Subcommittee on Canadian Industrial Sectors Committee on May 5th, 2009

[The Chair, Conservative, Dave Van Kesteren]

Welcome to meeting number 9 of our Standing Committee on Industry, Science and Technology. This is a subcommittee studying the crisis of certain industrial sectors in Canada, such as aerospace, energy, forestry, high technology, and manufacturing. Today we are pleased to have the energy sector.

Normally, we begin our sessions with opening remarks. We generally give you about 10 minutes, but if you need to take a little longer...we've been getting more and more generous as this thing has progressed. I think it has worked out fairly well.

We have presentations from the Canadian Association of Oilwell Drilling Contractors and from the Small Explorers and Producers Association of Canada; however, they are only in English. So I need unanimous consent if we are to distribute this.

Monsieur Bouchard, would you agree to that? If not, we just have to listen. A translation will be done, but not today.

[Robert Bouchard, Bloc, Chicoutimi—Le Fjord, QC]

Yes.

[The Chair, Conservative, Dave Van Kesteren]

Thank you. This is testimony to the great collective spirit we've had in this committee.

[Marc Garneau, Liberal, Westmount—Ville-Marie, QC]

I'll also allow it to take place.

[Mike Lake, Conservative, Edmonton—Mill Woods—Beaumont, AB]

I think I'm okay.

[The Chair, Conservative, Dave Van Kesteren]

Then we will begin.

Again, if it gets a little bit long, I'll just ask you to cut it short. However, as I said, you can finish your thoughts.

I think we will begin with Mr. Herring.

[Don Herring, President, Canadian Association of Oilwell Drilling Contractors]

Thank you very much.

Good morning, ladies and gentlemen. Thank you, Mr. Chairman, for the opportunity to come here today and present some views on behalf of the drilling and service rig industry. We're part of Canada's oil and gas upstream industry. There are the producers and then the service companies. We're part of a large collective that makes up the service industry.

The CAODC was formed in 1949, 60 years ago. We represent drilling and service rig contractors. In the slide material you can see pictures of some of the equipment. Our membership is comprised of 42 drilling contractors, 71 service rig contractors, and 150 associate members--banks and oil companies, and companies interested in our business. We have 890 drilling rigs in Canada's fleet. We also have about 1,150 service rigs. That represents 100% of all the drilling rigs in the country and about 98% of the service rigs.

In terms of employment, for every rig that's running, we have 25 jobs that are directly associated with our business--the drilling crew and the service rig crew. That number runs up to 135 if we include the rest of the service industry. We get that number because ours is a primary work site, but on that work site come a number of other individuals working for different companies in different phases of the industry. They come onto the location at various times during the operation. That number of 135 was put together by the Canadian Energy Research Institute.

I put a little piece in there about what we describe as the rig technician program. I did that, hopefully, for the committee's interest. The reason for that is Canada is the only country in the world--where oil and gas operations are undertaken--that has an established rig technician trade program in place. This was put together in 2004 in Alberta. It's actually a mandatory program in Alberta. It was rolled out to a number of other provinces and territories. It's a red seal program now. It has a curriculum that is agreed upon, and we actually try to drive that curriculum to ensure that everyone has the same training and is consistent across the country. Today we have 34 journeymen in place and another 3,000 technicians who are registered and working their way through the program.

In terms of where the drilling and service rig industries, or the service industry generally, fit in oil and gas, in the upstream industry, essentially our success, our economic health, is a function of the health of the investor, or what we describe as the operator. That's the oil and gas company. The upstream industries' economic health depends on three or four variables. Commodity prices, obviously, are very important. We measure our costs in Canadian dollars, but the resource production or potentials are actually measured in U.S. dollars.

Secondly, in terms of royalty rates or the fiscal regime, the royalty rates are set by each provincial jurisdiction, and depending upon how fair they are, the investor chooses to come and invest in the jurisdiction or not. Tax rates are set by the provinces as well as the federal government, and to the extent that the tax rates are viewed as reasonable and a return is left for the investor, then he's willing to take that chance.

In the cost of doing business, Canada is a fairly expensive place. A lot of the costs in the more remote areas are going to be higher than they are in some of the established areas.

In terms of regulatory burden, Canada has a fairly significant regulatory burden. I'm going to describe a couple of examples of that. Without upstream investment by the operator, the need for drilling stops, and with that the economic viability of our sector, of course, stops.

I put a little note at the bottom just to try to give you a sense of the size of the industry and what we, in turn, invest. We have invested about $4.7 billion building new rigs in the last ten years or so. That equipment is manufactured only in Canada. We don't import the stuff. We build it in Edmonton, Calgary, and a lot of it is built in Nisku and in Red Deer. That number I read to you doesn't include the capital maintenance for the same equipment, which is about $2 billion.

In terms of how we operate, I put in an activity slide for the last four years. What it indicates is that this is a seasonal industry in Canada. We work in the winter. It is the most significant time period for drilling activity. We slow down significantly in the spring. We call that breakup. And the reason we do that is we have no access to remote areas using the current infrastructure, meaning the roads. So if road bans come on, we can't move. We start working again in the summer--it's a function, quite frankly, of the amount of rain--and start wrapping our way up into the next winter drilling season, which essentially starts about mid-November. The ERCB in Alberta declares when winter starts.

The next slide shows a little bit about well completions and average rig counts. It's a 10-year or 12-year slide. The first column shows what's taking place in terms of average rig counts. You can see them back in 1996 at 316, rising in 2008 to 351. The second column talks about the fleet. The third is a very important one in our world, and that's utilization, because that shows, in terms of what we've offered to the market, what gets used, and of course then whether we profit or not. The numbers in red indicate years when economic activity was what we would describe as “sub-economic”; you can't make any money. If you're operating at less than 50%, then there is no contribution to the bottom line. Continue to do that for very long and you don't have a business.

In terms of well completions, that just gives a little bit of an order of magnitude as to what the industry is up to. In 1996 we drilled about 13,000 wells; 2005 and 2006 were great years, about 22,000; and now we're dropping off again. There was some confusion in the data; it'll show up in the operator data as well. The number we arrived at is 16,000, rather than 20,000; that's why it's starred. The data source is a bit of an issue, so to be consistent, what it really tells you is that in the last three years things are dropping off.

The next page shows what winter activity has been like for the last four or five years. Importantly, what it's trying to say is that in 2005 and 2006, when commodity prices were good, we operated at very high levels of activity. When commodity prices started to fall in reaction to some of the physical issues, some of the royalty taxation issues, particularly in Alberta, activity dropped off. If you look at 2009, you can see it significantly below where we have been in the previous four years.

The next slide is a forecast for 2009, and if you think back to where we were a couple of years ago, 2005-06, when we had 22,000 wells, we're suggesting we've got about half that in 2009, about 11,000 wells. We're going to run the equipment about 30% on average. It's clearly sub-economic. Again, you can compare that with some of the numbers along the bottom.

The assumptions include $50 oil. That's probably not too bad. For gas, our forecast is clearly not that realistic: $7. Gas is trading under $4 right now, and we suspect, quite frankly, that, if anything, this forecast will be reduced.

I put together a slide that talks about where we interact with the Government of Canada. The Prime Minister and others have stated that Canada would like to have this country be an energy superpower. Quite frankly, as a result of federal and provincial policy decisions--on the side of the federal government we had the income trust decision and on the provincial side we have Alberta's new royalty framework—investors have lost some confidence in Canada. For example, Alberta is ranked 50th out of 81 jurisdictions that were surveyed in 2008. Governments have regulatory policies in place that result in high-cost production.

In terms of where the drilling and service rig industries interact with the Government of Canada, I've given a description on the next slide. We interact on a regular basis on a number of taxation issues.

Transportation is a big deal in our particular industry. It takes a lot of time, and it bedevils us in some respects. We have human resources issues and we have exploration production issues, including revisions to various regulations.

I wanted to focus on two examples: a win and a struggle.

The win is this. We represent, of course, offshore rigs as well as land rigs. Our land rigs are positioned mostly in western Canada, but we have land rigs in Ontario and Quebec and the maritime provinces. In addition to that, of course, we have offshore drilling rigs. Five years ago, in 2004, we petitioned the Minister of Finance of the day to make a change in the duty applied against non-NAFTA rigs moving onto Canada's east coast. That was put in place, and it relieved the duty that was paid by those rigs and reduced, basically, the costs of operating in a high-cost environment. We think that worked well, and together with oil companies we petitioned the government of the day to extend that moratorium. On May 1, we were advised that this ask had been granted and that the moratorium will be in place for another five years. We're very grateful for that.

I put in a slide called “The struggle”. Hours of service, in particular, is something that is code for trying to make the roads safer. We're all on the same page there. Rules were drafted for all vehicles that have wheels, but essentially they're drafted for trucks, to make sure the 18-wheelers going back and forth across the country are doing so in a safe manner. We have wheels on our service rigs, and we're caught up in all these regulations, even though 95% of the time our rigs sit off-road. When we do move them, from time to time we move them in convoy and at low speed.

This was recognized by the provinces we work in, so we have structures and memoranda of understanding with the provinces that capture how we should regulate or deal with these across a number of areas. We've gone now to Transport Canada, because effective January 1, 2007, Transport Canada passed a new regulation respecting hours of service and said, here's how we are going to govern your activities, measured in terms of the hours that your drivers work.

We're okay with all that too. The only problem we have is.... We should recognize a couple of things. One is that we run 4,000 kilometres a year on average. Big-line truckers probably do that in a couple of days. Many of our rigs never see a public highway. Many of them sit over top of producing wells or new wells for weeks at a time. They just don't see much of the road. Provincial authorities have recognized that.

So we've said to Transport Canada, we have to produce a lot of documentation on a daily basis; why don't we take that measuring stick, the daily documentation we're doing anyway, and use it to measure the hours we're on the job, or potentially the hours we're actually driving, as opposed to setting up a new system intended for truckers and running it in duplication. That's our ask.

We began that ask two years ago. It will be two years ago in two weeks, actually. Still we don't have it. We met as an industry—ourselves, along with other parts of the service industry—on March 5 with Minister Merrifield to try to move the file. Still nothing has happened. We find that a bit of a struggle and a bit of a challenge. We're disappointed and are looking for opportunities to get that settled.

Mr. Chairman, ladies and gentlemen, thank you very much for a chance to talk about Canada's drilling industry.

[The Chair, Conservative, Dave Van Kesteren]

Thank you, Mr. Herring.

Next, from the Canadian Association of Petroleum Producers, we have David Daly.

[David Daly, Manager, Fiscal Policy, Canadian Association of Petroleum Producers]

Good morning.

Mr. Chairman and members of this House subcommittee on Canadian industrial sectors, my name is David Daly. I'm the manager of fiscal policy for the Canadian Association of Petroleum Producers.

Thank you for inviting CAPP to appear in front of you to discuss the impact of the economic recession on our industry.

The Canadian Association of Petroleum Producers, or CAPP, represents 130 companies that explore for, develop, and produce more than 95% of Canada's natural gas and crude oil. CAPP also has 150 associate members who provide a wide range of services that support the upstream oil and gas industry. Together, these members and associate members are an important part of the multi-billion-dollar-a-year national industry that affects the livelihood of more than half a million Canadians.

We live in some of the most perilous times we've seen since the 1930s. People are out of work, factories are closing down, families are losing their homes. The global economic crisis has sunk its tentacles into this country, and every part of Canada has been affected.

We are no exception. The recession has hit the Canadian oil and gas industry where we do business. We provide the energy to fuel factories, heat homes, and let people drive their cars. The slowdown in economic activity means our customer, the world, is cutting back and using less of what we produce. When the world buys less, the price goes down. We all know how the price has dropped in the last few months, from a record high of $147 a barrel last summer to lows in the $35-a-barrel range a few weeks ago—neither of which is seen by industry as being a sustainable price valuation, by the way.

Recently oil prices have bounced off their lows and are now trading around the $50-a-barrel mark. This is still a far cry from what some new projects need to get themselves off the ground, though. Many large projects, such as oil sands construction projects, have been deferred, and these deferrals are having employment impacts across the country. Oil sands facility components are often created and assembled in Atlantic provinces or Ontario or Quebec. Project deferrals in Alberta have had a subsequent impact on the national manufacturing sector, while construction jobs that supported labour from coast to coast to coast have been discontinued.

But it's not just oil prices that are a concern. In fact, our industry produces and sells more natural gas than it does crude oil. What happens in the marketplace for natural gas has an even bigger impact on the industry overall. Gas was at more than $11 per thousand cubic feet last June; today it trades at a little more than $3. With this unprecedented drop in prices, we've gone from being a $150-billion-a-year industry back in 2008, just last year, to about an $80-billion-a-year industry today, at least in the view of one financial analyst.

The effect on industry cashflow has been immediate. A large number of projects have been stalled. The number of wells drilled this year will be half of that at the peak in 2005, and people are losing their jobs. In March, employment in Canada's natural resources industries fell for the second month in a row. The country lost 11,000 resource jobs in March. We expect unemployment rates to continue to increase, in keeping with CAPP's drilling forecast, which estimates that drilling will be reduced by 1,100 wells from last year. With approximately 120 workers employed by each drilling rig, this represents significant job losses.

Despite the easing of interest rates by central banks around the world, credit still remains tight for a lot of companies, especially the small and medium-sized producers. Combine the steep drop in cashflows with tight credit and it's easy to see why activity levels are down. Investment levels are off by one-third from last year. Now at $34 billion a year, they still make our industry the largest private sector investor in Canada, but that loss of $16 billion will be felt by suppliers and workers from coast to coast.

Make no mistake about it: Canada's oil and gas producers know a thing or two about business cycles. I can't say that we invented the term “boom or bust”, but we've certainly lived through the cycle many times. We're a commodities business; ups and downs are in the very nature of what we do. We've lived through downturns in the past, and the industry will live through this one, although many companies may struggle to survive.

In the short term, this industry will go through its contraction pains like any other industry in Canada, but once the economy starts to turn around—and it's anybody's guess when that will happen—the Canadian petroleum industry will be poised to meet growing demand once again. We're the third-largest producer of natural gas in the world and the seventh-largest producer of crude oil in the world. We have the second-largest reserves of crude oil in the world, second only to Saudi Arabia.

We have an impact on individual Canadians through their investments, RRSPs, and pensions, since a quarter of the value of shares traded on the Toronto Stock Exchange is from oil and gas stocks.

Governments are some of the biggest beneficiaries of the oil and gas industry. Through a combination of royalties and taxes, federal and provincial governments collected $30 billion last year from the industry.

The oil and gas industry is here for the long term. When world energy demand rebounds and continues to grow in Canada, Canadian supplies will be there to meet it. As our conventional sources of oil and gas continue to mature, new sources of unconventional supplies, such as oil sands and shell gas, will more than make up the difference. Even with the growing emphasis on alternative fuels development, oil and gas will continue to be a growing part of the world energy pie. That's the long term.

In the meantime, in order to get from here to there, we face some significant challenges today. I've already touched on some of the issues of demand destruction, commodity price declines, financial market instability, slowing investment, and decreased activity. Even with some pullback in markets for steel and labour, costs still remain high. However, our most significant challenges seem to be in competitiveness, environmental performance, and public perceptions of the industry.

One thing governments in Canada had been able to do for decades was to underpin a volatile business with a stable, business-encouraging fiscal platform. This has produced a tremendous amount of national wealth for the country as a whole, including GDP growth, trade, investment, and employment.

Governments have come to realize, especially since the early eighties, that when business succeeds, the country succeeds. When the country succeeds, the country grows and prospers.

The federal government realized long ago that in a medium-sized open economy like Canada's, encouraging investment capital to come into the economy and generate activity is a key to encouraging productivity and growth.

The federal government has done a good job of paving the way for a competitive fiscal environment by reducing business taxes and encouraging the provinces to do the same. This encourages capital investment in Canada.

Environmental performance in terms of air, water, and land issues is important, as is energy security and economic prosperity, including employment. We believe in a balanced approach that considers all of these aspects. This applies to all of our industry. However, the oil sands have been the focus of a lot of attention lately, so let me talk about them for a bit.

The oil sands are a strategic Canadian resource, one that provides strong security of supply for North America and one that will remain a major component of the future energy mix.

On environmental matters, we are listening to the concerns of government and communities, and we're taking action. As you know, Canada accounts for 2% of the global greenhouse gas emissions from energy. Of that, oil sands account for 5% of Canada's total. Producers are continuing to reduce their carbon intensity and are contributing to Alberta's Energy Environment Technology Fund, set up specifically to encourage carbon reduction through industry action and the development of new technology.

Since 1990, the greenhouse gas intensity of the oil sands has been reduced by 38%. Carbon capture and enhanced oil recovery and storage are all being looked at to help us to do more.

In comparison to other crude fuel types entering North America, oil sands have similar, if not favourable, life cycle greenhouse gas emissions compared to the oil that comes from Mexico, Venezuela, and even California. These emissions are about 15% higher than those of light crude oil from, say, Saudi Arabia.

Industry continues to reduce its use of fresh water and relies more and more on recycling the water it uses, most of which is not drinkable and heads back into its own operations. Oil sands mining operations now recycle up to 95% of water, and in situ projects are increasingly using non-potable water from deep saline aquifers in their processes. Some projects, such as Devon Energy's Jackfish project, are using 100% non-potable water.

Our land management strategy is focused on minimizing the industry's footprint and ongoing reclamation.

What's needed for continuous improvement of our environmental stewardship is the continuing and concentrated commitment to technology development. It's technological advances that will have the greatest impact on our continuing to reduce carbon emissions, lowering the amount of freshwater use, and minimizing the land use footprint of exploration development activity. This includes direct investment in and support for new technologies like carbon capture and storage.

At this moment, industry is at the toughest point we've seen in over a decade. Activity levels are down, investment is off, and jobs are disappearing. The impact is being felt across the country in terms of jobs, equipment, and material. But we remain optimistic. Canada has a strong resource potential and an upstream oil and gas industry that will supply Canada and North America's energy needs for a long time to come.

Tight capital markets remain a concern. To the extent the federal government can continue to encourage credit availability, this will help the industry weather the storm.

The future resource potential remains strong, and industry continues to be optimistic about achieving this potential. But one thing is very clear: technology has been, and will continue to be, the key to unlocking that future. Technology has been the cornerstone of the oil and gas industry.

Looking forward, we will continue to need government support in driving these innovations forward, to unlock abundant but difficult resources, to address the environmental challenges, and to continue to generate economic benefits, jobs, and government revenues across the country.

With that, Mr. Chairman and members of the subcommittee, thank you for your time, and I look forward to addressing your questions.

[The Chair, Conservative, Dave Van Kesteren]

Thank you, sir.

I have just one question. Did you say it was the federal government that collected the $30 billion, or was it all government levels?

[David Daly]

Between the federal and all provincial governments.

[The Chair, Conservative, Dave Van Kesteren]

Thank you.

Finally, from the Small Explorers and Producers Association of Canada, Mr. Gary Leach. Go ahead, sir.

[Gary Leach, Executive Director, Small Explorers and Producers Association of Canada]

Thank you, Mr. Chairman. I welcome the opportunity to present our perspective on the current economic situation and its impact on Canada's oil and gas sector.

SEPAC bills itself as Canada's oil and gas entrepreneurs. Our association comprises small and medium-sized independent oil and gas exploration and production companies. The membership is about 400 companies currently; 80% are oil and gas producers and about 20% are companies that supply products and services to our industry, such as Mr. Herring's members, drilling contractors, investment banks, and so on.

The typical junior oil and gas company in Canada has fewer than a dozen employees, typically focused around core personnel in the geoscience professions, engineering, and finance professionals. The focus is mostly on western Canada and it's mostly on what we call conventional oil and gas exploration and development. But the junior sector is increasingly moving into unconventional resources such as shale gas and oil sands. That's a very encouraging sign for the future, that our smaller Canadian companies are able to participate in some of these very large resource development opportunities that lie ahead of us.

About 60% of the higher-risk exploration drilling in Canada is conducted by the junior sector. In 2006, which was a high point in the last few years, the junior sector invested over $5 billion in Canada in exploring for and developing new oil and gas reserves. That figure is only about half that much in the year we're looking at going forward. What's unique about the junior sector is that they invest two to three times their own cashflow. In other words, for every dollar they get out of their operation that is investable discretionary cash, they put another two or three dollars back into the ground. They raise those dollars from the equity markets here in Canada or they borrow that money from lenders. But typically you'll see junior companies putting every dollar they make here in Canada back into the ground, developing more oil and gas reserves. That's what their investors expect them to do.

So the junior sector is a key player in our oil and gas industry here in Canada. Although we're a much smaller total of the overall production, about 25% of the dollars spent in Canada in exploration and development drilling and production activity are spent by junior companies. This year we're forecasting that about $8 billion will be spent on drilling and completion work in Canada. The junior sector would be about 25% of that $8 billion. Note that this excludes oil sands investment spending; I'm speaking here more of the traditional drilling and development work. Compare that $8 billion in the year ahead with $14 billion a year ago in 2008, $16 billion spent on drilling and completion work in 2007, and—a high-water mark in our information—about $23 billion in 2006.

We do have some challenges here in Canada for our junior sector. Canada provides among the lowest rates of return on investment in the world for oil and gas investment. I know Canadians may be surprised to hear that, but in fact Canada ranks very low. I think Mr. Herring mentioned that we are maybe 50th out of a number of countries. Typical returns in oil and gas investment in Canada may be 10%, 11%, or 12% a year, and considering the risks our industry undertakes with capital, those are not astonishingly high returns.

We do have challenges here. We have a highly regulated industry. We have some of the highest environmental standards in the world. All of this increases the cost of operating in Canada. We have some growing resistance to the scale and pace of development in many areas of Canada. We are facing as an industry, and have for several years now, an uncertain regulatory climate for CO₂ emissions. The uncertainty alone delays, deters, and discourages investment. Undoubtedly it's going to increase the costs of developing our energy supplies in what is already a very high-cost country to do so. We're also facing, as many industries are, looming workforce shortages a few years down the road.

We do have some exciting opportunities, though, in front of us. Energy demand is growing around the world, including in North America. It rises in tandem with higher GDP and higher per capita incomes.

I would point out, as was pointed out earlier, particularly for the junior sector, that both the junior and mid-cap companies in Canada are 70% weighted towards natural gas production. Natural gas production, in my judgment, is the cleanest source of energy this country has. There are no waste disposal issues, as you have with nuclear. There's a very light carbon emissions impact from natural gas. There's no environmental impact, as you have with hydroelectric in terms of damming free-flowing rivers and flooding otherwise productive forest and wilderness areas. Canada has tremendous natural gas reserves. We do today, and we will tomorrow with the development of tight gas resources, shale gas, and coalbed methane.

We have a very bright future ahead of us in Canada. We have an opportunity to achieve what some have called our opportunity to become an energy superpower. We have to be very careful that we don't put in place obstacles that would prevent us from becoming an even more important global player on the global energy scene. As was mentioned earlier, we're number three in the world in natural gas production. We're actually the number two country in the world for natural gas exports, second only to Russia. We have an opportunity over the next few years to move into the top four or five countries in the world in crude oil production.

These benefits are distributed coast to coast in Canada. As was mentioned earlier this morning, there are some half a million Canadians whose livelihoods are directly or indirectly impacted by the oil and gas industry, from Newfoundland to British Columbia and from the Yukon to southern Ontario. It's been well publicized in the last year that as much as 16% or 17%, nearly one-fifth, of Ontario's manufacturing production in the last few years has been destined for Alberta. That has largely been driven by demand in the development of Alberta's energy reserves. So this oil and gas industry we have is truly a national industry, and the benefits are widely distributed.

The big challenge we have in front of us as an industry is to reduce, and to continue to do so.... This industry has made some enormous strides in reducing our impact on air, water, and soil. In fact, the oil and gas industry outspends every industry, by far, in Canada, not only on environmental mitigation technology but also on energy efficiency investment. Our industry is leading the nation, I would say, in terms of those kinds of investments.

At the same time, of course, our ongoing drive is to provide Canadians, and indeed the continental market, with a secure source of domestic energy. Hopefully, down the road, we'll develop additional export opportunities that will allow our energy exports to find markets outside the country.

We have, as a sector, looked to the federal government to provide some clarity in the future on greenhouse gas-CO₂ emissions policy. That's going to be a big issue for all of us in the next year or two. We are one of the few major energy-exporting nations that is at the same time trying to be a leader in what will ultimately look like some form of cap and trade continental CO₂ emissions regime. We, as a nation, have a huge economic stake in making sure that our interests are protected.

We also look to the federal government to provide a stable, competitive fiscal regime for our energy sector, in particular for smaller companies. We have, in this country, a flow-through share regime that's critically important to our smaller independent oil and gas producers in terms of raising capital. We have recommended for the last four years that the federal government improve that flow-through share regime to allow the junior sector to more easily raise capital. Our colleagues in the junior mining sector have similar concerns. In fact, we recommended to the federal government in pre-budget consultations for the budget that was approved in January that rather than the government borrowing billions of dollars that have to be repaid, the budget stimulus should do more to mobilize private capital through tax incentives. I'm sorry to tell you that our recommendations were not accepted in the budget. But we think they would be good for Canadian taxpayers as well as for our Canadian-based oil and gas companies. I'd be pleased to elaborate on those proposals later this morning.

Those are my remarks, Mr. Chairman, and I think for all of us, we're happy to answer questions.

[The Chair, Conservative, Dave Van Kesteren]

Thank you, Mr. Leach.

We will begin our first round of questions.

We'll start with Mr. Garneau.

[Marc Garneau, Liberal, Westmount—Ville-Marie, QC]

Thank you very much, Mr. Chair. Thank you all for your very good presentations.

I want you to know that I may have to leave partway through my questions. It's not because I'm not interested in what you're saying. I have to go to the House of Commons, so somebody else will be replacing me.

I'd like to start with Mr. Daly. I'd like you to give me an idea, if you would, of how you feel the federal government is providing assistance to you at the moment in the current depressed commodity situation. Can you highlight any particular measures that you feel are particularly helpful at this time?

[David Daly]

At the current time we haven't asked the federal government to provide direct assistance to the industry, and I'm not aware of specific direct assistance that the federal government is giving in terms of specific programs.

There are general measures in place that affect all businesses, such as continuing to reduce the tax level, which I think provides some fiscal relief to all businesses, including the oil and gas industry. Having businesses taxes at a more competitive level helps in terms of being able to encourage more investment activity in the country.

There are some specific things in terms of looking at carbon capture and storage technology that the federal government has said it's willing to take a look at. In terms of more general things for the oil and gas industry, there isn't anything in particular that the federal government is doing right now, or that we've asked them to do. Internally, CAPP has started to take a look at whether we want the federal government to provide some assistance, and we've started some discussions, but we haven't got to a point yet of coming up with a position or a number of options that we'd like to talk to the federal government about.

I think I mentioned in my remarks that one of the industry's major concerns right now is availability of credit and being able to access credit in order to fund either new projects or ongoing operations. It is a major concern for the industry. It still remains a concern for the industry, especially for the medium and smaller producers. It also affects the large projects that a number of companies have stated they wanted to get going, especially in the oil sands area. Continuing to encourage more easing of credit availability is something we would like the government to do.

Certainly the Bank of Canada has done as much as we hoped it would do in terms of lowering its bank rate down to 0.25%. I'm not quite sure that has always translated over well to what the chartered banks are doing in terms of credit availability; I think some of that has not led to the easing of credit that we would have liked to have seen.

[Marc Garneau, Liberal, Westmount—Ville-Marie, QC]

Thank you.

You mentioned carbon capture and sequestration, which takes me to my second question for you, on R and D.

To what extent does your sector spend on R and D? I know there are federal, and I'm not quite sure whether there are provincial.... I'd be interested in knowing how important R and D is from your company's perspective, and how it is reflected in terms of how much money is spent on R and D, not only for more efficient ways of extracting the resource, but also for issues related to such things as the environment.

[David Daly]

Research and development is very important for our industry. Technology is extremely important for any type of development in terms of being able to access less conventional sources of supply, such as oil sands, shale gas, coalbed methane, and other types of tight gas. We're continually spending money on developing new ways of being able to access those resources at cheaper costs. We see reducing costs to develop those resources as being key to the long-term health of the industry, and that only comes through technology improvement.

The industry does spend a lot on research and development. We try to take advantage of the federal tax credit that supports scientific research and experimental development, and various provinces have their own provincial tax credits for the same type of activity.

We have run into a number of difficulties in accessing that tax credit, because the process for applying for it and for getting approval from the Canada Revenue Agency tends to be fairly cumbersome. A number of our members have had difficulties in the past. They have spent quite a long time trying to come up with the application materials that the process requires and then submitting them to CRA. In some cases they have not heard back for 18 to 24 months, and then they have had their claims rejected outright and without explanation.

To a certain extent, the numbers that might be reported in terms of the industry's use of that tax credit underrepresent the actual amount of research and development activity within the industry. The industry's technological research and development tends to be more on development lines, so sometimes it's not as clear-cut as taking a look at R and D that might happen in a university laboratory, for example.

That's what a lot of people think about when they think of research and development: academic research and development. In application processes in the field, a lot of tests and a lot of pilot projects are developed, and you don't know if they're going to make any difference in terms of your ability to extract deeper resources in a cheaper fashion or not.

[Marc Garneau, Liberal, Westmount—Ville-Marie, QC]

When you mentioned tax credits, were you referring to SR and ED?

[David Daly]

Yes, SR and ED.

[Marc Garneau, Liberal, Westmount—Ville-Marie, QC]

Do you know how much your 130 companies invest of their own money in the environment—using less water to minimize tailings, carbon sequestration, ways of complying with environmental regulations? I'd like to get a sense of how much comes out of their own pocket.

[David Daly]

I'm sorry, I don't have that figure at my fingertips, but I can certainly find out and get back to you.

[Marc Garneau, Liberal, Westmount—Ville-Marie, QC]

I would be interested in that, yes.

Mr. Leach, you mentioned in your presentation an uncertainty in climate change regulation. Could you elaborate on that? To what extent is it having an effect on the operations and the future plans of your companies?

[Gary Leach]

A number of years ago, Canada signed the Kyoto Protocol. Ever since, the direction of the country in regard to climate change has been uncertain. Are we going to comply with Kyoto or not? Will something else replace Kyoto? Will we see a continental cap-and-trade regime with the arrival of the Obama administration? For a number of years now, we have not had much clarity from the federal government on exactly where we're going and what the regulations will look like.

The current federal government announced a couple of years ago their own Turning the Corner guidelines, which started to give us a bit of focus. But of course, with the election of the Obama administration, the direction has shifted to a continental approach. Canada is concerned to make sure we're not on the outside of what could be tariff-like restrictions on Canadian exports of energy and all sorts of energy-intensive exports to the United States.

When you don't know what the regulatory framework is going to be, long-term investments are going to be deferred. Companies have announced that, with respect to some of the long-term oil sands projects, they're not willing to proceed with multibillion-dollar, 30-to-50-year projects without a better idea of what the emissions regulatory framework is going to look like. They need to translate it into costs for their projects. The entire world is groping its way towards some kind of international consensus on this.

I would only urge that the Canadian government understand how much we all depend on the largest private sector investment industry in Canada. It is crucial to our balance of trade exports, the strength of our currency, and our prosperity. We cannot afford to diminish, inadvertently or not, the wealth-generating potential of the oil and gas sector through an attempt to comply with a regulatory framework that is not achievable in the short term. In fact, many advocates of Kyoto admitted it would have a negligible impact on climate change in this century.

If you look out to the year 2030, even at rapid—

[Marc Garneau, Liberal, Westmount—Ville-Marie, QC]

Globally speaking.