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

[David Daly]

I guess it's a matter of what you mean by doing well. If you have a $150-billion-a-year industry, certainly it's an industry in which you're spending a lot of money across the country in a lot of different projects. When you come down to an $80-billion-a-year industry, then you're cutting back on a significant number of projects. A year ago we thought we were going to go ahead with these things that would generate a lot of jobs, investment, and a lot of purchases of material across the country.

Things have been cut back. At $80 billion a year, we're back to being an industry about the size we were maybe six or seven years ago. A lot of that growth in the interim has been lost. We don't expect this to be long term; we expect it to be a short-term adjustment and we expect to continue to grow again, but it has affected the industry. We've seen job losses, projects put on hold, and we'll probably continue to see that for some time. When you knock $70 billion out of any industry's cashflow, you're going to have a major impact. It's down by almost half from what our cashflow was in the year previous.

[Glenn Thibeault, NDP, Sudbury, ON]

You are saying that there are job losses. Are we seeing companies shutting their doors completely, or are they putting things on hold? How are things being affected?

[David Daly]

A number of the larger oil sands projects that were announced one or two years ago have been put on hold; they aren't going ahead this year. They are being deferred until there's a more stable pricing environment, when prices recover a bit and there is easier availability of credit to fund some of those projects. A lot of the people who were being geared up to work on those projects are not being employed; they're being let go altogether.

We are seeing actual lay-offs in the oilpatch—different companies are laying off people—and some prospects for future development are being put on hold.

[Gary Leach]

Canada will be the hardest hit of any significant oil and gas region in the world for declining investment. Some forecasters say that this year investment in Canada is down as much as 36%, in the United States it's down 30%, and internationally it's down about 7%. The global average is down about 17% in terms of CAPEX in the oil and gas industry around the world.

Why is Canada so hard hit, with an investment decline of around 36% by our measure? We have a greater component of smaller oil and gas producers in Canada. Equity markets here have been largely closed for a year and a half to two years for smaller oil and gas companies trying to raise capital. Bank financing is tight, and cashflow is a long way down because the commodity price is down. By international measures, Canada is probably going to be among the hardest hit places in the world, measured by declining oil and gas investment in 2009.

[Glenn Thibeault, NDP, Sudbury, ON]

One thing we've heard about from all sectors—and it was mentioned, though I'm not sure which of you gentlemen mentioned it—is credit availability. How is that impacting the small and medium-sized enterprises that need credit? Or are they still getting enough investment to follow through? We have heard loud and clear that credit availability is difficult for all sectors.

[Gary Leach]

The oil and gas industry is very capital intensive. As I mentioned, once you've sold a barrel of oil down the pipeline, you have to find another one to replace it. For small and medium-sized oil and gas producers, it's been a very challenging market. Those are the first companies to feel the chill when the equity markets get nervous. For the last year it's been difficult; for the last six months it's been almost impossible for Canadian companies to raise equity financing.

Of course, with declining commodity prices, cashflows have been cut as much as 75% in the last year because of the drop in crude oil and natural gas prices. That makes it much harder for banks to provide the financing the companies need. After all, the banks provide the financing, just as with a mortgage on a house. The banks lend to oil and gas producers based on what the oil and gas reserves are worth in the ground. They're worth a lot less this year than they were a year or two ago; therefore, the available financing from banks is necessarily going to shrink.

All of that puts a lot of pressure on companies. They can only spend now what their cashflow is, because they can't go to the equity markets to raise money, which is where the small companies typically go, and the banks may be reluctant or unable to lend any more. So they have to live within their cashflow. This means that many of our smaller oil and gas companies are going to be smaller, in terms of the reserves in the ground, a year from now than they are today. They'll have to sell those reserves to bring in the cashflow, but they don't have enough cash left over to develop additional supply.

[Glenn Thibeault, NDP, Sudbury, ON]

Do I have a little tiny bit?

[The Chair, Conservative, Dave Van Kesteren]

Yes.

[Glenn Thibeault, NDP, Sudbury, ON]

This leads to a longer-term question, but I have a little tiny bit, so I'll try to get some answers to this and maybe come back to it after.

I heard you talk about innovation and technology innovation, so we talked a little bit about research and development. We all know we have to get greener. How does the gas and oil world think about getting greener? How are we going to start doing that? Is there research and technology being put into that?

[David Daly]

We are looking at different ways of trying to deal with any types of regulations or policy initiatives that the federal government and the provincial governments have for things specifically like greenhouse gas emissions. Carbon capture storage is a major development technology that we are spending quite a bit of time looking at. The Alberta government has a technology fund in place, where it has regulations that limit the amount of carbon emissions from larger plants. If you exceed those emissions, then you pay a certain amount per tonne that you exceed into a technology fund. We're looking at ways of being able to ensure that the moneys going into that fund are used to fund new technological development for carbon capture storage. We are spending time with the federal government and the provincial governments also on water usage issues and land usage issues. We do spend quite a bit of both time and money on environmental stewardship.

[The Chair, Conservative, Dave Van Kesteren]

Mr. Leach, do you have a question?

[Gary Leach]

I mentioned earlier, I think before you were in the room, that the most recent year for which statistics are published by Statistics Canada is 2006. I don't have the exact numbers in front of me, but I can tell you that the oil and gas industry led all industries in Canada by a wide margin in terms of not only capital investment on environmental protection and mitigation measures but energy efficiency improvement technology. In other words, they were using less energy to produce their output than any other industry in Canada. The oil and gas industry was number one.

We're here to talk about our industry, not about provinces, but Alberta also led all provinces, including Ontario, by a wide margin in terms of investment, largely due to the oil and gas sector's role in that, and in terms of spending, not only capital tax on new equipment but also ongoing operational expenditures on environmental protection measures, environmental mitigation measures, and energy efficiency improvement. I know the oil and gas industry is often criticized by those who don't have that kind of information. It actually, I think, was a real eye-opener. Everybody I've shown those statistics to is surprised by them. I'd be happy to supply those to this committee, although I would point out that they were publicized by Statistics Canada on its own website back in November and they are publicly available.

[The Chair, Conservative, Dave Van Kesteren]

Okay, thanks.

Mr. Valeriote, you're up next, sir.

[Frank Valeriote, Liberal, Guelph, ON]

Thank you.

Mr. Leach, I was here when you answered Mr. Garneau's question earlier about the uncertainty in climate change. A couple of weeks ago I was able to meet with some people in the gas industry. They expressed the same concern. They expressed a concern that a price on carbon has yet to be placed and spoke rather vehemently about the need to place a price on carbon sooner rather than later.

Do you agree with that, and can you expand on your thoughts?

[Gary Leach]

You can't have a functioning cap-and-trade system. The whole premise of a cap-and-trade system requires somebody, usually a government, to put a price on CO₂ emissions or the equivalent of CO₂ emissions. The Europeans had a rather chaotic genesis to a cap-and-trade system in Europe. The price of CO₂ in Europe, the last time I looked, a few weeks ago, I think was $10 or $11 a tonne, well below the initial starting price. Of course, the Europeans awarded their industries that asked for special exemptions or permits...they over-awarded permits. It caused the collapse of the CO₂ market there. The expected price collapsed.

It depends on artificial pricing allocations. It depends on a market that functions efficiently. We have a nascent carbon trading platform here in Canada, in Montreal, trading of futures on CO₂ emissions when we get a national system in place here. The price there, I think, is $10 or $11 or $12, well below what people think carbon should be priced at. The whole problem with cap and trade and carbon pricing is that it's an artificial market. Nobody knows what the stuff is worth. I think that's a real serious concern, that people really have not confronted in a thoughtful way how you price something like CO₂ emissions. You cannot have a cap-and-trade system without putting a price on it, because that's the commodity that gets traded on the market. People buy those or they sell those, and you need a price.

[Frank Valeriote, Liberal, Guelph, ON]

Thank you.

Mr. Daly, I understand from Mr. Garneau's notes that you had expressed a concern about a U.S. threat to bar the import of dirty oil. If you didn't say that, I'm wondering if you do see that as a threat. How might you balance, in your opinion, their insatiable thirst for oil and how might your industry rely upon their insatiable thirst to avoid cleaning up our environmental house? That would be as opposed to, in the absence of any existing regulations and with none on the horizon, voluntarily engaging in cleaning up at least the production of this natural resource.

[David Daly]

I think that might have been a question Mr. Garneau came up with on his own. I didn't mention anything about U.S. initiatives to try to bar Canadian oil or dirty oil. That is a concern. It may be targeted at Canadian oil sands oil or any oil from Canada. We've tried to point out to the Americans that our oil, on a full cycle of greenhouse gas emissions basis, is no dirtier than oil that comes from Venezuela or Mexico or even parts of California. As I understand it, that potential legislation is being pushed a little bit more by California than by some of the other states. I think Californians need to look at the oil they are accessing in their own backyard before blaming others for any oil they might see as being not up to the standards they would like to have.

I think it would be an unworkable regulation, since once oil leaves the ground and is put into a pipeline, it's fungible. It's mixed in with oil that comes from all sorts of sources. It would be pretty hard to segregate oil that comes from one area, such as the oil sands, from oil that comes from an area near Edmonton, for example, which is light and is a lot cleaner.

[Frank Valeriote, Liberal, Guelph, ON]

When you say that it's no dirtier than other oil from other sources, is that taking into account the approximately five barrels of water--at least five barrels of water--rendered unusable when it is used to extract one barrel of oil, or does it just take into account greenhouse gas emissions?

[David Daly]

It's looking at greenhouse gas emissions on a full-cycle basis.

[Frank Valeriote, Liberal, Guelph, ON]

It is just the emissions.

[The Chair, Conservative, Dave Van Kesteren]

Thank you, sir.

We'll go to Mr. Lake.

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

I wonder if I could talk a little bit about labour. As you know, over the last few years, Alberta, in particular, has experienced a significant labour shortage, actually prior to this global economic slowdown. Maybe you could comment on how significant that was. What was the impact of that labour shortage in terms of your members? Maybe talk about any impact on the projects that have been pipelined, so to speak, for a while in Alberta.

Second, I noticed, Mr. Leach, in your presentation that one of your bullet points actually talks about looming workforce shortages, which I found kind of interesting in this context. Maybe talk about the future as things start to rebound. What challenges do you foresee us having, from a labour standpoint, and what might the impact be?

[Gary Leach]

Sure, I'd be happy to do that.

The largest part of the workforce, actually, is in construction, drilling, and the service sector. I wonder if I might first defer to Mr. Herring on labour issues.

[Don Herring]

Chair, we've had significant reductions in our workforce. About 20,000 of our workers are unemployed. Our workers don't live in Calgary and Edmonton. They live in the small towns and villages across western Canada and in different parts of Canada generally. They're the people who are immediately impacted, and they're laid off. We did have a run-up in activity levels, of course, in 2005 and 2006. We competed against people who were offered work in the oil sands. That tended to increase our wages and increase our costs, and we attempted to address that by putting in place a trades system, for example. We were trying to demonstrate a career path for individuals who would come into our industry. Of course, to be an effective career path, you need a stable economic environment. We don't have one. Some of that is no fault, obviously, of Canada or its provinces.

At the end of the day, we're experiencing significant reductions in our workforce. We will have difficulty, when there is a recovery, trying to attract them back into the business. It depends on how the recovery is managed and on whether it becomes driven by the oil sands or in fact by investment in natural gas, for example, or conventional oil. That becomes us basically. We supply the workforce for that.

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

Mr. Leach, when you talk about looming workforce shortages, what are you referring to there?