Industry Committee on Oct. 3rd, 2006

[The Chair, Conservative, James Rajotte]

Mr. Carrie, you have thirty seconds.

[Colin Carrie, Conservative, Oshawa, ON]

I was going to speak about the infrastructure issues, where you think they are now, where you think they need to be over the next ten years, and what you see as the federal government's role in improving infrastructure. What have your organizations done to help improve infrastructure in Canada?

[Michael Cleland]

As I say, regulation is a key one. I think there are some things that can be done on the tax front to improve capital costs, and there's allowance treatment to improve the investment climate for infrastructure. Apart from that, our industries are investing billions of dollars all the time, working with regulators to get approval to put those investments in the ground, or, alternatively, in unregulated industries, working with our shareholders to get the dollars. We need to push harder on it; we're talking about renewal of old infrastructure as well as new.

[The Chair, Conservative, James Rajotte]

Mr. Baily, do you want to wrap it up?

[Dane Baily]

Yes.

I think in terms of regulatory clarity on the environmental side, certainly from a hydrocarbon business viewpoint, understanding where we're going to go on climate change and what the expectations are.... It would take a very brave soul to build a brand new refinery today. There's lots of investment in incrementally expanding the refineries we have. But a grassroots refinery is $3 billion to $4 billion. We don't know where we're going in terms of climate change. Will it have an effect on demand? There are things that can drive the demand down, in which case our refining capacity would be more than adequate.

Those types of issues need to be clearer, so that people have an idea of where they can go, so that before they put those kinds of dollars into the ground, they know there's a good chance of getting a return.

[The Chair, Conservative, James Rajotte]

Thank you.

We'll go to Mr. Masse. You have six minutes.

[Brian Masse, NDP, Windsor West, ON]

Thank you, Mr. Chair.

Thanks for appearing today.

One of the things we heard from a number of the different delegates who came through the first part of the phase of the study we had is the issue of speculation—that of efficiency—in the sense that some world events out there, which caused the market to increase, didn't actually come to fruition. It's done out of fear and a series of different tactics. It's a great inefficiency for manufacturers because it's another cost in the system that's not even real.

Are there any suggestions or is there a position you have on that speculation? Personally, I find that it's completely inefficient. How do we deal with that?

For example, the plastics industry gets whacked pretty hard when stories drive the price of the commodity up on the market. Maybe it's good for people in Chicago, New York, and Toronto, but it's not good for small and medium-sized manufacturing plants that are trying to deal with it on a regular basis.

[Dane Baily]

I guess I'll take a crack at the liquid barrels.

Actually, manufacturing industries can buy crude futures or gasoline futures, so they can hedge their cost structures. The gold people have been doing it for a long time; they sell all their production forward at a guaranteed price. You could lock in a margin, if you can lock in your selling price.

The problem is they get caught on the down side; they're just like the traders. At a company I worked for they used to try to hedge this. They just said, our shareholders are not looking to buy a gambling organization, they're looking to buy an oil company, and we're going to buy and sell oil on the commodity market and that's it.

Gambling is a different business, and I think most people would live and die via the current price.

But it's the same thing with your heating oil contracts. You can get natural gas contracts that will lock in a price. They were out selling them last fall, and I bet you the people who signed up then, when the prices were pretty strong, might not be happy right now. So it's a risk-reward business of trying to get the volatility out of the market or trying to anticipate it.

[Hans Konow]

I would offer that it comes back down to basics. If the supply-demand equation is tight, then it's fertile ground for volatility. And volatility is what drags the speculators into this game, because they can make a lot of money at it. In that world, you're right. All of us who are just trying to plan our production runs and acquire enough stock can be victims of it.

Dane is right. You can hedge your requirements in different ways, but then you're locked into a certain future, and if the price goes lower, you feel like it's like the old mortgage game. Mortgages today are a bit different from when I was younger. You had 12% interest rates and you were trying to lock in. But a lot of people now, just as Dane was describing in terms of energy purchases, are going with the market because the differences don't seemed to be large enough.

Maybe we're in a new world where people will have to forward buy and play the old traditional mortgage game of trying to hedge their risks. To the extent that we can get fundamentals right in this country, to ensure enough investment in infrastructure and resources, then perhaps we can be a little long in our supply, which then will have a dampening effect, in terms of globally induced-type markets. There's no perfect solution.

[Brian Masse, NDP, Windsor West, ON]

I have two quick questions here. What is your position on strategic reserves? The U.S. employs a system of strategic reserves through which the President intervenes on the market. That has an effect on the commodities we export to them. The strategy they've employed was supposed to be, for national interest's sake, related to other measures but is now market-driven. So what is your position on strategic reserves and the American system of their use?

Second, I was disappointed that I didn't hear anything about new technologies and cleaner products and alternatives, so if you have some comments on that, they would be helpful.

[Dane Baily]

In terms of strategic reserves, the U.S. is the driver because they're a net importer. In fact, there's the worldwide requirement under the International Energy Agency that says that any importing nation is required to have a certain number of days' supply. For the net exporters, there's no requirement. We're a net exporter of just about every form of energy. There's no real benefit to us. We've got the crude coming out of the ground. We've got the refineries to refine it. We export gasoline and diesel. We export crude oil. We export a lot of electricity. We export lots of natural gas. In a shortage environment, with the way the international energy allocation system works for oil, when we had the Hurricanes Rita and Katrina, we actually were required to reduce our own consumption to be able to export more to the U.S., as were a bunch of European countries. There's no real advantage to Canada's having a strategic reserve.

[Brian Masse, NDP, Windsor West, ON]

But we're awfully quiet when the President uses market manipulation on the products we're exporting to them. That's the reality. He's introducing product into the market through the state system.

[Michael Cleland]

Briefly, on the question of clean technologies, and again it's something we should probably spend a bit of time on--we didn't particularly touch on it, but clearly it's something that all of our industries are involved in. My industry actually made some proposals before the finance committee a couple of weeks ago, with some ideas for the way we can introduce cleaner and more efficient technologies into the energy delivery system in Canada's cities and towns. There are lots of things we can do there. In some places we need a bit of help from provincial and federal governments. There are other areas where our companies are simply investing in that because it is the future.

I don't want to belabour it, but I just want to come back to the speculation point, because it's important in terms of the way these things work. There's a fairly straightforward trade-off; my colleagues alluded to it. If you lock in, you lock in. You could lock in high when a market may be going down, and you'll pay for it. One of the reasons, as I said, customer intervenors in our regulatory processes actually don't want us, the gas delivery industry, to contract long is that they're not sure we're going to do it the way they would like it to be done. They actually prefer to follow the market and manage their own market risk. That may be the right way to do it. I think, as they say, there are some arguments for long-term contracts to underpin investments, but there is a pretty straightforward trade-off there.

[The Chair, Conservative, James Rajotte]

Thank you very much.

We're well over time here.

Let's go to Mr. Lapierre for five minutes.

[Jean Lapierre, Liberal, Outremont, QC]

Thank you, Mr. Chairman.

Gentlemen, thank you for being here.

In recent months, manufacturing sector representatives have told us that one major factor contributing to their competitiveness problems was energy costs and, consequently, the cost of transportation.

However, if we compare the costs of energy in Canada, for your three industries, to costs in competing countries -- like China, India and Brazil -- are prices equivalent? All other things being equal, if these countries are following the global trend, are you really facing any particular disadvantage?

Are variations in the cost of energy in developing countries, which are our major competitors, in any way an additional advantage? Do they benefit from a protected price, unlike in Canada, where we pay the market price, at least for our oil? For electricity, it's another matter. Is there more protectionism in developing countries? That may not apply so much to natural gas.

[Michael Cleland]

If I can speak very briefly on natural gas, I have two responses to that. Yes, in a lot of developing countries they do control energy prices in ways that keep them artificially low. That's pressure they'll eventually have to pay the piper for, but for the moment, indeed, they give some of their industries a competitive advantage. If you look at natural gas in particular, on slide 13 you can see the way European, Japanese, and North American markets work together. They aren't much different. By comparison--and I think our manufacturing colleagues would have shown you this--for the people who use natural gas as a feedstock, in particular, there's a big difference. In places with what's called stranded natural gas--gas that will eventually become part of the LNG market but right now is stranded--the natural gas costs may be 50 cents per thousand cubic feet, as compared to what we pay in Canada, and that's just because of the circumstances of those particular countries.

[Dane Baily]

Let's talk about oil. Let's take the example of Venezuela that, for all intents and purposes, practically gives its gas away. People pay practically no taxes and practically no value is attached to the production of natural crude.

China was an exporting country. However, two or three years later, it became an importing country. I don't know exactly how it deals with its own production, but it does pay the world price for its imports.

There are very few countries that produce crude oil. As a result, just about everyone tends to pay the world price, except exporting countries such as those in the Middle East, and a few others.

[Hans Konow]

With respect to electricity, Canada still has amongst the lowest prices in certainly the developed world relative to the developing world. I don't have good data on that. My impression is that prices are considerably higher in the developing world, particularly if you factor in reliability, which has a cost. If you can't count on it, obviously it's a huge cost to your production system. On the whole, electricity is not an issue of competitive disadvantage in Canada.

If you look at the data in the slides that showed the U.S. and Canada, you would see there are some regions in the United States that have lower prices than Ontario, for instance, and Ontario has some of the higher prices in Canada. Notwithstanding that, if you look at the northeast New England states, prices in Ontario are still lower than those generally in New England, which is your prime competitive market for a lot of products. So with respect to electricity, it's more about reliability, making sure that our system can deliver absolutely top quality reliability.

Coming back to the technology argument, the technologies that we would deploy in the electricity area, particularly to deal with the environmental challenges, will raise the price of electricity, not reduce it. At the distribution level, however, we have technologies emerging that allow customers to be much more selective of when they use electricity, and therefore, while the commodity price may be rising, the bill could actually be stable or lower. So that mix of pressures will give you an end result that, I would submit, will still be attractive in terms of our competitive circumstances.

[Jean Lapierre, Liberal, Outremont, QC]

We all agree that as far as oil is concerned, there is no avoiding paying the world price. However, we currently have a competitive advantage as regards electricity, although all the projects currently on the drafting table are predicting that electricity will cost a lot more.

In Quebec, for instance, there is a new philosophy. The Government wants to collect dividends from its investments. But all of that has consequences. None of the scenarios suggests that electricity could be cheaper in future. The curve has to rise as a result of these new investments and, I would also say, the governments' appetite. That is true, is it not?

[The Chair, Conservative, James Rajotte]

Perhaps we could ask you to be brief. We're out of time here.

Who wants to take this on?

Mr. Konow.

[Hans Konow]

Very briefly, the price of electricity will continue to go up; it just won't have the volatility, driven by external factors, that you see in some other fuel choices.

[The Chair, Conservative, James Rajotte]

Okay. We're going to Mr. Van Kesteren for five minutes.

[Dave Van Kesteren, Conservative, Chatham-Kent—Essex, ON]

Thank you, Mr. Chair.

Thank you, gentlemen, for appearing here today.

I want to talk about futures. I'm wondering what effect the speculation of what's going to happen in climate is having on the price of oil and gas. I'm thinking in terms of what we witnessed with the hurricanes two years ago, and then the predictions that we were going to have the same things happening again, and that just plainly didn't happen. What effect did that have on our pricing, and what effect would that have on our industry?

[Michael Cleland]

Maybe Dane and I could talk about the natural gas side of things. You saw it in the prices. Natural gas, in particular, is basically driven by heating costs, and increasingly, as more and more people use air conditioning and you have gas-fired electricity, it's going to be driven by cooling costs. So it's very weather-dependent. Most models of natural gas prices can swing the market by as much as $4 or more, simply depending on whether you think you're going to have a cold winter or a particularly hot summer. So there's no question, in today's circumstances, that weather has that effect. The fear of unusual events—we hope, unusual events—like last year's hurricanes, can swing it further.

I'm not sure there's a lot you can do about that. You have to adapt to those circumstance, except—going back to Mr. Konow's point—to the extent that we can get more supply into the marketplace and that the underlying fundamentals are not as tight. In the case of natural gas, to the extent that we can get more storage—and investing in storage is a big issue for my industry—we can mitigate and dampen those effects. I don't think there's anything we can do to make it go away.

[Dave Van Kesteren, Conservative, Chatham-Kent—Essex, ON]

I was thinking more in terms of the prediction that we were going to witness the same thing we witnessed in 2005. Did that have an effect on our petroleum prices this summer in the speculative market?