Industry Committee on June 11th, 2007

[The Chair, Conservative, James Rajotte]

Can we get that?

[Howard Brown]

I think the question that's being asked, though, Phil, is how much is profit and how much is cost.

[Maurizio Bevilacqua, Liberal, Vaughan, ON]

Yes, refining and marketing costs and margins, if those can be essentially subdivided. You say, Mr. Jennings, that is possible.

[Philip Jennings]

We can separate refining and marketing margins.

[Howard Brown]

You can separate marketing from refining, but the question is can you further subdivide the refining margin into profit versus cost, for example.

[Maurizio Bevilacqua, Liberal, Vaughan, ON]

Really, you should be asking your own question.

That's right. That's what we want.

[The Chair, Conservative, James Rajotte]

You have the floor.

[Maurizio Bevilacqua, Liberal, Vaughan, ON]

Thanks, that's it.

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

Could I ask how you're going to do that if only two of the four major companies segment reports between refining and marketing?

[Howard Brown]

We were just consulting on that. I'm not sure that is doable.

[The Chair, Conservative, James Rajotte]

You have a minute.

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

Thank you, Chair.

It seems to me that if we have all the other components here, the one that remains the big mystery is the refining marketing cost, and we don't even have an idea of what those costs are going to be or what those margins are going to be.

We have a pretty good idea from the Competition Bureau that it's 5¢ or 6¢ a litre. It's 6¢ in Ottawa. It's 5¢ in Toronto. He didn't say that, but he knows I know that is the case.

Let me ask this question. What would prevent an industry that we've seen going from 44 refineries down to 17, if Canadians were to really get green and curtail by 10% the amount of use of this product, from just shutting down another plant or removing another two refineries from the equation, so you artificially bump up...so demand remains static while the supply plummets?

[The Chair, Conservative, James Rajotte]

Thank you.

A brief answer.

[Howard Brown]

I must say I'm slightly baffled by this. Most people would agree that part of the problem has been inadequate capacity in the industry, if you look back over the past 10 years and particularly look at recent experience. People are in business to make money; that's why companies operate oil refineries and oil wells and convenience stores and all the rest of it. So it seems to me that what we would want to do, if we want to encourage more oil refineries and more capacity, is allow people to make an adequate rate of return on those investments. People will not shut refineries in a competitive market unless the rate of return on those refineries is too low.

I will say I have heard from major oil companies that one of the reasons they have not built more oil refineries is that they expect oil consumption to drop.

[The Chair, Conservative, James Rajotte]

Thank you.

We'll go to Mr. Carrie, please.

[Colin Carrie, Conservative, Oshawa, ON]

Thank you very much, Mr. Chair.

Thank you for your presentations.

On one of the slides they mentioned gasoline supply and fuel quality regulations as factors affecting gasoline prices. I was wondering, with the environmental changes and everybody wanting to see us improve our environment, if we have cleaner fuels, is that going to increase costs? By how much will it increase refining costs? Have we changed our regulations in the last few years so that might have increased refining costs?

[Howard Brown]

We certainly have moved to ultra-low-sulphur diesel, which has a very stringent regulatory requirement and certainly has added to costs. Most people are aware the government has introduced greenhouse gas regulations and has also adopted long-term objectives for clean air. How that will play out, we don't know. What the cost will be is pretty uncertain, and my friends and colleagues at Environment Canada are the experts on that.

It is fairly safe to say there will be some cost entailed in those regulations.

[Colin Carrie, Conservative, Oshawa, ON]

I'll ask the tax people this. Do we have a competitive market as far as the competitive tax structure in Canada versus the U.S. is concerned to build refineries here to increase capacity? What role would you say regulatory disharmony plays in companies' decisions on where to build and where to increase capacity? With the environmental changes coming up, could you comment on that?

[Geoff Trueman]

It's a little broad and a little beyond our scope of expertise, to be honest with you.

Certainly a major oil company allocates a lot of capital to build a refinery. The various income tax provisions that are available and the environmental regulations would be key factors they would have to look at across jurisdictions.

[Colin Carrie, Conservative, Oshawa, ON]

Is our tax structure in Canada pretty good relative to the U.S.? I know in the budget this year, as far as manufacturing goes, we've given significant write-offs. How would you compare Canada versus the U.S. as far as tax structure goes?

[Geoff Trueman]

We'd look at long-term capital assets that are not covered in the current budget. We'd have to look at it and get back to you. It's beyond my area of expertise.

[Lise Potvin]

Our corporate tax rates are competitive. A commitment in Advantage Canada is to have the lowest marginal tax rate on business investment by 2011.

Again, on your question and on Madame Brunelle's question, maybe we can get back to you. We don't do corporate income tax.

[Colin Carrie, Conservative, Oshawa, ON]

Could you answer a question that I quite often get in the constituency? As an exporter of crude oil, why should Canada pay international prices for crude oil? How do gasoline prices and refining margins in Canada compare to our closest economic partners?

[Howard Brown]

We did an experiment on that. It's not often that you get to perform experiments in economics, but we did.

After the national energy program, I think many people will remember the famous headline in The Economist, “Canada Resigns From The World”. But however well intentioned it may have been as a policy package, I think the results were pretty dismal for Canadians and for the industry. We had a withdrawal of investment, and Canada's energy security was imperiled by that.

Since the NEP was dismantled, under both Conservative and Liberal governments, we've had a market-oriented energy policy in Canada. I think the results of that have served Canadians well. It's a booming industry, it employs a lot of people, it generates a lot of profits, and it pays a lot of taxes.

[Colin Carrie, Conservative, Oshawa, ON]

I have one more question.

If the government were to establish a petroleum monitoring agency, do you think it would result in lower prices? There was one, to my understanding, and it was cancelled by Prime Minister Martin. Do you think it's a worthwhile thing to make a difference?