Thank you very much, Mr. Chairman.
I will endeavour to respect your timelines. Obviously what's of interest to you is the opportunity to ask questions, so I'll move through it. There's a PowerPoint presentation, and I believe you all have copies of it.
Just by way of introduction, we've all read your interim report with considerable interest. This is an important study, and there are a lot of challenges facing the Canadian manufacturing sector. We welcome the opportunity to talk with you about how energy fits into that picture and how energy and manufacturing are closely intertwined. They are two important components of the Canadian economy that depend on each other in important ways.
We are the deliverers of energy to the manufacturing sector, but we are also important consumers of the products and services of the Canadian industrial economy. So it's a mutually beneficial relationship that has existed for a long time.
As I said, energy and industry are very strongly linked in an overall system. Energy is a supplier of abundant, reliable, low-cost fuel to the manufacturing sector, but at the same time it's a consumer of steel, cement, equipment, and a whole variety of high-technology services from the Canadian economy, as well as inputs from around the world. Energy itself is a system or series of subsystems, and we find that it's useful when you talk about energy, where it's going, and the drivers of the various parts of the system to see it in that full perspective.
Industrial energy use is the biggest single component of energy demand in Canada. It's not the fastest growing, and I think there's an important and positive story here. The industrial sector has made big strides in reducing its energy intensity, in some measure by having increased its energy efficiency. That's made a big difference in sustaining the competitiveness of Canadian industry, even in the face of rising energy costs. It will have to make a bigger difference going forward, for both environmental and economic reasons. In any event, what we've seen is good progress. I'm sure you've heard this from our industrial colleagues over the past years. It will clearly have to be one of the focuses looking forward.
If you look at industrial demand overall, about 30% of it is the energy industry itself--mostly the upstream oil and gas industry. So the cost pressures we're facing in the industrial sector are being faced right across the board--the big one is pulp and paper. A lot of the growth in demand has been driven by the oil and gas sector itself, particularly in the last ten years. That's been a big success story for the Canadian economy, but it also contributes to the demand for energy in Canada.
Where do we get it? Canada is blessed with diverse sources of energy. The industrial sector uses gas, electricity, and refinery products, and a fairly substantial part of its energy comes from owned sources, particularly in the forest sector where they're increasingly using biomass. So options in fuel choice is an important consideration for policy, as well as options in ways to improve energy efficiency.
The next slide is really a kind of macro picture of industrial energy. An important point here is that you can see important gains in efficiency and changes in industrial structure. Over time the Canadian economy, as with any developed economy, is becoming less energy-intensive because of the basic structure. We're moving to products such as high-tech manufacturing, which are inherently less energy-intensive. But Canada has a highly energy-intensive industrial structure, and that will continue for a long time into the future. It's something that has benefited Canadians for a long time, and we need to be mindful of how to ensure that Canadians benefit from that in the future.
On the next slide, the other side of the equation, if you will, is that as we've been increasing our capacity to produce energy in Canada, we've also benefited from a growing export success story on oil, on gas, indeed on electricity, on uranium, and on a number of energy fronts. It is a big success story for Canada and one the energy industry wants to continue, while at the same time sustaining energy supplies for the Canadian economy and for individual Canadians.
Going to the next slide, the chairman mentioned that energy is an industry in its own right, a major contributor to the economy right across the board, most notably, though, with respect to exports and investment, where energy is a very big part of the Canadian economy, and of course to TSX market capitalization—a relatively new phenomenon in the last few years, but an extremely important one.
I'd note as well the last bullet on that page. Energy is also a big contributor to governments, and that is to all governments right across the country; to provinces such as Alberta through royalties, but to the federal government and other governments through corporate income tax, and indirectly through the taxes paid by employees.
The next page gives you a bit of a regional picture. Again, you could spend a lot of time on this one, but note that the regional distribution of energy as a part of the economy is pretty widespread—clearly concentrated in Alberta, but also right across the board in Canadian provinces. It's a big part of GDP and a surprisingly big part of exports from the provinces, again right across the country.
Let me just take a few minutes to go through the different sectors. Three of us are represented here, the main input sectors to industry: electricity, natural gas, and petroleum products. We have different markets, different forms, and different geography, with oil being the most deregulated, the most competitive, and the most world-scale in terms of the market. Natural gas is a continental market, largely deregulated. Electricity is the least deregulated and the most regional in its basic structure.
On the next page, briefly dealing with oil—Mr. Baily can pick up on a lot of this and get into the details—there are a couple of key things worth noting. One is that product markets are very closely linked to the underlying crude price. The underlying crude price itself is derived from a world market, and product prices will tend to move with that price. There are some regional differences and regional lags, depending on the logistics of specific regional markets and things like product standards. That may be even more true going forward. In any event, there's a very strong relationship between the two.
The basic point on the next slide is to show the relationship between the underlying world crude price and the price of refined products. If you look at five different jurisdictions here and strip out the effect of taxes—this is looking at diesel fuel—you basically have an underlying price that is very similar, and indeed those product prices interact between continents, as does the crude price.
Summing it up, on the crude front what we have is a growing demand in developing countries, putting a lot of upward pressure on prices that's likely to continue. We're all familiar with the geopolitical uncertainty that underlies oil prices. It comes and goes. Right now we've seen an easing of it and a consequent reduction in prices.
Refining capacity will be a growing challenge in North America, and indeed in the developed world in general going forward, and it's something there will be growing pressure on.
Related to it is the need to integrate biofuels into the picture. Obviously there's a lot of policy drive to find more room for biofuels. They have to be integrated into the refined petroleum products stream in a way that makes markets work better.
The next page is natural gas. This is a highly developed and mature North American market that works generally well, but it has been under a lot of pressure in the last five years because of a very tight supply-demand balance.
What you see there on that graph is several spikes over the last few years as that tight supply-demand balance has been affected by weather, for the most part, but underlying that is a longer-term trend going up. The reason for this is simply that finding and development costs for natural gas have been steadily growing, and that's likely to be the future we're going to face.
LNG comes into the market in North America, is coming in now, and will make the North American and world markets come together; nonetheless, you're looking at a worldwide phenomenon.
The next page just looks at the future of natural gas in North America. The big picture is there is lots of gas but changing sources, more likely for the north, from the deep Gulf of Mexico, from the Rockies in the U.S., and to a very considerable degree from liquefied natural gas coming in from offshore sources. What that means is there's lots of gas. It means we're going into higher-cost sources of gas, and we're also looking at increased pressure on the transportation system to accommodate the different geography. So investment in transportation will be an important thing going forward.
Page 15, again, sums that up: more expensive, more remote, more unconventional need for investment to sustain those supplies.
Very briefly on electricity, starting on page 16, there are several things we could say on this page, but there are a couple of things to note. Canada is still very strong on hydro. It's one of our big advantages, and an advantage we can sustain going forward if we can get the hydro projects built. But there still has been an increasing reliance on fossil and a stronger and stronger integration going forward between fossil markets, coal, natural gas, and electricity. It goes back to my point about the energy system. They are tied together in a whole variety of ways.
Page 17 gives you a bit of a comparison of prices in North American jurisdictions on electricity. Canada has had an historical advantage in electricity. That has eroded somewhat over the past few years, although Canada is still not uncompetitive in a North American context. Some regions are under more pressure than others, but, generally speaking, our position is still not bad.
I might note as well something you'll probably want to update in your further report, which is that the price conditions we're looking at today are rather different from what they were at the end of last year, which is where your interim report left off. If you look at natural gas, by the end of last year you probably had prices in the order of $13 to $14. Today they're around $4. The point there is that prices move. They can move very rapidly and they can move a lot, but they move in both directions.
So on electricity, I think the key thing there is it has been regulated, and it's tended to be frozen for a lot of reasons that we all understand. Consumers have gotten used to that; it feels good. It feels good until it starts to move, and there are a lot of reasons why it will probably have to move going forward--because of underlying fuel costs, because of the need for new infrastructure, because of the need to upgrade existing infrastructure, and right across the board because of the need to manage growing environmental pressures.
Mr. Chairman, I'm going to sum up on the last page several reasons why we think energy matters to Canada, undoubtedly reasons that would be familiar to all of you. It is an industry in its own right. It's a hugely important part of the input mix to Canadian industry.
On the other hand, we have a diverse energy mix and it's growing more so. We are getting better in terms of energy efficiency. We need to do more. That has to be an important part of the puzzle. We are moving to a higher-cost world. We're certainly not going to move back to the low-cost world we knew up until the turn of the century. We do need to develop more supply in a timely manner.
Mr. Chairman, I'll turn it back over to you.
