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

[Gary Leach]

Globally speaking, if you look to 2030, even with the rapid pace of development in biofuels, solar, and wind, those three sources will contribute only 2% to global energy demand in 25 years. Fossil fuels, natural gas, crude oil, and coal will still contribute about 80%, which is about what these sources contribute today.

Canadians need to be told an uncomfortable truth—we're going to be relying on traditional sources of energy for a long time to come. All forms of energy are going to be contributing to the solution, but the oil and gas sector is going to be a major contributor to Canada's energy supply for many decades to come.

[The Chair, Conservative, Dave Van Kesteren]

Thank you.

Monsieur Bouchard.

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

Thank you, Chair.

I would also like to thank our witnesses for appearing before us today.

I am from Quebec, and the oil industry, when it is working at full capacity—as we saw when the price of a barrel of oil went up to $145 or $150—is one that causes economic hardship for Quebec, a province that depends on its manufacturing industry.

Quebec relies very heavily on electricity. The point should be made that the oil companies enjoy tax benefits that are unique to them, such as the accelerated cost allowance and income tax reductions.

My question is to Mr. Leach.

Do you agree that the oil companies get more advantages than companies that produce electricity or other types of energy?

[Gary Leach]

No, I wouldn't share that view. Perhaps that's the answer you expected.

Hydroelectricity requires massive capital investments up front, and then it tends to be self-renewing. In terms of the oil and gas industry, every time you sell a barrel of oil down the pipeline, you have to replace it. It requires massive, continuing new investment in developing additional energy reserves. I think the two energy industries are quite different in their makeup.

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

Do you have any comment on this, Mr. Daly?

[David Daly]

I have to disagree with your comment that the oil and gas industry has tax advantages over other industries. You specifically mentioned the accelerated capital cost allowance. That was something the oil sands industry had. It was eliminated and is being phased out as a result of Budget 2007. It was something that only the oil sands industry would have taken advantage of. And the accelerated capital cost allowance is really just a way of deferring taxes. You don't get a tax break as a result; it's a tax deferral.

Right now, the corporate income tax rate for the oil and gas industry is the same as that of all the other industries. The capital cost allowance is heading in the same direction as that of all the other industries. In fact, the manufacturing and processing industry is getting an advantage right now in terms of the special two-year accelerated capital cost allowance, because of the economic crisis. This is a stimulus for manufacturers and processors that the oil and gas industry is not privy to at this time.

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

Do you agree that consumers rely too much on the oil industry? When the price of oil goes up, the impact on the economy of provinces that do not produce oil is devastating or at least significant.

What can be done to avoid price fluctuations of the type we saw in 2008? There were wild price increases. What must be done to ensure some stability in the price of oil? The oil sector has the greatest fluctuations in price. I am referring here to 2008, when there were major price fluctuations. What must be done to ensure some price stability that would benefit consumers?

The question is for any or all of our witnesses.

[Gary Leach]

Maybe I'll speak first. The oil and gas industry is not helped by rapid increases and rapid declines in the price of oil and natural gas. We also would be happier with a more stable price environment.

I can tell you that the rapid run-up in prices is typically influenced by the belief that the supply is not going to be sufficient to meet demand. One of the reasons that we saw a rapid decline in prices, particularly for crude oil, which is a globally traded commodity, was the global collapse in demand as a result of the economic slump.

The only solution to more stable prices, at least from the consumer's point of view, is adequate supply. Adequate supply depends on incentives for investment in bringing on new supply. That's certainly a point of view that I think all of us would share. If Canadians want to enjoy the benefits of the tremendous energy reserves we have in this country, a sensible policy framework from the national government would be to make sure we have an investment climate in this country that permits our oil and gas companies to develop and bring on supply at a pace that's at least equal to the demand.

We can't control global prices for crude oil, but we can certainly make sure that Canadians are adequately supplied with those kinds of energy. Natural gas prices are set in a continental North American market. We have very little influence from imports of natural gas into North America. It's a continental market and we have adequate supply. In fact, natural gas prices have dropped so low not only because of the economic slump in demand in the United States, to some extent, but also because we have discovered in the last two or three years that we have an incredible natural gas resource base.

A few years ago we didn't have the technology to capture resources such as shale gas. In the last few years, the technology has been developed to do so, and we're now realizing that North America has abundant supplies of clean-burning natural gas. By some measures, we have a century or more of supplies of natural gas. It's a benign, clean-burning fuel. That's what our industry exists to do: supply this continental market with energy supplies.

As I say, from our perspective, the best thing the national government can do is make sure that Canada is a good place to invest, to bring on these supplies when they're needed.

[The Chair, Conservative, Dave Van Kesteren]

Mr. Daly, do you have anything to add?

[David Daly]

I'll just add that nobody likes to see the price variations and fluctuations up and down that we've had over the last few years. In our industry, we don't like to see it either, because it affects our cashflow and it makes things uncertain in terms of being able to plan forward.

But it works both ways. We know we're in a commodity business, and we know that prices go up and prices come down. In the last year, certainly, they've come down, and that's been a help to the manufacturing processors who said it was a hindrance when they were on the way up.

Also, having the markets sending those signals tends to send signals to alternative fuel developers. It makes some of the projects for biodiesel, wind power, and other alternative fuels more economic and allows them to ramp up their plans and production to be able to contribute to the energy pie in the future. It also makes things like shale gas and LNG much more viable. Even in Quebec, for example, we've seen possible shale gas developments in the Utica basin, as well as more of a look at LNG facilities in the province.

So I think the price signals there, although they're uncomfortable, tend to signal that either alternative fuel developments can become more economic, or people, businesses and individuals, can use less energy or have more incentives to use less energy. Last year, with the high prices for refined products, we saw throughout North America and even throughout Europe that there was a drop in the use of refined products in terms of gasoline and some heating fuels. So it works. In terms of looking at policies around the environment and policies around the use of fuel, to be able to encourage people to use less by having higher prices I think is a good thing.

[The Chair, Conservative, Dave Van Kesteren]

Thank you, Mr. Daly.

Mr. Lake.

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

I'll start by thanking you for making your way to Ottawa on what I understand was fairly short notice.

I am going to start, as I have with most meetings here, with just a little bit of global context, because I think it's important when we're talking about the global crisis here. There's a lot of negative economic information out there, and I want to put Canada's position in this global crisis into some context.

Several commentators from around the world have spoken about Canada's economic situation. The Wall Street Journal, for example, has pointed out, “Canada is connected at the hip to the world's largest market, and collateral damage coming from the housing and financial meltdown in the U.S. can't be ducked”, but it goes on to say that tax cuts in 2007 softened the blow and kept Canada out of recession.

Newsweek has said “In 2008, the World Economic Forum ranked Canada's banking system the healthiest in the world. America's ranked 40th, Britain's 44th....” That article went on to say “If President Obama is looking for smart government, there's much he, and all of us, could learn from our...neighbor to the north.”

The Economist has said, “...in a sinking world, Canada is something of a cork. Its well-regulated banks are solid.... The big worry is the fear that an American recession will drag Canada down with it.” The article in The Economist goes on to say, “Mr. Harper says, rightly enough, that his government has taken prudent measures to help Canada weather a storm it cannot duck.”

The New York Times says, “Why not emulate the best in the world, which happens to be right next door?”

There are more and more of these quotes. Of course, the IMF and the OECD have projected that Canada will come out of this situation sooner and stronger than virtually any other country in the world. I know we're the only country in the G-8 that has run a surplus in each of the last three years. Every other country actually ran a deficit in every one of those three years. So the Canadian situation is considerably stronger than almost any country in the world, and obviously the energy industry deals in a global marketplace. There's a significant advantage to operating in a stable environment, a relatively strong environment.

How important is Canada's relative strength and stability to not only the short-term success of members--and I guess in the short term we're talking about bridging the gap through this global crisis--but equally or more importantly to the long-term success of your members? Could each of you comment on that?

[Gary Leach]

Canada is in a very enviable position from the perspective of the oil and gas world. Being a G-7 country, we are one of probably only two or three countries in the world that can contemplate increasing their crude oil production in the next few years while almost every other country in the world that is currently a major oil and gas producer is looking at declines. We are so fortunate in this country to have the energy reserves that we have. Canada really is unique. In fact, I know a year or so ago it was well-publicized that Canada was home to about 60% of all the world's investable oil reserves, reserves that free enterprise and private capital could actually turn into useful energy for Canadians and other customers. You need to understand that about 90% of the world's oil reserves are off limits to investment because the reserves are controlled by state governments that highly restrict or block foreign investment.

So we really are a very special country from that perspective, and it's an advantage that will give Canada a considerable economic boost in the years ahead. We're currently going through a rough spot, but I think our long-term future as a major energy producer, which has been seen to provide tremendous benefits to our economy, is likely to continue, and hopefully we will emerge from this current recession in the next year or so and emerge stronger, and energy demand will respond, as it does, with increasing prosperity.

Energy efficiency is increasing as well, I might add. For the last 20 years or so, the western industrial countries, the G-7 countries, have all been able to increase their GDP with progressively less incremental demand on energy. So energy conservation is helping a lot too.

David or Don, go ahead.

[Don Herring]

We certainly share the view that the investor or the operator has expressed. Being the tail on the dog, we're very pleased to hear that when the recovery starts to come back, we'll get back to work.

On the immediate issues we face in terms of credit problems, we're very much affected. We're affected by commodity prices and the credit collapse. We're not able to raise capital for the drilling and service rig industry at the moment. Mr. Daly talked about the Bank of Canada setting the rate at 0.25%. But in fact when you go the market and try to extend your line of credit, the interest rate is around 12%, so it's significantly different. This is a tough economic environment.

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

Mr. Daly, do you want to add anything?

[David Daly]

I concur. We've pretty much covered it.

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

One of the things we announced several years ago was a real effort to get our corporate tax rate down from 22% to 15% by 2012. We've continued that, even in this budget. We have it down to 19% now. Moving it to 15% by 2012 will make it the most competitive corporate tax environment in the industrialized world. How important is that to your organizations?

[David Daly]

That's been very important. As an industry we're very dependent on being able to attract capital from around the world to fund our investment activities. Last year, as an industry, we spent $50 billion across the country on exploration development activities. Some of that capital came from outside Canada. So foreign capital and domestic capital need to feel they are getting good return on their investments if they're going to invest in Canada, as opposed to elsewhere in the world.

In order to attract that investment capital, the tax rate affects the return on investment, and having a lower tax rate that applies to the oil and gas industry as well as to other industries is an important feature in making those investment decisions. So getting the tax rate down to 15% and encouraging the provinces to get their tax rates down to 10%, for a combined tax rate of 25%, is a very prudent way for the federal government to go.

[The Chair, Conservative, Dave Van Kesteren]

Mr. Leach.

[Gary Leach]

I agree with that. I think the direction Canada is taking deserves to be applauded. It is important for us to be a competitive nation in terms of corporate tax rates to attract investment.

I would add that the smaller and medium-sized oil and gas companies don't pay a lot of corporate tax because they invest all their cashflow back into developing oil and gas reserves. Certainly for the largest companies that dominate our oil and gas industry--80% of Canada's oil and gas production comes from the top 20 to 25 companies--that's hugely important. It is a considerable competitive advantage for Canada to have those kinds of tax rates. For the junior sector it's less so, although important. The juniors would all like to become large companies some day.

I think it deserves our support, and it is certainly something we would like to see continue. It's important that we get down to those targeted tax rates.

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

Thanks.

[The Chair, Conservative, Dave Van Kesteren]

Mr. Daly.

[David Daly]

It's also important to realize that even though the tax rates have been coming down, tax revenues have been going up. We've seen that in a number of other cases. Although the rates are lower than they were a few years ago, the revenue that the federal government itself is collecting from the oil and gas industry has been going up. It's now around $4.5 billion a year--I think that's what we estimated for 2008. That's higher than a few years ago, when it was around $1 billion to $1.5 billion a year, even with the higher tax rates.

[The Chair, Conservative, Dave Van Kesteren]

Thank you, Mr. Daly.

Mr. Thibeault.

[Glenn Thibeault, NDP, Sudbury, ON]

Thank you, gentlemen, for coming.

We've had several other sectors here--the forestry sector, for example. Those conversations were a lot different, and the questions were quite different from what you've been getting today. It seems that your sector is still doing well because we need energy.

Mr. Daly, I think you talked about losses of $80 billion to $150 billion. Those are significant losses, but it seems that your sector is still doing well. Maybe you can comment on that briefly.