Natural Resources Committee on April 3rd, 2014

[The Chair, Conservative, Leon Benoit]

Good morning, everyone.

We are here today to continue our study on the cross-Canada benefits of the oil and gas sector of the Canadian economy.

Before we get to our witnesses, Ms. Moore has asked me about the report on the rare earth study and how it's progressing. The analysts have collected the key quotes from the study so it is progressing. We can see what we want to do with that.

Maybe what we should try to do is, and this isn't for sure, but at the end of our Thursday meeting next week we could try to spend a short time on future business to discuss some of the things regarding the future of the committee. That's where we are now, if that answers the question you had for me privately.

We now go to our witnesses for today's meeting. From Suncor Energy, we have Heather Kennedy, vice-president, government relations, business services. Welcome. With her is Jean Côté, vice-president, Montreal refinery, refining and marketing. Welcome.

From the Canadian Steel Producers Association, we have Ron Watkins, president. Welcome and thank you for being here.

Also we have David McHattie, director, institutional relations from Tenaris Global Services Canada. Is he not here today? Okay. I'll just note that.

From the Sarnia-Lambton Economic Partnership, we have George Mallay, general manager. Welcome to you, sir, and thank you for being here.

We have two witnesses by video conference.

From Paris, France as an individual we have Normand Mousseau, a professor at University of Montreal, department of physics. Welcome to you.

Also by video conference, we have from St. John's, Newfoundland and Labrador as an individual, Andrew Leach, associate professor, author, Alberta School of Business, University of Alberta. Welcome to you, sir, as well.

We will hear from our witnesses today. We will proceed with the presentations of up to seven minutes each. I will ask you to keep your presentations to seven minutes.

As listed on the agenda we'll start with Suncor Energy.

Please go ahead, Ms. Kennedy, with your presentation for up to seven minutes.

[Heather Kennedy, Vice-President, Government Relations, Business Services, Suncor Energy Inc.]

Thank you, Mr. Chair. On behalf of Jean Côté, thank you very much for having Suncor here today to chat about the benefits of the oil and gas economy.

Energy touches every aspect of our lives. It heats our homes, fuels our transportation, and provides access to services within our communities and also outside of them. It creates the materials for the consumer goods, and gets them to us. It supports health and education programs and systems, and is a major contributor to our high standard of living. At Suncor we actually believe that we are able to develop energy responsibly and enjoy the benefits it provides for all Canadians.

Canada is in an enviable position when it comes to oil and gas. Our abundance of fossil fuels has positioned us as a global marketplace, providing a unique opportunity to develop the reserve base over the long term.

Suncor is Canada’s largest integrated energy company. We employ approximately 14,000 people all across Canada. In addition to that, we have about 10,000 to 15,000 contractors who work on a routine and regular basis on our sites. When we do a capital expansion we might have up to another 10,000 people on our sites. Individually you can tell we are a major employer across Canada.

We have two oil sands mines and a third mine has just been approved, called Fort Hills, which is a joint venture partnership with Total S.A. and Teck. We have two in situ oil sands operations. All of those are, of course, in northeastern Alberta, where the oil sands are. We have refineries in Edmonton, Sarnia, Montreal, and one in Commerce City, Colorado.

We have offshore operations off the coast of Newfoundland. We have reserves of natural gas in the Montney region in British Columbia. We don’t plan to develop those immediately, but we have them. We also have a renewable energy portfolio. We operate Canada’s largest ethanol facility in Sarnia, and we have six wind projects in operation, and two under development.

We have a major lubricants business. It's located in Mississauga. It sells 350 products in more than 70 countries around the world. We are the proud owner of about 1,500 Petro-Canada gas stations all across Canada.

From an investor perspective, approximately 85% of our ownership is North American, the vast majority of that in Canada, with the small remaining 15% across England, Europe, and globally.

I know you had the Canadian Association of Petroleum Producers here recently, so I won't go into the rather large statistics that the industry generally provides—$783 billion in taxes and that type of thing—but we'll specifically speak to Suncor's contribution to that.

In 2013 alone, our net earnings were $4.3 billion spread across all of our businesses, thus all across Canada. One of the things we're proud of is that our spending is right across the country. In 2013 alone we spent $10.5 billion on goods and services, and while the majority of that would have been spent in Alberta where the oil sands are, it was significant all across the country, including $1 billion of spend in Ontario, $241 million in Quebec, and $220 million in British Columbia.

We have that spend with over 11,000 vendors that reach all the way into transportation, telecommunications, and the primary, secondary, and tertiary aspects of manufacturing. I thought I would site a couple of examples. In Quebec, the oil sands industry gets a delivery of 45 buses a year from Prevost, so we have a great arrangement of buses coming from Quebec. Suncor has a large fleet of jets and all of them are CRJs from Bombardier, also a Quebec company.

A company like Fastenal in Kitchener supplies all of our consumable and safety vending machines across our sites. We have a very interesting partnership on social prosperity with the University of Waterloo. A company like Jacobs Engineering Canada will do maintenance and engineering at several of our sites all across the country.

We will pay in 2014 according to our guidance—I want to be clear, this is guidance and forward looking so a number of things could influence that—somewhere between $1.7 billion and $2.3 billion in income taxes to governments, including of course the Government of Canada and provincial governments. These contributions, along with the income tax contributions of our suppliers, we think help enable a strong fabric in Canada, providing governments with the revenue that they use for social programs, health care, and education.

Further, our contributions for income tax at Suncor are not heavily dependent on bitumen prices because of our integrated business model. We play at every level in the value chain all the way from upstream to downstream and refined and final products. That integrated model is what allows us to insulate our bottom line from the volatile and somewhat vast price differentials between bitumen and world crude pricing, something that, if you've spent any time thinking about it, you will have heard the term “the bitumen bubble”, it's not something that we experience. We actually get 88% of world pricing for all of our product that we produce.

We know that operating means reaching out and working with other businesses and being part of the community and local suppliers and communities who are impacted by our energy development, for example, first nations groups. Since 1992 we have spent over $2 billion on goods and services with aboriginal businesses. Last year alone we spent $425 million. This includes fostering incubators in aboriginal communities. Community investment for us in aboriginal communities promotes diversity, and provides training for in-demand trades including female-focused programs like Women Building Futures.

As we continue to make major investments in non-profit organizations to support sustainable communities we currently support 1,300 charitable and non-profit organizations across Canada. In 2013 alone we invested $22 million in communities, including some very innovative approaches like the social prosperity that I spoke to, building community leaders, engaging citizens, and collaborating on our energy future.

I'll stop there since I think my seven minutes are up. Jean and I will l be more than happy to entertain any questions when the other speakers are finished.

[The Chair, Conservative, Leon Benoit]

Thank you very much and thank you for keeping on time. I'm sure the members of the committee have read the rest of your presentation and will question you as they see fit.

Next on our list of witnesses is Ron Watkins, president of the Canadian Steel Producers Association.

Go ahead, please, with your presentation for up to seven minutes.

[Ron Watkins, President, Canadian Steel Producers Association]

Thank you, Mr. Chairman, and good morning committee members and fellow witnesses.

My name is Ron Watkins and I'm the president of the Canadian Steel Producers Association, which represents virtually all of the primary steel production and major steel pipe producers in Canada. We generate some $13 billion to $14 billion in annual shipments of high-quality steel products for domestic and export markets.

Our members employ some 20,000 Canadians with steel manufacturing in all provinces from Alberta through to Quebec. Sister companies and other parts of the broader steel industry, such as steel fabricators, are active throughout Canada. Our industry is an integral part of three major supply chains, automotive, energy, and construction, which represent a very large proportion of our business collectively.

CSA welcomes the committee's inquiry into the cross-Canada benefits of developing the oil and gas industry. Previous testimony has discussed at length the oil and gas industry itself, looking at matters related to development, processing, transportation, and direct economic impact. In my remarks I aim to add another dimension to the benefits picture for the committee's consideration.

The development and distribution of oil and gas reserves is very significant to us in two basic ways. Most importantly, the energy sector has grown to become a major customer segment for our industry such that it now rivals automotive as an end-use for Canadian steel products. We estimate that each of these sectors, each of these supply chains, is approximately one-third of the demand for our products.

Also, energy enables manufacturing and it particularly enables steel making. We are major industrial users of natural gas and other energy forms, so competitive and reliable domestic energy supplies are important to the competitiveness of steel producers. I'm unaware of any other industry that is simultaneously such a major customer and supplier for the oil and gas industry.

Today I'd like to focus on our energy supply chain relationships in Canada. Our product, steel, is the most important material input to the development, processing, and distribution of oil and gas resources. There are four steel-intensive components to our supply chain relationships. Surface transportation and equipment is required to transport workers and equipment to development sites, to house the workforce, and to build physical infrastructure, including roads, bridges, and water and sewage systems. Much of this is steel based.

In the exploration and development phase, reserves are extracted either through underground drilling, or in the case of the oil sands, a combination of underground and surface extraction. Both methods require specialized advanced technology steel tubular products, equipment, and structures, all made of steel.

Once extracted, oil and gas reserves are processed in large industrial complexes, including refineries, upgraders, pressure vessels, separators, storage tanks, piping, and more. Again, it's all steel based.

Finally, transporting oil and gas products to markets in Canada and abroad relies on thousands of kilometres of steel pipeline, rail tanker cars, truck transport, and related facilities. All these modes are built with steel.

Given the focus of these hearings, I'd like to highlight how this steel demand translates into benefits across Canada when Canadian steel is used. I'll use two examples from the steel pipe and tube part of our business.

First, an underground project using the steam-assisted gravity drainage, or SAGD, technology in the oil sands requires highly engineered seamless casing and speciality connections to join each pipe section in the well. Those pipe products might be manufactured in Sault Ste. Marie and threaded in Alberta with proprietary technologies using steel originally melted in Sorel-Tracy, Quebec. Other pipe products might be made in Alberta, Ontario, or Saskatchewan using steel produced at mills in Hamilton also with iron ore from Quebec and metallurgical coal from British Columbia.

Thus, in this example, iron ore originally mined in Quebec, for example, is transformed through a series of advanced manufacturing stages combining capital investment, skilled steel workers, technology, energy, other materials and transportation services. This is a value chain that adds value and jobs in several regions and communities across the country.

A second example is EVRAZ North America, which makes large diameter pipeline and other steel products. It produces its steel in Regina by re-melting more than a million tonnes of scrap steel every year that come from recycling operations from British Columbia through to Ontario. Not only does this add economic value and create necessary and valuable products for the oil and gas industry, and over 1,000 jobs in Regina alone, but it also contributes to steel's environmental record as the most recycled product in Canada. We recycle over seven million tonnes of steel per year in Canada.

Let me add a final comment regarding our own supply chain. We asked our members to quantify their supply base, and the result was some 10,000 suppliers of goods and services, large and small, that do billions of dollars of business annually with us. So our success obviously pulls an additional supply chain element.

Mr. Chairman, in closing, the key point I want to emphasize in these opening remarks is that when oil and gas developments use Canadian steel products, it's more than an input. Our products embody cross-Canada supply chain relationships that add value and jobs in multiple phases in several regions, and for multiple uses. We see additional growth opportunity for Canadian industry to contribute to and benefit from the further development of Canada's energy resources. So we look to work with the oil and gas industry, with steel fabricators, with our steel supply chain partners, and with government policy-makers to increase our value-added contribution in the development of Canada's energy and other resources.

I'll end there. Thank you, Mr. Chairman and members of the committee.

[The Chair, Conservative, Leon Benoit]

Thank you very much, Mr. Watkins, from the Canadian Steel Producers Association, for your presentation

We have now from the Sarnia-Lambton Economic Partnership, George Mallay, general manager.

Welcome to you. Go ahead, please, for up to seven minutes. I see your member of Parliament is here listening intently.

[George Mallay, General Manager, Sarnia-Lambton Economic Partnership]

I'm really under the gun. I don't have a prepared text like these guys.

I represent the Sarnia-Lambton Economic Partnership, which is a public-private sector partnership to advance the Sarnia-Lambton economy.

Sarnia-Lambton has been a significant refining and chemicals complex in Canada. Oil was discovered in the 1800s. From about 1940 to 1970 was when most of the investment happened in the complex. However, presently, we're in the best position that we've been at in 30 years in terms of future potential.

We basically say we have three platforms. Platform one is oil and natural gas from Alberta. Platform two is shale gas that's coming from Marcellus and Utica into our area. Platform three is biomass that's being sourced from Ontario and from across the Great Lakes region. Of course, our location is right at the centre of the North American marketplace.

People talk about oil and gas and bio as one here and one over here. We've adopted a different view. We're building what we call a hybrid chemistry complex. Because of all the downsizing that happened in traditional hydrocarbon in our area, we had to find other ways to compete. For the last 10 years, we've poured a lot of effort into positioning our labour force, our infrastructure, to accommodate more bio-based chemicals and bio-based fuels, and we're getting a lot of traction there. The bio companies can save about 20% on capex by taking advantage of the existing infrastructure and using the distribution system. The first products are the ethanol like Suncor has. We have the largest biodiesel plant in Canada, and we're seeing drop-in chemicals go right on the chemical site to take advantage of the chemical industry distribution.

There's a lot of discussion across the country about pipelines, and trying to reach end markets. We have pipelines coming to our community now that have capacity that can bring oil. We have a group of retired senior executives from Suncor, from Shell, from Bayer, and other companies who have been working diligently to build a case for a new upgrader in our area. Again, we have the shale gas, which provides very cost-effective feedstock for making hydrogen. We have a lot of pipeline infrastructure that's available locally in terms of moving product around the area. We believe that our models show that we can displace U.S. gulf coast product moving into PADD 2 and be competitive. The netbacks show $2.5 billion per year in positive return.

The other thing I would say is we have a 5,000 labour workforce. There's about 30% employment among skilled trades. We also believe we can get the social licence to make it happen so we get time to market faster than other locations.

We have 100 industrial service companies in our area. They have organized themselves into something called the Sarnia-Lambton Industrial Alliance. They are looking at global markets. Historically, they service the Sarnia-Lambton market. They can do scale-up, they can build a full-scale plant, and are experts in terms of plant maintenance and turnarounds. They're looking at projects in eastern Canada, in western Canada, and globally. Our MP has been very good at bringing groups from the In Situ Oil Sands Alliance throughout Canada.

Our guys are out in Alberta on a regular basis now marketing. We're starting to see some success, but as a Canadian Manufacturers & Exporters study that was released in November showed, there's still a lot of opportunity to improve the supply chain to enable a lot more Canadian content.

One of the issues is still transportation. The modules in Alberta are being designed 24 by 24 by 120. We can move 13 by 13 by 120 easily, but there's still some work required on the larger modules in terms of transportation. That needs to be addressed and that doesn't have to cost the country a lot of money.

On shale gas investment, NOVA Chemicals has spent and is spending about $500 million. They're converting their plants in Sarnia from naphtha to run on ethane. They're also doing ongoing evaluation for a world-scale polyethylene plant.

Union Gas, a division of Spectra Energy, is bringing more shale gas into the area. Sunoco Logistics, which is a provider for NOVA, has additional capacity, so we are also starting to get more interest from other users that can take advantage of the shale gas.

The plants in Sarnia, to my knowledge, are the first plants in North America that are actually going to be using shale as part of their operations.

I'll end it there.

[The Chair, Conservative, Leon Benoit]

Thank you very much for your presentation, Mr. Mallay.

We go now, by video conference, to Paris, France, and Normand Mousseau, professor, University of Montreal's department of physics.

Thank you very much for being with us by video conference.

Go ahead, please, sir, for up to seven minutes with your presentation.

[Normand Mousseau, Professor, Université de Montréal, Department of Physics, As an Individual]

Thank you for the opportunity to speak to the committee today.

I will start by introducing myself. My name is Normand Mousseau. I have a Ph.D. in theoretical physics, and I teach at the Université de Montréal.

I am currently in Paris as a visiting professor at the Université Pierre et Marie Curie. I co-chaired the Commission sur les enjeux énergétiques du Québec from July 2013 until the report was submitted, about a month and a half ago. The focus was on how to manage Quebec's energy-related future in a way that benefits the environment, the economy and society. And during that time, I also authored the following books: Au bout du pétrole — Tout ce que vous devez savoir sur la crise énergétique, L'avenir du Québec passe par l'indépendance énergétique, La révolution des gaz de schiste and Le défi des ressources minières. I think those are more or less the reasons why I was invited to appear before you today.

Among other things, I'd like to share with you my observations when I took a tour of the regions.

In the fall, we received more than 460 briefs to help us prepare our report on Quebec's energy issues. I would say the issues are somewhat common to the entire country.

First of all, Canada does not have an energy supply problem. We have ample energy resources, be it fossil fuels or renewable sources. We have significant, recoverable resources and an export market. There is no doubt that development comes with benefits, but it's important to take a close look at the issues it raises as well. After all, the focus of your study today pertains more to oil.

Canada has yet to really integrate oil development into its climate change policy. Yesterday, or the day before, the IPCC's report came out and the findings demonstrated the importance of climate change-related issues and the need to take action.

It's also important to note that Canada's renewable and non-renewable energy resources vary greatly from region to region. Canada can't simply focus on fossil fuels, which aren't renewable. It also has to support renewable energy resources.

I think we promote Canada. But it's one of the big fossil fuel-producing countries with the least amount of control over its energy and resource development. That remains a major problem that isn't talked about at all or mentioned in the document I received. Why raise the issue? Because it's essential if we want to increase direct and indirect spinoffs to the industry.

Several provinces have implemented specific programs to assume their climate change responsibilities. British Columbia and Alberta both have programs targeting the oil industry, and Quebec has just signed a carbon-cap and trade agreement with California. Regardless, Canada as a whole, and certainly the federal government, refuse to commit to any such efforts. Canada has systematically put up roadblocks to developing the Kyoto approach.

In some respects, that position is understandable. For a primary resource-producing country like Canada, the Kyoto Protocol's underlying philosophy is somewhat problematic because it holds the producer fully responsible for greenhouse gas emissions. But, in my view, Canada shouldn't just be content to do nothing simply because the Kyoto Protocol didn't suit its interests. Rather, it should be proactive and adopt a positive approach, both domestically and abroad; that approach should recognize that the costs should fall to the end consumer, not the country producing energy that is used elsewhere.

The oil produced in Alberta is consumed elsewhere. The end consumer should be the one who pays for the extra emissions associated with production, and not necessarily Canada. There is a way to change things, but the government has to be serious about action. I'd be glad to discuss that further later.

Canada has to increase its investments in the area. Considerable investments have been made in techniques for capturing and storing carbon, but so far, we have seen little in the way of results.

To date, however, those investments have resulted in very little. What's more, investments in other renewable energies are clearly inadequate. Canada has displayed a very strong bias in favour of oil development and seems to have overlooked the fact that the country's capacities in other types of resources are considerable and should be utilized.

I also think that Canada should make a more meaningful commitment in the energy sector. In December 2012, the Government of Canada announced that foreign state-owned enterprises would have to undergo a much tighter review of investments and takeovers in Canada, particularly in the energy sector.

The fact remains, however, that, unlike most big oil-producing countries, Canada still has no major players in the energy sector. Nor does it have the international clout it should for its level of oil production and wealth.

To my mind, it's important for Canada to assume a more prominent role in the energy sector, in both the private and public domains. It should encourage the development of world-class Canadian companies and Canadian energy resources, as well as significantly broaden its support for issues of energy relevance. And, above all, it cannot disregard the issue of climate change.

Thank you.

[The Chair, Conservative, Leon Benoit]

Thank you.

To remind all of our witnesses, this study is about the cross-country benefits of the oil and gas sector of the Canadian economy, and I would ask the witnesses to speak to that.

Thank you for your presentation, Monsieur Mousseau, professor from the University of Montreal department of physics.

We have next, by video conference, from St. John's, Newfoundland and Labrador, as an individual, Andrew Leach, associate professor and author, Alberta School of Business, University of Alberta.

Welcome to you, sir. Go ahead with your presentation, for up to seven minutes.

[Dr. Andrew Leach, Associate Professor, Author, Alberta School of Business, University of Alberta, As an Individual]

Thank you, again, Mr. Chair, for the invitation.

Good morning. It's a pleasure to appear before the committee this morning.

My name is Andrew Leach. I am an associate professor at the University of Alberta School of Business, where I also hold the Enbridge professorship in energy policy. For those who may have concerns about that, I thought I would lead off just by stating for the record that this position is a school position, not an Enbridge position, and does not in any way influence my research, nor do my views represent those of Enbridge this morning.

My presentation today will focus primarily on oil sands, in particular three aspects of oil sands: oil sands growth and the potential for the sector to grow, the risks to that growth, and questions you've been hearing about with respect to how to capture the greatest amount of value from that growth trajectory.

The first question is how large the oil sands sector will grow to be. If you look at industry forecasts, you'll see numbers that see the oil sand sector growing from two million barrels per day today to levels two to three times that within the next couple of decades, up to and above six million barrels a day. I feel, however, that these forecasts are likely underpinned by unrealistic assumptions about cost. I think the evidence of recent history supports that contention.

If you go back not to the beginnings of the oil sands but to the beginnings of the rapid growth of the sector in the 2000s to compare with today, operating costs since then have increased threefold to fourfold, and costs of building facilities within the oil sands have increased up to five times.

I'll cite a couple of examples for your consideration.

On the capital cost side, phase one of Imperial Oil’s Kearl project came online this year. That project initially sought regulatory approval with a budget of $5.5 billion for a project of 345,000 barrels a day.

The first phase of the project, at 110,000 barrels per day, cost Imperial Oil more than $12 billion. What you have is a project that costs basically on a per barrel basis more than five times what it was initially slated to cost.

That should be a concern for you, because of course the majority of those costs are felt in the form of defrayed taxes and royalties. When you hear about benefits, what you're often hearing about in the guise of benefits is really increased costs.

The same thing occurs on the operating cost side. You heard already from Ms. Kennedy from Suncor. I'm going to use them as an example here.

In 2003, Suncor set out a goal to reduce oil sands operating costs below $10 per barrel. Unfortunately, I can report that their last quarterly report saw their operating cost at $36 per barrel, out of relatively similar facilities.

Sadly, these two examples aren't the exception; they are the rule across the sector. These inflated costs and stretched project timelines are the reason we have seen lower production than we would have forecast.

Why am I telling you about this? If you look back a decade ago, forecasts in the oil sands had production much higher than it is today. The 2004 forecast would have seen us producing today three and a half million barrels per day of oil in the oil sands, whereas we're now producing just over two million. We're essentially five to six years behind what those forecasts would have held.

You might say that's not a big deal; why am I worried about it? To put it into perspective, those forecasts were made assuming $30 WTI oil prices, or oil prices at a third at what we see them at today. When you consider that oil prices have essentially more than doubled and yet we still haven't met growth forecasts in the sector, we may want to consider whether or not we're basing our future benefits forecast on an unrealistic assumption.

The second element I want to bring forward—and the previous witness alluded to this as well, but I'm going to take a little bit of a different view on it—is with respect to climate change policy risks.

This week we saw ExxonMobil come out with a report to their investors stating the degree to which they felt their own assets were at risk from future climate change policies, both within their operating areas and elsewhere throughout the world. In fact, they state, “Governments' constraints on use of carbon-based energy sources and limits on greenhouse gas emissions are expected to increase”.

My submission to your committee this morning, Mr. Chair, is to say that I believe Canadians deserve a similar assessment of the risks compared with the benefits that you're hearing about and the risks to oil sands development that arise from climate change policies here and abroad.

Interestingly—I think it's interesting, anyway—in research I have done with my colleague Branko Boskovic at the University of Alberta, we have asked these questions. We've asked how exposed oil sands projects are to climate policies and whether oil sands projects remain viable in low carbon economies. These are similar to the questions ExxonMobil asks.

We actually find that these projects are very robust to low carbon scenarios and to significantly more stringent carbon policies at home than those they face today.

The question this research leaves me with is, briefly for you this morning, why Canadians are generally told that you have to pick one. It might be implicit or explicit, but Canadians are generally told that they have to pick either climate change policy or oil sands development. Our research suggests that this is not necessarily the case.

The third element I'd like to raise, which has been raised a lot in your hearings to date, is the question of value-added. For those of you who don't have them in front of you, let me report that this term is in italics in my speaking notes.

I would like to remind you that most of our hydrocarbon reserves are in the form of bitumen. They are not light sweet crude, even though I think from everybody's perspective, we would certainly rather they were. But you're told often in this context that Canada should encourage more value-added processing of this bitumen.

I want to concentrate this morning on two words, the words “processing” and “encourage”, and I want to differentiate between value-added and increased processing.

If we're going to think about governments encouraging more processing of bitumen in the country, I want to ask how they would do it. The ways they can do it are really simple: through trade policy, fiscal policy, or direct involvement in the sector, as we've seen most recently in Alberta with an essentially government RFP for a new bitumen upgrader in the province.

Implicitly what these policies would do is either directly assign government assets, resources, or direct financial support to the upgrading of bitumen or de-value Canada's bitumen through trade policies in order to underpin increased processing. Neither of those options would generally be value-added; they would be value-transfer or value-detracting; they would be taking away the value of our natural resource to support greater processing. We must recognize that using resources to support processing is not the same as adding value. We should all want to add value; we should not necessarily want more processing.

I hope these topics are ones you'll choose to explore. I will leave my statement at that and look forward to your questions.

Thank you very much.

[The Chair, Conservative, Leon Benoit]

Thank you very much for your presentation, Mr. Leach, from the Alberta School of Business, University of Alberta, who again is here as an individual.

We go now to questions and comments from members. In the seven-minute round, we have Ms. Block, Ms. Leslie, and Mr. Regan.

Ms. Block, go ahead, please, with your questions and comments, for up to seven minutes.

[Kelly Block, Conservative, Saskatoon—Rosetown—Biggar, SK]

I would like to welcome our witnesses today and thank them for their testimony. I have a number of questions for a number of witnesses. I hope I will be able to get through them all.

I want to start with you, Ms. Kennedy.

I want to thank you very much for your opening remarks, in which you speak about the fact that energy touches every aspect of our lives. Then you go on to speak about consumer goods and say it “supports health and education programs and systems, and creates the high standard of living that we in Canada are so fortunate to enjoy”.

This is one of the reasons we embarked on this study of the cross-Canada benefits of the energy sector, focusing on oil and gas. We had a sense there were benefits that we weren't actually putting our finger on or identifying but that are very real and that are experienced by not only communities but also individuals. I thank you for that.

I want to give you an opportunity to speak to Mr. Leach's comments concerning the inflated projected costs and the references he made to Suncor. I'm going to turn it over to you to speak to that issue.

[Heather Kennedy]

Thank you.

Mr. Leach obviously spends a lot of his time studying this, so his facts are quite correct. Back in the early part of this, in 2000, we did have an initiative to reduce our costs to $9.80 a barrel by 2003, and certainly our costs are at $35 a barrel. I think it's an important point that he's brought up.

If you look at the cost of producing a barrel of oil sands, it is one of the highest cost barrels in the world. Why is that relevant? It's relevant for two reasons. One is that if you look at the large costs to actually invest in the oil sands, only the big oil companies can afford to be part of the oil sands industry now, so it's Imperial, Shell, Canadian Natural Resources, BP, etc. Those companies have choices so when they look at where they're going to develop their next reserve or resource, there are places where they can actually make a higher profit and their shareholders will drive them to do that.

Suncor is in a similar position. Our CEO uses the term “profitable growth” now and that's new for the oil sands in this decade. Previously it was kind of grow, grow, grow, whereas now if we can't produce a project that meets a rate of return for our shareholders, we won't actually do it anymore.

Back to the operating costs, it's absolutely a strong initiative at Suncor to reduce them. We understand that we want to be middle of the pack in terms of operating costs. The best way for us to do that is twofold. One way is to sweat the assets and make them more reliable. I'm sure that Mr. Côté spends a lot of his waking hours making sure the equipment runs well, that it runs efficiently and effectively. The second way is in using new technology to actually reduce costs, particularly in terms of energy consumption and in terms of the human capital it takes to operate the assets. The more we can do, the more able we're going to be to reduce the costs, the more taxes and royalties that get paid, and the more opportunity there is for growth in the industry and reducing the risks that Mr. Leach spoke to.

[Kelly Block, Conservative, Saskatoon—Rosetown—Biggar, SK]

I do note that you mentioned you have budgeted $175 million in 2014 for research and development funding. I'm sure that speaks to your commitment to look for those innovations that will help reduce the costs of production of the oil sands.

I want to move to Mr. Watkins.

Thank you for the comments you made this morning. In particular, I appreciated your summary at the end of your comments. I want to ask you to perhaps reflect on those comments a little bit more. Perhaps you could speak to us about some of the projects that are on the table right now in the oil and gas industry, and what these projects could mean for the steel industry.

[Ron Watkins]

As I was explaining, we see ourselves active in all four components of what we would consider to be an oil and gas development project. Different parts of our business will supply different components of those projects. The physical infrastructure above the ground, so to speak, is everything from rebar to piping, flat products, and steel plate. The range of products we make in our steel mills can appear in different applications at every phase.

In the actual oil and gas business, a lot of that is, of course, about pipe and tube for extraction, for distribution, and for long-distance pipelines.

From the interest of our membership, what we've seen over time is a growth in not just simply demand because it happened, but there is also more focus on these areas of industrial opportunity for us.

Now, it's a tough business and very competitive. We're not just competing among ourselves but with suppliers from the rest of the world. When those products are traded on a market base we stand prepared to compete with those enterprises.

Our company has put a stronger focus on the breadth of opportunity posed by the further development of oil and gas reserves. Obviously in these meetings we talk a lot about oil sands but we shouldn't ignore other sources of potential growth. We are engineering, developing and refining the products in particular that the business needs.

I just want to emphasize that it's not in a sense just about the pipeline, although pipe products are clearly a big part of what we do.

[Kelly Block, Conservative, Saskatoon—Rosetown—Biggar, SK]

Thank you.

Mr. Mallay, would you please speak to us briefly about Line 9 and its significance to your community?

[George Mallay]

Line 9 is the line that brings the crude to Sarnia from Alberta. It's critical in terms of keeping our refineries going.

[Kelly Block, Conservative, Saskatoon—Rosetown—Biggar, SK]

Okay, thank you.

[The Chair, Conservative, Leon Benoit]

Thank you, Ms. Block, the Parliamentary Secretary to the Minister of Natural Resources.

We go next to Ms. Leslie, for up to seven minutes, please.

[Megan Leslie, NDP, Halifax, NS]

Thanks to all of our witnesses.

I'd like to start with Ms. Kennedy. This is actually my first official interaction with Suncor since the death of Gordon Shields.He would often be here at committee, so I do want to extend my condolences to everyone at Suncor.

[Heather Kennedy]

Thank you.

[Megan Leslie, NDP, Halifax, NS]

My question for you is about the price on carbon.

Suncor has been pretty open about the fact that you factor in a price on carbon when you're looking at your long-term and medium-term strategic planning. Maybe saying that you've advocated for one is a bit strong, but you've been pretty open that this is a reality. I want to ask you why.

I assume it's because of two reasons: first, certainty, and second, social licence, the idea that if we have these kinds of robust environmental regulations, Canadians will say, “All right, I give you the social licence or the permission to dig and drill and pump, etc.”

I imagine those are the reasons. Is that correct?

[Heather Kennedy]

Thank you for that question.

In fact in our forward-looking analysis and our long-range planning, we do put in a price for carbon. Part of it is the reality that, as Mr. Leach mentioned, in Alberta there actually is a price on carbon and we've already paid into the large emitter fund since it came into effect. That's part of it. That's real. We think that's a relevant and important thing. Certainly Alberta is the first jurisdiction to do that. We thought that was very forward thinking.

The second is that obviously through the last year there was a lot of discussion around the oil and gas regulations. While they certainly appear to be on hold at the moment, we think it's relevant and important that Canada, when it's the right time and at the right place, actually proceed with that, working with the rest of the globe and the other countries.

We just think it's so real that it's important for us and for our board and our shareholders to see we're accepting that reality.

I think more importantly, it's really to the subject of social licence. It's been a curious thing as part of the oil sands business as we look at the amount of focus on carbon and emissions with the oil sands. There are a number of people out there who genuinely believe that the climate change issue, which is real and legitimate, would actually stop if we shut down the oil sands. The global contribution is very small, but certainly it is the largest growing sector in Canada, and so as a country we have to address it.

When we consider it, interestingly enough it is one of a number of areas that we look at in terms of our long-term plan, in terms of social licence. For us it's a combination. If you actually ask local stakeholders, the Athabasca River is a fundamentally important river to the region. Its health is, I would say, as critical to local stakeholders as emissions. Certainly aboriginal business and employment and community health are also part of the social licence, so we have a broad look at it. Carbon is just one element to it.

[Megan Leslie, NDP, Halifax, NS]

Okay, thanks. I appreciate your answer.

Mr. Leach, it's nice to meet you virtually, although I feel I already know you through our interactions on social media.

I want to pick up on the price of carbon. I want to pick up on some of your recent writings, actually, on your blog postings.

You talk about the viability of the oil sands. You're looking at what even a $50 per tonne carbon price could do to the oil sands industry. You argue it presents a really serious risk to its economic viability.

I'm trying to explain it in my layman's terms. You're arguing that some people will say the emissions are really downstream. That's where the problem is. But most of our carbon policy exposure comes from other jurisdictions, the fact that another jurisdiction might put a price on carbon or another jurisdiction might implement other kinds of environmental regulations.

Do I have that right?

[Dr. Andrew Leach]

Yes, absolutely. If you look at life cycle emissions out of an oil sands barrel, for example, probably 80% of the emissions are downstream, so to speak. In the refining sector, the largest share is in the combustion side.

Any policy that affects combustion emissions and therefore releases demand for oil, releases the oil price the producers see, is going to have a much larger impact on the financial viability of these projects than something that affects that smaller share of emissions upstream.

If you want to boil it down, the real question is what's the producer oil price after these policies go in place?