Natural Resources Committee on April 29th, 2014

[Anna Barbarzak]

First of all, thank you very much for remembering our very positive anniversary. I just wanted to point out that this is also part of the success of our alliance that has over years helped and supported Poland in our efforts to become a member of NATO and the EU. We should extend our thanks to all our friends who have not lost the faith and supported Poland during this time.

In relation to your question—and let me put it this way—a lot of energy infrastructure is in place. The problem is that the European energy market is not fully integrated. For example, if you look at the LNG infrastructure, it is already in place. We have, as far as I remember, close to 20 [Inaudible--Editor] plants in all of Europe, but not a lot of the potential volume is used today. When discussing the possible scenarios in Europe right now, we looked at the costly infrastructure in place. We now have interconnective systems and integrated corridors that will take us from, for example, Spain, which has potential in this respect, to Poland, for example, and farther to Ukraine.

What the European Union is looking at right now is trying to discuss options, how to streamline and accelerate the development of infrastructure that was either considered or done at certain stages so that we can fully integrate the internal market in the EU. Ukraine is also a big challenge in terms of cost and investment. I understand that there is a lot of investment already, of funding already generated by international organizations, that also goes to the development of infrastructure in Ukraine. I hope this will ensure there is some progress in the development of infrastructure and that there will be critical energy infrastructure in Ukraine in quite a short period of time, because this is what is needed right now.

[Linda Duncan, NDP, Edmonton Strathcona, AB]

I also noticed, Mrs. Barbarzak, that you made mention of the initiatives through the EU for improved energy efficiency. Of course, we're aware as well that the EU nations committed through the G8, now G7 along with Canada, to remove subsidies to the oil and gas sector. I wonder if you could expand a bit more on discussions that are going on. There was mention by some of the Canadian oil companies involved with oil industry here about meetings recently with Merkel in Germany. We know that a good number of the European nations are trying to shift over to renewable sources and invest heavily in energy efficiency.

I wonder if you could elaborate a bit more on that. Is Poland as well participating in that and pursuing it? You mentioned that it would be helpful in the number of things you recommended to Canada that Canada could potentially also provide expertise in improved energy efficiency.

[Anna Barbarzak]

Yes. Thank you very much for this question.

Energy efficiency in the case of Ukraine offers great potential because of such negative numbers and statistics that we are faced with today. Poland is probably not one of the most efficient economies in Europe, but per capita, the Ukrainian economy is three times less efficient than Poland's. In terms of the GDP units, it's even worse. It's 10 times more energy-intensive in the case of Poland.

Therefore, I think that in order to reach the goal of decreasing the energy consumption in Ukraine, we must have a coherent approach to achieving energy efficiency in Ukraine, both in terms of the industries and in terms of the distribution of energy and energy generation in Ukraine. I think a lot can be achieved.

A lot of effort has been invested in the Ukraine, but the fact is that there's a lack of ownership, and there's no comprehensive approach to energy efficiency policies in Ukraine. The deficiencies of the regulatory system, which could help develop certain policies and strategies that, for example, were the case with Poland over the last two decades, are the major obstacles to achieving some success in Ukraine.

Some nations that have been active in this spirit in Ukraine have been very frustrated by the effects of the already invested funding. What we need to do is revise our policy so we can find a way of exporting the knowledge to the Ukrainians, so they can take ownership of the changes being made to the energy sector and of energy efficiency projects in Ukraine. This is my conviction.

When you look at the case of Poland, because we've also travelled a long way in our energy efficiency blueprint in Poland, you see that with the help of other nations, we were able to develop capacities and know-how that helped us distribute and conduct the policies and the strategies that we had put in place at the very beginning. This is what is desperately needed in the case of Ukraine.

[The Chair, Conservative, Leon Benoit]

Thank you.

[Anna Barbarzak]

Mr. Cios will also add to this.

[The Chair, Conservative, Leon Benoit]

Very briefly, please.

[Dr. Stanislaw Cios]

Yes, just briefly.

One of the key problems in Ukraine is the low price of energy, which does not stimulate efficiencies and savings. Therefore, the whole energy system and the pricing must change in Ukraine. But raising the price of energy and establishing a market price offers serious political and social challenges, because the society at large is rather poor, and it would be very difficult for it to accept high market prices for energy. This might lead to other serious challenges for the society.

[The Chair, Conservative, Leon Benoit]

Thank you.

Mr. Regan, you have up to seven minutes. Go ahead, please.

[Geoff Regan, Liberal, Halifax West, NS]

Thank you, Mr. Chairman.

I want to thank our witnesses today, who have been absolutely excellent. This is very interesting.

I'd like to go right back to that last comment by that gentleman from the Ministry of Foreign Affairs of the Republic of Poland, who said that serious political and social challenges would result from raising prices. Wouldn't this also cause serious economic challenges?

[Dr. Stanislaw Cios]

It would create certain economic challenges, especially as regards the competitiveness of the industry. Nevertheless, in our opinion, the main challenges that we would face would still be political and social ones, because to implement such a policy of energy effectiveness and efficiency requires, in any scenario, public support for such a policy. In the long term, of course, this would imply support for the government and political and social stability.

[Geoff Regan, Liberal, Halifax West, NS]

It's not easy to put aside this problem, but putting it aside for a moment, and for our discussion, you talked about the role that Gazprom would have to play in terms of modernizing the pipeline system within Ukraine. Obviously, I would assume that it's not in Gazprom's interest to cooperate in something that will result in them losing business, so my question is, how much of an obstacle would Gazprom be to this development and for how long?

[Dr. Stanislaw Cios]

First of all, the problem with Gazprom is the price of gas, which has been raised significantly by Gazprom in the last few weeks. Secondly, Gazprom has a contract with Ukraine for the supply of gas, and one of the key elements in this contract is that the gas that passes through Ukraine has to be exported.

One of the elements considered in Europe as a possible way of assisting Ukraine is the virtual reverse. Gazprom is rather unhappy about the possibility of the virtual reverse, which would solve part of the problems of the Ukrainian gas sector.

[Geoff Regan, Liberal, Halifax West, NS]

Thank you.

Let me turn to Mr. Sorensen.

As a Nova Scotian, of course it's interesting to me to hear about your plans in Goldboro. I realize that location in Goldboro is already connected to the North American natural gas grid, because of the Sable offshore energy project and now Deep Panuke, but I'm still interested in where you expect you would obtain natural gas. Is it obvious, or could you expect over time to be purchasing or receiving natural gas from different parts of North America?

[Alfred Sorensen]

Under our current plan, we certainly will have the two trains, or it's 10 metric tonnes, equivalent to about 1.5 bcf of gas a day.

The first train is very much focused on Canadian offshore gas, taking the reserves that today are uncompetitive and moving into the United States, which was what used to be its natural market, then looking at developing the New Brunswick onshore, and particularly even maybe the Nova Scotia onshore once they get through their fracking issues.

The second train is very much focused on Marcellus production in the United States. As you already mentioned, that's all connected to the grid through the Maritimes and Northeast Pipeline, which currently runs from north to south. I think that when you talk about the reversal of infrastructure, here's a very good example of a pipeline that was designed to do that.

If you want to take that same scenario and move that to Europe, the pipeline systems aren't designed to go backwards and forwards. They're really very much designed to go in one direction, and just as we've seen here in Canada, to try to reverse flow—including the Enbridge's line 9, a few months ago—is physically difficult to do, but it's also sometimes not even technologically possible. In our scenario, one of the reasons why Goldboro was a very good place to start trying to build an LNG terminal was the fact that the pipeline itself was already designed to go in both directions, and so the reversal to bring gas from the United States into Canada, versus going in the other direction, was already a viable option and a relatively inexpensive one.

[Geoff Regan, Liberal, Halifax West, NS]

Mr. Sorensen, we just heard a minute ago from the gentleman from Poland about the issue of pricing in Ukraine and how it's low and is a problem.

Yesterday I was reading an article that said, for instance, that the new LNG plant in Louisiana, the first one to be built in North America, is likely to sell its product to Asia. If those sales to Asia offset some of the sales from, for instance, the Middle East, those Middle Eastern products might end up going to Europe instead. But you're talking about direct supply to Germany.

When you're looking from the point of view of an LNG plant in Goldboro, first of all, am I right to assume that your first consideration would be where the best price would be obtained? Secondly, obviously, you've said that you were talking to a utility in Germany, which is of interest. What facilities *have to exist in Germany or elsewhere in Europe to, let's say, unpack or to gasify the LNG before it can be put into pipelines?

[Alfred Sorensen]

First, starting with pricing, certainly North America is not a cheap place to develop a resource. It takes a significant amount of capital to get to where we need to go. Certainly we've seen prices come down here very rapidly because of all of that development technology-wise. I'd say the full cost replacement of natural gas in North America is probably around $5, so by the time you add all the costs to ship it overseas, you do need markets of some certain size and price to absorb those cost structures. That's principally what they're talking about when they say most of the gas coming out of the Gulf more than likely has to go to Asia, because that's where the highest prices are. So it's really as a function of cost and profitability that the formula begins to take place.

I think what you are going to see worldwide on LNG prices, and certainly even within the European Union—and this past winter, which was a relatively mild but wet, prices were relatively stable in Europe—is that for volumes to be attractive, the price has to go up. The price will probably eventually settle to one that is somewhere between the price in Asia today and the price in Europe today.

When you look at countries like Qatar or Australia, each of these countries has different advantages from a shipping perspective, so when it comes to getting gas into the Ukraine from different places.... For example, I think RWE, the other major German utility, was just recently able to bring a cargo of LNG into Ukraine—I think more to show it could be done versus that it could be done profitably. In our own discussions on moving gas into eastern Europe, certainly I don't think price-wise it's any less than what currently is being charged by Gazprom. So overall the international price of natural gas is set by different events. If you look at what happened with the Fukushima disaster, in 30 seconds, almost immediately, the value of natural gas changed, because Japan turned off its nuclear fleet so things changed very rapidly. That's probably one of the reasons why long-term contracts are important, in that you can have some price stability. But overall, North America works on a capitalist system, so the volumes are naturally going to move to the highest-price markets regardless of how it works.

Since we don't have a government regulation within our marketplace, whether it be Canada or the United States, that forces volumes to go where one might want them to go for other reasons. You have a scenario where we very much deal on a purely commercial basis. So that makes things a little bit different, from that perspective. If you look at Gazprom as a company, it acts very much the same way. They use energy as a tool more in eastern Europe than they obviously can in western Europe, because there are more alternatives and they can just push them back.

Generally speaking, I would say from an economic perspective, whether it's on the Gulf coast or with Goldboro or in western Canada, pricing certainly has to be at a certain level to ensure an economic return.

[The Chair, Conservative, Leon Benoit]

Thank you.

Thank you, Mr. Regan.

We will go now to the five-minute round. We will start with Mr. Trost, and then go to Mr. Leef, Mr. Nicholls, and then Mr. Opitz.

If we could start, first is Mr. Trost, for up to five minutes.

Go ahead, please.

[Bradley Trost, Conservative, Saskatoon—Humboldt, SK]

Thank you, Mr. Chair.

Mr. Salkeld, you mentioned something in your testimony earlier, when you discussed some of the difficulties as far as drilling and so forth in eastern Europe are concerned. You noted that Poland was an area you didn't have specific knowledge of. Could you again give us a bit of an overview of what the real difficulties are as far as producing gas is concerned, particularly in Ukraine, but also in other eastern European areas? Is this predominantly an infrastructure question? Is this predominantly a geological question, or predominantly a political question?

Give us a little bit more context, because one of the questions we're asking today is whether there is room for Canadian technology, for us to make some money, and also for more production in the European, particularly eastern European, market.

[Mark Salkeld]

Thank you very much.

To your last question, yes, there is opportunity for Canadian services companies to develop revenue, earn money in the European market, specifically because of the technologies we have today in North America with respect to horizontal drilling and multi-stage hydraulic fracturing. As we've seen in North America, that's opened up what we once thought were un-economic plays to develop. Well, those same types of unconventional resources are in Ukraine, where they are actually drilling and producing unconventional resources currently. But there's room for modern technology and what we have to offer with respect to the microseismicity, the ability to analyze the data accurately, to drill very accurately into these unconventional resources—

[Bradley Trost, Conservative, Saskatoon—Humboldt, SK]

What's holding them back?

[Mark Salkeld]

—to drill the long, horizontal legs with multiple stage fracking, drilling highly productive wells with a fewer number of wells on the surface.

[Bradley Trost, Conservative, Saskatoon—Humboldt, SK]

So what's holding them back? Is it regulatory issues then, is it political difficulties? Most of the countries, unless there are environmental questions, want to produce their own gas. It's profitable, etc. So what's holding them back?

[Mark Salkeld]

Right now with respect to Ukraine itself, it's essentially the business environment. It's very onerous as I mentioned in my testimony. Our members have been there, where it's difficult to deal with the shadow economy. I was actually just there and heard first-hand in Kiev that the shadow economy there is essentially cradle-to-grave.

[Bradley Trost, Conservative, Saskatoon—Humboldt, SK]

May I make one more comment—

[Mark Salkeld]

That said, I was part of a group that went to Siberia in the early nineties when it opened up, and we're still operating there very successfully over 20 years later and it's come around. So there are definitely success stories and those are similar types of resources and geology.

So the biggest holdback, in Ukraine in particular, is the business environment. The second part is that there are areas of Europe that are leery about the new technologies. We're doing our best to try to educate them, not only in Europe but in North America as well.