Finance Committee on March 10th, 2015

[Tim McMillan]

I think rail has been an important part of today getting our product to market, but there are advantages to having more pipe in the ground, which I think would be a benefit to our industry.

[Andrew Saxton, Conservative, North Vancouver, BC]

What are the risks of transporting by rail versus by pipeline?

[Tim McMillan]

We feel strongly no matter how our products get to market, it needs to be done safely. Rail is a safe option to move product to market. Pipelines are a safe option. Some oil travels on the road in trucks, and that needs to be done safely as well.

Regardless of the mode the high standards need to be set.

[Andrew Saxton, Conservative, North Vancouver, BC]

Thank you.

Finally, my question is for Steve Reynish at Suncor.

What impact has the lower oil prices had on your plans for investment in the industry?

[Steve Reynish]

They certainly have impacted the plans.

I think there are two parts to the answer. One is that we have deferred two fairly large projects as a direct result of the current downturn. We hope to, and I think we will, pick those back up in subsequent years. On the other hand, we have two major long-life projects, in terms of Fort Hills in the oil sands, and Hebron off the east coast of Canada, which we are continuing to invest in.

We've deferred some and we're pursuing and maintaining others.

[Andrew Saxton, Conservative, North Vancouver, BC]

Thank you very much.

Thank you, Mr. Chair.

[The Chair, Conservative, James Rajotte]

Thank you, Mr. Saxton.

Mr. Brison, please.

[Scott Brison, Liberal, Kings—Hants, NS]

Thank you for joining us today and for your testimony.

Mr. McGowan seems to be issuing a challenge to companies, Encana and Suncor, that we could be doing more value-added and refining in Canada. What are the market impediments to making that happen?

[Steve Reynish]

I'll talk for Suncor.

I would say first of all that we do a lot value-added, so we do run upgraders. As I mentioned at the start of my comments, we are in the refining business, so we like to add value wherever we can within Canada. One example where we'll be able to improve that I think is the reversal of Line 9 and being able to take crude oil into our Montreal refinery. We see that as a positive step.

It is a complicated calculation in terms of market balance and where existing refinery operations exist and where markets exist. We'll do it where we can, but I don't think it's a one-size-fits-all blanket comment that it can be done everywhere.

[Scott Brison, Liberal, Kings—Hants, NS]

Mr. McGowan's message fits on a bumper sticker; yours is more complicated. We're kind of in the complicated business up here, so further information would be helpful so that we can understand what the market reasons might be and why you're not seeing a ramping up.

Mr. McGowan is saying that we should increase focus on value-added production in Canada now and not proceed with more pipelines.

Are these two mutually exclusive? Could we not build pipelines now and take advantage of low bond yields, a soft employment market, a soft economy, and build market access infrastructure now for the future? Is now not the ideal time to build that market access infrastructure while the economy is so soft and money is so cheap?

[Steve Reynish]

I'll let others comment on this as well, but I would say that this is a good time for building additional market access. I think it does have some implications for value-added as well as export.

[Scott Brison, Liberal, Kings—Hants, NS]

Mr. McGowan, some of your members would have an opportunity to work in helping to build some of these projects. In the U.S., there have been some labour unions that have been supportive of the Keystone XL pipeline, for instance.

Would market access that brings a higher price for Canadian petroleum and more jobs to your members not be a positive thing?

[Gil McGowan]

Let me respond to that in two ways.

First, when it comes to job creation, the kinds of projects you're building matters. Certainly, if you're building pipelines, jobs will be created, but in much smaller numbers and for a much shorter period of time than if you were building a big industrial plant such as a refinery or an upgrader. It depends on the project, but when you're building a pipeline you are talking about hundreds of construction workers over a period of a year or two, whereas when you're building a refinery you are talking about thousands.

In addition, once you've built a refinery you're creating long-term employment over the life of that facility, not just for the people in operations but also those in construction maintenance. I talked about turnarounds and shutdowns and regular maintenance. We employ literally thousands of construction workers—plumbers, pipefitters, and electrical workers—every year to maintain the existing plants. If you don't build the plant, that ongoing construction work is not there; it's missed.

I take issue with the argument that building pipelines to access new markets will automatically increase the price you get for the oil that you sell. Talk about bumper sticker arguments. That's a bumper sticker argument we have heard from the Alberta government and organizations such as CAPP for years and years. I have talked to economists and have sat through hearings in front of the National Energy Board hearing from experts, and it is not a given that, just because you connect our supply with the market overseas, the price will go up.

Look at the Asian market, for example. When you send bitumen over there, only 25% of their refiners can actually accept it as a feedstock, because they are what we call cracking refineries rather than coking refineries.

The market is really not as big worldwide as we've been led to believe. Light sweet crude oil can be used in every refinery in the world, but our product—bitumen—cannot be. Just sending it overseas does not guarantee a higher price. That is especially true now that there's a glut not just in the United States but on the global market. It seems ridiculous to me to say that dumping more product into a glutted world market is going to get us a higher price. I think most people would agree that dumping product into a glut is just going to maintain the price at a lower level for a longer period, whether it's Alberta doing it or OPEC.

[Scott Brison, Liberal, Kings—Hants, NS]

Mr. McMillan, how do you respond to Mr. McGowan's assertion that increasing production now is folly, given the pricing?

[Tim McMillan]

Did you say that production is falling?

[Scott Brison, Liberal, Kings—Hants, NS]

You were saying earlier that you're planning to ramp up production, which seemed inconsistent with the message from one of your members, Mr. Reynish.

[Tim McMillan]

We are expecting to see.... Investments are coming off, but projects are coming through the pipeline.

[Scott Brison, Liberal, Kings—Hants, NS]

Investment is coming off, but you're seeing production going up.

[Tim McMillan]

That's right. Some of the projects that are coming on stream in the next two years are projects that have been four or five years in the development and building. They may be in year three or four. When they come on, we will see the increased capacity of those projects. We're seeing, largely on the conventional side, flatlining in the coming one or two years. On the oil sands, we're seeing an increase because of large projects.

[Scott Brison, Liberal, Kings—Hants, NS]

What is the delta between oil sands production and, for instance, U.S. shale energy production and Saudi production. It strikes me that this is an important question, because if the Saudis are pursuing a low price agenda to try to squeeze out shale gas production in the U.S., the delta between oil sands production in Canada and shale gas production and their production is an important one for us to be cognizant of. What is the delta between these modes of production?

[Tim McMillan]

Each of them has a different cost profile. The shale involves projects in which you drill a well and get production very quickly, and the life of it is shorter than that of an oil sands project, which could be 20 years. However, each project is going to be different as well in the oil sands, from mining to in situ, based on the resource and many different parts of the project.

The Saudis have a substantial piece of the market and the ability to move the market, and that is what we're seeing here now.

[Scott Brison, Liberal, Kings—Hants, NS]

Mr. Dunn, you said that $50 WTI is not sustainable. If you look back to the nineties, when it was significantly lower, why would you say it is not sustainable?

[Richard Dunn]

As we mentioned, certainly in terms of the new techniques, those techniques have brought on a lot of supply, and they tend to be at a higher cost. In fact, Canada tends to have higher costs, whether it's—

[Scott Brison, Liberal, Kings—Hants, NS]

So production levels are not sustainable. The WTI may go lower, but you're saying that production in Canada may not be sustainable at that level.

[Richard Dunn]

No, what we're saying is that we expect that ultimately, once you work through some of the lagged production, prices will recover somewhat.