Evidence of meeting #70 for Finance in the 41st Parliament, 2nd session. (The original version is on Parliament’s site, as are the minutes.) The winning word was prices.
A recording is available from Parliament.
Associate Professor, Alberta School of Business, University of Alberta, As an Individual
Could you expand a little on the type of policy you have in mind?
Liberal
Emmanuel Dubourg Liberal Bourassa, QC
I'm not thinking of anything specific, but I would like to know whether there would be economic advantages for Canada and how that might affect a particular industry.
For example, do you think a company like Energy East could stabilize the price of oil in Canada?
Associate Professor, Alberta School of Business, University of Alberta, As an Individual
Okay, thank you.
A project like the energy east pipeline won't have a stabilizing effect on world oil prices in the sense that it is merely moving product from one area to another. As some of the colleagues have already mentioned, a project like energy east would change crude movements in Canada. It would allow eastern Canadian markets to access western Canadian crude, but they will also be doing that at a cost. They're going to be paying a toll to move that oil across the country.
So what would you see? You might see a slight reduction in crude costs to eastern Canadian refineries. You might see a slight increase in the net revenues to western Canadian producers. But you have a long distance to cover, and that's important.
Why have we always, historically, shipped our oil to the centre of the U.S.? We shipped it to the centre of the U.S. because that was a premium market and because it was cheap to get it there. Even if you were a self-interested Maritimer saying, “I want cheap crude”, your best trade for decades would have been to take crude from Alberta to Chicago and sell it in Chicago, and then go to Saint John and buy oil at the port. That has changed a little bit now but it's not a free lunch, so to speak.
Liberal
Emmanuel Dubourg Liberal Bourassa, QC
We have seen the impact that this price drop could have on the economy. In some ways, the economy is somewhat vulnerable.
Are we right to be focusing on a single sector of the economy?
Associate Professor, Alberta School of Business, University of Alberta, As an Individual
I'd take issue with that. I don't think we have an economy that's any where near as focused on oil or on oil sands as your question might suggest.
Oil and gas is an important share of our economy, but it's far less than 10%. What we have seen is a lot of economic activity tied to the construction of new oil sands projects, and that may trail off a little bit. But if you look at it's share of our economy overall, we're not by any means a one industry economy. We're nowhere near as dependent on that oil and gas production as some recent sound bites have certainly led us to believe. We don't have all our eggs in one basket.
Liberal
Emmanuel Dubourg Liberal Bourassa, QC
Lastly, to boost this sector in particular, should we try to improve relations between the Government of Canada and certain partners? I'm thinking here about President Obama's decision, so with the United States and with First Nations.
Do you think we should do more to facilitate relations between Canada and these partners?
Associate Professor, Alberta School of Business, University of Alberta, As an Individual
I think, without question, with regard to both of the points you made, we need to look at what our position is globally, and in partial response to Mr. McLellan's point, how our resources are portrayed globally. There is that idea of communication, but it's also a question of what policies we put around our resources, how we portray those policies, and how we make it clear that we're operating under conditions that are globally credible.
On the first nations file, I couldn't agree with you more. I think we desperately need better relations on that file. I was shocked a couple of weeks ago. I read a survey—I believe it was in Alberta Oil magazine—of oil industry executives on what the barriers were to oil development. One of the categories offered was first nations. If I'm not mistaken, the answer was that 0% of respondents felt that first nations relations were a key barrier. That's something I couldn't disagree with more. I think, for a lot of our development in Canada, we could benefit a great deal from better first nations relations.
Conservative
Conservative
Joyce Bateman Conservative Winnipeg South Centre, MB
Thank you, Mr. Chair.
I would like to thank all our witnesses for their testimonies. We have had good discussions with both panels.
Hopefully I will get to all of you because I so appreciate the discussion we're having, but I would like to start with Mr. Schaefer.
In your testimony—kindred spirits, another CA—you talked about the long-term impacts and the short-term impacts. The part I would like you to expand on a little more is the impact upon making investments in the industry. Obviously, if we don't feed the industry with investments, that's a factor.
Could you expand on that?
Executive Vice-President, Trading and Marketing, TransAlta Corporation
Sure. Let me explain it a little in this way. It takes about five years to develop and build a power plant. It's much longer, if it's a hydro plant; that could take up to 10 years or more. It's a long cycle.
Like any industry, we respond to price signals. We have a low price signal right now. Nobody is going to invest, or it's going to be very difficult to make investments in that context. The challenge I'm pointing to is simply that if we have a protracted low price period and then get started with new investments, there is potentially a gap. This doesn't mean we won't make the investment; it just means that we're going to be challenged for a while.
Conservative
Joyce Bateman Conservative Winnipeg South Centre, MB
Okay. That's fair enough.
You've all spoken, as did our previous panel, about market volatility and the impacts of the market price.
Ms. Kent, you talked about that. It wasn't that long ago that we were reading articles about the negative impacts on Mexican farmers and the food supply chain, based on your industry growth. It has impacted upon all of us.
But Mr. McLellan, you're a relatively small player in a world market. We've had some big players come to speak to us on this issue. What are the particular challenges that you as a smaller corporate entity face, and what are the opportunities?
Senior Economist and Business Strategist, Packers Plus Energy Services
Our business is going to thrive and survive with the capital expenditures of the large E and P producers. If they're cutting, then we're just going to have less work.
The opportunity, though, is in market share. As my opening statement said, our completion technology was innovative. In fact, it was one of the key attributes to usher in this era of collapsing natural gas prices and now faltering oil prices, being able to unlock hydrocarbons from what had been previously uneconomic sources—shale oils, tight gas.
Our opportunity, then, is that, first, shale resources exist all around the world. We need to abandon all talk of peak oil, in the sense that we're not going to run out. We're going to move beyond the era of oil long before we ever run out. It is employing technologies such as ours that will enable the extraction of what had previously been stranded. Ours is a low-cost, efficient method developed in Canada.
There's some resistance in the United States. There's an attitude in Texas in particular that “if it wasn't invented here, it might as well not exist”. They can do that. They didn't face the same price pressures as Canadian producers. They are in the world's largest consuming market and are very close to the largest refining market. They didn't have the same regulatory oversight, and they don't pay their people the same. Canadian producers have had their hands tied behind their backs and have managed to thrive despite that by being more innovative.
Now with this new price regime, I'm finding that Texas operators are much more willing to sit down and ignore the fact that this is a Canuck technology. To be clear, I presented this. We're a global company. We are Canadian and proud to be Canadian, but we're now a global entity, and it makes it easier for the Texans if I present it that way.
Conservative
Joyce Bateman Conservative Winnipeg South Centre, MB
One minute?
Perhaps we could split the time between Mr. McLellan and Mr. Leach. You have touched already on the importance of the diversity of our market. I very much appreciate your comments on how Canada stacks up in terms of oil production in the world. Could you speak to how we diversify?
Conservative
Senior Economist and Business Strategist, Packers Plus Energy Services
Tidewater.
Conservative
Associate Professor, Alberta School of Business, University of Alberta, As an Individual
Highest value markets, absolutely. Today, that's tidewater, but don't lose focus on why we have the market we have. It was because we turned down going to tidewater to go to the mid-continent of the U.S.
Conservative
The Chair Conservative James Rajotte
Okay, thank you.
We'll go to Mr. Cullen, please, for his round.
NDP
Nathan Cullen NDP Skeena—Bulkley Valley, BC
Thanks, Chair.
Thank you for this. I find this a fascinating topic in general. We're trying to get a proper understanding of current prices and potentially prices that may prolong. There's been some talk today equally about uncertainty or volatility. It's somewhat volatile, but it's also been this way for a few months now, and most of the energy projections we read about at least say it's not changing tomorrow. The question I'm facing is not so much volatility, but a $50 price, just a lower price. Am I wildly outside of the parameters there, Mr. Leach, just in terms of some assumptions we're making about the federal budget, about the state of the energy economy in Canada?
Associate Professor, Alberta School of Business, University of Alberta, As an Individual
No, I don't think so. I think you asked the question earlier about whether using the spot price as a forward-looking variable is a good one. I tend to be more of a fan of looking at the forward curve. That gives you a little more sense of how the market is betting. But the Bank of Canada had a research report last spring that indicated that the spot price was the best performing forecast over time, so assume that today's price plus inflation....
NDP
Nathan Cullen NDP Skeena—Bulkley Valley, BC
The Bank of Canada said that last spring. The federal finance department said that last November. In the fall update that they used for Canada's economy they chose the spot price as the assumptive. That's a small “c” conservative approach. Is that a prudent approach to take, if the bank is saying it and the finance department is saying it's a good way forward?
Associate Professor, Alberta School of Business, University of Alberta, As an Individual
I think the evidence lines up in favour of that generally, yes.
NDP
Nathan Cullen NDP Skeena—Bulkley Valley, BC
I'm wondering whether there are any similarities historically, because we're seeing that this is not similar to the 2008 crash. This is potentially a supply side effect. This is a glut on the market right now. Is that fair, Mr. McLellan? Am I assessing that right?
My question is specifically this. I know they are different commodities and different industries, but how different is this than what we see on the gas side, and have seen for the last number of years? We have seen a new and large supply of gas without an increase in demand and prices have stayed persistently low for natural gas for how many years now? We're going back seven, eight—