Industry Committee on June 11th, 2007

[Dan McTeague, Liberal, Pickering—Scarborough East, ON]

Mr. Chair, they know every day; they have crude posted every three or four minutes. Perhaps we could get Natural Resources Canada to do the same for gasoline. I don't put crude in my tank, I put in gasoline.

It's just an offer, Mr. Jennings and Mr. Brown.

Thank you.

[The Chair, Conservative, James Rajotte]

We'll go to Madame Brunelle, please.

[Paule Brunelle, Bloc, Trois-Rivières, QC]

Good afternoon, Mr. Jennings. In one table of your presentation, entitled "Regular gasoline pump price components—Canada average", I was extremely struck by the component "Refining and marketing costs and margins". It has increased enormously, from 9.1¢ a litre in 1996 to 24.3¢ a litre in 2007.

What is the reason for that increase?

[Philip Jennings]

I think the better graph to help explain this is on slide 9. It essentially tracks the major events that have occurred.

What we're seeing here in terms of refinery margins is the difference between the price of crude oil and how much a refiner can get to sell it to a retailer. What we're noticing now in terms of the recent hike is really a question of the supply crunch, or how much capacity is in the system to balance supply and demand.

As I mentioned before, the 30 different events that have occurred this year alone have constrained some of the capacity of these refiners. Some of them, actually pretty important ones, have occurred in Canada.

[Paule Brunelle, Bloc, Trois-Rivières, QC]

In your view, the refining margins companies set are appropriate.

[Philip Jennings]

The margins are the margins. Refiners have a market, and try to sell their product at the highest possible prices. When products are rare, companies can obviously sell at higher prices.

[Paule Brunelle, Bloc, Trois-Rivières, QC]

So you are saying that the industry is impossible to discipline.

[Philip Jennings]

I am saying that this not something we do.

[Paule Brunelle, Bloc, Trois-Rivières, QC]

I see.

Ms. Potvin, last year, the combined net profit of Canada's six major oil companies was $12 billion, an increase of $5 billion over 2004. That is a 70% increase in net profit, a very large amount.

With the passage of Bill C-48, tax revenues paid to the federal government dropped, and will continue to drop over the next few years.

What sort of loss does that represent for the government? What impact has this legislation had on the federal government's tax revenues? Are we giving a large present to the oil companies? In my view, they don't really seem to need it. Why should they have paid less tax over the past three years and why should they pay less tax in the future?

[Lise Potvin]

Corporate taxes are not really in my field of expertise. When oil companies make bigger profits, they are taxed. Corporate tax rate reduction is a general measure intended to eliminate certain distortions and to make Canada more competitive. Really, I cannot give you any more details. My colleague, who should have been here, is absent.

[Paule Brunelle, Bloc, Trois-Rivières, QC]

I read a study done by the Canadian Association of Petroleum Producers that gave a three-year analysis of the impact of what I might call the entirety of tax breaks given to oil companies. In 2005, those tax breaks accounted for more than $5 billion. In 2008, they will account for $2,362 billion. Oil companies receive large gifts on a yearly basis. I think that such a measure is somewhat unreasonable, considering the strong position of the industry. I find this hard to explain to the constituents in my riding.

[Lise Potvin]

I cannot make any comments about this study, but I can say that several tax breaks given to the sector were eliminated, such as the remission order for Syncrude and the resource allocation and accelerated depreciation allowance for tar sands. Unfortunately, I cannot comment the figures given in this study.

[Paule Brunelle, Bloc, Trois-Rivières, QC]

When the price of a barrel of oil was very low, the cost of extracting oil from the tar sands was comparatively high. However, when a barrel costs $62 or $65, I think that oil companies are making great profits. Is this the kind of benefit that was taken away from the companies? In your opinion, are the exemptions granted to companies still reasonable?

[Lise Potvin]

As I said, this is not in my field of expertise and I do not want to stick my neck out. I understand that most of the tax breaks granted to the sector were eliminated.

[Paule Brunelle, Bloc, Trois-Rivières, QC]

Do I have any time left, Mr. Chairman?

[The Chair, Conservative, James Rajotte]

You have one minute left.

[Paule Brunelle, Bloc, Trois-Rivières, QC]

Quebec has to import every litre of gasoline that it consumes. The substantial increase in price of a litre of gas is a heavy burden on our economy. As the minister of Finance, could you look into the regional disparities in the tax revenues received from the oil industry? Is Quebec getting poorer while Alberta is getting richer? This is the main issue.

[Lise Potvin]

I cannot make any comments about this.

[The Chair, Conservative, James Rajotte]

I could probably answer that, but I'll let Mr. Van Kesteren begin.

Six minutes, Mr. Van Kesteren.

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

Thank you, Mr. Chair.

Thank you, witnesses, for coming.

It's like UFOs; everybody has seen them, but the government keeps insisting they don't exist. I think Canadians feel that way too.

Your testimony was good. I think you've offered us some great charts. But a few things are puzzling me. Help me to understand this a bit. Canada has the second largest oil reserves, and I assume that most of those are locked in the tar sands. An oil company goes in there, extracts that oil, and gets whatever the crude price is. What about out east, where they're drilling offshore? Are the costs comparable?

For instance, in Saudi Arabia, if they're getting 62¢ a barrel when they're just drilling a hole and the stuff is gushing out, who reaps the benefits of that? Is this reflective in the pricing?

[Philip Jennings]

It's on the world stage. At the end of the day, it's supply and demand in terms of the total supply of oil and how much you can get for a barrel of oil. Comparable crude slate will get the same price around the world. Whether it's produced in Saudi Arabia or Canada, it will be the same amount.

The difference is that in the oil sands that crude slate is actually a lot heavier. It takes a lot more refining and processing to make it into usable products, so it's actually worth less. The second point is the fact that it costs a lot more to extract. You get less for a product that costs more to extract.

In terms of the east coast, you actually have a fairly good-quality oil, depending where you're producing the oil. But again, you're in a fairly high-cost environment. One thing is finding it and second is producing it.

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

Looking at your final chart, I see that in Canada, although we fare well as far as price is concerned, we don't do all that well as far as the cost of a barrel goes. Why are we so much higher than the United Kingdom or Japan? Wouldn't Japan get its oil from Saudi Arabia? Why would its price, excluding taxes, be 66.8¢ per litre of gas while we pay 72.8¢?

[Howard Brown]

I think that's an excellent question. It's one that was going through my mind when Mr. Jennings was giving the presentation. We'll have to commit to get back to the committee with the answer to that.

I would point out that this includes the cost of crude, as well as the cost of refining, labour, and so on.

The answer is not immediately obvious to me either.

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

This is a question I have to ask. How many oil companies are there in the world that control the oil? Does anybody know?

[Howard Brown]

Well, I'm sure you know that they're probably uncountable. But you're quite right, it is a very concentrated industry. I think we're down to four super-majors in the west now.

I think, though, on the question about who controls the crude, it's not actually the oil companies that control the crude, but rather the state oil companies or the governments of the countries where the reserves are.