Finance Committee on March 10th, 2015

[Nathan Cullen, NDP, Skeena—Bulkley Valley, BC]

Over how long, sorry?

[Gil McGowan]

Forty years when you adjust for inflation.

[Nathan Cullen, NDP, Skeena—Bulkley Valley, BC]

Yes, adjusted for inflation.

You have spoken somewhat differently about the current price of $50, the investment decisions being made, and the impact on the federal treasury. You also talked about not using disaster rhetoric. What is the most important—if you want to use the term—opportunity in the crisis that you think the federal government should be looking to take advantage of?

[Gil McGowan]

I think the federal government, the provincial government, and industry should look at this low price environment as an opportunity to do what they should have been doing for the past 10 or 20 years, which is to move up the value ladder. Almost all of the current development in the oil sands is what I would describe as “rip it and ship it“ development, designed for raw export. There's no doubt that there was a lot of money being made with that approach when oil was trading at $100 a barrel, but what was being lost was an opportunity to create value here in Canada through the construction of new upgraders and refineries.

[Nathan Cullen, NDP, Skeena—Bulkley Valley, BC]

On that subject, how many upgraders and refineries have we built in, say, the last 20 or 30 years in Canada?

[Gil McGowan]

Of the current generation of oil sands projects, only a handful are what I would describe as value-added. We have the North West upgrader that's just started construction, the latest phase of the Canadian Natural Resources upgrader. Almost everything else is raw export oriented. Part of the problem is that, in the last generation, there was no coordinated approach to development. It was sort of a gold rush mentality. Everyone was building at the same time. They were piling on. It drove up costs. We sort of priced ourselves out of the market in terms of more desirable, value-added development.

What I'm saying is that this low price environment presents us with an opportunity to go back to value-added projects for a number of reasons. First, the construction costs will be lower because the gold rush has ended. Second, I would argue that one of our competitive advantages when it comes to the oil sands is access to low-cost feedstock. Like it or not, bitumen trades below the price of light sweet crude oil. That's always going to be the case regardless of how many pipelines we build. We should just embrace that advantage.

[The Chair, Conservative, James Rajotte]

Mr. McGowan, could I get you to wrap-up, please? We're over Mr. Cullen's time.

[Gil McGowan]

Yes.

The essential point is that this should be seen as an opportunity to build value-added projects because costs are lower, feedstock is cheaper, and by building these projects, we create the kinds of jobs that we need to sustain us through this period of volatility that your other speakers have talked about.

[The Chair, Conservative, James Rajotte]

Thank you, Mr. Cullen.

We'll go to Mr. Saxton please.

[Andrew Saxton, Conservative, North Vancouver, BC]

Thank you, Mr. Chair, and thanks to our witnesses for being here today.

Listening to Mr. McGowan reminds me of that Supertramp album from the 1970s Crisis? What Crisis?, but that's another story for another day.

My first question is for Peter Boag from the Canadian Fuels Association.

Has a drop in oil prices, like the one that we're experiencing now, been experienced before, and if so, when?

[Peter Boag]

Most recently, the drop in oil prices that came after the 2008 financial crisis would certainly be another example of the kind of drop that we've seen over the last six months.

[Andrew Saxton, Conservative, North Vancouver, BC]

Can you tell us, what the effects on the economy were at that time, and how this time is different or similar?

[Peter Boag]

It is difficult for me to talk about this specifically in any great detail, but I think we all saw the impacts on the economy in terms of a slowdown and job loss. Canada was relatively well insulated compared to other economies around the world. We were very well positioned fiscally as a nation. While we certainly did see a dip and a minor recession, the impacts in Canada, on an economy-wide basis, were far less than those experienced by most other countries in the OECD and the in G-7 for that matter.

[Andrew Saxton, Conservative, North Vancouver, BC]

Thank you.

My next question is for Tim McMillan of CAPP.

Oil prices are naturally volatile, but has the recent drop been an anomaly? Is this time different?

[Tim McMillan]

I think in a commodity market the volatility is something that comes with the territory, be it fertilizer, grain, or oil and gas. It's something that is a part of being in business.

If there's a difference, it's that 2008-09 was largely a low-cost environment due to the world economy slowing down. The one we're seeing this time is that the productive capacity of the energy production sector through the use of technology has gotten better. We have too much supply on the market, driving the price down as opposed to a demand side.

[Andrew Saxton, Conservative, North Vancouver, BC]

What does the current drop mean to the importance of diversifying our markets for our oil products?

[Tim McMillan]

Being it's a world market, everyone in the world that's producing oil has the same world price. The differentials between light and heavy certainly have an effect. The ability to get our products to market is a challenge. It's something I think was important at $80, $90, $100 a barrel. It's an imperative that we have these type of efficiencies at $50 a barrel.

In Canada from Quebec and eastern Canada they import 60% of their oil from offshore—Angola, Azerbaijan, Norway. I think if we're looking at Canada, Canadians should have access to Canadian oil.

[Andrew Saxton, Conservative, North Vancouver, BC]

Right, but we only have one customer for the export of our oil, which impacts the price that we can sell it at, so that's my question. How will diversifying our markets impact the price we can get for our oil?

[Tim McMillan]

It's very important. Over the last few years we have seen the differential between Brent, the price of oil off the U.K., at sometimes substantially higher prices than what we're getting in western Canada. Those in eastern Canada in Quebec are paying Brent prices while Canadians producing oil in western Canada are getting West Texas prices. Both are being disadvantaged.

If we could connect Canada and have access to both eastern Canadian markets and markets in Asia, India, and around the world, it would be very meaningful to not just our industry but our country.

[Andrew Saxton, Conservative, North Vancouver, BC]

Thank you.

My next question is for Richard Dunn from Encana.

Richard, what impact would pipelines to tidewater have on the oil industry?

[Richard Dunn]

Certainly the access, as Tim rightly mentioned, the ability to realize a world price for our products certainly on the crude side....

On the natural gas side of things Canada has well in excess of 200 years of supply, and we're rapidly becoming constrained in western Canada with respect to opportunities to deliver into the United States. So in order to not only realize the opportunities that world natural gas LNG prices present, but also to expand our industry and grow our industry, access to tide water is critical for natural gas as well.

[Andrew Saxton, Conservative, North Vancouver, BC]

How much is rail picking up the slack that would otherwise go through oil pipelines?

[Richard Dunn]

It's certainly increasing. I don't have that number at my fingertips, but certainly rail has increased dramatically in the last few years.

I would look to Tim. He may have those figures.

[Tim McMillan]

It has been very meaningful in certain locations. In Saskatchewan we've seen it ramp up from almost zero, three or four years ago, to today where 15% to 20% of the oil leaving our province leaves in railcars.

In North America in some places it's even far larger than that. North Dakota is sending, I believe, the majority of the oil produced; over half in North Dakota leaves their state in railcars. It is picking up the slack in North America where pipeline capacity is challenged.

[Andrew Saxton, Conservative, North Vancouver, BC]

If there were pipelines in place then more oil could be transported obviously than what's being transported by rail today, correct?