Industry Committee on Oct. 3rd, 2006

[Dane Baily]

It's really difficult to say there's $5 a barrel in speculation. Trying to define that criteria is a rogue's game. But there's no question there was a speculative premium in the price of crude when it hit $77 per barrel in July.

There were supply-demand fundamentals driving it. We were heading into the peak driving period in the U.S. They're the biggest and they consume 25% of the world's oil.

There was still a lag effect of Katrina and Rita in shutting down the refining industry in the gulf. We had a lot of refineries that were supposed to shut down in the fall for maintenance, and we put it off because of the other ones that were shut down by the hurricanes. They were shut down in the spring. We had many more shutdowns in the spring, and then the inventories for gasoline were low. Crude also tends to be pushed up if there's a perceived gasoline shortage.

All of that was combined, along with the threat of Iran, and we had the Lebanese war. There was nuclear tension in the U.S. Was the U.S. going to use sanctions, and was Iran going to shut off the oil supply? All of that was in the world of speculation.

We made it through the summer, and almost before Labour Day, the U.S. President was not being quite as categoric about sanctions and was looking for negotiated solutions. The pipeline in Alaska didn't look as if it was going to be as severe, and the Lebanese war stopped.

All of a sudden, we had lots of gasoline in inventory in the U.S., and people said we were going to make it through the summer with no problem. People said $77 a barrel was never going to hold, they started unloading it, and it went down.

Was there a premium? Yes, there was a premium. It came out pretty quickly too.

Are there still some? It's very tough to say.

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

I understand we have 17 refineries here in this country. Are we missing the boat? Should we be building more refineries?

[Dane Baily]

Yes, there's certainly an opportunity to build more refineries. But as I mentioned earlier, we really need to be clear on what our plan is going to be for climate change. To what extent will it affect the demand for petroleum products if it drives demand down?

Essentially, if you're going to hit your Kyoto target, you have to take 30% of the demand for petroleum products out of the market. If you do that, you don't need to build refineries. That's one key.

The opportunity to export really depends on where you are. Our two Atlantic refineries, the Irving Oil refinery and the North Atlantic refinery in Newfoundland, are primarily export refineries. They basically import crude and export finished products to the thirsty nation south of us.

[The Chair, Conservative, James Rajotte]

Thank you, Mr. Van Kesteren.

Mr. Lussier, pour cinq minutes.

[Marcel Lussier, Bloc, Brossard—La Prairie, QC]

On page 7 of your document, you say the energy sector pays some $18 billion to the Government. But the word “Government” is in the singular.

Are you referring here to the federal Government?

[Dane Baily]

I believe we talked about “all governments” in our presentation.

[Marcel Lussier, Bloc, Brossard—La Prairie, QC]

Of that $18 billion, what is the oil companies' contribution to government revenues?

[Michael Cleland]

Mr. Chairman, I don't know whether Mr. Baily knows that off the top of his head, but it may be best if we get back to you with the precise answer. We can give you the breakdown on where that comes from.

[Marcel Lussier, Bloc, Brossard—La Prairie, QC]

Could we add some columns to your table? For example, I would like to know how much companies are receiving in subsidies, how much they are realizing in profits as a result of research and development, amortization, and so on. Another column could be added to show oil company profits.

There could be three other columns: one for the oil companies' contributions; another representing federal Government subsidies to oil companies; and a third showing oil company profits.

Would it be possible to provide us with that data?

[The Chair, Conservative, James Rajotte]

Would this be tax that is paid federally and provincially or only federally?

[Marcel Lussier, Bloc, Brossard—La Prairie, QC]

Federally.

[Michael Cleland]

If I could just comment, we can still see what we can follow up on there.

The tax credit issue is one that is much talked about, and not terrifically well understood, in my experience. If you go to the Department of Finance data on that, you can find information that basically defines what is a tax expenditure, as opposed to what is a legitimate write-off. The actual tax expenditures, over and above appropriate write-offs linked to the economic life of assets, are relatively small, and have been relatively small for certainly the oil and gas industry for the past ten years.

I can't comment off the top of my head as to what other subsidies there may be around. Again, there are some definitional issues around that, but we will endeavour to get some further information to you.

If I could just add to your question, I don't know what the number is, but clearly, if you look at the industry overall, the vast majority of those taxes are paid by the oil and gas industry, particularly the upstream production industry. It's far and away the largest part of the sector.

[Marcel Lussier, Bloc, Brossard—La Prairie, QC]

You don't have any figures? Ninety per cent or...

[Michael Cleland]

It would be better not to speculate for the record. It would be better to give you the information.

[The Chair, Conservative, James Rajotte]

This would be the Canadian Association of Petroleum Producers?

[Michael Cleland]

Yes. We were their colleagues in the Energy Dialogue Group. We can follow up on that.

[Marcel Lussier, Bloc, Brossard—La Prairie, QC]

We've talked about the future in relation to climate change, and especially climate change. What is your reaction in that regard?

We know that the oil sands project will double the production of greenhouse gases between now and 2015, with the risk that the efforts made by other businesses and industries to reduce greenhouse gases will be completely annihilated. The oil industry will be doubling its production while all the other manufacturing industries are trying to reduce greenhouse gases.

In light of that reality, what is your position on the Bloc's proposal, namely that the polluter pay?

[Michael Cleland]

Mr. Chairman, I would be loath to comment on matters that are of particular concern to my colleagues in the upstream oil and gas industry, and I suspect my colleagues might feel the same. But perhaps more generally, I think there are two points to think about here that are of general application.

One, as the economy grows, as the population grows, it tends to put pressure on greenhouse gas emissions, and that's true right across the board. As the commercial sector grows, it will use more energy. In fact, it's the fastest growing part of the energy system, and it therefore will put more pressure on greenhouse gas emissions. That's true right across the board, whether it's residential, commercial, or any other.

The question for Canada is whether Canada believes it's in its interest to continue to be a big energy producer, to enjoy the benefits, the jobs, the investment, and the export dollars that come from doing that. That's a question of policy, and I think probably a lot of us, certainly at this end of the table, would agree that's probably a positive policy. There are inevitably consequences with respect to greenhouse gas emissions as a consequence of that.

On the polluter pay principle, at a general level, I think most people would agree that when you're talking about a polluter—in other words, somebody who is creating environmental emissions but has a mitigation technology available to them. Then under some measure of controls, usually regulation, it's entirely appropriate that those costs should be internalized by the investor. To that extent, I think most people would agree that polluter pay makes a lot of sense.

[The Chair, Conservative, James Rajotte]

Thank you.

Mr. Konow, briefly.

[Hans Konow]

I would briefly offer that I think in terms of the choices we make, as Mr. Cleland alluded to, strategically it's important that if Canada is to retain a sense of energy security based on having indigenous supply, then the tar sands development has to go ahead. Our conventional basins are shrinking in terms of production, so we have on one level a challenge with respect to having our own indigenous supply of crude oil versus being dependent, like so much of the world, on the Middle East or other highly vulnerable sources. So I would look with great care at not upsetting that rather advantageous situation in Canada.

Secondly, the polluter, in the sense that you speak of, will pay, because whatever requirements emerge from our climate change strategy technology will be what will be required to solve that problem, and that technology investment will be made by the companies active in the oil sands. What benefit will accrue from that remains to be precisely seen, but all of us, whether we're electricity-dependent, in some regions on coal, or we're developing more global warming gas-intensive oil options, we will deploy technologies that will raise prices--make no mistake about that--in order to achieve whatever is decided is the requirement for dealing with global warming gases. So it will happen, in my view.

[The Chair, Conservative, James Rajotte]

Mr. Baily, you wanted to respond--very quickly.

[Dane Baily]

The oil industry is part of a world market. So, if there are additional costs for the oil sands sector, the world price will not change. An increase in costs would mean that these projects would no longer be viable, but that will not happen. It's a question of balancing the security of supply in Canada and the cost-effectiveness of these kinds of projects, depending on the result of additional costs for greenhouse gases.

If these projects were not cost-effective, there would not be as much development occurring today. However, our balance, in terms of supply and demand in Canada, would mean that we may be subject to imports.

This is a very important question for the country and for the federal policy.

[The Chair, Conservative, James Rajotte]

Thank you.

I have seven more members here who want to ask questions, so I would ask members to be brief in their questions and you to be brief in your answers as well.

I think it would help the committee to have, especially from your member associations, revenues to the federal government, what your industry associations are doing on emissions--and you can include greenhouse gas emissions as well as SO ₂, NO ₂, particulate matter, everything, just to give the committee an idea of where your industry association is at--the issue of credits or subsidies that your associations may receive, and then new technologies, because the Energy Dialogue Group includes everything from oil and gas to wind and solar, so anything in new technologies, and any advice you have to the committee on any policy changes we ought to make in these areas.

I think this covers members and what they've been asking for, and obviously we're continuing this study for over a month, so don't feel you have to get this into us next week. But it would be helpful information for us to have, and if you could, please submit the information to the clerk.

We will go now to Mr. Shipley for five minutes.

[Bev Shipley, Conservative, Lambton—Kent—Middlesex, ON]

Thank you, Mr. Chairman, and thank you for being with us today.

It's an interesting topic, obviously, and we've had a lot of discussions. And I think actually a lot of the questions get framed around the same issue of manufacturing--how can they be successful, how do the inputs from those who supply all sorts of energy to the industries...and make things a win-win situation.

I want to go to a question about the fluctuations. You've talked about how the fluctuations in the market and the volatility are not only not good for consumers, which is obviously so, but they are also not good for industry. But when the prices do go up, and they have--they're still up from where they were, as you mentioned, a year ago--is that particularly bad for industry? Give me some reasons for why it is, when we're talking about global markets, where actually it isn't just Canada, where industry and manufacturing are struggling with the energy costs.

[Michael Cleland]

I'll kick it off.

I'll make a couple of comments here, and I suppose these are very much matters of opinion. Competitiveness is a relative concept, and I think you alluded to that. If your cost structure is going up and so is your competitor's, then on balance it should not make a difference. It depends a lot, though, on where you are and what your capital structure looks like. If you have a lot of old, inefficient capital, then you're going to take more of a hit in the face from rapidly changing costs.

Going back to Canada in the 1980s, when we protected ourselves briefly from the effects of rising energy costs, I think most analysts going back and looking at that would say it wasn't a good thing. We didn't win as a consequence of that; we delayed the adjustment process we needed to go through.

Clearly, we want to avoid things that create an imbalance so that our costs become higher than our competitors . We're not in that position now, and we need to keep pushing on that. The last thing we should do is protect ourselves from underlying global fundamentals.