Finance Committee on March 10th, 2015

[Andrea Kent]

One thing specifically in our sector that is pretty obvious from a policy standpoint—looking at the current price environment—is that the policies put in place in 2006 are working as they should. A big part of having mandated requirements for renewable content in our fuel pool is to mitigate and to plan for stabilizing demand in uncertain times. Looking at shrinking margins like we have right now, having those mandates and that policy stability is certainly very important.

We're fortunate here in that our mandates are by percentage. We don't have the same policy to the south, in the U.S., where they have volumes that are negotiated on an annual basis for their renewable fuel content. A lot of the ambiguity that we're facing right now because of the price environment is kind of added to because the EPA has not set those blend volumes for 2014 or 2015.

I think it is good to take a moment and reflect on the fact that we have policies in place that are working and that are helping stabilize demand for us in the face of these lower prices for sure. I think that it is also worth taking a look at how production has grown. We have been able to increase production to 1.8 billion litres of ethanol in Canada. It's impressive. Looking at growing out mandates is the next logical step to ensure that growth continues to pay forward and Canadian policies that are very strong continue to keep pace internationally.

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

Former colleague Bob Mills, who was here for a number of years, was passionate about using alternative fuel sources. I know he spent nine years in local government, and recently “The Management of Municipal Solid Waste and Industrial Materials” report was released by the federal government, looking at cellulosic ethanol as a supply. Could you maybe expand on how that will possibly help provide additional renewable fuel to the supply chain?

[Andrea Kent]

Absolutely. Yes, I know Mr. Gale; his group in Niagara is part of our membership now. We're really proud to have them on board.

The environment committee did good work in looking at the whole scope of municipal waste and how that problem is really affecting municipalities and communities across Canada. What a lot of people don't realize is that the feedstocks for renewable fuels have expanded and grown and now include solid municipal waste. When you look at cellulosic ethanol, which describes an ethanol or renewable fuel that can be made from products that include solid municipal waste, we can use that, decrease GHG emissions by 62%, and produce a clean burning fuel for our transportation fuel. It's really a double win.

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

Congratulations.

[Andrea Kent]

Thanks.

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

I know the concern in the south of course has to do with the corn and all the rest of the impact there, but we're looking at alternative fuel sources.

Mr. McLellan, congratulations to you and your company on your innovative technology for the oil and gas industry.

As the vice-chair of the Canada-U.S. group, I'm going to Washington in a few weeks and working with our colleagues and our biggest trading partner. I want to know if you could expand on a comment that President Obama recently made that Canadian oil has provided an extraordinarily dirty process. Would you agree with that comment?

[David McLellan]

Absolutely not. I find that comment offensive.

First, we have oil sands, which is probably what he was referencing, and then we have our own shale and conventional oils. Oil sands is the area I worked in before joining Packers Plus. I had brought American executives from a California oil processing facility up to our site. We shared a landing strip with Statoil. As we were descending, they were getting all excited looking out the window, because what they saw was pristine lakes and forests. We were doing in situ production. They said, “Man, this isn't what we expected.”

[The Chair, Conservative, James Rajotte]

I just need to remind members that they have to leave enough time for the witnesses, because we're well over time.

[David McLellan]

We do it better than anybody else.

[The Chair, Conservative, James Rajotte]

Okay.

Sorry about that; I apologize, but let's leave enough time for witnesses to respond.

Mr. Côté, you have the floor.

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

Thank you, Mr. Chair.

Dr. Leach, the first panel of witnesses mentioned earlier that the oil market was highly speculative. There has been a massive change in the past few decades.

We have talked a lot about supply and demand, but there is also oil as an investment vehicle. This explains—and you can confirm this for me—the sudden drop in the barrel price that we have seen in recent months. Basically, the fact that the market is very open accelerated this reasonably sudden drop.

To what extent could this “investment” factor, by which investors can more or less trust the future barrel value, influence things, either by sustaining a low barrel price or slowing the increase of the barrel price?

[Dr. Andrew Leach]

Thank you for the question.

Certainly there is a broad market in futures and options and all sorts of speculative trading in crude markets. What still anchors that market at one end is the operator producing the barrel. At the other end is the entity burning or using the barrel, transforming it into transportation fuels.

In the short term, absolutely you can see amplifications. In the long term, it has to come back to the same thing as it was in 2008, when there had to be someone willing to pay $147 to burn a barrel of oil. Today there has to be somebody willing to produce and deliver a barrel of oil to market at $50. That's really still the fundamental that underpins the market.

I think what you've seen more aptly, as Mr. McLellan alluded to, is that technology has changed in the market. It now allows more people to bring barrels of oil to market and make money at those lower prices. That's changed the game much more than speculative investing in the market.

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

I think another aspect is fairly important. Investors have seen this a lot when they wanted to make oil products transactions.

We haven't really heard much about the United States strategic oil reserve. If I've understood correctly, the Americans are trying to reduce this reserve because they no longer see the point of keeping it very high. However—and perhaps you can give me more details on this development—it seems that the reserve is being maintained, probably because of low prices and because they want to avoid intensifying the drop. That's a factor to be considered in the context of the transactions. Even if, in absolute terms, the impact is perhaps not as important, it can intensify the price drop on the market.

How much do you think a factor like this could influence prices in the future?

[Dr. Andrew Leach]

To my knowledge, there hasn't been any movement on the strategic petroleum reserve in the U.S. in response to the current price drop. What you have seen is substantial increases in non-strategic petroleum reserve storage in the U.S. and floating storage on tankers, etc., and people essentially betting on crude prices going up by storing crude oil, but that's not the strategic reserve. In terms of the strategic reserve, I don't really have anything to add.

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

Given these non-strategic reserves, we can suppose that a future increase may be delayed by a few months or a few years in order to get rid of the reserves held by various companies around the world. North America is still a specific market.

[Dr. Andrew Leach]

I think you can see that in two ways. You can see people holding that storage because they're expecting crude prices to increase enough to make holding that storage viable. It's just another aspect of the market. It's holding inventory as you would in any other commercial operation.

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

Mr. McLellan, do you have anything to add?

[David McLellan]

Just to address that—and it's not necessarily speculation—I can buy a barrel of oil today at $50, or I can sell it on the forward curve for $58. If my storage costs are 75¢ a barrel per month, I'm going to make money. A lot of this forward selling is already locked in.

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

How much time do I have left, Mr. Chair?

[The Chair, Conservative, James Rajotte]

You have one minute.

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

Perfect.

Ms. Kent, you spoke about the effect of the barrel price on other types of fuel, including biofuel. You said you are concerned about the fact that the price of a barrel could be kept low. I imagine that this has a fairly solid impact on the industry you represent.

In the long term, might this hurt the capacity to produce certain types of biofuel?

[Andrea Kent]

Thanks for the question.

So far our production has remained stable in spite of the prices. I think forward-looking continues to look positive for our industry. A lot of that has to do with the demand-stabilizing effects of the mandates, but a lot of it is to the credit of our membership as well. They've innovated. They're diversifying. Mr. Cannan talked about cellulosic technology, which is coming online. That's first-of-kind technology, but a lot of it is also being done by existing ethanol facilities that are diversifying, that are bringing in new technologies. I think this diversification needs to be supported going forward, because really—from an economic standpoint for us, for petroleum, and for everyone—diversification is competitiveness, and competitiveness is survival.

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

Thank you very much, Ms. Kent.

Thank you, Mr. Chair.

[The Chair, Conservative, James Rajotte]

Thank you, Mr. Côté.

Mr. Van Kesteren, please, go ahead for your round.

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

Thank you all for being here. It's a fascinating discussion.

Mr. McLellan, you mentioned that peak oil is no longer.... I remember when I was first elected the big topic was that we were running out of oil. You're right that today we talk about how we have reserves for possibly 200 years. Nobody knows what the Saudis have; they don't seem to tell us. One of the aspects we haven't touched on is the fact that high oil prices encourage a lot of new development. Let's face it—although we no longer speak about peak oil, we have taken all the low-hanging fruit, from what I understand about drilling. Are we drilling seven miles down sometimes to get reserves somewhere in the Gulf of Mexico?