Natural Resources Committee on May 1st, 2014

[The Chair, Conservative, Leon Benoit]

Good morning, everyone.

Before we get started on the business of today's meeting, I want to mention a couple of things really quickly.

First of all, there was a question by Ms. Duncan at Tuesday's meeting about witnesses from Ukraine. We have one today.

On Tuesday we will start working on the report on the cross-country benefits of the oil and gas sector, so perhaps everyone could come prepared for that. You'll probably receive the report sometime on Monday.

Yes, Ms. Moore.

[Christine Moore, NDP, Abitibi—Témiscamingue, QC]

Mr. Chair, how can we be efficient on Tuesday morning if we receive the report on Monday and we have to study it? I'm sorry, but one night to study a report and be ready for Tuesday morning I find unacceptable. I think we should have at least two or three days to study a report before talking about it in committee, if we want to be efficient.

We should have a normal committee meeting on Tuesday if we just receive the report on Monday.

[The Chair, Conservative, Leon Benoit]

I guess that's one way to view it. We have no business arranged for Tuesday's meeting, so if you want to take that time to go over the report, we could probably decide to do that.

Is that what you want to do? Do you want to come back and start Thursday with the report?

[Christine Moore, NDP, Abitibi—Témiscamingue, QC]

For me, having just one day to study a report is.... Can we get it before?

[The Chair, Conservative, Leon Benoit]

No, it doesn't sound like we can. It's gone to translation. That's always a slow process. It's been there for a while now. It takes time. It's a long report.

Ms. Duncan, let's not get into a long discussion on this, if we can help it. We have witnesses from around the world waiting.

[Linda Duncan, NDP, Edmonton Strathcona, AB]

I'm merely speaking to the matters you've raised, Mr. Chair.

I second the concern of my colleague. I don't think it's extreme to ask for at least two days to review the report and then we can be efficient. We may well come to agreement more quickly and just look at the issues of contention. We can start right away with “We're generally supportive of the report, but here are the issues”. I have many things already booked on Monday, so I'm not sure I have sufficient time to review it.

I'm also asking what has happened to the brief report we asked for on rare earth, and if we could have some kind of guidance on what the next study might be. For example, I know that our Liberal colleague has been waiting for his review of propane. We would be fully supportive of that. If we could gear up for that on Tuesday, that would be terrific.

That might be an option. Who knows? We may actually be able to get through the report at the Thursday meeting.

Also, I am pleased that we have somebody who has studied Ukraine, but I'm just wondering if we could have clarification on whether or not we're able to have anybody representing the Government of Ukraine.

[The Chair, Conservative, Leon Benoit]

We have no witnesses who were asked for by committee members, Ms. Duncan, as you know.

Mr. Trost.

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

Mr. Chair, maybe we could take a few minutes at the end to decide if we're going to cancel Tuesday and to go through some of the other things Ms. Duncan mentioned, etc.. but now we really need to get to the witnesses.

[The Chair, Conservative, Leon Benoit]

We do. This meeting will end on time, so we'll end maybe five minutes early and do a quick discussion on whether we want to cancel Tuesday's meeting or postpone it until Thursday.

Let's get to the business we're here to talk about today, which is the study of the opportunities for Canada to contribute to energy security in Ukraine and the rest of Europe.

I really do want to thank the witnesses for being here today. It looks like a very interesting day, indeed. I want to make sure that we have the maximum time possible to hear from our witnesses and then to have members question and make comments on what the witnesses have said.

In the room with us today, appearing as an individual, is Michael Edwards, principal, Fairweather Hill. Welcome to you, sir.

By video conference from Geneva, Switzerland, appearing as an individual we have Vitalii Dem’ianiuk, participant, executive master program for international oil and gas leadership, Geneva Graduate Institute of International and Development Studies. Welcome to you, sir. Thank you very much for being with us today.

By video conference from Calgary, we have Geoff Hill, consulting partner, national oil and gas sector leader. Welcome to you, sir. Thank you very much for being here.

There's a change here: by teleconference, unfortunately, rather than by video conference, from Washington, D.C., we have as an individual Anders Aslund, senior fellow, Peterson Institute for International Economics. Thank you very much, sir, for being with us today.

We'll go directly to the presentations in the order listed on today's agenda.

Michael Edwards, principal, Fairweather Hill, please go ahead with your presentation. You have up to seven minutes, sir.

[Michael Edwards, Principal, Fairweather Hill, As an Individual]

Mr. Chair, and honourable members, thank you for your invitation to contribute to your study.

I'm an independent policy analyst, and I focus on energy. I've been following the energy sector now for about three decades. The opinions I express today are my own.

The current political crisis unfolding within Ukraine, and between Ukraine and Russia has raised the question: can Canada play a role in Europe's energy security? If you believe this crisis might drive an opportunity, then it may be fair to ask if that opportunity will outlast the political crisis.

Those in Europe with whom I spoke this week cannot see a future when Russia will be displaced from the energy markets of Europe. Russia simply has too large a role to play in supplying Europe with energy. More than 25% of Europe's total market for gas—34% is the last figure I had—and just under 30% of EU oil is shipped from Russia. Europe and Russia have become entwined in a symbiotic relationship, a web of interlocking business and financial relationships, based primarily on energy.

Of course, we've seen disputes that have arisen between Russia and states of the former Soviet Union, and these created some collateral damage for Europe, including interruptions to gas supply in 2009.

Security issues aside, the priority need for Ukraine today is financial help in meeting debts. I fully expect that Europe will assist as this is clearly in its interest to resolve the problem.

Is there an ongoing threat to European energy security? If markets are any indication, the answer is probably not yet. We see that European gas prices have moved little on the latest Ukrainian problems, not an indicator that energy security is top of mind, or that the intensity of the current political confrontation is enough to create a willingness by Europeans to pay an estimated $35 billion annual premium for diversification away from Russia as a supplier of choice.

It is also not likely that European consumers will be easily convinced to accept a 50% increase in their gas bills, so the energy security issue may well fade, provided the political crisis resolves itself.

After the crisis in 2009, there was increased investment to support trade with Russia, the most notable was the 14 billion euro Nord Stream project to bring gas directly from Russia to Germany under the Baltic Sea.

Some have decided to move toward less dependence on Russia. Lithuania, for instance, has commissioned a floating LNG receiving facility, and Poland is also taking steps to tap the world market for LNG.

Europe currently imports about 11 TCF of gas annually. To put it into a Canadian context, the Russian share would be equivalent to about four Sable Island gas projects exhausted every year, or about the volume of output from four or five good-sized LNG projects like the current one in Sabine Pass on the Louisiana-Texas coast.

That being said, Europe cannot afford to have uncertainty over where its energy will come from for any amount of time, let alone the decade or more it would take to transition away from Russia. During that decade there would be opportunity for an immense amount of dislocation: economic, political, and social.

The reaction from Europe on the energy security front will not be uniform, of course; we've seen that. It will reflect that individual states have to assess their own vulnerabilities, and those vary widely from the U.K., with very little direct need for Russian gas, to former Soviet Union states, which are wholly dependent on Russia.

Europe, with so much Russian-focused infrastructure, may augment a small portion of Russian gas with a little more gas from Norway, a little more LNG from the world market, a switch back to more coal, revisiting nuclear, ramping up renewables, and redoubling conservation efforts, but in the end, Russia still remains a key player.

We should therefore assess markets realistically with Russia as part of the dynamic, an entrenched player that has a competitive cost base and the infrastructure to deliver its product, and one that has demonstrated that it will defend its markets very aggressively.

What can Canada do? Canadian gas is not available on the east coast yet in sufficient quantities to justify the investment in LNG infrastructure. That may change, of course, with new discoveries or by making the investments in gas pipeline infrastructure required to bring more gas into the region. This is a five- to ten-year prospect.

Notwithstanding this, LNG will still go where it will fetch the highest price, and currently, that is Asia. Interestingly, we are about to repurpose the main west-east gas transmission pipeline to move bitumen, which won't really help the gas situation in Europe.

Is there really an opportunity to do something here? Well, considering the points that I've raised, the fact that there is little interest in the European market as demonstrated by the current round of U.S. LNG export project whose focus is Asia, the answer to that on the gas side is probably not. The question is if there's anything else we can do.

For Ukraine, it's been estimated that if that country were as energy efficient as western European countries, its own domestic production would be sufficient for its own needs. I see an opportunity if Ukrainians decide to take themselves off the Russian subsidized gas habit, and therefore the real opportunity may actually be Canadian energy efficiency expertise working in partnership with knowledgeable Ukrainians, not more gas to feed an inefficient energy system.

If I have time, I would like to make a short comment on oil.

Canadian producers at the moment have a negligible impact on the EU oil market. We currently export to the EU about .47% of their imports and that's light sweet crude. Perhaps there's some room to move more light sweet from Newfoundland and Labrador as more projects come on stream. However, I see no barriers to that production. It sells itself, it's very competitive.

Finally, on the matter of Canadian heavy blends, these certainly could displace imports to Greece and Turkey, but that would actually displace heavier gulf blends, not Russian Urals, and that is also true elsewhere in the basin.

I would like to leave it there and await any questions you may have.

[The Chair, Conservative, Leon Benoit]

Thank you very much, Mr. Edwards, for your very interesting and informative presentation.

We go now by video conference to Vitalii Dem’ianiuk, who is a participant in the executive master program for international oil and gas leadership in Geneva. He is here as an individual.

Would you go ahead, please, sir, with your presentation.

[Vitalii Dem'ianiuk, Participant, Executive Master Program for International Oil and Gas Leadership, Geneva Graduate Institute of International Studies and Development, As an Individual]

Thank you, Mr. Chair.

Good morning, bonjour, dear madams and sirs.

Please let me express my sincere gratitude for the invitation to join you at this panel and the possibility to be an expert witness at the Standing Committee on Natural Resources. I've been in the energy sector for 15 years and 8 years in the gas sector.

The matter of energy security of Ukraine, which primarily relates to the issues of natural gas supply to Ukraine and transit of natural gas through the territory of Ukraine, could be solved only if any and all actions of the Russian Federation aimed at an increase in natural gas price, a reduction in supply volumes of natural gas, or a reduction in transit volumes don't have a significant impact on the Ukrainian economy and the political decision-making process for Ukrainian authorities.

The guiding role of hydrocarbons, first and foremost, the share of natural gas of Russian origin, should be reduced to the greatest possible extent in the energy balance of Ukraine, deploying a wide range of measures.

Ukraine must become an inherent and integral part of the European energy market.

On September 24, 2010, Ukraine acceded to the Energy Community Treaty. In doing so, Ukraine accepted and committed itself to obligations on the staged implementation of the European energy legislation. In a rather short term, Ukraine has to complete this assignment and implement on its territory the European model of energy market operation.

The integration of Ukraine into the European energy market would enable implementation of the projects related to the cross-border flow of energy resources and joint development of transport infrastructure. Even today, we may ascertain that the reverse flow supply of natural gas from the European Union countries to Ukraine can produce a tangible and economically reasonable alternative to Russian gas. Today, Ukraine is in need of support, by any and all political means, of her efforts aimed at stabilizing the reverse flow supply of natural gas as the most time-efficient tool for enhancement of its energy independence.

Let me briefly describe the potential action-oriented aspects from Canada and Canadian industry on the issue of contributing to the energy security of Ukraine by means of participation in a range of comprehensive focus areas.

First is the reduction in natural gas consumption volumes, increase in energy efficiency, and development of alternative energy sources. This area makes possible a significant decrease in energy dependence. At present, the marketing niche of energy efficiency and the alternative energy market in Ukraine can be attractive both for injection of capital and for the transfer of technology.

According to data from IHS CERA, today the energy capacity of the Ukrainian economy is, by a substantial margin, higher in comparison with that of the European Union, which provides the most unique opportunity to invest and to apply creative technology in every sector, including energy and construction. The tremendous potential of Ukraine in biomass creates an opportunity for substitution for natural gas in power and heat generation.

Second is the increase in domestic production of natural gas in Ukraine. In specified areas, mutual cooperation can occur in multiple spheres: investment in the production of natural gas and the operation of Canadian oil and gas companies in Ukraine; the transfer of sophisticated technologies related to the production of unconventional natural gas and the augmentation in production of conventional gas at the fields with the production volume decrease phase; the transfer of sophisticated technologies related to minimization of losses of produced hydrocarbons over the course of extraction and processing.

Ukraine requires innovation technology and it is highly important to find the appropriate partnership models in order to provide the means for Canadian energy, engineering, and service companies to operate in Ukraine.

Third is diversification of the natural gas supply to Ukraine and in general to the European market. Its increase by any possible means other than sources from Russia will automatically enhance the energy security of Europe and Ukraine, in particular.

For this purpose, contribution by the Government of Canada and participation of Canadian companies in multiple initiatives and projects aimed at the saturation of the European natural gas market will automatically cause a positive impact, including for Ukraine.

Fourth is educational programs and further professional training. This focus area of cooperation and endorsement is a key one, because the long-term implementation of the above-mentioned tasks will succeed only under this condition. International education in the energy sector, the possibility of continuing professional development, and the introduction of new technologies will enable the real sector of the economy to be filled with advanced professionals and the implementation of necessary structural reforms in the energy sector of Ukraine.

Canada already provides such kind assistance for Ukraine, which we genuinely appreciate, and many young people of Ukraine study at universities in Canada or intern at Canadian companies.

The indicated cooperation could be extended to the energy sector as well.

Therefore, diversification of the natural gas supply, the increase in energy efficiency, the increase in volumes of natural gas domestic production, alternative energy use, and improvement of the professional educational level are the key areas to be entered into by Canadian investments, Canadian technologies, and Canadian companies.

Thank you for your attention. I am ready to answer your questions.

[The Chair, Conservative, Leon Benoit]

Thank you very much for your presentation, sir, and we'll get to the question part later.

We will now go to our next witness, who is with us from Calgary by video conference.

From Deloitte Canada, we have Geoff Hill, consulting partner, national oil and gas sector leader.

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

[Dr. Geoff Hill, Consulting Partner, National Oil & Gas Sector Leader, Deloitte Canada]

Thank you, Mr. Chair, ladies and gentlemen. It is my absolute pleasure to be here today.

As you may know, Deloitte is among the largest professional services firms in the world, with offices in more than 150 countries, including Ukraine. Suffice it to say, the issue we’re discussing is close to us in numerous ways.

For my part, I am a partner in our Calgary office, and I lead our Canadian oil and gas practice. Services we tend to provide to all of the oil and gas companies are regarding advisory, modelling, and general consulting services, just to set the stage on where we contribute to this industry.

Meanwhile, it is important to note that our member firms are legally independent of each other throughout the globe. Therefore, today I will be speaking specifically from a Canadian perspective.

I am honoured to speak from a Canadian supply and demand, and logistics and capacity perspective of the high level of what we believe Canada could do to help out with the current crisis.

The primary challenge is really around infrastructure. By way of resources, if we set the stage at a very high level, we clearly have plenty to share.

Let us look at a quick calculation of the 2013 production in Canada versus its current domestic use, in other words the amount we export. If we were to take the high-level, somewhat impractical but illustrative exercise of diverting all of our current exports to the European Union, how much of the current European import amounts would that displace? In other words, how much of a player could Canada be in helping out this situation?

Currently we export 1.2 million barrels a day of crude oil. If Russia turned off all the taps entirely, that would be almost 40% of the potential European Union shortfall, almost 1.8 trillion cubic feet of gas per year, which is almost 33% of the EU shortfall, and 21.7 million tonnes of coal a year, which is almost 43% of the potential European Union shortfall.

Those are large numbers, but in the context of what we can reasonably do in the situation in the Ukraine, those numbers assume some very important things.

First, it's assuming there is no increase in Canadian production, even though we have significant proven reserves. I will talk about that in a second.

Second, it's assuming we have market access and all of the infrastructure to get the product to tidewaters, and then to process that to transport to Europe. It's also assuming that the Canadian oil and gas companies will consider that an economic export location versus some other alternatives.

Third, which is the largest assumption, but is for illustrative purposes only, it's assuming that all the Canadian excess capacity would be currently diverted from its current customers, primarily the U.S., to the EU.

Let's go through those issues in detail, because I think it will illustrate some of the challenges and opportunities we have in Canada.

In terms of existing pipelines, we know they're pretty well all maxed out, which is why growth, especially in the oil sands sector, needs the three-million-plus barrels a day of new capacity represented in the variety of pipeline proposals currently on the books. If the capacity does expand, production of all those resources is forecast to far outpace our current domestic consumption. In other words, the rate of which we can increase our production is a lot higher, a lot faster than the rate of which we are going to be able to build infrastructure. So production isn't our problem.

The second assumption is very fair, and that is regarding market access and infrastructure constraints. It is our belief that projects like Northern Gateway, Keystone XL, the Line 9 reversal and Energy East are all very viable and should proceed, notwithstanding some legitimate stakeholder concerns that must be addressed. Currently, of course, the pricing economics favour exports from Canada to Asia over that of Europe. That, therefore, may not make it as attractive to export to the European Union, even if we did have the infrastructure to export out of Canada.

Of course, there's the proposed fuel quality directive, which is a clear and present danger to some of our crude export hopes, particularly the oil sands.

As for the third assumption, which is diverting all of current exports from the United States, that is exceptionally impractical. But it does show that with no increase in our current production, Canada's energy independence as a country would not be threatened by an increase in exports outside of Canada.

Regardless of any of those scenarios playing through, we're still left with a very serious infrastructure deficit.

By any estimates, the most aggressive estimates to supply gas to Europe are for around five, six, or eight years, during which time we would have to be exceptionally busy building the needed facilities, none of which we are currently building at the required pace.

I would also like to point out that this means we are not ready to respond to any other similar situations like this should they happen in the next few years. I am talking about similar global energy crises with which Canada may come to help.

I believe we know most of this, so rather than retread over covered ground, I would like to close with a couple of short-term and medium-term ideas that we may want to consider.

For a short-term idea, we are an exporter of resources, and we have been since the founding of our country, but what about exporting our technology, individuals, people, and our expertise as well? Canada could provide not just resources but knowledge, skills, and technology to help develop local resources, proficiency, and expertise. I understand an earlier witness suggested this, but I want to mention it, because we agree it's a substantial opportunity for Canada.

We understand that we do have a skills shortage in Canada, there is no doubt, and this seems to conflict with what we're talking about. But we are talking about growing a centre of excellence, not just for resources but also for technology know-how in the areas of oil field services, energy efficiency, education, and training. This will benefit Canada as a whole. Meanwhile, Canadian expertise in these areas is absolutely world-renowned.

A medium-term opportunity would be Canada collaborating with the United States to collectively feed the EU markets. I will talk about gas first.

In terms of an LNG supply, North America offers relatively short shipping distances, relatively little political risk, and very transparent pricing. The viability of U.S. LNG liquefaction projects can be understood by using the concept of shale spreads, which represent the price differential between shale-driven natural gas, which is a low price, and natural gas prices in other regions, including the EU and Asia. There's a substantial spread. Although in Europe it's not as substantial as it is in Asia, there is still a substantial spread. Collaboration between the United States and Canada, with its already existing interconnected natural gas infrastructure, would accelerate the export of liquefied natural gas.

With respect to collaboration with oil, pipelines such as Keystone XL would allow the transfer of Canada's heavy oil to the U.S. gulf, which those refineries are well set up to produce. It could allow the possibility of diverting some existing U.S. imports or even U.S. production of light oil to the EU, which the refineries there are better suited to produce.

Beyond those two ideas, I would like to reiterate that I believe the infrastructure is still the crux of our challenge, both in specific terms of the situation in Ukraine as well as domestically. All the best intentions in the world won't change the fact that we just don't have the means to ship our energy products to anywhere but the U.S. for the near future. If we focus on changing that, we do believe the rest will follow.

Thank you.

[The Chair, Conservative, Leon Benoit]

Thank you, Mr. Hill, from Deloitte Canada, for your presentation.

We go to our final witness for today's meeting, who is with us by teleconference from Washington, D.C. Anders Aslund is a senior fellow at the Peterson Institute for International Economics.

I welcome you, sir, and thank you very much for being with us today. You can go ahead with your presentation, for up to seven minutes.

[Anders Aslund, Senior Fellow , Peterson Institute for International Economics, As an Individual]

Thank you very much. It is a pleasure, Mr. Chairman and members of the committee, to testify at this committee today.

I work at the Peterson Institute for International Economics, an independent economics think tank. I have been dealing with Soviet Russia and Ukrainian economic affairs for the last 40 years. This is where I come from. I come particularly from two perspectives, one is the dysfunctionality of Gazprom, the Russian supplier to Ukraine, and the other is the dysfunctionality of the Ukrainian gas sector. That is where I think I can add something to all the knowledge the other witnesses have already provided you with.

The European oil market is well supplied and functions well. The same is true of the coal market in Europe, which is oversupplied, and the nuclear market is minor. What we are talking about really is gas, and specifically with regard to Canada LNG.

Starting from the Russian side, the Russian state-dominated natural gas giant Gazprom stands out as the possibly worst managed big company in the world. Its market capitalization has fallen by 77% in the last six years. Its price equity ratio is as low as 2.4. It should be worth three to four times more. The reason is that Gazprom is a company that does not allow its so-called shareholders to get part of its actual profit, apart from the dividends.

Each year it spends about $45 billion on so-called capital expenditures, which means plenty of large pipelines which make no commercial sense. In particular, Gazprom has built Nord Stream, the big pipeline through the Baltic Sea in order to avoid Ukraine. It has now started building South Stream, a large pipeline through the Black Sea in order to avoid or circumvent Ukraine. The clear intention of Russia is to abandon the relatively well-functioning Ukrainian gas transit system, and leave it unutilized.

The building of these pipelines has another purpose as well. It is to enrich the subcontractors. Out of this $45 billion in annual capital expenditure, $30 billion or so goes to what investment bankers delicately call value destruction, which ordinary people would call waste and corruption. Much of that money has gone to some of the Russian companies that the U.S. Treasury recently sanctioned for having financial connections with a top Russian official. In short, $30 billion or so effectively goes to kickbacks.

The other goal of Gazprom is geopolitical, to bully countries dependent on its gas supplies. Ten European countries receive 100% of their natural gas imports from Gazprom: Finland, Belarus, Estonia, Latvia, Lithuania, Czech Republic, Slovakia, Bulgaria, Moldova, and of course, Ukraine.

Of these countries, all but Finland have experienced sudden, repeated, impermissible cuts in their gas supplies usually caused by a combination of geopolitics and corruption. In particular, in January 2006 and again in January 2009, Ukraine and much of Europe suffered from Gazprom cutting its supplies.

The reaction to Gazprom's sustained cut in supplies in January 2009 was severe and persistent. Gazprom's exports to Europe fell by 21% from 2008 to 2012. Its share of EU gas imports fell from 32% in 2008 to only 25% in 2012.

Russia has been largely crowded out by LNG supplies of some 10% of total European gas imports now largely from Qatar.

The European energy market is not expanding. On the contrary, it has fallen by a few per cent in the last decade, and it's likely to be flat in the future as well.

The other aspect is what is happening inside Ukraine, and it has been quite dramatic. In 1989, Ukraine consumed 100 billion cubic metres of gas a year. Now that consumption has gone down to 50 billion cubic metres or so last year. Even so, Ukraine remains one of the least energy efficient countries in the world. The short of it is that Ukraine could cut its consumption to 30 billion cubic metres, if it became as energy efficient as Poland. Then we would have a very different situation. The fundamental problem is that the household price of gas in Ukraine covers only 15% of cost recovery. It's about to be increased by 50%, but that doesn't help much.

Another side of the Ukrainian gas market is that Ukraine was a major gas producer until the early 1970s, when its production peaked at 70 billion cubic metres a year, then production was sharply slashed to some 20 billion cubic metres a year, at which level it has stayed, because the Soviet authorities turned their focus to the giant gas fields in west Siberia.

Ukraine can increase its production of conventional gas with existing infrastructure. For example, Shell is working in this area. There's no reason to believe that they couldn't increase conventional gas production by 50% within five years or so with elementary order in a very disorderly gas sector.

In addition, Ukraine has plenty of shale gas potential. Both Chevron and Royal Dutch Shell have concluded product-sharing agreements with the Ukrainian government about the development of shale gas fields, Chevron in the west and Shell in the east of Ukraine. Both of them anticipate they could reach a production of five to ten billion cubic metres a year in a decade. Ukraine could reach gas balance in five years by doing elementary things, and it could be oversupplied with exports in five to ten years, thanks to shale gas.

The rest of Europe has also reacted to the Gazprom cut in 2009. Energy savings had already gone quite far, so that is not the key element. Instead, they've undertaken four major measures.

First, they accelerated the development of LNG infrastructure that has been discussed here before. Europe has now more than a score of LNG terminals and the LNG tanker market is oversaturated.

Second, they opted for all kinds of interconnectors so that gas flows in the existing pipelines can now easily be turned around in various directions.

Third, central Europe especially has increased gas storage substantially.

Fourth, the European Commission has reinforced its competition policy, launching its biggest case ever against Gazprom, and its whole business model is likely to be disqualified.

Then you wonder what the role of Canada would be here. In the short term, there's nothing Canada can do. In the long term, Ukraine should be in good order. We don't know what will happen with the dysfunctional gas production in Russia, but in the medium term, Canada could produce and export LNG and make a contribution to the market, even if most of this went to east Asia where the prices are the highest.

If Canada declares that it is intent on exporting LNG to the benefit of Ukraine, that declaration on its own will have a positive impact on energy security in Ukraine and the rest of eastern Europe.

Thank you.

[The Chair, Conservative, Leon Benoit]

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

Before we get to questions and comments from committee members, could I just ask the committee if maybe we should agree to have an hour for future business on Tuesday, to have that as our meeting on Tuesday?

It gives more time for the translation of our draft report to make sure we have time to read it. If that's agreed, we won't need to put aside any time today to deal with future business. Is that agreed?

[Some hon. members]

Agreed.

[The Chair, Conservative, Leon Benoit]

Okay, we will do that then, and have some reasonable, more lengthy discussions on future business.

Thank you very much for that.

We go now to questions and comments in the seven-minute round. We'll start with Mr. Trost, followed by Ms. Duncan, and then Mr. Regan.

Go ahead, please, Mr. Trost, for up to seven minutes.

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

My first question will be for both Mr. Aslund and Mr. Dem'ianiuk.

We heard from some of our previous witnesses at our previous committee hearing that if you're a Canadian company wanting to work in the Ukraine, there are—how shall we say this?—issues involving dealing with the government, dealing with the regulatory system, dealing with corruption, etc., throughout that part of the world. Having actually lived in Russia in a previous life, I understand some of the business dealings they're dealing with.

As some of the suggestions made today were about getting involved technologically with Ukraine to help them, be it for production or for energy efficiency, with that as a background, I have this question: does Ukraine currently have the infrastructure, political, legal, cultural, physical, etc., to absorb and use whatever technology Canada or other western countries would have, be it for producing more natural gas or be it for assisting them in transitioning to a more energy efficient sector? This is a problem: companies go in there, and they really don't want to deal with the business climate.

I see some other witnesses nodding their heads, but could the two witnesses who I asked start off? Then if we have a little more time, I may ask the other witnesses to comment.

[Anders Aslund]

The short answer is that the current situation is undergoing a massive transition. As you know, yesterday, the IMF decided on a standby program for Ukraine of $17 billion. This is a big reform that is under way.

The answer falls into two parts.

As it was, until February, it was quite a hopeless situation for small and medium-sized enterprises. There are two good big western companies that manage to operate. Those are Chevron and Royal Dutch Shell. In order to find reasonable conditions, they have insisted on product-sharing agreements for their taxation, and they have managed to get such agreements. There are no good, small, independent companies in Ukraine that have reasonable conditions. You need the existing conditions to be big and strong, and that means when Canadian companies want to work together with Shell and Chevron, they can operate.

I'm not sure if either of these two has started the exploration for shale gas, but Shell is doing deep drilling on land and on shore. ExxonMobil was about to make an agreement with the Ukrainian government about offshore, off Crimea. I think that has fallen off the board for the time being, and for the future we will simply see how far the reforms go.

I have been dealing with Ukrainian economic reforms since 1994. From 1994 to 1997, I worked as a government adviser. I had some hope then, and then it became clear that it was stuck. This is the best possibility of a breakthrough that I have seen in Ukraine, so I have high hopes for a substantial improvement in [Inaudible—Editor], but it's not done yet.

[The Chair, Conservative, Leon Benoit]

Thank you, Mr. Aslund.

Mr. Dem'ianiuk, go ahead, please, sir.

[Vitalii Dem'ianiuk]

I would like to express my feeling exactly from my perspective.

Today the Ukrainian government is totally open to cooperate and to support this cooperation. If you look at internal production of natural gas in Ukraine, 90% is concentrated in state-owned companies. I strongly believe that for the moment it would be much easier to organize this cooperation and to intensify it.

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

My next question follows up on that one. We've mostly concentrated on Ukraine, but we are looking at other eastern European and European countries, because they do interplay on this.

Again, I could go to the same two witnesses, but if the other two witnesses want to answer, they should indicate.

What is the infrastructure capability? How open are other countries in that area to similar measures? Are there other countries that could use a great boost in their energy efficiency, local production, etc., and are they open, for example, Moldova and Romania? We talked to Poland the other day. They seemed very open. How can we interact on that level with those other countries?

Do any of the witnesses have a comment about countries other than Ukraine, in a similar fashion?

[The Chair, Conservative, Leon Benoit]

Point of order, Ms. Leslie.