Evidence of meeting #70 for Finance in the 39th Parliament, 1st session. (The original version is on Parliament’s site, as are the minutes.) The winning word was industry.
A recording is available from Parliament.
Liberal
John McKay Liberal Scarborough—Guildwood, ON
But a 239% return, cash on cash.... First of all, explain “cash on cash” to me, because that seems like even better than profit.
Managing Director and Senior Oil and Gas Analyst, Canadian Imperial Bank of Commerce
It's pre-tax.
Managing Director and Senior Oil and Gas Analyst, Canadian Imperial Bank of Commerce
Yes, that's an important qualification here.
What we're looking at here is basically the cash generated from producing a barrel of oil at Syncrude, minus the investment cost for that barrel, divided by the investment cost. It's like a return on that investment before tax. So we still have to take off taxes.
Liberal
John McKay Liberal Scarborough—Guildwood, ON
I can't fathom any other industry in this country that gets that kind of return on its investment. So if I had $1,000 in this project, I could expect a 239% return on my $1,000 cash. Is that correct?
Managing Director and Senior Oil and Gas Analyst, Canadian Imperial Bank of Commerce
It's interesting if you look at The Globe and Mail this morning, because a question always comes up. Read the article. Astral Media is buying Standard Broadcasting, and if you look at their margins, they're higher, I believe.
Liberal
The Vice-Chair Liberal Massimo Pacetti
Thank you, Mr. McKay.
On that note, Monsieur St-Cyr, vous avez six minutes, s'il vous plaît.
Bloc
Thierry St-Cyr Bloc Jeanne-Le Ber, QC
Thank you, Mr. Chair.
I find the discussion very interesting. I enjoyed Mr. Raynolds' presentation. I also had the chance to talk with Ms. Taylor, who could not be here today, but who is doing a very good job.
Mr. Raynolds, you have done a very good job as well. It's interesting to show that there are significant economic aspects behind the question we're addressing today.
I find it somewhat paradoxical that it is the Conservatives, those free market supporters, who are fighting to preserve a tax benefit for the oil companies. That's all the more strange since, in cases such as those of Boeing, older workers, the bicycle industry, textiles and I don't know what else, when we ask them to intervene, they always respond that, if you let the market operate, it will adjust to demand. However, when it comes to the oil industry, that's something else: the oil companies obviously need government assistance in order to develop.
As a progressive, I'm not opposed to the government intervening in the economy, but it should do so in areas that we want to develop, that is to say industries that benefit society.
Earlier we talked about costs, but we didn't talk about environmental costs, costs that society would have to bear for all this development of the oil companies. Analysts have told us about the benefits to be derived, more so or less so depending on the positions the government would adopt, but no one has ever considered the amount of money that society would have to pay for all that.
Apart from any economic consideration, is the question submitted to us simply a question of choice? A business could very well be engaged in a completely pointless activity, such as destroying mountains, then rebuilding them.
Bloc
Thierry St-Cyr Bloc Jeanne-Le Ber, QC
If we encouraged that business, that would develop an economy: the company would employ people, and so on. However, it would serve no purpose. Would we like to encourage that? Of course not. Why do we want to do so in the case of the oil industry?
Can someone here tell me why the oil industry should benefit from accelerated depreciation at a rate of 100 percent rather than 25 percent, when no other industry enjoys that? Can one of the witnesses explain to us why Canadians should allocate a portion of their taxes to granting a tax benefit to an industry that pollutes a great deal, which, by its nature, is necessarily ephemeral and which is not as structuring as a host of industries that we should be developing?
Bloc
Thierry St-Cyr Bloc Jeanne-Le Ber, QC
Someone should be able to explain that to me. Otherwise, I don't see why we should continue investing in this area.
Managing Director and Senior Oil and Gas Analyst, Canadian Imperial Bank of Commerce
I'm sure Mr. Roberts in Calgary will want to say something too.
On the point about useless activity and pointless activity, I don't think those people who are trying to get to work in Toronto today and who can't buy gasoline will consider this industry to be pointless or useless. That's sort of tongue in cheek, but that's what it comes down to. This is a resource.
I was born in Iran, so I grew up with some familiarity with mining. For me, Canada's mining is about resources, oil and gas. That's why I don't analyze bank stocks; I analyze oil and gas.
Is this important? Is it vital? The oil companies have access to 15% of the world's reserves. If you take OPEC, that's 75%; Russia is another 10% of the world's reserves; and that means there's 15% left over to find the oil that we need so people can get to work. And some of them can't get to work in Ontario today.
We never run out of oil. You made the point earlier about whether we are squandering this resource. We never run out. However, it costs more. And this is why I answered the question about $80 oil. If oil prices go up to $80, you can be sure the operating costs to build one of these things, the capital costs, go up as well.
Bloc
Thierry St-Cyr Bloc Jeanne-Le Ber, QC
My question isn't changing. Why would we use tax money to fund faster oil sands development, export our oil to the United States more quickly and thus exhaust our resources more quickly? What's the point, when, to develop our economy and reduce our dependence on oil, we could invest that same money in a host of industries that are much more in need of tax incentives?
Why spend money in that way? I think I know the answer. It's because a lot of financial interests are at stake and because people don't want to lose the privileges. Why should we, as a society, help the oil industry rather than the renewable energy, bicycle, textile or aeronautics industries? Why should we as a society make such an irrational choice?
Managing Director and Senior Oil and Gas Analyst, Canadian Imperial Bank of Commerce
Okay—
Liberal
The Vice-Chair Liberal Massimo Pacetti
Mr. Plexman, if you can answer that in 30 seconds or less, I'd appreciate it. The time is up.
Managing Director and Senior Oil and Gas Analyst, Canadian Imperial Bank of Commerce
In 30 seconds? The question was five minutes.
Managing Director and Senior Oil and Gas Analyst, Canadian Imperial Bank of Commerce
I can talk about it as an oil and gas analyst. Let me talk about it just in terms of energy security.
You're probably going to pay the same price for oil, which is a global commodity, whether it comes from Fort McMurray, Angola, Iraq, or Iran. Do you want to be dependent on Iran or Fort McMurray?
We have the Americans up here and we have the Chinese over here, because they've figured out that we have this fantastic resource that no one else has. It's an advantage. We have to be very wise about how it's developed, recognizing all the interests. But unless we all plan to walk home tonight, oil is essential to what we do here, from my perspective, anyway.
Liberal
The Vice-Chair Liberal Massimo Pacetti
Okay, thank you.
Thank you, Mr. St-Cyr.
Ms. Ablonczy, you have six minutes, please.
February 27th, 2007 / 1:20 p.m.
Conservative
Diane Ablonczy Conservative Calgary Nose Hill, AB
Thank you, Mr. Chairman.
Thank you, everyone, for your presentations. We appreciate that very much.
I'd like to start with Mr. Raynolds. You are an investment banker. You advise clients on whether to invest in mining projects, such as the oil sands. We're somewhat confused here. We have heard that the rate of return on these investments is 7% to 10%, and no more than 13% or 14%, and yet Mr. McKay brought up something about it being over 200%. Can you enlighten Canadians as to the rate of return on these oil sands investments, please?
Vice-President, Investment Banking, TD Securities Inc.
This is Bill Roberts speaking.
I guess, from our perspective, the rate of return is going to be very much dependent on the commodity price assumptions used, as these projects typically run for many years. That's really key to coming up with a conclusion on what sort of rate of return these projects are earning.
What we've seen--and further to this escalation in costs and this theme that keeps coming up--is that as far as the oil sands have been concerned, that has eroded, to a significant degree, those returns earned by projects. If you're looking at $45 crude, which, again, is a typical price that a lot of major oil companies will use for planning purposes because they can't rely on $60 or $100 oil to remain for the next 40 years while their projects operate, then you're seeing returns that are in the high single digits. If you compare that against returns that would have existed a number of years ago, when costs were significantly lower, those two sort of roughly equate, as far as returns go.
Conservative
Diane Ablonczy Conservative Calgary Nose Hill, AB
Thank you for that.
I want to talk about this idea of the oil sands projects getting a subsidy, or mining projects getting a subsidy, through the capital cost allowance. I had understood that for capital-intensive projects, where you have to invest an awful lot to build a project before you get any profit out of it, the capital cost allowance simply allows you to write off those upfront costs, which allows you to actually make the project work. But those costs are recovered by government down the road.
Is that not correct? Or is this an outright subsidy?
Executive Director, Pembina Institute
No, I believe that is correct.
Again, there are billions and billions of dollars at stake being put up by private enterprise without seeing any form of return from these projects for a number of years, as there is the time delay between capital investment and cashflow from these projects. In encouraging companies to take on that risk, the ACCA has been, we think, instrumental in indicating government support for these private companies extending those significant capital investments.
I don't know if that answers your question.
Conservative
Diane Ablonczy Conservative Calgary Nose Hill, AB
With Canada moving toward a green agenda that will involve all of our industries, including the oil and gas industry, will this move both demand and require further significant capital outlays, as far as your projections show?
