Finance Committee on March 10th, 2015

[The Chair, Conservative, James Rajotte]

I call this meeting to order.

This is meeting 70 of the Standing Committee on Finance. Our orders of the day, pursuant to Standing Order 108(2), are for a study of the impact of low oil prices on the Canadian economy. This is our first meeting on this topic.

I want to welcome our witnesses here in Ottawa. We're also expecting a witness in Edmonton for this first panel.

From the Canadian Association of Petroleum Producers, we have the president and CEO, Mr. Tim McMillan. From the Canadian Fuels Association, we have the president and CEO, Mr. Peter Boag. From Encana Corporation, we have Mr. Richard Dunn, vice-president. From Suncor Energy Inc., we have the executive vice-president, Mr. Steve Reynish. Welcome to the committee everyone.

We are expecting Gil McGowan, the president of the Alberta Federation of Labour, in Edmonton. Hopefully he will arrive in time for his presentation.

You each have five minutes maximum for your opening statement, and then we'll have questions from members.

We'll start with you, Mr. McMillan. Please begin.

[Tim McMillan, President and Chief Executive Officer, Canadian Association of Petroleum Producers]

Thank you, Mr. Chair.

Thank you to the committee members for inviting CAPP to be part of this presentation.

I'll start off by introducing CAPP briefly. Then I'll move on to the effects of the current price environment on our industry and the effects we think that will have on Canada.

CAPP represents the upstream oil and gas producers in Canada; 90% of all the oil and natural gas produced is from the members of the Canadian Association of Petroleum Producers. We are by far the largest private sector investors in Canada. In 2013 we had about 74 billion dollars' worth of investment in building the Canadian economy, and in 2014 about $70 billion. Out of that we've seen $18 billion a year, on average, contributed to governments for taxes and royalties over the last several years.

We make up 20% of the stock market, or at least we did until six months ago. With the current price environment, that has reduced to about 12%. We are 20% of Canada's exports. We employ over half a million people. Our supplier network reaches really across the country with more than 2,500 suppliers to the energy sector.

Price volatility in the commodity market is the norm, not the exception. Our industry has been through high and low price environments in the last several decades. We as an industry are actively positioning ourselves right now. You will see those effects really across Canada to ensure that we can be successful in the medium and long term, and Canada can maintain its strong position as a supplier of choice in the world for energy products.

The Bank of Canada came out in January and made some statements around the effects of the low price environment on the Canadian economy. I'll quote the bank, “The considerably lower profile for oil prices will be unambiguously negative for the Canadian economy in 2015 and subsequent years.” The effect of the low price we think will be felt across Canada—through our supplier network, through the employment that is sourced from across the country, and through the taxes and royalties that are paid to really all levels of government and across the country.

Getting into the specifics of what our expectations are, we put out an interim report in January updating our annual report on investment expenditures. In January we said that we saw a 33% reduction in capital expenditure in 2015. We've seen that further eroded in the last few months. With those public statements from January, we would break it apart to about a 40% reduction in conventional oil and gas and about a 25% reduction in oil sands investment. The reason for this is that oil sands investments are multi-year and larger projects. Projects that are in years two, three, four, or five will get ongoing investment and will be brought into production. The western tight oils will have a production profile that is higher at the front end and declines more rapidly, and the time from drilling to production is so much shorter that it can be far more elastic with price sensitivity.

We also want to be clear that even with the lowering of investment by 33%, going from over $70 billion to below $50 billion, we will still be by far the largest investor in the Canadian economy. The effects that will have on production in the short term I think are clear to point out as well, because they aren't always obvious. We would expect to see a reduction in production from what we had predicted, but the Canadian energy sector is going to continue to grow production even in the current environment, even with the lower investments. The numbers we put out in January predict about a 150,000 barrels a day increase in 2015, and in 2016, roughly 190,000 barrels a day. As I said, those were a snapshot in time in January, but we are looking to increase production regardless of the current price. We want to ensure that our industry is strong in the long term and that Canada maintains its position as a supplier of choice around the world.

Thank you for the time here this morning.

[The Chair, Conservative, James Rajotte]

Thank you very much for your presentation.

We'll now go to Mr. Boag, please.

[Peter Boag, President and Chief Executive Officer, Canadian Fuels Association]

Thank you, Mr. Chairman.

Members of the committee, good morning, it's my pleasure to be here today.

I represent the refining sector, which is an integral component of Canada's petroleum value chain. Refineries are the manufacturing intermediary between crude oil and refined products. Canada has 18 refineries located in eight provinces, with a total capacity of two million barrels per day. They contribute $5.6 billion in direct GDP and employ more than 18,000 Canadians.

The refining process simply separates, breaks, reshapes, and recombines the molecules of crude oil into value-added products such as gasoline, diesel, and aviation fuel. These transportation fuels typically account for 75% of refinery output, the remaining 25% comprises heating oil, lubricants, heavy fuel oil, asphalt for roads, and feedstocks that the petrochemical industry transforms into hundreds of consumer goods and products that Canadians use and rely on every day, from plastics to textiles to pharmaceutical products.

Crude oil is the single biggest cost input for refiners. Over the long term, refined product prices for gasoline, for example, generally track movements in crude prices although other factors can come into play. The difference between crude oil and the price of gasoline at the pump comprises three components: the refiner margin, the marketers' margin, and taxes. The decline in crude oil over the past six months has been accompanied by a significant decline in retail fuel prices. The current Canadian average retail price of gasoline is about 20¢ per litre lower than it was a year ago.

I've handed out a document, the Natural Resources Canada “Fuel Focus” report. It's from last Friday, March 6. If you look at figure 1 on page 1, it shows on a national basis how retail prices for gasoline have closely tracked crude prices into February of this year. The overall trend line for refiner and retail margins has not materially changed over the past months.

If you look at figure 5 on page 4, and I'm looking specifically at the chart in the upper left, it shows that beyond typical, short-term variations in refiner margins, and that generally reflects seasonal demand changes and other short-term gasoline supply and demand dynamics, there's been a modest downward trend in refiner margins over the past two and a half years, on a national basis. The retail margin trend, again on a national average basis, has slightly increased. As you can also see from the chart, refiner margins significantly dipped in January. Gasoline margins were under significant downward pressure over this time not only because of seasonal demand changes but also because of a surge in production resulting from North American refineries running at very high utilization rates.

Relatively inexpensive crude prices and a refined product futures market indicating higher future prices compared to current spot prices caused refiners to process more crude and store more refined product for future sale. This resulted in bulging gasoline inventories that were well above their seasonal norms, accompanied by lower margins. In the past month, the national average refining origins on gasoline have increased materially. There are several factors behind this: a confluence of recent refinery-related issues, in particular, strikes at several facilities in the U.S.; a major, unplanned outage at a major U.S. west coast refinery; and weather-related issues at several refineries in the eastern U.S. and Canada. Combined with short-term maintenance shutdowns, normal at this time of year, the supply side of refined products has tightened significantly leading to an increase in wholesale prices and refining margins. Another major factor is the record refined product exports from the U.S., in particular for gasoline in the last two months.

However, increasing wholesale prices and refining margins for gasoline are common at this time of year. Despite all the refinery and supply-related issues this year's seasonal increase in refining margins is consistent with historical norms. Current refining margins for gasoline aren't materially higher than they have been throughout the first quarter of the previous three years. Diesel prices have also generally tracked the change in crude prices, although to many this may have been masked by the recent price difference between diesel and gasoline.

Disparities between retail gasoline and diesel prices are normal phenomenon driven by different seasonal demand patterns of two very distinct commodities. Gasoline demand peaks in the spring and summer, while diesel demand peaks in the winter due to its close relationship with heating fuel.

Since 2008 Canadian diesel prices have averaged nearly 7¢ per litre more than gasoline during the period of November to February, while averaging nearly 4¢ per litre less than gasoline from May through August.

Seasonal disparity between the two products has been much more pronounced in recent months and that's largely because of the significant decline in gasoline margins that I previously mentioned. In fact, diesel refining margins remain virtually unchanged from where they were at this time last year, and the gap between diesel and gasoline has already begun to narrow as we move from winter into spring.

In conclusion, lower crude prices have resulted in lower fuel prices. Moreover, according to Statistics Canada's most recent data on consumer prices, overall transportation costs declined 5.3% in the 12 months to January 2015 as fuel prices declined.

Thank you and I look forward to your questions.

[The Chair, Conservative, James Rajotte]

Thank you very much, Mr. Boag.

Mr. Dunn, please.

[Richard Dunn, Vice-President, Canadian Government Relations, Encana Corporation]

Thank you, Mr. Chairman.

Good morning. I'm Richard Dunn, vice-president of government relations for Encana. Encana is a significant upstream producer in Canada. Thank you for the opportunity to speak today on how the global oil price decline has impacted Canada's energy sector, and the challenges and the opportunities we see going forward.

The current low commodity price brings into sharp focus the importance of industry and government working together to ensure Canada maximizes the long-term economic opportunity presented by our natural resources. To do so demands a partnership approach with industry continuing to adapt and innovate, and government continuing to take steps to ensure economic competitiveness.

As Tim McMillan of CAPP noted, the impacts of a low price environment are being felt across Canada. The Bank of Canada estimated that energy-related capital investment declined significantly in 2015. Already, energy companies, including Encana, have reduced their investment by billions of dollars, affecting the bottom lines of governments, businesses, communities, and individuals across the country.

No one has a crystal ball; however, some observers believe the market may begin to rebalance toward the end of 2015. The question remains, what's the new balance point?

Just as we did not believe that $100 oil was sustainable, we don't believe that $50 oil is sustainable either. Collectively, industry and government need to find ways to thrive at a range somewhere in the middle and to transition to a more realistic long-term modest oil price environment.

Industry will continue to respond with versatility and innovation. In Encana's case, we have exercised strict financial discipline, increasingly focused our investment on our core strategic assets, and lowered our costs through operational efficiencies, technological innovation, and working with our supply chain. We've exercised financial discipline by reducing our 2015 capital investment by some $700 million, $300 million of which is in Canada.

As part of our focus on efficiency and operational excellence, we are employing new technologies to maximize production and minimize our environmental footprint. This includes pad drilling, which optimizes our land uptake, and the use of saline water sources for hydraulic fracturing, thereby minimizing our fresh water use. To be clear, operating in an environmentally responsible way is non-negotiable. Put another way, responsible development will not be compromised in a low price environment.

These are just some of the ways in which Encana is dealing with $50 oil, and I might add, dealing with a sub-$3 natural gas price environment as well. We have an opportunity to work together to meet the challenges of the low commodity price cycle and ensure that Canada prospers over the long term.

I've talked about what industry is doing. I'd like to touch upon the pivotal role that government plays.

I believe it's more important than ever for government to find opportunities for Canada to increase its competitiveness by focusing on critical infrastructure, a competitive fiscal environment, regulatory efficiency, first nations engagement, and public acceptance for resource development. I'll touch on those points.

Canada must continue its strong efforts to put in place critical infrastructure for global market access, including LNG, in order to realize our full resource potential. For companies, there is an urgency attached to capital decision-making, and in order to maximize Canadian investment going forward, it is crucial we expedite these infrastructure projects.

We must continue to focus on the fiscal environment. The federal government's recent announcement of a tax reclassification for LNG projects is a great example of a fiscal measure that positions Canada as an attractive and competitive place to invest.

On the regulatory front, we encourage the government to continue to address legislation and regulations that risk putting Canada at a competitive disadvantage. In order to carry on with our shared mandate of responsible resource development, we need to maintain the right balance of environmental protection and economic competitiveness in policy and regulation. This is not about lowering environmental standards but rather about ensuring that our regulatory review processes are as efficient as possible.

With respect to first nations, ongoing government leadership is imperative on a number of fronts, including bringing greater clarity to the consultation process and improving first nations capacity. Government leadership is essential to creating an environment of shared economic prosperity, one which will provide greater investment certainty while at the same time creating opportunities for aboriginal communities.

Finally, and importantly, together we need to continue to earn public trust for resource development. Both industry and government have leadership roles to play in bringing balance to the discussion. Our shared voice must help the public understand how the energy sector's success translates into success for all Canadians.

In conclusion, we believe the time for collective and unified industry and government action is now. A low commodity price environment affects people across the breadth of this country. This is a national issue with national implications and nationwide generational opportunities.

Working effectively together, we can play our parts in ensuring that all of Canada benefits and prospers in this low commodity price environment and is well-positioned for the anticipated price recovery.

Thank you.

[The Chair, Conservative, James Rajotte]

Thank you, Mr. Dunn, for your presentation.

We'll go to Mr. Reynish now, please.

[Steve Reynish, Executive Vice-President, Strategy and Corporate Development, Suncor Energy Inc.]

Thank you, Mr. Chairman, and good morning, everyone. I appreciate the opportunity to appear before you today. My name is Steve Reynish and I'm with Suncor Energy.

As I'm sure you know, Suncor is one of Canada's leading integrated energy companies, employing thousands of Canadians from coast to coast. Our operations include oil sands development and upgrading in northern Alberta as well as conventional and offshore oil production. We own and operate refineries in Edmonton, Sarnia, and Montreal, as well as a lubricants plant in Mississauga. We are also active in renewable energy with interests in seven wind farms, and we operate Canada's largest ethanol plant in Sarnia. Many Canadians know us as “Canada's gas station” through our 1,500 Petro-Canada locations.

I think the first point I'd like to make is fairly obvious to everyone in the room. The world has changed significantly, with oil prices having dropped something like $50 per barrel over the last number of months. I see this morning that WTI is trading again under $50 a barrel. There's no doubt that this will have an impact on the industry and the Canadian economy. For Suncor, every $10 change in the price of oil per barrel equates to over a billion dollars in cash flow.

At Suncor, we've been preparing for this downturn in prices, and what we see is a return of volatility to these markets. We think we are positioned reasonably well thanks to a clear strategy. The fundamentals of that strategy are simple: optimize our base business, pursue profitable growth, return cash to shareholders, and be an industry leader in sustainability. This strategy is underpinned by a commitment to capital discipline.

We've been taking a hard look at our costs for the past couple of years, and these lower prices have caused us to accelerate those efforts. We've reduced our capital budget for this year by a billion dollars, and we're looking for $600 million to $800 million in operating budget savings over the next two years. I think you may have seen that we've also announced a reduction in our workforce of a thousand positions. Let me emphasize that these reductions were made in a way as not to jeopardize safety or environmental performance.

Others in our industry with higher debt or limited cashflow may not be in the same financial position. Their situation highlights the very real effects of the downturn on the Canadian economy. Let me just run through a few examples of that.

With respect to the oil supply-demand balance, lower prices will stimulate demand for energy—and we've seen this particularly already in the U.S.—but producers' cashflow obviously will be negatively affected, forcing cost reductions.

On the employment side, declining revenues will also limit our ability to sustain a stable labour force. Our strategy, however, remains to look for local labour first, then regionally, then nationally, and then only as a last resort do we look internationally. The current environment has allowed us to source closer to home, and we are reducing or eliminating higher cost fly-in, fly-out labour to our operations. Significantly, lower prices have rationalized the most expensive labour option for us, which is temporary foreign workers.

In terms of capital investment, companies are shelving projects in light of the new price environment. That of course impacts engineering, construction, and the operation of projects. The declining Canadian dollar softens the blow somewhat for Canadian operators but does not completely offset the decline in oil prices. For us at Suncor, a lower dollar is a double-edged sword. Our earnings are in Canadian currency but our debt is largely denominated in U.S. dollars.

Regarding the supply chain, lower prices also impact spending in other sectors including transportation, manufacturing, hospitality, tourism, and high tech. I think in Canada's case that list is a long one. Of course, depressed oil prices also result in lower taxes and royalties.

Overcoming this challenge will require a sustained effort for all of us. For us in industry, it means focusing on reliable, safe operations, and reducing costs. For contractors and suppliers, we are looking for them to help us find creative ways of reducing costs. For government, we think it means ensuring a strong, cohesive policy framework is in place to facilitate future development. We're particularly interested in any potential cumulative effects of taxes and regulations.

I'll leave it there. Thank you, Mr. Chair.

[The Chair, Conservative, James Rajotte]

Thank you very much for your presentation.

We will now go to Gil McGowan in Edmonton, from the Alberta Federation of Labour, and then we'll go to members' questions.

[Gil McGowan, President, Alberta Federation of Labour]

Mr. Chair, I've done this before so I know how quickly the time goes. I'll dive right in. I have six observations and seven recommendations.

Observation number one is that the fall in oil prices has been precipitous. There's no doubt about that, but no one should be surprised. Oil prices go up and they come down, and you can't say that something is a crisis or an emergency if you knew it was going to happen sooner or later.

Observation number two is that we are not in uncharted territory here. If you adjust for inflation, the average price for oil over the last 40 years has been actually $50 a barrel, almost exactly where we are today. Any company that assumed prices would stay at $100 a barrel forever, frankly, was being unrealistic.

Observation number three is that we probably need to get used to this price range. The factors that led to the current glut are still in place. International demand is low. Production is still high and showing no signs of slowing. Of course, we have new technology that is reshaping the oil market in the same way that similar technology reshaped the global and regional natural gas markets about a decade ago, which resulted in long-term price declines for natural gas. We can expect something similar in terms of oil.

Observation number four is that the drop in the price of oil has been bad for some Canadians, but good for others. It really depends where you work and where you live. Obviously, it's good for consumers because the price of energy is down. It's also good for some manufacturers because of the lower dollar. That cannot be lost in this discussion.

Observation number five is relates to the labour market in Alberta. The effect of oil prices on jobs has been variable, even in Alberta, and even within our energy sector. The reality is that our energy sector is actually a grouping of industries, at least three different sectors within a sector, so drilling and oil field service, for example, have been hit very hard because companies always respond to low prices by ramping down capital investment very quickly. We've seen that and that's already resulting in dramatic job losses for drilling and oil field service.

The second sector within a sector is oil sands-related construction. Our concern for our members is not right now. Most of our members are working on projects where funding was approved before the price of oil dropped. The big question is what will happen for the next generation of oil sands projects if the price remains where it is right now, but for now, most of our guys are working.

The third sector within the sector is downstream value-added production, so upgraders, refineries, and petrochemical. One of the things we always point out is that during periods of low oil prices, employment in these downstream sectors remains very stable. It's one of the reasons why we always encourage more investment in the downstream because it provides stability even when prices are dropping.

In addition, a lot of our members in construction are finding work this year in what we call shutdowns and turnarounds, which are basic maintenance on existing energy facilities like upgraders and refineries. This just happens and the timing is very good as this happens to be a year with a lot of shutdown and turnaround work, so it comes at a very good time. There's also a lot of commercial work in Alberta right now, so the effect of oil prices on the construction sector is muted.

Observation number six is that I urge members of the committee not to put a lot of stock in what I describe as disaster rhetoric. Winston Churchill famously said that you should never waste a good crisis and that's what's happening with some people who are speaking out with a lot of gloom and doom about the oil sands right now. For example, we heard the president of Canadian Natural Resources talking about a death spiral in the oil sands one day and the next week he was announcing $3.9 billion annual profits. We also hear our premier singing from the doom and gloom song sheet.

I would argue that things are really not that bad and people like our premier and the president of CNR are simply using this crisis as Winston Churchill suggested to take advantage for their own self-interests. In the case of Canadian Natural Resources, they're trying to use the crisis to squeeze contractors. When it comes to the premier, he's trying to squeeze public sector workers.

In terms of recommendations—

[The Chair, Conservative, James Rajotte]

Mr. McGowan, you have about 30 seconds left.

[Gil McGowan]

Okay.

Number one, don't panic. Number two, abandon the fixation on pipelines. It simply doesn't make sense to pump more oil into glutted markets. Number three, repair our social safety net. Our unemployed workers are going to need it. Number four is tax reform. You can ask me about that later. Number five, focus on more value-added production for three reasons: because it provides stable jobs, as I talked about; because it's cheaper to build now; and because our feedstock costs are lower.

I guess I'm out of time. I have a couple more recommendations, and I'd appreciate it if the committee members would ask me about them.

[The Chair, Conservative, James Rajotte]

Thank you for your presentation.

We'll go to Mr. Cullen first.

Colleagues, if we stick to our time limits we can do the first four members at seven and then the rest at five minutes.

Mr. Cullen, you have seven minutes, please.

[Nathan Cullen, NDP, Skeena—Bulkley Valley, BC]

Thank you very much, Chair.

Thank you to everyone for being here. Thank you, Mr. McGowan, for being up a couple of hours even earlier.

All of us politicians like to think we're more influential than we are. I'm reading the quote from the former MP from Fort McMurray who said that he'd like to see it all slowed down, that they have two-hour waits in the morning and the oil sands aren't going anywhere. He said, “Let’s manage it properly.”

If I were to try to find a theme through what I heard this morning, it's that there's a change in the profile for the companies in terms of investment decisions.

I want to start with you, Mr. Dunn. From your company's perspective, from Encana's perspective, this is a time when extras are being taken off the books. You're looking to save money. You're looking to keep things nimble and lean. Is that a fair assessment in terms of where the company is at?

[Richard Dunn]

Certainly we have a number of strategies that look to weather the storm that we're currently going through, and the dip, and then position ourselves for the longer term, as mentioned.

[Nathan Cullen, NDP, Skeena—Bulkley Valley, BC]

In weathering that storm you've committed to certain projects and certain investments. For anything more speculative, anything a little bit more venturing, this is a time when the cashflow determines that some of those projects get pulled back. You have to make assumptions about where the market's going to be. I put this to both Suncor and Encana. Do you folks assume the price that we have today, in terms of projecting forward through your spending plans right now?

I see Mr. Reynish nodding.

[Steve Reynish]

The quick answer to that is no, we don't. We look at short-term prices. We think for 2015 we're going to be in similar pricing to what we see today.

[Nathan Cullen, NDP, Skeena—Bulkley Valley, BC]

Right.

[Steve Reynish]

I think we do see some form of recovery, post this year. Then, of course, we look at the long-term price. From that we would have higher than today's price.

[Nathan Cullen, NDP, Skeena—Bulkley Valley, BC]

I'll hear Mr. Dunn's comments on this, and then I'll want to turn to Mr. McGowan.

The prudent or conservative approach, in terms of your own budgeting and what you're looking at, is not to assume a return to $100 oil by the end of year. The more conservative approach is what? Do either of your companies take an assumed price of barrel?

[Richard Dunn]

As mentioned, we don't believe that either $50 or $100 is sustainable and there'll be some point in the middle that ultimately will be landed on. Our strategy is to focus on those quality properties that will be worthwhile to develop at some midpoint price.

[Nathan Cullen, NDP, Skeena—Bulkley Valley, BC]

I ask this in part because looking through the last report from TD Economics their assumption was that the government, in its own estimates for revenue and the economic update of this past November, took the price of the day and made that assumption in terms of what kind of revenue the federal government would receive from the industry. Is that considered, from your perspective, a prudent approach to take? It's not speculative, I suppose. You take what you have in front of you. The government did that in November in its update and its forecast. Does that seem like a prudent way to go, Mr. Reynish?

[Steve Reynish]

I would say that is one data point. We would look at a range of different viewpoints and different data points. The one thing we do know is that none of us can predict a spot price for oil at any time in the future.

The one point I would make is that we believe that we've seen the return of volatility. That will make estimating an average price or spot price increasingly difficult. We will see much more volatility than we've seen over the last three or four years; more akin to what we saw before that, which is quite a volatile price.

[Nathan Cullen, NDP, Skeena—Bulkley Valley, BC]

I have a question for you, Mr. McGowan. You cited a statistic that the $50 barrel is.... I didn't quite catch what your average was and what timeframe you were using. I assume it was under adjusted dollars.

[Gil McGowan]

It was forty years.