting testimony.
I'd like to start with you, Mr. LeFort, because you gave very compelling testimony around sustainability.
I've been up, as you know, to the oil sands about half a dozen times over the last year and a half, and issues of sustainability are something that many people in Fort McMurray and the region share. Certainly Brian Jean, the former Conservative MP, spoke as well, once he stepped down, about the pace of development, as you did very eloquently today. I think there's more and more questioning of current government policy and the government's approach on the oil sands.
I'd like you to speak a little bit more to the issue of sustainability. You referenced the reaction of the Americans and the Europeans, and I've certainly heard first-hand that a lack of oil and gas regulation is something that is a real black mark on Canada internationally and that the reason there is so much objection internationally is that many people see the current government's lack of responsibility on the environment as profoundly irresponsible.
Could you speak to what we need to put in place to assure the sustainability that you spoke so eloquently on?
9:30 a.m.
President, Local 707A, Unifor
Thank you, Peter. I can for sure.
I live in a community that has grown from 25,000 to more than 100,000. When we build an infrastructure like that, we have to put it into context. Where is it going to go, if society, as we believe it will, takes a different view on the development of the oil sands or on oil and gas and fossil fuels altogether? What do we do with a community like Fort McMurray, if that slowdown ever occurs?
When we talk about sustainability, that's what we want to talk about: moving this forward so that, as we're doing so, we maximize our ability to extract the oil sands and the value of them to build a better country. We can develop the resource to move it across the country, as the other speakers have identified so well, and build our country, whether it be through the infrastructure....
For example, we saw some real tragedies with Lac Mégantic and the transportation of the product without proper legislation, without any concern about that infrastructure being the right infrastructure for moving that resource.
The rail system is a great infrastructure, if we build it for that purpose and for other purposes. We heard about the tertiary industry being, for example, agriculture. I don't think we have the infrastructure in rail now to adequately supply that tertiary industry.
It has to be part of a strategy that means everything to us; that means we're going to be developing this resource knowing that at some point there is an end, so that we prepare for that end in the transition process; that means we develop it knowing that we have some responsibilities to the world, that we're not growing it to an extent that is not sustainable, that our strategy includes not only the extraction of the resource, but the refining and marketing; and that means we accept responsibility for emissions in all of that and come up with a target that is achievable.
If we are increasing our emissions because we are developing the resource, then we need to find other ways to reduce our total emission, and that could be by developing the right infrastructure on public transit, for example, or on rail, again, because we already know that transportation—
[Technical Difficulty—Editor]
9:35 a.m.
NDP
Peter Julian NDP Burnaby—New Westminster, BC
I was actually going to go to Mr. Harrison next. How long will it take to get him back?
9:35 a.m.
Conservative
The Chair Conservative Leon Benoit
It could take a while to get him back; you never know. If you want to question the witnesses who are with us by video conference, then why don't we finish your last two minutes and a bit after they're back on?
Mr. Regan, were you going to question the people who are here? Could we go to Mr. Regan, have him complete his time, and then when the witnesses with us by video conference are back, we'll finish yours. How's that?
For up to seven minutes, Mr. Regan, go ahead, please.
March 6th, 2014 / 9:35 a.m.
Liberal
Geoff Regan Liberal Halifax West, NS
Mr. Boag, you heard Mr. Harrison talk about the issue of value added, and I think most Canadians would like to see the kinds of value added for all kinds of resource products that would bring in good jobs for Canadians. Mr. Smillie certainly talked about lots of good jobs associated with the industry.
Mr. Harrison said the thinking in the industry is that you have huge amounts of bitumen, so you might as well ship it south or to the coast. Clearly there is certainly a lot of concern about the gap between WTI prices and prices in Alberta—what we're getting for our oil, so to speak—and there's a feeling that there's a strong need to be able to get the oil to tidewater so that it can be sold at world prices and shipped internationally.
In your view, what is it that impedes more of that value added from happening in Canada?
9:35 a.m.
President and Chief Executive Officer, Canadian Fuels Association
The economics of the refining business are very complex. As you will know, it's a very capital-intensive industry. When you're talking about building new refining capacity, for a modest size of refinery that's capable of refining the growing amounts of heavy crude, you're talking about an investment of $8 billion, $10 billion, or $15 billion, and of course the payback period for that kind of investment is 25 to 30 years or more.
There's a complex set of variables that really do determine if that is a smart investment and if that investment can address all of the issues associated with commercial risk, economic risk, technical risk, or regulatory risk. It's not a simple decision for someone to decide that they're going to put $10 billion on the table to invest in a new refinery capacity. Also, of course, we have to look at the overall supply and demand situation within the market where Canadian refineries would compete.
Certainly, the challenge in North America for our business is that it's really a declining market when you look at the demographics of North America and our mature transportation systems. There are significant new regulatory requirements that will substantially increase fuel economy and reduce the fuel demand from our vehicle fleet. Of course, there's the diversification of the transportation fuel mix, with more biofuels, electricity, and natural gas.
All of those factors really come together to create a market—at least in the North American context, where our refineries have traditionally been market participants—that is in fact flat to declining. That's not unique to Canada or North America. That's essentially the situation that exists in any OECD developed country.
We already have enough refining capacity in Canada to more than meet our own demand. We are net exporters of fuels, with significant imports into the U.S. and beyond. The challenge within our current market is that there is already more capacity than there is actual demand. As a result, unfortunately, we've seen refineries closing, particularly in what we call the Atlantic basin, and there's still an overcapacity.
Unfortunately, we've seen refineries close in Canada, and obviously one very close to your constituency, the Imperial Oil Dartmouth refinery. We saw a refinery close in Montreal. Back a decade ago, we saw a refinery close in Oakville, and we saw refineries close in the U.S., in the Caribbean, and in Europe. It really is reflective of this kind of supply and demand dynamics in an overcapacity. It creates a huge challenge in an investment environment to substantiate a $10-billion or $15-billion investment in new refining capacity.
Quite frankly, our members are challenged to keep our refineries viable, competitive, and open, particularly in eastern Canada. The Atlantic basin is the most challenging market right now with respect to an imbalance between capacity and supply.
So certainly, the access to western crude, the ability to have a more diversified crude access and make choices based in part on price differentials, is an important issue for sustaining the competitiveness of existing refineries. Investors will ultimately determine whether those issues change the competitive dynamics enough to warrant new investment.
Investment to pursue export markets beyond Canada is again very challenging. We are seeing significant refinery investment already happening in the U.S. Gulf coast and Asia. It's a question of whether the supply and demand dynamics within our traditional local North American markets and also the supply and demand dynamics more broadly across the globe really address satisfactorily the economic, commercial, technical, and regulatory risks that can warrant the investment of the kind we're talking about.
So that's really the complexity of.... It would be great to say that we are producing all this oil, we should just refine it here in Canada, and we should be selling refined products. You need to have a market for it, you have to be able to get it to market, and you have to be able to do it and actually make a reasonable return on investment. That's the issue that investors face today.
9:40 a.m.
Liberal
Geoff Regan Liberal Halifax West, NS
Aside from the question of supply and demand in North America, are you able to comment on other economic factors that go into deciding whether processing happens close to production or close to market or population?
9:40 a.m.
President and Chief Executive Officer, Canadian Fuels Association
Traditionally in our business, processing has generally been close to market.
9:40 a.m.
President and Chief Executive Officer, Canadian Fuels Association
I think that's because, number one, it's much easier and more effective and more efficient and less costly to export and import crude than it is to move refined product. The costs of moving refined product are higher than the costs of moving crude because of the quality standards initially that need to be maintained. With regard to the ability to respond more quickly to changing patterns, whether we're talking about seasonal demand patterns or demand over a longer term, it's easier to do that when you're supplying a market that's close.
Today the dynamics are shifting. Being closer to market is not so important anymore. It's still important, but it's not as dominant as it used to be. I think that's in part because we've seen continuing growth in the size of refineries. Refineries that do have tidewater access are actually able to access transportation through large VLCCs or potentially even ultra large crude carriers and use those to ship product at a price and a cost that can begin to make them competitive in the market. As a result, from the Canadian perspective, we're now seeing the people we compete with for our own domestic market expanding beyond their traditional competitors in the U.S. to competitors as far away as Asia that are building massive refineries, where there are lower labour costs and environmental standards that may impose less of a cost burden. The ability to ship large quantities at a relatively low cost is now making them competitive in the North American market. So being close to market isn't the only factor any more.
9:45 a.m.
Conservative
The Chair Conservative Leon Benoit
Thank you.
Thank you, Mr. Regan.
For the two witnesses with us by video conference, as you know, we had a technical problem and we lost you for a while. You're back so we'll go back to Mr. Julian to continue his line of questioning.
Mr. Julian, you have about two and a half minutes left.
9:45 a.m.
NDP
Peter Julian NDP Burnaby—New Westminster, BC
Thank you, Mr. Chair.
Welcome back, Mr. Harrison and Mr. LeFort.
Regarding the issue of value added, we heard from the Alberta Federation of Labour earlier this week. They talked about the impacts of an export pipeline, exporting raw bitumen or diluted bitumen, as Mr. Calkins likes to say, and the thousands of jobs being shipped south of the border. Both of you referenced the value added.
Keeping the emphasis on exporting raw bitumen or raw logs or raw minerals as opposed to doing value-added production in Canada: what does that cost us economically?
I'd like to start with you, Mr. Harrison.
9:45 a.m.
Professor and Director, Parkland Institute, University of Lethbridge, As an Individual
I don't have an exact figure on it, but from some of the earlier testimony here we can see that certainly when you have a finished product, you're going to get a higher value for that. I referred earlier to the issue of staples production. Of course these are highly capital-intensive projects. One of the downsides of this is that the shareholders want a return on this. What tends to happen quite often in staples-based economies is that the impetus to pay off the shareholders means that you start to produce higher quantities of whatever the staple is at the expense of that value added. You try in a sense to increase the amount of money coming in through the sheer volume of the product as opposed to limiting the size and the amount of the product but raising the value that you're actually getting from it.
One of the things we're seeing with the pressures to export bitumen is that so much money has gone into oil sands development to increase the sheer volume of product that to now pay it off you have to find a way to get it out of here. We don't have the capacity for processing, but we're going to keep shipping larger and larger amounts hoping that doing so will pay off in a gross amount of money. I think that's the dynamic that is actually pushing this.
9:45 a.m.
President, Local 707A, Unifor
I think it's very clear if we look at the other industries, such as forestry, for example, that the move towards exporting the raw product is totally decimating the jobs and work in Canada. We've seen it and we are seeing closures of communities that were once vibrant. Without the focus on the secondary industry, if we call it that—the paper mills and the industries that were supporting those communities—there are drastic effects such as closures and vacancies and ghost towns.
I don't think as a country that we need to submit ourselves to that. I think we can do much better. We can plan for what it should look like, not only for today but for the future. I think it's irresponsible to say we develop without knowing where we will end up or, as our previous speakers said, that we have overproduction and now we're stuck in a system that says we got here and the only way out is to ship to markets elsewhere. That's what happens when we don't build a strategy. What happens when that market ends?
9:50 a.m.
Conservative
The Chair Conservative Leon Benoit
Thank you, Mr. LeFort, and thank you, Mr. Julian. We now go to the five-minute round, and we have Mr. Leef with us first, followed by Mr. Calkins, and then Ms. Duncan.
Go ahead please, Mr. Leef, for up to five minutes.
9:50 a.m.
Conservative
Ryan Leef Conservative Yukon, YT
Thank you, Mr. Chair, and thank you to all of our witnesses here today.
Mr. Boag, I was looking through this document here, and some of the statistics around the kilometres of road and the volume of passenger travel around the country are pretty impressive.
When we have discussions about the oil and gas energy sector, a lot of times it seems that the overall sort of tone and tenor of it is that we're consuming this, but we don't ever really seem to drive down to the point that the consumption of oil and gas is not necessarily, in most cases, the end use. It's really a facilitator to do other things, to achieve other things. For example, it's for moving goods and supplies and services and people, for getting people to their jobs, and for getting products like critical medical supplies around the country. It really helps facilitate the movement of everything in our country, but I think a lot of that gets lost, in that we don't fully acknowledge that the consumption of that product is not the end option for us.
On that vein, what do pipelines do to help facilitate that movement of people and goods across the country for this nation?
9:50 a.m.
President and Chief Executive Officer, Canadian Fuels Association
Number one, you're quite right in observing that, ultimately, energy is all about the provision of a service. Energy is not the end. The end deliverable is the service that people expect. Whether it's mobility for people or goods, or for home heating or electricity, those are services that ultimately Canadians expect and demand and that underpin our economy and our standard of living. It's very good for you to recognize that.
On the pipelines: where oil is found and produced isn't necessarily where it's needed. We need to have some form of energy infrastructure to take and transport that raw energy product, which for our industry is crude oil in its various forms, and get it to facilities that can transform it into the useful product that people need. In our industry, it's primarily transportation fuels that ultimately underpin that mobility, the importance of which you have so eloquently spoken to.
For us, pipelines are a critical part of the overall oil and gas value chain, providing that essential linkage between the location where the raw material is found, the processing facility, and beyond the processing facility. What most people probably don't understand is there is actually—particularly here in Eastern Canada and Ontario and Quebec—a substantial network of pipelines that deliver finished product to market. The gasoline or the diesel fuel you buy at your local station here in Ottawa has most likely come via pipeline from Montreal. The terminus of that pipeline is in the southwest part of the city, where there's a large terminal, and from there, it's delivered by truck to facilities.
Pipelines are an integral component of the overall oil and gas value chain. In industry terminology, they often get called the “midstream” component of the industry, which connects the upstream to the downstream, but in a context of product pipelines, they connect that product almost directly to consumers as well.
Pipelines are a big part of our industry. As we continue to increase our crude oil production, we're now coming up against the limits of the existing infrastructure. Clearly, the infrastructure I spoke about in my prepared remarks, which would enable bringing crude oil from western Canada all the way to Montreal and refineries in Quebec and ultimately to refineries in Atlantic Canada, is a key part of what will help to maintain competitive refining infrastructure in Canada, which will continue to provide those fuels so essential to our Canadian mobility.
9:55 a.m.
Conservative
9:55 a.m.
Conservative
The Chair Conservative Leon Benoit
That's very nice of you. You're just a nice guy and we all know that.
9:55 a.m.
Voices
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