Finance Committee on March 10th, 2015

[Pierre Dionne Labelle, NDP, Rivière-du-Nord, QC]

You mentioned the issue of the greenhouse gas emissions policy. Can you expand on your position on that?

[Dr. Andrew Leach]

Certainly.

I don't have a specific policy that I'm advocating for, for example. My position generally is that what we should have in Canada is a policy where we can look at our policy and say that if everybody else implemented this policy, we'd reach an agreed-upon set of global goals.

So if that's the two degrees Celsius goal, we should be able to go to credible researchers, tell them to take the policies we would implement in Canada and impose them globally on other economies in the same way, and see what would happen globally. If we don't meet global goals, then by my definition, we're not doing our share. I wouldn't get into global pie-dividing by asking what percentage of historical emissions do we get, or they get, or what have you. I'd look more at the policies themselves.

[Pierre Dionne Labelle, NDP, Rivière-du-Nord, QC]

If I understand correctly, you think that we aren't sufficiently involved in this area. That's what I got from your comments.

[Dr. Andrew Leach]

I think we have some very interesting policies, both provincially and federally, that we can build on. I think if you took my test, which is to take Canada's policies and impose them globally, you don't have enough stringency to meet the global goals that Canada's governments agreed to at Copenhagen, for example.

[Pierre Dionne Labelle, NDP, Rivière-du-Nord, QC]

Ms. Kent, was it you or Mr. Schaefer who spoke about wind farms? I think it was Mr. Schaefer. Well, my question is for both of you.

What is the future of wind farms? We know that there has been a lot of criticism, opinions I don't necessarily share. What do you see for the future of wind energy in Canada?

[The Chair, Conservative, James Rajotte]

Ms. Kent.

[Andrea Kent]

We deal with the liquid transportation field, so I think that Mr. Schaefer would be better placed—

[The Chair, Conservative, James Rajotte]

Okay.

Mr. Schaefer, please.

[Rob Schaefer]

On the future for wind, certainly the wind generation that's in place today will continue to be in place. We have wind across Canada and it's working quite well.

The challenge I'm pointing to is that if we see a protracted period of low prices, any form of generation is difficult to make an investment decision on. Wind is one of the more expensive forms, so it becomes a challenge to continue to grow the wind industry.

Again, we're in a commodity cycle, so it won't last forever. My hope is that we'll be able to have the lead time that we need as an industry to respond to the demands of consumers in a reasonable way.

[Pierre Dionne Labelle, NDP, Rivière-du-Nord, QC]

Have you postponed any projects to date?

[The Chair, Conservative, James Rajotte]

A brief response, please.

[Rob Schaefer]

No, we haven't.

[The Chair, Conservative, James Rajotte]

Thank you.

Mr. Saxton, please, you have six minutes.

[Andrew Saxton, Conservative, North Vancouver, BC]

Thank you, Chair.

Thanks to our witnesses for being here today.

My first question is for Andrew Leach from the University of Alberta.

Andrew, this is not the first time we have seen an oil price correction in Canada and across the world. How is this time different? How can we learn from past experience? How did past corrections impact the Canadian economy, and how will things be different this time, if anything?

[Dr. Andrew Leach]

That's a great question.

Probably the key difference from the most recent oil price crash, if we look at 2008-09, is that this is not a global economic crisis. This doesn't have the overriding credit constraints that we had in 2008-09, so that changes the dynamic of it. This is more of an oil supply shock, although, as we all know, there are some significant headwinds in the economy globally as well.

From a government and from an industry point of view, one of the key features—and I've written a bit about this crash versus 2008-09 in Maclean's—is that we didn't have a run-up in prices beforehand. We didn't have this buffering, of whether it's government budgets or industry balance sheets, that came from an unexpected price appreciation, as we had in 2007-08. That translated through to a crash and then you ended up averaging out much better than you would have had you just had that drop. This is a bigger drop against, for example, last year's prices. I think that is a key difference.

In terms of the supply side, you may have to look back to the eighties and nineties to get a better sense of what a global crude glut looks like and how long that can last. Whether we're in that or not, it is going to take a while to tell.

[Andrew Saxton, Conservative, North Vancouver, BC]

Thank you.

My next question is for Andrea Kent from the Canadian Renewable Fuels Association.

Andrea, can you expand on how this oil price correction is affecting your industry?

[Andrea Kent]

There are a few things that are important to bear in mind.

This is related for us with fuel prices and the relationship between how gasoline is affected by that compared to the pricing for ethanol. Ethanol historically, on average, is about 20¢ cheaper per litre than gasoline. That results in a natural financial incentive for people to blend more ethanol into the fuel supply. That's not a bad thing because that cost saving is traditionally passed down to consumers. There is also a very strong GHG emissions reduction benefit that is associated with the higher octane in ethanol. On the whole, we see overblending in Canada and we surpassed the federal mandate. That's good news for producers because it's a good demand for their product.

When we see that this price advantage starts to contract there is less demand for ethanol generally because Canada also imports ethanol for this overblending from the U.S. When that demand in the U.S. market, which is much larger, starts to shrink then we see that product back up into the U.S. market. This means that the Canadian market for ethanol shrinks as a result. Ethanol is priced on the Chicago Board of Trade, so it attracts U.S. prices. Looking at the corn-to-ethanol price relationship right now, we have corn at CBOT, I believe, at about $3.50. It's still a profitable relationship, but it's nowhere near where we were this time last year in terms of profitability. When you look at 2014 it was a record-breaking year, so the numbers are going to be exacerbated a bit. It's going to look much worse, but that is because of the record profits that were recorded against North America as well.

One thing that's really helping, and I'll mention it quickly, is diversity. When we look at ethanol it's one output. DDGs, or dried distillers grains, are part of the feed market that comes off ethanol production naturally. The DDG values are good right now. That has buffered a lot of the price constraints and the operating costs that would otherwise be much more volatile in this environment for ethanol producers. I think that's a microexample of why diversity is good. If you look at biorefineries that are able to produce more products, they're going to have more market opportunities. That's going to help build that resiliency in the face of price fluctuations.

[Andrew Saxton, Conservative, North Vancouver, BC]

Thank you very much.

My next question is for David McLellan from the Packers Plus Energy Services.

David, in your presentation you talked about the discount for Canadian oil because we only have one purchaser for our exported oil. How would the diversification of our markets for oil impact and benefit the Canadian industry, and how important are pipelines in this equation?

[David McLellan]

I think the answer is in the price differential between Brent and West Texas Intermediate. Our blends are based on a discount to WTI right now. If we were able to get material volumes to the coast it would be based off the discount to Brent. I believe that Canada, being a much more stable jurisdiction and seen very favourably around the world, would be a preferred supplier. I think that we could command a higher price as long as Brent trades at a premium to West Texas Intermediate. That is the situation, but nothing lasts forever. It would give us flexibility. What we need in industry is the flexibility.

[Andrew Saxton, Conservative, North Vancouver, BC]

How important is it for us to diversify our markets?

[David McLellan]

I think it's absolutely critical. I'm now down in the United States in their oil capital.

Witnessing the president talk about Canada's extraordinarily dirty oil extraction is offensive. I've been to the oil fields of California. I've been to Malaysia, Indonesia, Algeria, and parts of the Middle East, and Canada does it better than everybody else. We have the president of our only customer saying it's extraordinarily dirty, disparaging it, and postponing Keystone. It's imperative that we see that not just as a signal, but almost a command to diversify our market.

[The Chair, Conservative, James Rajotte]

Thank you, Mr. Saxton.

Mr. Dubourg, you have six minutes.

[Emmanuel Dubourg, Liberal, Bourassa, QC]

Thank you, Mr. Chair.

Good morning to all my colleagues.

Ladies and gentlemen, welcome to this committee meeting.

My first question is for Mr. Schaefer, who said that he is in a very diversified industry. He also spoke about the short-term impact of the drop in oil prices. He said that, in the long term, we will have difficulty renewing investments in this sector.

Given that his industry is so diversified, could he tell us about the impact of the drop in oil prices on employment in Canada?

[Rob Schaefer]

Yes, gladly.

Thank you. That's a very good question.

My perspective is that I don't see the kinds of impacts we've seen in the oil and gas sector in the power sector. In other words, we're not seeing significant layoffs, or anything like that, because the generation that's in place will be needed and will continue to supply consumers for some time to come.

The issue is more about growth, or about replacement of generation, and it's a longer-term impact. I don't see dramatic impacts on employment. It relates more to how we invest and turn over the capital stock that we have today.

[Emmanuel Dubourg, Liberal, Bourassa, QC]

Thank you.

My next question is for Dr. Leach.

You said in your presentation that we don't necessarily need new legislation. I would like to know whether a policy on the price of oil might include economic benefits.