Finance Committee on March 10th, 2015

[Ron Cannan, Conservative, Kelowna—Lake Country, BC]

What capacity are we running at right now?

[Peter Boag]

Our installed capacity, on a name plate basis, is about two million barrels a day, and Canadian demand is about 1.6 million barrels a day. So about 25% of Canadian refinery production is exported, largely to the United States.

[Ron Cannan, Conservative, Kelowna—Lake Country, BC]

As you chart out that surplus right now, is it trending outward? Will we continue to have a long-term oversupply?

[Peter Boag]

Certainly the supply situation in Canada is going to remain strong, because we are in a market that, in terms of the demand for refined products not only in Canada but in North America, is flat to declining. That is a function of our mature demographics, our very mature transportation systems, rapidly expanding vehicle fuel-efficiency requirements, as well as the increased market penetration of alternative fuels. The demand for refined petroleum products is actually flat to declining, if you look out over the long term in North America.

[Ron Cannan, Conservative, Kelowna—Lake Country, BC]

Would you support market diversification, then?

[Peter Boag]

Market diversification is certainly a potential opportunity, but the issue is whether you can be ultimately competitive. Can you actually access those markets, and then, can you be competitive in those markets while at the same time making an adequate return on investment? There's a lot of economic and commercial risk associated with opening up new export opportunities for finished products.

[Ron Cannan, Conservative, Kelowna—Lake Country, BC]

Thanks.

Mr. Reynish and Mr. Dunn, I'd appreciate your comments. Following up on Mr. Brison's comments about the Saudis' influence on the world pricing, The Economist magazine a few weeks ago talked about part two of the Saudis' initiative and how they're, some would say, dumping large quantities in the market and disturbing the world pricing. We saw a little correction back three weeks ago. There was some optimism going at $59, the high fifties. We're back down to the fifties today. From the world supply and what the Saudis are indicating, what's the rationale if OPEC is saying 400,000 barrels per day this year? Others think it could be even higher than that. Is that something you're modelling at? Is that 400,000 figure something that folks from your industry are looking at or is it a conservative estimate?

[Steve Reynish]

I'm not quite sure what the 400,000 number is but let me make a couple of comments. I think some of the analysis I've seen that does resonate with me is, first, I think we found out that for Saudi Arabia the last three or four years at $100 or $110 Brent and with very little volatility, if any, in the market did not work for them, if you like. It brought stability to a lot of the market around the world but it caused a lot of investment to go into the production side of oil and created the glut. That would be one comment that I think seems to resonate with us.

[The Chair, Conservative, James Rajotte]

Could you just briefly wrap up.

[Steve Reynish]

Yes.

The second one is that you read a lot of reports that they need, socially, a much higher price themselves. I guess we don't know what's in their minds and we don't know how it will play out, but I don't think we think this current price will stay forever.

[The Chair, Conservative, James Rajotte]

Thank you.

Thank you, Mr. Cannan.

Mr. Côté, you have five minutes.

[Raymond Côté, NDP, Beauport—Limoilou, QC]

Thank you, Mr. Chair.

I would like to thank all the witnesses. Unfortunately, we don't have time to look at the question in depth, but I would like to thank you for being available.

I'll start with Mr. Boag.

In the Natural Resources Canada document, I see that the refinery margin is clearly higher to the west of the Ottawa River. We're talking about refineries in Toronto, Calgary and Vancouver, compared to those in the east. The Canadian Renewable Fuels Association's document provides an explanation and says that the situation was caused by excess refining capacity over demand.

Is that the only factor for explaining the clearly higher margin in the west than in the east? Are there any other factors?

[Peter Boag]

In fact, the most significant aspect on refining margins is actually the crude price differential, in that eastern Canadian refineries are still largely dependent on imported Brent benchmarked crude where western refineries have 100% access to a lower-priced WTI benchmark crude. That would be the most significant aspect of that refinery margin difference between east and west.

There are other competitive dynamics in terms of the market. The interior part of Canada in the west is a largely landlocked market. It has less access from foreign sources of supply. Eastern refineries compete in the Atlantic basin market for which there are many more alternatives to supply because much of that market is adjacent to tidewater and fuel now is a product that is traded internationally, no longer just on a North American basis. There are a number of factors but certainly crude price market differences would be the bulk.

[Raymond Côté, NDP, Beauport—Limoilou, QC]

I read the document for investors in Valero. I'm talking about the Ultramar refinery on the south shore of Quebec City. I saw a radical change in terms of supply. Everything is imported from countries outside North America, but processing is done using crude mainly from the United States. Things can change very quickly. That happened within a year and a half in Saint-Romuald, on the south short of Quebec City.

[Peter Boag]

First of all, I don't have shareholders. We're a not-for-profit association representing the interests of members. Certainly selection of a crude biorefiner is driven by a number of factors including quality, availability, price, and what the market demand for products is, because your product slate is in part influenced by the crude you refine. It is a very complex and dynamic situation for any refiner in terms of the day-to-day decisions on what crude they are going to refine. That will change over time. That will change seasonally. It will change over the years as crude markets change and the product market changes.

[Raymond Côté, NDP, Beauport—Limoilou, QC]

Thank you very much.

Mr. McMillan, the previous presentations have shown us that oil sands development in the west was a long-term investment, given that it is done over a very long period of time compared to shale oil development, for example in North Dakota. Certain factors have an impact on production. There's been a slowdown in production of the oil sands here in Canada.

Has the changing barrel price had a significant effect in terms of slowing down shale oil production in North Dakota?

Is the impact significantly increased by the fact that developing this type of oil in North Dakota is much riskier and more short term?

[Tim McMillan]

My knowledge regarding the reaction in North Dakota to the current price environment isn't as good as it is regarding the reaction in Canada. The Bakken oil field straddles the Canada-U.S. border. Part of it is in Saskatchewan and Manitoba, and the experience in Manitoba and Saskatchewan would be very similar to what's happening just south of that line. The reaction has been quite clear. Drilling numbers are down. In our January snapshot, we predicted about a 33% reduction in drilling in conventional oil production. Since that prediction we have seen that decline even further.

The same effect would be happening in North Dakota or in the Eagle Ford in Texas or across the U.S. As companies look to realign themselves to be successful in the long term, we are seeing them react.

[The Chair, Conservative, James Rajotte]

Thank you, Mr. Côté.

Mr. Van Kesteren, go ahead, please.

[Dave Van Kesteren, Conservative, Chatham-Kent—Essex, ON]

Thank you all for being here this morning. It has been an interesting discussion.

Mr. McGowan, I want to congratulate you on your points. Oftentimes when we have testimony, we get lost in a lot of the explanation, but you did a magnificent job of expressing your observations and your recommendations. I want to talk about some of those things, because there seems to be a suggestion that we can possibly work this in our favour.

Here's my problem. We don't have any economists, and I'm certainly not an economist either, but I do understand supply and demand. I'm also very nervous when governments.... I think of Ronald Regan and the famous quotation of “I'm here to help”.

What can we agree on? Is there a consensus in the industry that we should move some of the western petroleum, and would the refineries then do the needed updates so that would work? I'm looking for that marriage between supply and demand. Who decides? Suncor doesn't go to the government...at least not at this point, and I hope that day will never come. The market decides these things.

Is there a consensus? Is there something we recognize as industry and we can recognize as government that we can start to work towards? I suppose at this specific point I'm talking about the pipeline to the east.

Somebody mentioned something about the tides too. Are you talking about when the oil tankers come in? They float with the tides, don't they?

[Peter Boag]

I think the term we would use is access to tidewater, and tidewater means you have access to big ships that facilitate trade in market waters.

[Dave Van Kesteren, Conservative, Chatham-Kent—Essex, ON]

Speaking of tidewaters, I understand when the oil tankers come in, they actually use the tides. They're that close when they get into Montreal. Is that not correct?

[Peter Boag]

I'm not an expert on that, so I would be hazarding a guess and I'm not going to do that.

[Dave Van Kesteren, Conservative, Chatham-Kent—Essex, ON]

Okay.

Does anybody want to comment on that? I think I'd like to hear what Suncor has to say.

[Steve Reynish]

The comment I would make—and I hope I'm getting to your question here—on the question of pipes is that the key thing is to connect the resource with the market. That's what the pipes are for. I don't think it's about the labour involved in actually building the pipe, although there are real jobs. The real economic significance comes from connecting the resource to the market.

I think over the last number of decades Canada has had the resource, and the U.S. has been the big market. I think with the rapid increase in U.S. production, that dynamic has started to change. I think one of the big economic things going forward is how we can diversify that market. I think that's the whole point of the pipeline debate, if I can call it that.

[Dave Van Kesteren, Conservative, Chatham-Kent—Essex, ON]

But again, we're talking about how “we” diversify. Are you suggesting it's the government's role to enter the market and to determine where these products should go and how much of that product should go there?