Evidence of meeting #177 for Finance in the 42nd Parliament, 1st Session. (The original version is on Parliament’s site, as are the minutes.) The winning word was funding.

A recording is available from Parliament.

On the agenda

MPs speaking

Also speaking

Pam Bryan  As an Individual
Susan Roberts  As an Individual
Margaret Schoepp  As an Individual
Kim Rudd  Northumberland—Peterborough South, Lib.
Ken Kobly  President and Chief Executive Officer, Alberta Chambers of Commerce
Lynette Tremblay  Manager, Government Relations, Alberta's Industrial Heartland Association
Mark Scholz  President, Canadian Association of Oilwell Drilling Contractors
Michael Holden  Chief Economist, Canadian Manufacturers & Exporters
Janet Lane  Director, Human Capital Centre, Canada West Foundation
Wesley Morningstar  Chair of the Board of Governors, Explorers and Producers Association of Canada
Mark Plamondon  Executive Director, Alberta's Industrial Heartland Association
Richelle Andreas  Chair, Board of Directors, Agricultural Manufacturers of Canada
David Malloy  Vice-President, Research, Alliance of Canadian Comprehensive Research Universities
Chief Marlene Poitras  Regional Chief, Alberta, Assembly of First Nations
Isabelle Des Chênes  Executive Vice-President, Chemistry Industry Association of Canada
Martin Roy  Executive Director, Festivals and Major Events Canada
Lindsay Hugenholtz Sherk  Senior Leader, Sport Matters Group
Marc Kennedy  Olympic Athlete, Sport Matters Group
Neville Wright  Olympic Athlete, Sport Matters Group
Chantell Ghosh  As an Individual
Jim Gibbon  As an Individual
Paul Lucas  As an Individual
Min Hyu Lee  As an Individual
Kyria Wood  As an Individual

9:25 a.m.

Liberal

The Chair Liberal Wayne Easter

Thank you very much, Janet.

From the Explorers and Producers Association of Canada, we have Mr. Morningstar, who is chair of the board of governors.

Welcome.

9:25 a.m.

Wesley Morningstar Chair of the Board of Governors, Explorers and Producers Association of Canada

Thank you, Mr. Chairman.

Good morning, panel members.

I'm here today representing the Explorers and Producers Association, otherwise known as EPAC. I am the chair of EPAC for 2018-19, which is a volunteer position. My day job is chief executive officer of Canlin Energy Corporation, owned by a consortium of Asian entities. EPAC is pleased to be asked to present our views on the topic of economic growth and ensuring Canada's competitiveness.

EPAC represents Canadian oil and gas entrepreneurs. We have 150 members that operate 65,000 wells and supply approximately 20%, or one-fifth, of Canada's oil and gas. Our members invest about $15 billion per annum across British Columbia, Alberta, Saskatchewan and Manitoba, which supports employment for tens of thousands of Canadians, their families and communities, including indigenous communities. In short, our operators and our participants operate from Virden, Manitoba, to Fort Nelson, B.C.

Ongoing robust demand for both oil and gas globally should be a strong signal for Canadian energy companies. Unfortunately, it is not. Today, there exists significant and systemic competitive gaps relative to competing jurisdictions, particularly the United States. Canadian oil and gas—natural gas—remains trapped in western Canada leading to unprecedented differentials on pricing for both oil and natural gas. These pricing differentials are costing the Canadian economy tens of billions of dollars each year and have a significant negative impact on oil and gas economics leading to reduced oil and gas activity.

Canada's energy industry is one of, if not the largest driver of our economy. Our oil and natural gas resources are world class. Production of our energy is some of the safest, cleanest and most highly regulated in the world. The western Canadian sedimentary basin is a natural gas-prone basin, allowing Canada to play an outsized leadership role in the global transition to a lower carbon energy.

Why should our product be stranded and heavily discounted to world prices at great cost to all Canadians?

Our challenges on competitiveness and access to capital are many: the perception that we cannot improve oil and natural gas egress by building pipelines or liquefied natural gas facilities; the reality of a confused, ever-changing and never-ending regulatory process; multiple levels of government that appear less than supportive of this cash cow and the Canadian industry; and the lagging tax and fiscal regime that does not encourage spending or growth. The capital flows to the oil and gas business in western Canada have dried up. Even our large public sector pension plans are increasingly looking to invest in the U.S. The Government of Canada can and should help to enhance our competitive position.

Gary Leach, the president of EPAC, has contributed a written submission for pre-budget consultations that outlines five recommendations. These five recommendations are predicated around competitive deductibility for capital costs, innovative approaches to finance small and medium oil and gas entities, framing the leadership role Canada has taken with respect to greenhouse gas emissions on the carbon and methane fronts, and continual improvement and innovation on technology to ensure Canada's leadership on the energy front continues.

These recommendations have been developed in consultation with other industry associations and indicate five ways for the federal budget to support an improved competitive landscape so that our industry can get back to exploring for and producing our abundant, clean, safe energy in an efficient fashion.

Thank you very much for the opportunity to speak this morning. I look forward to answering any questions you may have about EPAC's presentation.

9:30 a.m.

Liberal

The Chair Liberal Wayne Easter

Thank you very much, Wesley.

Thank you, all, for your presentations. Certainly, everybody on this panel was on the productivity and competitiveness issue, which we really do appreciate.

We'll go to seven-minute rounds, and we'll start with Mr. Fergus.

9:30 a.m.

Liberal

Greg Fergus Liberal Hull—Aylmer, QC

First, I want to thank you for your presentations. They were truly outstanding.

One of the privileges we have as MPs is that we sometimes hear things that surprise us, but that are very helpful in our discussion of priorities for the upcoming budget. If there is a common thread in all your presentations, it is the capital cost allowance. That was very clear.

I have two questions, one for Ms. Tremblay and one for Ms. Lane.

Ms. Tremblay, can you tell us again how important this allowance is? You quoted figures from market studies on the positive impact of this allowance in the United States, but do you know if such figures are available for Canada?

9:35 a.m.

Manager, Government Relations, Alberta's Industrial Heartland Association

Lynette Tremblay

Yes, of course. If you don't mind, I will answer in English.

9:35 a.m.

Liberal

Greg Fergus Liberal Hull—Aylmer, QC

By all means.

9:35 a.m.

Manager, Government Relations, Alberta's Industrial Heartland Association

Lynette Tremblay

I know that the Chemistry Industry Association of Canada is going to cover this in the next session in terms of the numbers that associate for Canada on the accelerated capital cost allowance, but essentially the stakes are quite high. We know what the stakes are if we don't implement this. Essentially, there are a lot of lost jobs and GDP on the table.

On the other hand, on the positive side of things, I know that the Chemistry Industry Association has done a lot of research on what the return would be for Canadians if it's implemented. Essentially, eight years afterwards, the federal government starts to regain revenue again, which in the life of the facility—essentially over 50 years—is a huge return for Canadians. On top of that we have the revenue from the construction period, as well as the full-time jobs and the multiplier effects, as I mentioned before.

I'm not sure if Mr. Plamondon would like to add to that.

9:35 a.m.

Mark Plamondon Executive Director, Alberta's Industrial Heartland Association

Thank you. I would like to add a comment.

We conducted a study in December of last year that looked specifically at if we build, or if somebody builds, an $8-billion facility that would produce polyethylene in the industrial heartland—or if they build that same facility in Pennsylvania, on the gulf coast, in the Middle East or in China—what that would look like in terms of how economic that project would be. What is the most economic jurisdiction in which to build that facility, considering the cost of feedstock, labour availability, capital cost, operating costs and all of these things?

What was really interesting about that study was that it showed that the industrial heartland, on the surface of it, had a competitive advantage to these other jurisdictions. What was happening in the United States was that the United States jurisdictions were providing additional incentives to these companies that would then make their jurisdictions more competitive. On top of that, around that time the Americans introduced their tax reforms. Ignoring all incentives, it completely changed the competitiveness of the United States' jurisdictions so that they are the most competitive and the most economically attractive jurisdictions for these types of projects in the absence of any other type of incentives provided simply from the change of the capital cost allowance. For these types of facilities that would be going in the industrial heartland, it adds a significant impact to their cash flows and, hence, the economics.

9:35 a.m.

Liberal

Greg Fergus Liberal Hull—Aylmer, QC

Thank you. I am very much in favour of your suggestions.

Ms. Lane, thank you for your testimony. I have to say I was pleasantly surprised by the part of your presentation that stressed the need for young people to overcome illiteracy and for them to do everything they can to learn to read and understand properly. It is unusual for economic organizations to talk about that. Would you care to elaborate?

I think it is very important for everyone here—not just the other witnesses, but the MPs as well—to understand how essential it is for our young people to develop good literacy and numeracy skills.

9:35 a.m.

Director, Human Capital Centre, Canada West Foundation

Janet Lane

When I talk about reading and literacy, people think that of course we're a literate country. Yes, we are a literate country. Only a handful of people are unable to read effectively.

I'm not talking about whether you can decode the language, though. I'm talking about whether you can read at a high enough level to critically think about what you're reading. Can you apply what you're reading here in a new situation? Can you read between the lines? Remember back in high school when we were asked to compare and contrast? Can you do that? Too many of our youth are not able to read at that level. They're not absorbing what they're reading. They're not applying what they're reading elsewhere.

Unfortunately, it's not just youth. If you are a person who has been working in a fairly routine job for a long time, you will also have lost skills. You may have had those skills when you started, but over time you have spent less time reading, thinking, comparing and having to apply your skills in new and different ways. You've lost that capacity over time.

The problem is that the economy is changing so quickly. Things are changing in jobs constantly. Being able to adapt to new processes and fluidly problem-solve, which is actually a function of literacy skills, has decreased in people at a time when we need it to increase. The skills gap that Canada has is actually growing, and it comes right back down to those basic cognitive skills: reading, writing and arithmetic.

Employers will tell you that some employees have the technical skills but don't know how to work with people. They can't work in teams and they don't know how to do customer service. They wonder what it is. These are functions of a person's capacity to read well, critically think, adapt to change and grow. That's the important piece, especially right now, at a time when jobs are changing ever so quickly.

9:40 a.m.

Liberal

The Chair Liberal Wayne Easter

Thank you, all.

I'll turn to Mr. Jeneroux for seven minutes.

9:40 a.m.

Conservative

Matt Jeneroux Conservative Edmonton Riverbend, AB

Wonderful. Thank you, Mr. Chair.

Thank you, everybody, for your presentations here today.

I want to add to Mr. Fergus' assessment of the theme of the presentations. I also heard that Bill C-69, Bill C-48 and carbon taxes don't help the industries we're talking about today. They actually hinder them. I just wanted to take a second to get that on the record, from my assessment on this side of the table.

I want to start with you, Mr. Scholz. You spoke of 1,800 wells to 600, to about 550 wells next year. Each of those represents 135 jobs. Could you expand on what that means? What types of jobs are those? What does that mean, broadly, for a community here in Alberta?

We've gone across the country, as you know, and heard from a variety of organizations, but this is quite specific to Alberta and what we're experiencing right now. If you have any examples of those jobs and of the impact on the community, that would be helpful.

9:40 a.m.

President, Canadian Association of Oilwell Drilling Contractors

Mark Scholz

Sure. We're not talking about wells. We're talking about drilling rig equipment.

For example, the overall drilling rig fleet peaked back in 2007 at around 900 drilling rigs. We have seen a gradual decrease in the overall equipment fleet, but that's really.... I would say that prior to the downturn we did see a decrease, but that was more in line with aligning the equipment with the market and where the market was going, which was with much heavier types of equipment and longer-reach horizontal types of wells, so the fleet did change.

What has changed rapidly in the last four years is not so much the changing specs or dynamics of the equipment; it's in fact this equipment, this high-tech innovative equipment. Some of the most technologically advanced drilling rigs in the entire world are built right here in Nisku.

Here in Nisku, if you take a 20-minute drive down to the heartland of our manufacturing sector here in the oil and gas industry, you'll see the construction of rigs, but those rigs are not being deployed in Canada anymore. They're being built here for export. Some of them are going to Alaska. Many of them, actually, are going into the United States.

What we've seen is that we've gone from 900 drilling rigs in 2007 to 600 today, so that's a delta of 300, and 200 of those in the last four years. We think we're going to be going down to about 550.

What we always compute is that every active rig that's working generates 135 direct and indirect jobs, and these are some of the highest-value jobs in the entire country. We have individuals who are coming in with a high school education and a good skill set to work with their hands and to work outside. There's a demographic that enjoys that kind of work. Even at the lowest end of a drilling rig crew, the opportunity for someone who has a grade 12 education to make $90,000 at a minimum, entry level, is not uncommon in our industry.

Those types of jobs are leaving. The talent is leaving and the equipment is leaving. I say this somewhat to raise awareness to our policy leaders that if we want to be in this space and we want to have the high-tech equipment that we need to compete, we have to make sure that we're sending the right signals and incentivizing that type of investment in this industry.

9:45 a.m.

Conservative

Matt Jeneroux Conservative Edmonton Riverbend, AB

Where are they going? Are they going south? Are they unemployed?

9:45 a.m.

President, Canadian Association of Oilwell Drilling Contractors

Mark Scholz

Yes. I would say the relocation assets would be going either to the Permian basin or, for the majority of them, to Texas. We see a number of reasons for that.

One is that we cannot command a sustainable price model in Canada. The return on capital is just not there, and as a business.... These aren't large organizations that are making these decisions. Small and medium-sized businesses are making that decision. They're doing that because they want to get a fair return on their equipment and have a sustainable business model. You can't do that today, unfortunately, in this market in Canada.

9:45 a.m.

Conservative

Matt Jeneroux Conservative Edmonton Riverbend, AB

They're moving their families. The community impact is significant when that happens. Thank you for sharing that.

Mr. Morningstar, thank you for your presentation. You commented that energy investment has completely dried up. I'm hoping that you can expand on some of your thoughts and some of your association's thoughts on why exactly that's dried up recently.

9:45 a.m.

Chair of the Board of Governors, Explorers and Producers Association of Canada

Wesley Morningstar

Yes. I think the biggest issue for our membership continues to be around product egress: the ability for us to be able to sell our natural gas and oil at world prices.

Recently, a barrel of oil in western Canada on the heavy side is traded at a discount as high as $50 compared to West Texas Intermediate. If West Texas Intermediate is at $72 U.S. today, that means our Canadian heavy barrel is getting just over $20 per barrel. There are massive discounts on the oil side, but something people forget is that there's also a large discount on the natural gas side as well. Again, because of egress, we can't move our gas out of western Canada. As an example, a normal differential on a molecule of natural gas would be $1 U.S. per thousand cubic feet of production. Today, we're seeing it mostly at $2 U.S. Again, it's a big differential. That does tend to curtail investment in our business.

One of our member companies, Peyto Exploration, a year ago probably would have had 20 to 30 rigs working in our basin. Today, they have six. Another one, Tourmaline Oil Corp. would be of similar vein. They would have had 25 to 30 rigs working a year ago, similar to Mark's comment, whereas today they'd probably be working with 10 to 15 rigs.

There are big impacts on our communities across Alberta, B.C. and Saskatchewan in particular.

9:45 a.m.

Conservative

Matt Jeneroux Conservative Edmonton Riverbend, AB

Quickly, before my time is up, Mr. Kobly, I want to get to you because you mentioned Bill C-69 and what your members are saying about that. I'll give you about 20 seconds to expand on that before the chair cuts me off.

9:45 a.m.

Liberal

The Chair Liberal Wayne Easter

Go ahead. I won't cut you off. Do your full explanation.

9:45 a.m.

President and Chief Executive Officer, Alberta Chambers of Commerce

Ken Kobly

Thank you, Mr. Chair.

On Bill C-69, from what we're hearing, mainly in the media and from our members, there is a lot of concern as to the final outcome of this particular bill. What will be the increased regulatory requirements? What will be the increased consultation requirements? Again, I fall back on the interview that I saw with Hal Kvisle where he questioned the intelligence of any pipeline company that would in fact apply under that new legislation. It does not appear to be legislation that will actually enable us to get our product to market.

9:50 a.m.

Liberal

The Chair Liberal Wayne Easter

Thank you, Mr. Kobly.

Before I go to Mr. Julian, I'll just go back to you for a second, Mr. Morningstar. I will talk about the Alberta discount probably as much as anyone, but I'm usually thinking of oil, not natural gas. Can you expand on the natural gas because I don't think many of us think of the Alberta discount, what we call the Alberta discount. You people would all understand it. Can you explain that a little further on natural gas?

9:50 a.m.

Chair of the Board of Governors, Explorers and Producers Association of Canada

Wesley Morningstar

Yes, and oftentimes we do confuse the issue by calling it the oil and gas business, and when people think of gas they think of gasoline. In our case we're natural gas producers. Natural gas producers represent about 12 Bcf of production here in western Canada. That puts us in Canada at the fifth-largest natural gas producer in the world. Clearly, we have a big role to play in a lower-carbon world.

Our discounts, again, are related to the fact that we have too much gas developed in Alberta currently. We've been too efficient at expanding and drilling our world-class resources and we don't have enough pipeline take-away capacity. Of course, when there's too much product and not enough take-away capacity that leads to wider differentials.

We currently have a pipeline monopoly in Alberta, essentially known as the NOVA Gas Transmission Ltd. system owned by TransCanada, and they, quite frankly, have not done a very good job of improving take-away capacity in western Canada.

9:50 a.m.

Liberal

The Chair Liberal Wayne Easter

Okay. That's really helpful. Thank you very much.

Mr. Julian.

9:50 a.m.

NDP

Peter Julian NDP New Westminster—Burnaby, BC

Many thanks to all the witnesses.

You are clearly providing some interesting food for thought.

I'm going to start with you, Mr. Kobly. I'm a member of the New Westminster Chamber of Commerce and the Burnaby Board of Trade. Welcome to this committee.

You talk about a review of income tax and we've heard from other witnesses across the country who have talked about how dysfunctional our tax system is right now. I certainly join my voice to yours in terms of a review, but that review, a number of witnesses have indicated, should include as well the role that overseas tax havens play right now in sucking potential investment out of the country and the fact that there are sectors like the web giants that don't pay any income tax or any payroll taxes at all in Canada.

Would you not agree that if we are looking at the income tax system we have to look at those two considerations, overseas tax havens and the web giants?

9:50 a.m.

President and Chief Executive Officer, Alberta Chambers of Commerce

Ken Kobly

Mr. Julian, certainly, when we're talking about a royal commission on taxation we're talking about reviewing all portions of the Income Tax Act and the enforceability of the Income Tax Act. We're looking at things like GST, everything that's related, the personal side of income tax.

We saw what happened last year when the Government of Canada tried to one-off the changes on incorporated individuals and small businesses. That did not work well. What we found from this is that in their endeavour to try to make the tax system fairer, simpler, in fact the end effect was to make it more complex. When you start to look at one-off pieces of the Income Tax Act and try to amend one-off pieces of the Income Tax Act, you have unintended or perhaps intended consequences that don't work well for anybody.