Thank you, Mr. Chair, and thank you, committee members, for the opportunity to present to you today.
I have a number of opening remarks and a power point presentation that accompanies the remarks. I will reference particular slides as I move along.
My name is Jeff Labonté and I'm the director general for the petroleum resources branch of Natural Resources Canada. I'm joined today by two of my colleagues, Claude Gauvin and Mike Rau, who both work in the same branch as I do.
My areas of responsibility include the monitoring of oil and gas markets and the development and implementation of oil and gas policy in Canada. As well, I have oversight for advice pertaining to crude oil, refined petroleum products, and natural gas south of 60 degrees. I'm here today to speak to the committee on a number of specific points.
I'll be talking to two particular purposes today. The first would be to outline Natural Resources Canada's role as it relates to the Canadian refining sector and the domestic supply of petroleum products in Canada, as well as giving the committee some brief overview on the petroleum refining and distribution market in Canada over the past number of years and its relationship to regional economies and international events. More specifically, my remarks will cover NRCAN's role, the product supply chain, regional differences, and realities affecting Canada's refining industry.
With respect to oil and gas, NRCAN covers the following areas. First, in response to energy supply disruptions of national significance, NRCAN could act on a temporary basis to ensure Canadians have access to energy. This is in the context of Canada's market-based approach to energy policy where private sector supply and demand and investment choices are made in relation to market fundamentals and demand.
Second, NRCAN ensures that Canada honours its international obligations under the International Energy Agency's treaty. Should the IEA declare an emergency of any sort in the face of a supply disruption, Canada is obliged to act in support of that treaty.
Third, we at NRCAN provide Canadian consumers with information on Canadian oil and gas markets, and we provide policy support and advice to the government on oil and gas markets as well.
In terms of legislation, the issues from an energy security perspective, at this point in time it is NRCAN's view that the potential conversion of the Shell refinery does not pose a risk of a supply disruption on a national scale. Therefore NRCAN has no particular role to play with respect to this instance of this particular conversion. However, I would like to point out that there are two pieces of federal legislation that provide the government the authority to temporarily intervene in the case of a severe energy supply disruption of national significance. Under the Emergencies Act, if a national emergency is declared the Governor in Council can declare a public welfare emergency, which authorizes special and temporary measures to ensure safety and security during a time of national emergency. This could include the disposal of property, including energy commodities such as gas, oil, and crude and refined products.
The second piece of legislation is the Energy Supplies Emergency Act. If a national emergency has been declared, an energy emergency could be declared and the Energy Supplies Allocation Board could be activated. It has the ability to temporarily allocate energy supplies in Canada and could redirect crude oil to ensure that all refineries in particular regions of the country experience similar and manageable shortages and access to petroleum products, or draw down stocks to meet limited supply interruptions.
Moving to the next slide, which is a fairly complicated one, I'll draw attention to a number of aspects of Canada's refinery marketplace. A key point to make, as has probably been presented previously to the committee, is that the upstream crude oil extraction and transportation business and the downstream refinery and retail business operate as two independent segments in the petroleum marketplace. In other words, companies working in one market segment versus another may or may not have decisions that are independent of one another.
If you refer to slide six and you look at the map of Canada, you see a quick snapshot of what are the orbits or areas supplied by particular refineries. The map identifies that there are 16 major refineries in Canada that are each regionally located. Virtually all of the petroleum supply comes from these 16 refineries located across the country. You will note in the map that Canada exports and imports crude oil as well as refined petroleum products. So some of the equation is that Canada is both an import and export nation and that at the net scale Canada exports more crude oil and more refined petroleum products than it consumes.
It is because of transportation economics that the Canadian petroleum marketplace is also quite regional in nature. Drawing into these regional issues and variations, moving to slide 7 and going from west to east, the western provinces and territories are predominantly served by domestic refineries, with Edmonton being the largest centre. These refineries process Canadian crude oil, which is predominantly produced from Alberta as well as Saskatchewan. The region is also a small net importer of refined petroleum products from the western United States.
Southern and northern Ontario rely predominantly on refineries in Sarnia and Nanticoke, which process predominantly domestic crude, which is piped from Alberta to Ontario. However, there are some imports in this area as well, both crude and petroleum products, which come to this region via pipeline from Montreal. The region is both an importer and exporter of petroleum products.
Moving to eastern Ontario and western Quebec, petroleum product markets are supplied by domestic refiners in the province of Quebec, as well as petroleum imports from other countries. It is important to note that the refineries in the region largely process imported crude oil.
The maritime provinces and northern Quebec are supplied by refineries in Quebec, Newfoundland and Labrador, and Nova Scotia, and by seaborne petroleum products; that is, by petroleum-based products imported by ship and transport. Again, refiners in this region predominantly rely on imported crude oil, with the exception of the offshore production in Newfoundland and Labrador, which also supplies refineries in Atlantic Canada as well as other international markets.
The domestic industry in Canada operates, very clearly, in an international marketplace. Due to economies of scale, the global refining industry has been undergoing a rationalization over the last number of decades. Global demand for refined products is growing and is driven by emerging markets such as China, India, the Middle East, and Latin America, while North American demand for petroleum products has been fairly stable or declining with the impacts of the recent recession. It is not expected that demand in North America will grow significantly either, when one looks at the trend over time.
Larger and more efficient refineries are part of the rationale for this particular context, where we see overseas refineries coming onstream that are more efficient, larger, and that produce product at a cost that's difficult for North American refineries to compete with.
We see that this has had an impact on domestic investment choices. In keeping with global trends, the rationalization of the refining industry has been taking place in North America. In Canada alone, we have seen the number of refineries go from 44 in the late sixties to 16 today, while at the same time the overall domestic refining capacity has actually doubled. Most of this rationalization took place because of the oil shock in the seventies, as well as increasing economies of scale in competing nations. For example, in the early 1980s there were six refineries in Montreal; by the mid-1980s, four of those refineries had closed. These refineries were typically small in scale, and all of them had less than one-third the capacity of the Ultramar refinery that is operating near Quebec City today.
Domestic capacity has been on the rise while throughput has been declining. The current realities of the Canadian refining sector pose a challenge for profitability. From 2000 to 2009, domestic refining capacity has increased to roughly 2 million to 2.1 million barrels a day, with production refineries decreasing to the point that capacity and utilization rates have been hovering at around 80% as recently as 2008-2009 and the first two quarters of 2010. I should point out that a capacity rate, generally speaking, of 95%-plus is considered full capacity and generally viewed as optimal.
To put the degree to which Canadian refinery equipment is underutilized into perspective, in 2009 the idle capital in Canada's refining sector was close to 300,000 to 400,000 barrels of oil per day.
There has been a downward trend in refinery profit margins in Canada over the past number of years. Refining margins represent the differential, of course, between crude oil and the price refiners sell their products at on the wholesale market. Margins must meet and cover all costs. It's important to note that expenses are more or less fixed, and changes in refinery margins directly affect the profitability of the particular firms operating.
In summary, I'll reiterate the following two points.
First, from an energy security perspective, the potential conversion of the Shell Montreal East refinery does not pose a risk to the supply of national scale.
Second, the total capacity to Canada's refineries has increased over the past number of decades, even though the number of facilities has decreased, as has the utilization rate. This reflects part of a North American and global trend towards rationalization and increased competition.
Thank you.