Natural Resources Committee on May 1st, 2014

[Megan Leslie, NDP, Halifax, NS]

Mr. Chair, I have a point of clarification. When Mr. Aslund speaks, it's quite low. But if you use your earpieces, it's easier to hear him.

[The Chair, Conservative, Leon Benoit]

Thank you. We have a volume adjustment issue there.

[Megan Leslie, NDP, Halifax, NS]

Yes, it works well this way.

[The Chair, Conservative, Leon Benoit]

Thank you very much, Ms. Leslie.

Mr. Aslund, do you want to answer that question?

[Anders Aslund]

I'm happy to do so.

If you discuss a business environment in Moldova, it's very complicated. When we discuss energy issues, you can't have very big companies. Big companies in small economies bring about complications. Moldova has, to my knowledge, no energy findings of its own. It has, rather fast, improved its business environment. I'm thinking of a Transparency International corruption perception index and also the World Bank's index on the ease of doing business. But it is so small and it's poor, so it's difficult to operate, from that point of view. It has some substantial improvement in energy efficiency.

Romania is, to my mind, one of the most interesting countries, perhaps the one, besides Ukraine, that I would bet the highest on developing shale gas. Poland, as you mentioned, is another country that is intent on developing shale gas. Poland has introduced quite bad tax rules for shale gas exploration, and therefore, they have now changed those rules, because they scared off countries.

There are a couple of countries that have simply prohibited shale gas. They are the Czech Republic and Bulgaria. I think this reflects the strong influence of Gazprom that is going against it. Gazprom is supporting all kinds of non-governmental environmental organizations in order to make sure that shale gas does not develop. Gazprom is going about this in a very clever political way in eastern Europe.

By and large, all these countries have greatly improved their energy efficiency after the communist era, so the European Union has had a big positive impact. What has also had a great impact is the so-called third energy package of the European Union, which means that countries now have to force energy companies to divide pipelines from the production and sales of energy, which hits Gazprom directly.

This is one of the big battles that is taking place. Both east European countries that are members of the European Union and the European Union itself are very firm on these points.

We're seeing a lot of positive development, meaning more efficiency and more market orientation in this area. As Mr. Dem’ianiuk mentioned before, Ukraine is part of the European energy community, which is what is really needed in order to get into the European energy policy.

Thank you.

[The Chair, Conservative, Leon Benoit]

Thank you very much. We have to leave the answer at that.

I'm going next to Ms. Duncan, for up to seven minutes.

[Linda Duncan, NDP, Edmonton Strathcona, AB]

Thank you to all of the witnesses. I know it's very difficult when you're at such a distance. We wish we could have brought you here personally, but perhaps some other time. I'm glad you could join us by phone at least, Dr. Aslund.

[Anders Aslund]

Thank you.

[Linda Duncan, NDP, Edmonton Strathcona, AB]

I noticed that both Dr. Aslund and Geoff Hill have mentioned that there are two sides to this issue of what Ukraine is struggling with right now. One is to ensure a secure supply of gas or other fuels, other sources of energy electricity, and the other is energy efficiency.

Some of you may be aware, likely Dr. Aslund is, that the IMF have just declared that they will give $17 billion to Ukraine, and $3.2 billion of that immediately. Those dollars are conditional on a substantial effort by Ukraine on energy efficiency. Certainly that's another side that Canada could readily provide.

One thing that I would add is, I had the pleasure in 2012 of travelling to Ukraine twice, including meeting with some of the local governments. Some of them are particularly struggling with trying to provide jobs in small-scale industries. There could potentially be a lot of job creation through energy retrofits, installing renewable energy, and so forth.

Interestingly, and you wouldn't know this, Dr. Aslund, unless you saw the proceedings, we were fortunate to have representatives from the Government of Poland testify before us on Tuesday. They put forward a number of recommendations. One of them was in keeping with what you've said. Because Ukraine is among the least energy efficient and there's pressure by the EU in that direction, they strongly recommended that they move toward greater energy efficiency. Apparently the IMF is requiring greater energy efficiency, not just for large industry which might be more readily possible, but also for smaller scale commercial and home. They realize there has to be some kind of a social safety net.

I'm wondering if we could hear from, first of all, perhaps, Dr. Aslund and then Mr. Hill, who, to his credit, and we looked at his report, said that part of a national energy strategy for Canada should be energy efficiency, and certainly we have a lot of expertise that we could be exporting to Canada on that.

Dr. Aslund.

[Anders Aslund]

I can only support what you were saying, Ms. Duncan.

What I should add is that the price policy in Ukraine has been totally out of whack. Ukraine last year paid $53 for 1,000 cubic metres of gas. That was produced in Ukraine by a state company, while it imported gas for slightly over $400 per 1,000 cubic metres from Russia. This is with our transport under VAT. That means Ukraine paid only one-eighth as much for domestic production.

The idea was that this should be used for domestic consumption. The gas price in Ukraine has only been one-sixth, 15%, of the cost recovery for gas. Now it will go up to something like 23% of a cost recovery, which is still far too little, and the idea is that it will go up. You wonder, why this is. Well, it's because somebody takes about half of the domestically produced gas, say, nine billion cubic metres is my assessment, and resells it. This was somebody very close to President Yanukovych, or possibly Yanukovych himself who was in this business.

If we do the simple calculation, that was about a $3 billion cost. This is the reason nobody has worked on energy efficiency, because somebody higher up all along has been making money on it. All the big fortunes in the 1990s in Ukraine were made on gas. In reality, Ukraine probably has 20 billionaires, and most of those billionaires have made their money on this kind of gas trade which has moved among different people.

In order to get rid of this corrupt dealing, one needs to increase the gas price all the way so that there's no difference between cost recovery prices and the prices at which gas is actually sold, both for production and consumption. Then you get incentives to save energy, and then all the techniques become relevant. Of course, Canada has a lot to offer in this regard, and this can be done in so many ways, but first the prices must get right.

Thank you.

[Linda Duncan, NDP, Edmonton Strathcona, AB]

Thank you.

Go ahead, Mr. Hill.

[Dr. Geoff Hill]

Thank you for the question. It's a very good point. Any time an energy efficiency project is undertaken, of course it requires equipment, but it also requires the skills and the knowledge and the know-how that go along with it—the skills to choose the right equipment, to install it properly, to operate it properly—and those are very highly technical, highly specialized skills that Canada does have. I think we do have the potential to help out.

There are some challenges, though. Those skills are also in high demand in North America. As was mentioned earlier in a previous question, it is easier to do business in Canada or in the United States than it is in other countries, particularly for some small companies.

I realize the Chevrons, Shells and ExxonMobils of the world are more comfortable going into newer geographies, but the small companies that might have 10, 20, or 30 engineers, and that might be the world's expert at a certain area of energy efficiency, are probably more nervous going into those areas. They would need some help. I think they would need to understand the economic potential, the economic gains they could get from going in, but I think they would need some help on how to navigate the system, to take some of the risk out of doing that. But we definitely have the skills to build the export, for sure.

[Linda Duncan, NDP, Edmonton Strathcona, AB]

If I could just follow up on that, I know that in my own province of Alberta there are a good number of energy efficiency and retrofitting companies. They're actually already working in Europe and developing that exchange.

The challenge, of course, for Ukraine is that it has a struggling economy and the people who will be the most vulnerable will be the homeowners and the small businesses that are struggling to get going. I know it's very important. If large industry in Ukraine is the biggest energy consumer, there is also the other side, and there probably is a lot of expertise. Electricians, carpenters, and so forth could potentially be assisted by Canada to go over and train Ukrainians, which would be job creation and would help with energy efficiency.

I wonder if Mr. Dem'ianiuk could speak to that.

[Vitalii Dem'ianiuk]

It's actually what I mentioned in my short presentation. I think that today the very wide field for small companies that have expertise in energy efficiency is open in Ukraine.

I personally can even help and can provide some additional information on how they can communicate directly with the local governments in the regions of Ukraine that are currently seeking this help and seeking these opportunities.

[The Chair, Conservative, Leon Benoit]

Thank you very much.

Thank you, Ms. Duncan.

Now we go to Mr. Regan, for up to seven minutes.

[Geoff Regan, Liberal, Halifax West, NS]

I think we're very fortunate to have such excellent witnesses for this discussion today. It's an interesting one, although it seems to be somewhat futile.

Let me ask you, Mr. Edwards, what price...? I don't know how we would do it, but let's put aside for a moment the concern you have about the fact that it would take a decade really for Canada to be able to supply natural gas, for example, to Europe and mainly to Ukraine. What do you think the price would have to be before it would make economic sense? What price would we have to obtain in Ukraine for natural gas?

[Michael Edwards]

There's a lot in that question. I might dodge it simply by saying we need to get the world price. Shareholders need to get the highest price for their product, so they will take their product to the market that will provide that price.

The question really comes back to the thread that has been going through the questions and the answers this morning, which is that there's a certain amount of dysfunctionality in the Ukrainian market, so that would have to be addressed first. Really, the answer to your question is, if we were going to ship LNG from Canada to Ukraine under the current situation, someone has to subsidize it. Who is going to do that? That really doesn't make much sense.

The question then is, do we really know what Ukraine wants? At the moment we have a government in transition. We need an elected government that is, I think, prepared to govern with a mandate to change the business environment and create that environment that would allow the world price to regulate there.

What's the price? It would be roughly $4 or $5 more than we are currently getting for natural gas here, and that would be roughly the cost of converting gas to LNG and shipping it into that market.

[Geoff Regan, Liberal, Halifax West, NS]

Then it would be somewhere in the $9 or $10 range?

[Michael Edwards]

I would say so, yes.

[Geoff Regan, Liberal, Halifax West, NS]

I think we've heard that in Asia these days people are paying $14. Am I right?

[Michael Edwards]

That's correct.

[Geoff Regan, Liberal, Halifax West, NS]

When you say world price, the difficulty is there's not a world price per se, in that you have different prices in different parts of the world right now.

[Michael Edwards]

Well, that's true, but we are moving more to a global market in LNG. As more infrastructure is in place, we can expect to see more reference to a global price, and that will definitely be higher.

One of the arguments, part of the debate in the U.S. at the moment, is the impact of exports on domestic prices. The other side of this is that if we were to open up our market entirely to the world for natural gas, then we can assume that we would pay world prices in Canada for our natural gas, less the cost of moving it to those other markets. That may be of concern to a SAGD oil and gas oil sands operator who doesn't have a captive supply. That's going to drive up the cost of new projects, and I would be concerned about that, quite frankly.

The debate in the U.S. has been sort of two-sided. One is the likes of Dow Chemicals, which is concerned about the cost of its feedstocks if too much gas is exported, and the other side of it is the shale gas operators who are looking to get more value out of their product, who want to have more exports. You want to decide whether to export jobs out of the U.S. or keep them at home. That's the debate going on right now in the U.S.

[Geoff Regan, Liberal, Halifax West, NS]

I only have seven minutes and I wish I could have half an hour for all my questions.

We've heard that Professor Mohan Malik from Honolulu has done research suggesting that over the next 20 years, 85% of the growth in energy consumption will come from the Asia-Pacific region while Europe, as we've heard today, is not expected to grow, and in fact it's likely to be flat. First, if that's true, should Canadian exporters be focused more on the Asian markets than on European markets? Second, where do we rank in LNG, considering that there is one plant under construction already in Louisiana, five others planned in the U.S., and there are three, I think, already operating in Australia?

How are we doing in that regard? What are they doing that we're not?

[Michael Edwards]

Canada is just getting into the game and I think it's significant that the first LNG export project is on the west coast. It's the logical route to the market you've just described.