Evidence of meeting #21 for Natural Resources in the 39th Parliament, 1st Session. (The original version is on Parliament’s site, as are the minutes.) The winning word was going.
A recording is available from Parliament.
3:35 p.m.
Conservative
The Chair Conservative Lee Richardson
I will call the meeting to order just short of a quorum. We have a special provision to start the meeting with four, in anticipation of the others arriving. So with the indulgence of the committee, I will begin the meeting.
I guess there's some debate in the House that members opposite are attending to.
3:35 p.m.
An hon. member
Don't you need three opposition members to start?
3:35 p.m.
Some hon. members
Oh, oh!
3:35 p.m.
Bloc
Claude DeBellefeuille Bloc Beauharnois—Salaberry, QC
Various witnesses, including the deputy minister, told us that they would send or table documents concerning research and technology estimates. Has the clerk received them? If so, will he be distributing them soon?
The Bloc Québécois has submitted a list of witnesses. Will we be hearing from them in the days and weeks to come? Is the selection of witnesses completed? With the witnesses that we have suggested, will we be considering issues other than economic impact?
3:35 p.m.
Conservative
The Chair Conservative Lee Richardson
Yes, we will. We say this at every meeting.
Maybe the clerk could comment on your first question.
3:35 p.m.
The Clerk of the Committee
Regarding the documents, I am in touch with the department and the office of the commissioner. They are conducting the necessary research and compiling information for the committee. I will forward the documents to the committee as soon as I receive them.
3:35 p.m.
Bloc
Claude DeBellefeuille Bloc Beauharnois—Salaberry, QC
We wont be getting the documents before the minister's appearance?
3:35 p.m.
The Clerk
Allow me to check again tomorrow, especially with the commissioner, because department representatives are in attendance. They have heard your question and are aware of the matter. I will do a follow-up.
3:35 p.m.
Conservative
The Chair Conservative Lee Richardson
Okay, I'm sorry, I thought there was a new question. We have asked and answered this question four times. We had a motion at the last meeting and debated this. Everyone spoke on that question.
3:40 p.m.
Bloc
Christian Ouellet Bloc Brome—Missisquoi, QC
Mr. Chair, at the end of our last meeting, you told me to submit the names of witnesses, and that they would be called on to appear. We submitted a list with the names of seven people. Will they appear before the committee, yes or no? My answer is in reference to your question.
3:40 p.m.
Conservative
The Chair Conservative Lee Richardson
It's a simple answer too, and I have answered it three times, but I'll get the researcher to answer it this time because obviously I'm not getting through.
All right, Clerk.
3:40 p.m.
The Clerk
Thank you, Mr. Ouellet.
I can confirm that the Pembina Institute, among others, will appear again next week to discuss the issue of water. As well, after the break week, we will discuss local impacts in greater details. Witnesses will include Melissa Blake, Mike Allen, from the Fort McMurray Chamber of Commerce, and a First Nations Tribe from the area.
I am sure that the Chair and the committee have taken your list into consideration. We decided to first address the economic impact, and then have those witnesses appear.
3:40 p.m.
Bloc
Christian Ouellet Bloc Brome—Missisquoi, QC
I agree, and I have no problem with that. Mr. Chair asked me to submit the names. You seemed to say that we had not submitted any; that is why I was asking where things were at.
3:40 p.m.
Liberal
Roy Cullen Liberal Etobicoke North, ON
Just a very quick point. We had the department here the other day, Howard Brown, the assistant deputy minister. We asked a very simple question about how much water was being recycled in the oil sands. My experience with other committees is that normally the departmental officials respond in a much more timely fashion. We've been waiting now for about two weeks and we should be getting an answer.
Maybe the parliamentary secretary knows something about it. Is it that complicated? We just want an answer.
3:40 p.m.
Conservative
Christian Paradis Conservative Mégantic—L'Érable, QC
We'll have to follow up, Mr. Chair. I'm not aware of what happened with that. We'll follow up.
3:40 p.m.
Conservative
The Chair Conservative Lee Richardson
Thank you, Mr. Cullen.
With that, we now have a full quorum. Thank you all for attending.
We will begin with the witnesses.
As I have said in previous meetings, this is a somewhat different approach because we're really looking for information, general education on the subject of oil sands and the various impacts of the development of the oil sands.
I would like you to start with 10 to 15 minutes. If we're going to split the time—CAPP will have one speaker or two? All right, then we'll follow up with Pembina at that time.
Let me welcome Pierre Alvarez, the president of CAPP, the Canadian Association of Petroleum Producers; and Greg Stringham, the vice-president of markets and fiscal policy; and from the Pembina Institute, Dan Woynillowicz. Thank you again for coming. We have made several requests and next week we are also going to have another representative from Pembina helping us with our question of water. I'm delighted because we have not been able to achieve the balance Mr. Ouellet is looking for, so I'm very pleased that we're going to make that happen and that your schedules have been able to accommodate us.
With that, perhaps I could ask CAPP to start.
Mr. Alvarez.
3:40 p.m.
Pierre Alvarez President, Canadian Association of Petroleum Producers
Thank you very much, Mr. Chairman. It's a great pleasure to be here.
Mr. Stringham and I will be splitting the time. It's partly because Mr. Stringham, as an engineer with an MBA, spent a significant part of this career working for Syncrude. He has personal experience that I think will be invaluable to the members prior to their trip to the north.
We have sent you written material, and we're not going to go through that. We'll spare you the PowerPoint presentations, but we did circulate those, and we will be referring to some of the charts as we go through them.
We're delighted to be here.
Mr. Chairman, my understanding is that the committee would like us to focus on the economic aspects, but we're obviously quite prepared and would be delighted to talk about any part of the operation you would find useful.
Mr. Cullen, if you'd like, we can even answer your water question. But I guess I should wait until you ask it.
In the first place, I think it is important to put the oil sands story into context. It is part, and only part, of a much larger industry.
This year we expect to see the industry invest about $47 billion in Canada. Payments directly to governments, which Mr. Stringham will talk about to some degree of detail, will be about $27 billion. We represent about 25% of the private sector investment and about 30% of the value on the Toronto Stock Exchange. Total employment across all the provinces and territories approaches half a million Canadians.
But on those numbers, I think it's important to understand that of the $47 billion, $11 billion to $12 billion is in the oil sands. There is a very robust and conventional oil and gas industry in western Canada that will invest somewhere in the area of $30 billion to $35 billion a year.
When you talk about the oil sands, I think it's important to keep in context that the energy economy is far more than that. We've given you a chart that shows where the money is being spent.
The other fundamental that's important to understand about our industry is that people always refer to west Texas crude. Over the last year or so, you've heard numbers of $50 to $70. Fifty percent of our production here in Canada is heavy oil or super heavy oil, which is bitumen, and receives half or less than half of the prices of west Texas intermediate.
Certainly, Mr. Trost is aware of the differential issues in the heavy oil. As we go through some of this conversation, I think it's important to remember that not all oil is created equally.
To give you an idea, over the past year, revenue in the industry has approached $100 billion. But where does the money go? Approximately 45% of it is re-invested in capital that goes directly back into Canada, and we'll talk a little about where that shows up. Twenty-two percent of it is operating costs; that refers to those hundreds of thousands of Canadians who are working. Twenty-nine percent goes to royalties and taxes, including land sales, which is an important factor, and about 4% is returned to the public in terms of distribution to shareholders, unit holders, and other forums.
As you can see, Mr. Chairman, it is a very big part of the economy. Mr. Stringham will touch on a number of the specific aspects, and then I'll close.
3:45 p.m.
Greg Stringham Vice-President, Markets and Fiscal Policy, Canadian Association of Petroleum Producers
Thank you.
I'm going to continue going through the slides we've handed out and give you a little more background in preparation for your trip to Fort McMurray. This is just background material, so I'm going to go very quickly. If you have questions, I'd be happy to answer them.
As you know, the size of the oil sands resource is very large. We are one of the top ten countries in the world producing oil, and right now we're number eight. With the growth in the oil sands we're going to become number four, or perhaps number three, depending on what happens in other countries. I think the important point shown on that slide is that of the top ten oil producing countries in the world, there are only three that can grow--the rest of them are either flat to declining--and they include Venezuela, Saudi Arabia, and Canada. It places a very strong international interest on the development of this oil to meet world as well as Canadian needs.
In looking at that, we have 175 billion barrels of oil in reserves. To explain that number, because there are many different numbers out there, that is how much oil is recoverable at today's economics, using a forecast of prices and today's technology. If either of those change, there could be more that's available, but the 175 billion barrels really today is over 150 years' worth of reserves that can be developed going forward, even at the higher forecasted production rates that we see coming on.
We've also included in here a list of the spending and a list of all the oil sands projects. In particular, you can see these projects are phased. It's not all built upfront in one project. They actually build it over time to try to spread out the labour and the concerns associated with infrastructure and other things. It also shows how many upgraders there are. These take the very thick oil that's like toothpaste or molasses and convert it into light oil, which is light like water or cooking oil. This upgrading process is being done in Canada. There are about another 14 that have been announced to go ahead, or another $43 billion worth of investment in that upgrading process to get it into a nice light oil.
When you put that all together, what I want to show on this graph on page 12 is really the forecast for where we see oil sands going. You can see that today we're at a million barrels a day. We're going to be expanding that with the projects that are going forward--and this is not everything that has been announced, but this is what we think is reasonably accomplished--and it will reach 3.5 million barrels a day by 2015. If you put a constraint on that to say, as the market is speaking, we don't have enough labour, or if we don't have enough infrastructure through pipelines or other things, it will probably drop down below that number, so we've put on here our constrained case line as well. It shows it going from one million barrels a day to about three million barrels a day, instead of 3.5 million.
The very important point on this chart is that the infrastructure and the spending that is going to bring that production on between now and 2010 is already being spent. It takes that long to get those projects on. Therefore, what we're talking about is that there is some variability in the projects post-2010, but up to that point in time they're already spending that money and it will be coming on.
The next couple of charts talk about the economics, in case you had questions on how much it costs to develop the oil sands. The National Energy Board appeared here, so I won't repeat them. They did explain it. Here's the data that shows if you're creating the heavy oil that's like toothpaste or molasses, it costs you somewhere between $10 and $20 U.S. per barrel. If you upgrade it into the nice light sweet oil, then it costs you somewhere in the $30 to $35 range. That was done in 2003.
The next chart shows that the capital costs for doing this, in particular steel costs, have gone up significantly since 2003. You can see that what used to cost about $3.3 billion for a 100,000-barrel-a-day project now costs closer to $6 billion or $10 billion. That's because the world price of steel is going up significantly and quickly. That is not a Canada-only issue, but a world issue, with construction happening around the world and the demand for steel, whereas the labour issue, which is on the next two charts, is really more of a North American issue in the constraints for labour going forward.
I want to explain these two labour charts. One of them looks like a Batman mask, so you understand which chart I'm on. Really, that was last year's view of how much labour was going to be required. You can see they've just published the new version of this year's view, and you can notice the difference. It's being pushed off into the future. The market is pushing some of these projects to spread themselves out over longer periods of time. In other words, they are slowing down somewhat because of the labour constraint, which leads us back to that constrained development going forward. It is also increasing in height. Therefore, there's going to be more required, but more into the future as we go forward. One of the big constraints and concerns we have for developing oil sands is the availability of labour as we go forward.
That's all background.
The reason we were asked to come here is to talk more about what's going on with the royalty side of the system, which is administered by the province, as well as the tax side of the system as it affects the oil sands in particular. I've put some charts together to educate on what elements of royalty and tax are affecting us right now.
The first chart shows that the royalty system comes because the province owns the resource under the Constitution, and as an owner they charge a royalty on that. They have a two-part royalty system that collects money up front before anyone starts anything by selling the rights to win the lease and to develop the lease. They put that up for auction; it's bid on--and those bid prices have been going up dramatically recently--and that collects the economic rent up front.
Then, once a project starts producing, they also collect a royalty on the production. So there are those two parts. The prices going up and down are adjusted in both of those mechanisms. It's like a shock absorber. It actually goes up and down very quickly.
The diagram entitled “Oil Sands Royalty Increases with Higher Prices” shows what happens to a project and the royalty from it when prices go up.
Two things happen. First, it has a 1% royalty until they've recovered their capital cost. That time period shrinks because they recover their capital, the money they have spent, faster. Also the amount of royalty goes up, so they get a twofold benefit: a shorter period at 1% and a larger amount of 25%. The royalty system is very complex, and I'd be glad to describe more details.
On the next chart I've laid down the different elements of the royalty system: what happens during pre-payout royalty, when that payout occurs, what the post-payout royalty of 25% is, what costs are allowed to be deducted in that royalty, and whether there are any uplifts or allowances for overhead. A number of different things go into that; we can discuss that if you like, but those are the basic elements of the royalty regime.
One question that has been asked recently is whether these projects ever reach payout, or do they just stay at the 1% royalty regime? The chart on the next slide shows that 33 of the 65 projects have already achieved that payout and are paying the higher royalty as they go forward. You can see it has dramatically increased recently over the last couple of years. As the prices have been higher, those payouts happen faster, so you've seen the prices and the royalties collected from oil sands this year go to a high of $2.5 billion just for the production royalty, plus another approximately $1.6 billion for the bonus bids or the payments for the leases to get access to it. So it's a total of about $4 billion, compared to under $1 billion a couple of years ago.
When you look at the oil sands royalty regime, you must look at it on the life of the project from the beginning to the end, because it's meant to collect a certain amount of economic rent over the whole life, not in any particular year. That's the difference between that and conventional oil royalties, which you can actually look at on a month-to-month basis as it moves up and down. The oil sands royalty is more project-based; it's similar to what they have in the Canada lands process.
I will switch now from that to what I call “government take”. Really it's a combination of royalty and taxes. Someone would ask how this competes or compares with other places in the world. That's really what you want to see--how reasonable is the fiscal system associated with the oil sands? Many other countries in the world do not have, or have a different combination of, royalties and taxes, so you really need to put the two of those together to try to get an equal comparison between countries.
What I've described here is just what I call “government take”, which includes the royalties, the lease bids, and the taxes. A diagram on slide 20 shows the sharing of the net revenue that comes out of an oil sands project. You can see that for the first eight years a company is investing money into the ground to develop an oil sands project. You can see they're spending what we call in this diagram “project capital”. That can be $1 billion to $10 billion, depending on the size of the project.
They reach a point at which they're actually starting to produce oil. That's when the lower 1% royalty kicks in. Then, when they've recovered their capital--so if they spent $5 billion, when the revenues equal $5 billion coming back--they are allowed to hit that payout when the larger royalty kicks in, and that's the point at which taxation kicks in as well. If you add those together, you can see that over the life of the project, if you put in the project money--the share the project gets out of this--they get back about 51% of the net revenues, which is revenue minus cost.
The governments take about 49%, so it's very close to a 50-50 sharing between the industry and all levels of government when it comes to the net revenues of the oil sands project.
That's how it works. Is that fair?
We've looked at an external consultant named Pedro Van Meurs. He looks at world fiscal systems. He compared 324 different oil fiscal systems around the world. I've listed a number of them here; we can certainly provide to you the list of all 324, but here's the list of systems, many of which our companies are competing with for capital. Number one is the one that collects the least government take, and number 324 is the one that collects the most. You can see that there's the U.K., Kazakhstan, Brazil, Alberta third tier--which is just heavy oil in Alberta--the gulf coast, and then at number 79, the Alberta oil sands. You can see it's kind of near that 100 mark out of the 300. If you look at some of the others, Alaska is right next to it at 89; Australia is at 99. You get down to Alberta, and if they don't have the royalty tax credit, which was eliminated, they drop to about 209. Norway is down at 257, so taking the most out of it as they go forward.
Another way to look at it for competitiveness internationally is to look at what the returns are that companies are earning to develop oil and gas around the world. So the next chart shows you what companies are earning in Asia-Pacific, South and Central America, Africa--and you can see that Canada is actually the lowest of those, although this 2005 report says that was during a time of a lot of oil sands spending. They would expect that once you get through that spending phase, the returns would come back closer to where they are in the U.S., but still fairly near the bottom quartile of the curve as it goes forward.
That's kind of an explanation of the royalty, and I'll get into the tax system a little bit later.
The next four charts talk about the CERI study. I know you've had witnesses before you from CERI talking about the benefits that come to the Canadian public as well as the industry and the manufacturers. The one thing that came out in a recent report that I saw from Statistics Canada that was quite interesting was that with the growth in the oil sands and the oil and gas investment, Alberta is now actually buying more products from Ontario and Quebec than Quebec and Ontario is buying from Alberta. So it's actually a net flow of products and services from Ontario and Quebec into Alberta, as they consume the goods that are produced in eastern Canada.
It really is becoming a much more Canadian industry. Even though the resource is located in Alberta, the goods and services and equipment are coming from all over Canada.
The last one I want to talk about is the tax system, and to really put it in context as to how the tax system applies to the oil sands industry. This is not the oil and gas industry in total. It starts on slide 29, which is right near the end, and it shows that the current income tax rate today is 23% for the oil and gas industry; it's 21% for all other industries. That's being phased in, and we're almost down to the same rate. Next year we will be at the same rate.
In addition, there was a concept called the resource allowance, which was simply a substitute for deductibility of provincial royalties. That's being phased out next year as well. For the oil sands and all other mines, there is a concept called accelerated capital cost allowance, which I'm sure you've heard about. I'll go into a little more detail, but that concept is really something that applies to all mines and to some other sectors in the industry today. But it's somewhat offset by another tax provision called the “available for use” rule.
The “available for use” rule says you can't deduct the cost you spend until it's available to be used. Well, in the oil sands, you're spending dollars for almost five years, sometimes six years, before you actually start producing anything. So you won't be able to deduct any of those costs until it's available for use, or a maximum of three years. The concept of the accelerated capital cost allowance was actually married with the “available for use” rule because they offset each other going forward.
Finally, there has been some question about the investment tax credit issue. There are no longer any investment tax credits, except for Atlantic Canada, and they apply there to a broad spectrum of industries. It's not dedicated only to oil sands or oil and gas.
The last one I really want to talk about is the accelerated capital cost allowance. Since there are a lot of questions about it, I think it is important to understand how it works. Accelerated capital cost allowance is really the deduction of the capital costs you're spending, for tax purposes. In other words, if you spend $5 billion in capital to build an oil sands plant, you're allowed to deduct that. The accelerated capital cost allowance allows you to deduct it as soon as you have revenue from your mine, rather than spreading it out over the life of the mine. So there's a time value of money associated with having the earlier deduction rather than later, but it's the exact same deduction. If you spend $5 billion, all you're allowed to deduct is $5 billion. There's no increase, no uplift, no subsidy. It's simply that you get to deduct it when the revenue arrives.
The limitation on that is that you can only deduct it against the revenue that comes from that mine. In most other tax situations you're allowed to take that deduction to your whole company. Accelerated capital cost allowance is limited only to that one mine, and that mine has to be a major expansion. It has to be greater than 5% of your revenue. It can't simply be ongoing expenditures. So it's very limited, in that sense, and it's also constrained by the fact that you have this “available for use” rule that says you can't deduct any of it until you start producing, or until at least three years have passed. This means it sits there being not deducted for three years, which is not applicable unless you have a large-scale project that's not producing.
The last part of this is really just looking at the tax deferral side of it. In a tax deferral, you can deduct this earlier than you would otherwise, but I just want to emphasize again that it's not deducting any additional costs. It is the time value of money associated with it.
I think I'll stop there. There is one slide talking about the $1.5 billion in subsidies to the oil and gas industry out there, and several people have talked about that. I go through here and talk about where it came from and how many of the things that are in there have been eliminated already. Resource allowance is going next year. Earned depletion was gone back in 1990. The Syncrude remission order has been gone since 2003, and ITCs were included in that.
The biggest part of that claim that was out there of $1.5 billion in “subsidies” was $1 billion associated with exploration, the writing off of dry holes. When you drill a hole and you don't find anything, you get to deduct that capital. That doesn't really apply to the oil sands at all, except in the very small circumstances of some exploration for the in situ.
The other ones are the ones in the accelerated capital cost allowances I've described.
I realize that's very technical. I apologize for taking the extra time, but I thought I would at least put the information out there, and if you have questions, we can describe it.
4 p.m.
Conservative
The Chair Conservative Lee Richardson
Thanks very much. I'm sure there will be more arising from questions as we go on.
Dan, would you care to carry on?
