Natural Resources Committee on Nov. 2nd, 2006

[Dan Woynillowicz, Senior Policy Analyst, Pembina Institute]

Thank you very much, to the Chair and the committee, for having me here today.

The approach I'm going to take, still within the context of economic impacts, is a little bit different. The way the Pembina Institute attempts to approach matters of energy production and consumption is perhaps broader, or some would say holistic, in that it tries to marry both the social and environmental costs and benefits to provide an overarching framework for how we can make decisions about energy development in Canada.

As you're all aware, a growing amount of national and international attention is being paid to Canada's oil sands, the development of which has led some to suggest that Canada is an emerging energy superpower. From our perspective, if we continue to pursue development of the oil sands in the business as usual manner, we risk becoming known not as an energy superpower but as a superpolluter.

The development of the oil sands is creating significant environmental challenges of both national and international relevance. How Canada's oil sands are developed, we believe, will serve as a defining test of our nation's commitment to sustainable development--that is, development that balances society's social, environmental, and economic imperatives.

As we've already heard today, in discussions regarding the economic impact of oil sands development, we tend to rely upon traditional economic metrics: capital investment, number of jobs created, contribution to the gross domestic product, tax on royalty revenues, etc. Unfortunately, decisions based solely upon these metrics don't take into account the full cost to society of whether and how we develop these resources--that is, the cost to our air, land, water, climate, and communities. We believe that a 21st century approach to sustainable development requires that the analysis of both the costs and benefits of resource development consider the environmental costs and the liabilities that accrue with that development.

Greg already spoke about the pace of development and the rate at which it is going to continue to grow, looking forward. I'd like to go back and look at what the national oil sands task force projected back in the mid-1990s, where they set what they thought was a very ambitious target of achieving a million barrels per day by 2020. That rate of production was achieved in 2004, 16 years ahead of schedule on the production side. Unfortunately, many of the environmental challenges, which the task force acknowledged, were not overcome in that time period. As a result, we're lagging behind.

Again, to provide some context from an environmental perspective, on the basis of the development in the Athabasca oil sands region between 1965 and 2004, this year, the United Nations environment program identified that region as one of the world's top 100 global hot spots of environmental change. That went from virtually no production to a million barrels today. Imagine, if you will, tripling that production, or increasing it by a factor of five in the coming decades, and I think you would acknowledge that we have some significant environmental challenges to overcome.

My colleague Mary Griffiths will be here next week to speak specifically to some of the water use challenges. There's a long litany of other impacts, whether it's local and transboundary air pollution or destruction of the boreal forest and the reclamation of these oil sands facilities back to boreal forest.

Today what I'd like to focus on, though, given my limited time, is what we believe to be one of the most significant and pressing challenges, and that is curtailing the oil sands contribution to climate change from soaring greenhouse gas pollution.

Presenting on that specific topic of climate change is very topical this week, given the release of Sir Nicholas Stern's report on the economics of climate change, which so clearly and eloquently links the environmental imperative, taking action on climate change, to the economic consequences of failing to do so. His review found that if we fail to act, the overall costs and risks of climate change will be equivalent to losing at least 5% of global GDP each year--now and forever.

In contrast, the costs of action to reduce greenhouse gas emissions to avoid the worst impacts can be limited to around 1% of global GDP per year. We believe that reducing greenhouse gas emissions stands as one of the world's most important economic imperatives, in addition to being an environmental imperative.

As a result of the energy intensity of extracting bitumen from oil sands and then upgrading it to produce the synthetic crude oil that can be shipped to refineries, the volume of greenhouse gas pollution produced on a per barrel basis is approximately three times greater for oil sands, relative to conventional oil production. With significant increases in projected oil sands production, the oil sands have become the fastest-growing source of new greenhouse gas pollution. So in an era in which we are grappling with levelling off our greenhouse gas emissions and beginning to reduce them, we have this one sector that stands alone with a very rapid increase in its emissions. Based on some projections we've undertaken, the oil sands could account for almost half of the projected business as usual growth of greenhouse gas emissions nationally between 2003 and 2010.

As was concluded in Stern's report on the economics of climate change, there is still time to avoid the worst impacts of climate change, if we take strong action now.

In Canada, the most urgent action is required in the oil sands. In the next several years, there will be several oil sands megaprojects that will be undergoing their design, engineering, and construction. As was famously stated by Benjamin Franklin, an ounce of prevention is worth a pound of cure. It's going to be much cheaper to build the ability to achieve significant greenhouse gas emission reductions and greenhouse gas management into oil sands facilities at the outset, rather than relying upon expensive retrofits in the future.

Just last week, the Pembina Institute released a report entitled, “Carbon Neutral by 2020: A Leadership Opportunity in Canada's Oil Sands”, in which we conducted an analysis of the cost for oil sands producers to achieve carbon-neutral or net-zero greenhouse gas emissions by 2020. While we advocate a number of different approaches to achieving this, including fuel switching and energy efficiency at the site, we chose to focus on two mechanisms: carbon capture and store, and the purchase of greenhouse gas offsets. We found that the cost of achieving carbon-neutral production could range anywhere from about $1.76 U.S. to $13.65 U.S. per barrel. At the lower end, this is comparable to the cost of removing lead from gasoline or reducing the amount of sulphur in diesel. We also believe that the analysis was quite conservative, given that it didn't consider possible sources of revenue associated with enhanced oil recovery using the captured carbon emissions, or the likelihood of cost reductions that would result from improvements in the technology after implementation.

Even in the shorter term, achieving carbon-neutral oil sands production could be cheaper than it would be in 2020, if you look at current offset prices under the Kyoto mechanisms. To purchase Kyoto-compliant emission reductions from real environmental projects today would allow a full emissions offset to occur for about $1 Canadian per barrel or less.

Implementing these solutions is going to require the industry to deviate from business as usual. Beyond just tweaking the current practices, such as energy efficiency and trying to reduce energy intensity, it's going to require that we make step-wise changes. Fortunately, when it comes to the oil and gas industry, they have both the financial resources and the technological know-how to make this happen.

In 2005, the sector achieved an historical record for profits when operating profits reached over $30 billion, an increase of more than 50% from 2004. The industry also boasts a record of technological and performance innovation to overcome both economic and environmental challenges—for example, reductions in the flaring and venting of solution gas in Alberta.

We believe this capacity for innovation must be directed towards overcoming the environmental challenges of oil sands development. As Thomas Homer-Dixon of the Trudeau Centre for Peace and Conflict Studies at the University of Toronto recently noted in an editorial, Canada needs to unleash its capitalist creativity on global warming.

From our perspective, when it comes to unleashing this creativity and innovation, the Government of Canada has an important role. Our markets exist within a framework of laws, regulations, and institutions that is crafted and implemented by the government. With the failure of corporate volunteerism to reduce greenhouse gas emissions, it's clear that legislated emission reductions are required.

Given today's economic theme, rather than discussing that, I'd like to focus on the Government of Canada's fiscal policy as it relates to oil sands, and more specifically the accelerated capital cost allowance that Greg already described.

In a 2000 study, the Commissioner of the Environment and Sustainable Development found that the oil sands received exceptional and preferential tax treatment relative to other forms of energy development. His analysis revealed that the oil sands received a significant tax break because these projects qualify for a 100% accelerated cost allowance. With this provision, a company only pays tax on income from an oil sands operation once it has written off all eligible capital costs.

By way of contrast, conventional oil and natural gas, the industry's peers, qualify for a 25% capital cost allowance.

The federal Department of Finance has estimated that the benefit of this tax concession is between $5 million and $40 million for every $1 billion invested. So given the magnitude of investment currently occurring and projected into the future, this translates into potentially billions in deferred tax revenue.

We've been advocating that the Department of Finance eliminate the accelerated capital cost allowance for oil sands to put oil sands on a level playing field with conventional oil and natural gas. This could be done by creating a new capital cost allowance within the Income Tax Act for oil sands and setting the capital cost allowance at 25%, the same rate that's received by conventional oil and gas.

The money saved by eliminating this preferential tax treatment can help facilitate a transition to more sustainable forms of energy production by providing funds for investments in renewable energy and energy efficiency, or perhaps it could just become more focused in its application to oil sands and apply to environmental technologies, such as carbon capture and storage, that can help us overcome some of the environmental challenges associated with development.

To close, I'd like to note that the world is watching Alberta. On a regular basis I get calls from media from around the world. There is a steady stream of journalists travelling to Fort McMurray to see just how we are developing this very large resource and whether or not it's in keeping with many of the international commitments and the way Canada is viewed and perceived by our international peers.

As a result, we're not going to be judged solely on the amount of money invested or jobs created or profits reaped, but by whether we develop the resource in a manner that ensures a lasting legacy of economic prosperity, a healthy environment, and improved social well-being.

I have focused a little bit more on environment. I certainly can comment a bit more on some of the economic dimensions, including some of the economic challenges in Alberta that are associated with the pace and scale of development, and I'd be happy to do so if you'd like.

Thank you.

[The Chair, Conservative, Lee Richardson]

Thank you.

That certainly stimulates some questions.

Mr. Cullen, are you prepared to begin?

[Roy Cullen, Liberal, Etobicoke North, ON]

Thank you, Mr. Chair, and thank you to the presenters.

Concerning the accelerated capital cost allowance, the Department of Finance now is moving more to economic useful life, so this must have been brought in as a way to encourage the development of the oil sands, which was probably needed at some point in time if you wanted to support the oil sands, but in today's economy I'm not sure that is appropriate.

The other point I'd like to make is that with the capital cost allowance, while it is true that it's a deferral, if there is a lot of capital expenditure ongoing, that deferral becomes quite permanent. I'm a CA and I know about deferred taxes. It becomes a permanent deferral of taxes, so it's not just one time.

Mr. Stringham, I know you wanted to comment on that, but I'd like to ask a question with respect to the development of the oil sands to meet some domestic oil consumption requirements. There was some transaction completed recently, if I understood it correctly, where Conoco in the United States signed a strategic partnership with EnCana to take huge amounts of their production out of the oil sands and refine them in their refineries in the United States.

If we need the oil sands production for our domestic needs, why would a transaction like that be approved?

[Greg Stringham]

Let me just address the first comment you had on accelerated capital cost allowance. The first thing that's important to recognize is that it actually was in place from back in the early seventies. It applied to all mining companies at that point in time. It was in 1996 that it was extended beyond the mining companies to include the oil sands. So from that perspective, that was the only change. It was already in place, so it wasn't something that was created on behalf of the oil sands.

It's now also been extended in different forms, as Dan has suggested, to conservation, energy efficiency, renewable energy, and other things. So it's being used by the department as a part of their tool kit as they go forward.

That's just so people don't believe it was put in place just for oil sands.

[Roy Cullen, Liberal, Etobicoke North, ON]

No, but we're playing with semantics. By extending it to the oil and gas sector, that made it newly available to the oil sands sector. Also, the Department of Finance, as you probably know, is moving now more to economic useful life. They're trying to get rid of all these accelerated rates.

But anyway, carry on.

[Greg Stringham]

So they just extended it to the renewables and other people to try to bring it on a level playing field. That's what I think they're trying to get to as they move forward.

On the question you had regarding the decision to build the refining capacity and the agreement that has been struck between the two companies, I can't comment about the commercial aspects of that, but one of the things that I think is important to put in context with this is, as you'll see in that list of upgraders I provided in the slides, we already upgrade in Canada 800,000 barrels a day of the 1.1 million we're producing; so we're upgrading about 72% already in Canada.

With the 14 additional upgraders that have been announced, which are on that chart, and that includes expansions of the existing ones as well as 10 new ones, if you put that along with our forecast for oil production at 3.5 million barrels a day, you're still going to see 3 million out of the 3.5 million being upgraded here in Canada. So you're getting close to or over 80% of that happening in Canada. It's not all going to happen in Canada, but the vast majority of it already is, and we'll continue to be doing that as we go forward.

The reason there was an agreement to happen with ConocoPhillips, as I understand the agreement, is because it was very easy for them to add a single facility, so a coker that takes the heavy oil to light oil, to their already existing refinery; the ones in Canada and Alberta are already doing much of that as it goes forward. So it is happening.

[Roy Cullen, Liberal, Etobicoke North, ON]

Yes, I understand it's happening, but I think there's a certain logic here that says if you're going to take the oil sands production, you need that for domestic production. I know it's not your decision to make. You're not a regulator. You probably think it would be a great thing. In fact, looking at everything on these charts, we know that everybody is going to make a lot of money, and that's great. I have no problem with profit.

But it's interesting. Some of the countries you compare Canada with, Kazakhstan and Brazil--I don't know if you looked at all the money, because there's a fair bit of leakage in countries like that, too, in terms of returns.

Nonetheless, I'd like to come back to Mr. Woynillowicz. I'm sorry if I have the pronunciation wrong.

You talked about the cost to do the carbon capture and sequestration and the water recycling. The technology is generally available, but there is a cost. What pressures would be on Syncrude or the companies that are operating in the oil sands to go aggressively after that? It's going to affect their bottom line. So if no one says you have to do it, if no one provides any incentives, if no one does anything, how is that going to happen on an accelerated basis? We're going to be pumping out more CO₂.

On the water issue, I think I'm getting close to an answer. I wish people would just come clean on it. But it looks like there's a timing problem. The water goes into these ponds...and I could never figure it out. If it's going into the ponds and we're getting 90% recycle, how is it that the Athabasca River Basin is under siege? It doesn't make any sense. So there's clearly a timing problem. As long as the production keeps growing the way it is, we're going to have this timing problem and we're going to have this problem, it seems to me, with the Athabasca River Basin.

So how are we going to get these technologies accelerated? These companies aren't going to take a $12 a barrel hit to their bottom line just to be good corporate citizens.

[Dan Woynillowicz]

I think you touch on a very good point, in terms of what needs to happen in terms of the context to actually make some of these what we refer to as step-wise changes occur. What we have seen--and to give the industry credit where credit is due--are some incremental improvements on an intensity basis, whether it's the amount of water used per barrel of synthetic crude oil or the greenhouse gas emissions, etc. But with the pace of development and the rate at which these companies are expanding, despite those intensity improvements on all fronts, we're seeing a drastic increase in the environmental footprint. So it begs the question, how do we manage that overall cumulative growth of environmental impacts?

Certainly one of the challenges I alluded to is that we don't actually have the regulatory framework in place today to actually drive the changes we need within the industry. I think government has a very clear role on the regulatory side, as well as in terms of using things like its fiscal tools, like tax concessions, such as the ACCA, to be directed very specifically at investments in technology that will make a very significant step-wise improvement, whether it's reducing greenhouse emissions or improving water use.

[Roy Cullen, Liberal, Etobicoke North, ON]

Do I have any more time?

[The Chair, Conservative, Lee Richardson]

No, you're right on seven minutes.

Madame DeBellefeuille.

[Claude DeBellefeuille, Bloc, Beauharnois—Salaberry, QC]

Thank you, Mr. Chair.

Thank you very much for the quality of your presentations. I much appreciated them.

My first question is for Mr. Stringham. You said that one half of the revenues generated by the oil industry was earmarked for Canada, and the other half, because of all the royalties, was for the oil industry. Of concern to us in the past two or three weeks, is the question of balance; if Canada and the oil companies each receive one half of revenues, who will pay the social and environmental costs? Will they be shared equally between oil companies and Canada?

The witnesses cannot assess the social costs. When I talk about social costs, I mean environmental costs.

This morning, someone told me that the boreal forest represented the lungs of the planet and that part of the forest was located in Alberta. She also told me that in Quebec, companies had to wait several months before obtaining cutting rights, whereas in Alberta, oil companies could obtain the same rights within one or two weeks.

The management of natural resources, such as forest and water, is not a federal jurisdiction. As Mr. Cullen mentioned, we are neither against profit nor progress, nor against a healthy economy, but once we will have tapped the well dry, who will pay for the social and environmental costs? This is something I am passionate about, and I have not been able to find out what the social and environmental costs are. Perhaps you can tell me.

How much does your industry invest in research and development, in the science and technology that specifically addresses the reduction of pollution and greenhouse gas emissions?

[Greg Stringham]

Let me start with your last question on the science and technology and on the investment in research and development by the industry.

I won't be able to answer your question directly on how much is directed at the social cost, because the costs are blended. The industry is spending money now, as Dan indicated, to reduce the temperature of the water they use, which reduces the amount of fuel they need, which reduces the amount of carbon dioxide that is emitted from that. Syncrude used to use 80-degree temperature water. They now use 40-degree water. They're trying to get it down to room temperature so that they don't need much heat. If they can do that, there's a social benefit built into that, as well as an economic benefit, so the $720 million the industry is spending on research and development has a blend of all of those. There's more than one reason for it, so it's very hard to separate things and say this is for that and that's only just for the social. It's for the benefit of both, and that's why they're doing it.

According to a recent study that came out just a couple of weeks ago, $720 million is how much the oil and gas and energy industry spends per year. But it is also working on environmental technology. It is working on other technologies as well to try to improve the cost while reducing the environmental footprint associated with it. Both of those go hand in hand, moving forward.

[Claude DeBellefeuille, Bloc, Beauharnois—Salaberry, QC]

This week, Mr. Reid explained that the carbon sequestration technique is still in the testing stage and that the technology was still not up to scratch.

Is the technology currently being used really only in the testing stage?

[Greg Stringham]

The carbon capture technology is available. The concern that many companies have is that if they take just the regular carbon dioxide that goes out of a stack, at the top of a chimney, it's already at atmospheric pressure. It's very expensive to compress it back down into usable form, and you may generate more CO₂ by doing that than you're capturing. So there needs to be some technological improvement for that kind of carbon dioxide.

At other places where it's more concentrated, it is being used now. In Weyburn, Saskatchewan, it is being used to take CO₂ coming from the United States. It goes into the Saskatchewan oil fields and is being sequestered and is pushing more oil out. In the United States, the CO₂ technology is very much used across the country. Certain elements of it are there, but when it comes to the capture of CO₂ when it's already at atmospheric pressure, that's one that needs to have some research. It's being done and people are working on that to come up with technologies to be able to put that in as a more mainstream or lower-cost ability to do that. That gets to some of the comments that Dan made on the research that is being done in that area.

[Claude DeBellefeuille, Bloc, Beauharnois—Salaberry, QC]

A number of sectors in the renewable energy industry are voicing their discontent at not receiving the same support as you are through the accelerated capital cost allowance.

You said that several sectors are entitled to that allowance, but you may want to qualify your statement, Mr. Stringham. The oil patch, which is your industry, enjoys a 100% capital cost allowance rate, whereas in other sectors the rate is of only 25 to 50%. You have a substantial advantage.

If the government decided to remove that advantage, what would be the concrete impact on your industry?

[Pierre Alvarez]

Merci beaucoup.

I'd refer to the committee a letter from the Minister of Finance on May 31, 2006, in response to the Sierra Legal Defence Fund, which deals specifically with the question of whether there's an imbalance between the renewable and non-renewable. I'm happy to make that available.

Secondly, I think it would be interesting for the member to know that one of the biggest sources of investment capital in the renewable energy business is the oil and gas industry. The biggest developer of wind power in Canada is Enbridge, a pipeline...TransCanada, a pipeline; TransCanada, a coal producer. The biggest user of solar-powered equipment in Canada is the oil and gas industry because it allows us to power. If you look at biofuels, tidal power across this country, one of the returns being made by these companies is going directly back into the renewables industry.

Do we need to do more? Yes, I think we do. I'll give you an interesting challenge that we're now facing. We've invested so much in wind power in Alberta that by 2009 we won't have the transmission capacity to move the electricity we're generating from all the wind turbines we've built.

In Ontario, by the way, Mr. Tonks, it is in even worse shape when some of these big projects come on.

What's very interesting is you see these big investments going in, but the rest of the system isn't keeping up with them. We have some real challenges as we go forward on some of these.

I'll be happy to make this available to the committee, Mr. Chairman.

[The Chair, Conservative, Lee Richardson]

Thank you.

We'll distribute that, because it seems there were some differences of opinion. I appreciate your question, and I hope that makes it clear.

Perhaps if both of you could provide your version of an answer to that question, it would be helpful to the committee, because it does come up quite frequently, this question of subsidies or not subsidies and what they really mean. So I would welcome a submission from both of you on that specific question.

I appreciate your offer, Mr. Alvarez.

[Pierre Alvarez]

Mr. Chairman, would you like us to get back to you in writing? Is that your request, just so I'm clear?

[The Chair, Conservative, Lee Richardson]

Well, I actually thought your presentation on that point was very good, and maybe you could just append that to this letter you referred to. Having now referred to it in committee, it will have to be tabled through the clerk, and he will distribute it to all the members.

[Pierre Alvarez]

Thanks very much.

[Alan Tonks, Liberal, York South—Weston, ON]

Without the editorial comment with respect to Ontario and me, Mr. Chairman.

[Voices]

Oh, oh!

[Pierre Alvarez]

That was purely a geographic concern, Mr. Tonks, as you well know.

[Alan Tonks, Liberal, York South—Weston, ON]

I didn't take it personally at all, Mr. Alvarez. Thank you.

[Dan Woynillowicz]

The Pembina Institute is currently just completing a research report looking at fiscal treatments of oil sands, specifically, both provincially with the royalty regime and federally with the tax system. That report should be scheduled for release before the end of this month. I can certainly make sure that all the members of the committee receive a copy.