Natural Resources Committee on June 15th, 2006

[Kory Teneycke]

I'll maybe take a stab at the agricultural component, just with a couple of quick words on the price issue.

Having open borders is going to be key to getting competitive prices. We're having a market for ethanol develop in North America with very transparent pricing. It's traded like other commodities on the Chicago Board of Trade. I think as long as the borders are open in North America, you should have a very transparent pricing system for ethanol; it's already largely developed. So I think we can protect against that.

As for agricultural producers, I would classify the benefits as falling in two different categories. One is the category of increased markets—and increased local markets—for the commodities they produce. So whether or not you are involved in an ethanol plant or directly as a primary agricultural producer, if there is one in your area—or even if there isn't, but there are just a number of them, broadly speaking, in Canada—you're going to get a lift in agricultural commodity prices, because you'll have a new market and a very large market for those primary agricultural commodities.

Most economic analyses show that within about 100 kilometres of a sort of standard 120-million-litre to 150-million-litre ethanol plant, you should get a 10¢ to 15¢ boost in local basis for your commodities. If it's corn or wheat, depending on what area you're in, that plant will raise the local commodity price for whatever the feedstock is. Everyone gets it, no matter what they're doing.

The second set of benefits would be specific to your being invested in the industry. About 40% of the plants in the U.S. are owned by primary agricultural producers. They're involved to one level or another in about 60% of the plant. These farmers are using the ethanol industry, and increasingly the biodiesel industry as it develops, as a natural hedge against the commodity they're growing. If canola prices are lower, your biodiesel plant should be more profitable, and a producer can use that as a bit of a hedge.

Value-added processing is something Canada has not done much of or done very well in the agricultural sector in the past. This is part of that story.

So larger markets for agricultural commodities, a chance to participate in those value-added businesses, and the combination of those two provide a substantial benefit to primary agricultural producers.

[The Chair, Conservative, Lee Richardson]

Ms. Bell.

[Catherine Bell, NDP, Vancouver Island North, BC]

Thank you, and thanks to all of you for your presentations. They're very interesting.

[Christian Ouellet, Bloc, Brome—Missisquoi, QC]

Maybe we could ask you to ask the witnesses to make shorter answers. They could condense their answers.

[The Chair, Conservative, Lee Richardson]

These are hard questions.

[Catherine Bell, NDP, Vancouver Island North, BC]

I hope that didn't eat into my time.

I have a couple of questions. All of you talked about the need for an energy policy or strategy in Canada, and I like the fact that you're thinking long-term. We've heard from other alternative energy producers in these meetings with respect to development of a policy, and some of you said we need to get it right, which I think is very important.

I'm wondering what role the alternate fuels sector should be given in the development of that policy. In that framework, could you touch on some of the things you see as important to be in a policy?

You started to touch on it in the last question, with open borders. I'm wondering how we achieve that. Mr. Perez, you've talked about the subsidies the U.S. has for their production incentive, and I'm wondering how we achieve this open border situation in light of that. What are we going to need to do?

Also, with regard to investments—some of you mentioned investments—there are subsidies for other energy producers in this country, specifically oil and gas, in the form of investment credits. I'm wondering, if you had the same kinds of things, how they would help the industry. And what kinds of research and development incentives are needed, or are any research and development incentives needed, or have there been some?

[Kory Teneycke]

Shall I take a first crack at that on the investment side?

As I mentioned, there are over 100 ethanol plants in the U.S. operating today, and 30 more in construction. In the biodiesel industry you have about a dozen large plants in the U.S. being constructed, and we have two that were recently opened in Canada.

We have within our industry a pretty good idea of what would constitute a good economic and regulatory environment to build in. What you want to be in is a jurisdiction that generates a return on investment that is competitive with that in neighbouring jurisdictions. If you're looking at doing a wheat-based ethanol plant or a canola-based biodiesel plant in western Canada, you're going to look at North Dakota and Montana versus Saskatchewan and Alberta. Your feedstock costs are going to be very similar irrespective of which side of the 49th parallel you build that plant on, and you're going to build it where you're going to get the best return.

It's no different from the auto industry, the aerospace industry, or any other non-resource industry in terms of being return-driven. Resource industries are different, obviously. You can't move the uranium in northern Saskatchewan to a tax haven: it's there and it's not moving. But you're not bound to a geographical location in the same way with a manufacturing industry such as this.

Being competitive in terms of return is very difficult. There isn't a simple answer to what that takes, because every jurisdiction is a bit different in terms of their tax policies or their labour laws. There are about 150 different factors in the equation that will generate what your return on investment is. Generally speaking, if you mirror the types of support programs that are available in the United States, which is the most important market to compare ourselves with, because it's so integrated, then you are going to be pretty competitive. I think we're realistic that the support threshold is at a number that's smaller than what exists in the U.S., but we have some advantages in terms of perhaps lower feedstock costs and other advantages.

I know this is not a simple answer, but I think you will know very quickly, based on whether people are actually announcing plants and are constructing plants, whether we've gotten the policy right. We're happy to pressure-test various ideas within our members' economic models to give you an idea whether or not it is right.

[Alain Perez]

Ms. Bell, first you have to decide who pays, the taxpayer or the consumer. That's the first critical question. If you don't match what's happening in the U.S., the Canadian industry will just not take off. If producers are not as subsidized here as they are in the U.S., U.S. prices will be lower, and we'll buy from the U.S. This is what's been happening in Ontario for many years. If the blenders do not get the same subsidies, you're going to have the Canadian producers unable to export into the U.S.

Overall, it's going to be very expensive, and who pays, taxpayers or consumers? If consumers pay, then you could probably have more flexible policies, but politically it's going to be difficult. If taxpayers pay, then I think the only way to address the policy is to look at each segment—agriculture, ethanol producers, ethanol blenders—and ensure that the prices and the costs to those segments on both sides of the border are the same.

The U.S. has started something that is very big, which they justify on security of supply. From security of supply, politically they'll digress to everything up to the war on terror. It's a paramount concern. A lot of money is being spent there, and that's something you need to consider.

[Jesse Row]

I think part of your question was focused on the larger renewable energy picture. If we look at that larger picture and try to develop the next generation of energy sources within this country, my short answer is that we need all of the above. We need to be providing incentives and support for research, commercialization, and production. It does need to be a comprehensive approach. If you only do one or the other, we're not going to get all the way to market maturity.

A lot of people say that in Canada we're not very good at commercializing. We lead the world in some of our technologies and research, but we don't get it into the marketplace. That happens in other jurisdictions, and the benefits go to other jurisdictions. So commercialization is one area on which we do need to focus in this country.

For some specific examples, I'll go back to the list in my opening remarks. If we're looking at the renewable fuels industry, you can see that within a standard, you can provide additional incentives to particular types of fuels that are not as mature as others.

Having biodiesel account for two litres, within the standard, for every one litre of starch-based ethanol or cellulose ethanol, you can give the same kinds of incentives: production incentives, similar to the wind power production; consumer tax incentives, such as the exemption of the road taxes on fuels; and capital cost allowance.

I would come back to the last one, since it's is a very big mechanism. Right now, in transitioning from conventional fuels, which are well established, it can provide multiple benefits to getting us the next generation of energy technologies we need.

[Catherine Bell, NDP, Vancouver Island North, BC]

Thank you.

[The Chair, Conservative, Lee Richardson]

I'd like to pursue that for a second, since it's something that recurs. This question of capital cost allowances, and so on, has come up in the committee before. It's my sense that this referred more to the commercialization, building, and capital costs, as opposed to a capitalization of R and D.

When you commented, were you suggesting that incentives should be in the end product, providing an incentive to get to that point, because the product is going to be for sale or available? Or should the incentives be in R and D along the way--or both?

[Jesse Row]

Again, I think it's all of the above. If you provide only a production incentive, without providing any way for the capacity to be built, you'll never get to production. If you provide support for the capacity to be built, but they can't make a profit at the end point, then you're back to where you were before. I do believe it needs to be comprehensive.

[The Chair, Conservative, Lee Richardson]

Kory.

[Kory Teneycke]

Mr. Chair, on that point, we've done some modelling on capital cost allowance. I think for our industry, it's a little different. It depends on what technology you're looking at and how high your capital costs are, versus how high your operating costs are. Some of these technologies are actually not very capital-intensive, so the actual benefit it would provide to our industry would be significantly lower than for other projects, such as an oil sands project, where capital costs may be exponentially higher.

I don't think there's a one-size-fits-all answer. It really depends on the technology platform you're looking at and how high those capital costs are for that particular type of technology.

We're looking at that question closely. Our early indications are that for ethanol and biodiesel, for more traditional methods it's a very low value. For cellulose ethanol, it may be a higher value because the capital costs are higher. But we'll be happy to provide to the committee members with some additional information.

[The Chair, Conservative, Lee Richardson]

Thanks.

It was really a question of the kinds of companies. And it's also different when they're vertically integrated and capitalize their R and D. Then you get the capital cost allowance essentially on the R and D going in, which doesn't always apply to these guys, because there are different companies that create, invent, and....

[Jesse Row]

I think customizing based on the specific examples is highly appropriate.

[The Chair, Conservative, Lee Richardson]

Mr. Harris.

[Dick Harris, Conservative, Cariboo—Prince George, BC]

Thank you, and thank you, presenters.

It's nice to see you again, Kory. It's been a number of years.

I have a couple of quick questions.

Obviously, you've been here visiting government before. You've laid out the needs, and you've laid out a bunch of recommendations. The benefits are evident from an environmental point of view.

How long have you been bringing this same message to government? What do you see is the most significant reason government has not acted and pushed this further down the road?

[Kory Teneycke]

I think the biggest change has more to do with the price of crude globally than it does with one government or another. Going into the last campaign Liberals, Conservatives, and NDP had virtually identical policies for our sector, so there's been a fairly strong consensus around some of these issues in Canada, and I think there's a very strong consensus in the United States. It may have been the only issue that Senator Kerry and President Bush actually were competing to agree on during the last campaign.

There's a political consensus, but I think there's been a shift in the economics of our industry vis-à-vis the economics of petroleum as crude. Our costs of production are tied to agricultural commodities, which have been very stable; if anything, commodity price is declining slightly over time. Crude oil, the feedstock for our gasoline and diesel fuel, has obviously had a major shift in price. How bullish you are on our industry depends on where you think crude oil prices are going to be ten years from now. Some people think they're going to be double what they are right now; some people think they'll be $35 a barrel.

To the countries that are more pessimistic in terms of what the price of oil is going to be, investing in renewables seems like a very good idea. If you are a net energy importer like the United States or China or Brazil, there are urgent national security and energy security reasons for you to invest heavily in this industry.

Globally speaking, I think that's the biggest change in terms of why we are seeing our industry in such a dramatic growth period.

[Dick Harris, Conservative, Cariboo—Prince George, BC]

Different governments aside, the goal of creating an alternative fuel to help with our environment and emissions is one every government could agree on.

You've all talked about having to harmonize the regulatory environment, creating a stable economic environment, and putting incentives together. Is it based strictly on...? Is it the cart before the horse? Is the industry waiting for the profitability to become such that it's worthwhile producing this, or is the industry waiting for the government to make some changes so that they can begin to make the production of these alternative fuels more profitable? Or is it both combined?

[Jesse Row]

I'd like to provide a few thoughts on that. For me, the answer to both the questions you posed is really that there's a combination of factors, and right now we're coming to a point at which enough of them have come together that something has clicked. Kory talked about world energy prices; certainly that's a big pressure. In this country, you look regionally; we started in the prairies and realized this was something that could be very good for the farmers as well, so there's a component that's come together. If we put enough provinces together, all of a sudden folks like the petroleum retailers say that it's going to be really hard for them to make boutique fuels in all these different places, so why don't we standardize it? For me, that's another very big component to talking about this nationally: the fact that as soon as you get enough people on board, enough provinces on board, all of a sudden it makes sense to go to the full country, as opposed to letting it evolve one after another and having specialized jurisdictions.

If you put all those components together, something has clicked, and that's the reason we're talking about it today--multiple reasons.

[The Chair, Conservative, Lee Richardson]

Alain, would you like to comment?

[Alain Perez]

On the economics of petroleum, once you massively invest in renewable fuels, in a sense you're betting that crude prices are going to remain very high. Nobody really knows what's going to happen. The price of crude oil today is $70. That $70 is at least $20 of speculation and fear of what could happen here and what could happen there, and probably $40 would reflect the current supply and demand tightness. It could go down or it could go up.

If you look at a world where Iran is not a threat or a perceived threat, if you look at a world where the Middle East becomes quieter, and if you look at a world where some conservation finally takes place—and I'm going to keep repeating that even if nobody asks me a question on it, because nobody talks about that, by the way—then crude oil's going to go down to $30 or $35.

If you look at a world where the threats increase, the fear factor keeps on having those effects, and no real conservation takes place, then you're going to have crude at $75 to $100. That's the range. A lot of it is within human control.

I don't know what it's going to be, but it's certain that with crude at $35, subsidization of other fuels is going to be a lot more expensive for governments or taxpayers than it would be if crude oil were at $70. But at $70, it already has inconveniences.

You have to choose the scenario for the future, and it's not easy. It's an added complexity to the policy that you're going to be defining. The policy will have to change or adjust to future petroleum prices, because the economics change completely.

[The Chair, Conservative, Lee Richardson]

Thank you very much.

Mr. Cullen.

[Roy Cullen, Liberal, Etobicoke North, ON]

Thank you, Mr. Chairman.

Thank you to all the panellists for participating today.

First of all, I want to thank Pembina for the reality check on the biofuels announcement. It may do a number of things in terms of agriculture and clean air. I know I've had this discussion with Mr. Teneycke and I'm not sure he agrees with me entirely, but I think we need to understand that in terms of greenhouse gas reductions, it's not a panacea, to say the least.

I want to congratulate Pembina on the work they're doing on the oil sands too. They need to keep that up. I think we need to depoliticize that issue and deal with it as intelligent and mature Canadians.

Nonetheless, I have a question on the freeze, if that's the correct word; I know the terminology is nuanced from time to time. The freezing of the ethanol expansion program by this government, coupled with this government's statement that they want to move to biofuels and these ethanol targets, seems somewhat contradictory, in my judgment. On the one hand, let's move to a world with ethanol-based fuels, biofuels, and biodiesel, but let's freeze the ethanol expansion program.

Do you see any inconsistency in that? How would you react? Mr. Row, Mr. Teneycke, and anyone who wants to may answer.