Natural Resources Committee on Dec. 14th, 2010

[The Chair, Conservative, Leon Benoit]

Good morning, everyone. We're here today to continue our study on energy security in Canada.

We're dealing today with the section of the motion that we passed to give a framework to this study. We're dealing today with regional economic impacts of oil and gas development.

We have with us today two groups of witnesses on the first panel and we also have two groups of witnesses on the second panel.

In the first panel today we have, from the B.C. Oil and Gas Commission, Eric Alexander Ferguson, commissioner and chief executive officer. Welcome, Mr. Ferguson.

And we have, by video conference today from Edmonton, Alberta, Alberta's Industrial Heartland Association, Neil Shelly, executive director, and Jana Tolmie-Thompson, economic development officer. Welcome to both of you from Edmonton. The area you're talking about today extends into the constituency I represent, so you're particularly welcome today.

We will go directly to presentations in the order listed on the agenda.

Mr. Alexander, go ahead with your presentation for up to seven minutes.

[Eric Alexander Ferguson, Commissioner and Chief Executive Officer, B.C. Oil and Gas Commission]

Thank you.

Good morning, everyone. I am Alex Ferguson, commissioner and chief executive officer for the British Colombia Oil and Gas Commission.

Some earlier submissions to this committee have highlighted the fact that unconventional gas--and more specifically, shale gas--is changing the energy landscape in Canada. Believe me, nowhere is that more evident than in British Columbia today.

In this submission I'll speak about our role as a regulator in British Columbia and the extent of the province’s natural gas resources from what we know today, and look forward a little bit from our perspective.

Certainly natural gas exploration and production has grown to become a crucial part of our province's economy, and as such, safe, responsible development has become a priority to stakeholders and citizens. The resource is abundant within our borders, and advances in horizontal drilling technologies have enabled more efficient capture. However, being rich in natural gas isn't the only piece we have in front of us. The government has driven competitive royalty regimes and a progressive regulatory structure we operate within. Prioritizing environmental and social stewardship has put us in the position we are in today.

My organization is a crown corporation that was signed into existence in 1998 through a piece of legislation in the province. We're headquartered in Fort St. John, which is the heart of our oil and gas industry for the province. We also have offices in Victoria, and satellite offices in Fort Nelson and Dawson Creek. We are an independent regulatory agency with responsibilities for overseeing oil and gas operations in the province through exploration, development, and pipeline transportation, all the way to reclamation--essentially a one-stop or single-window regulatory agency.

Essentially this means there's a split between government policy and the regulatory world. The province sells the land tenure, which gives companies the right to operate, and develops policies, whether they're environmental policies or fiscal policies, while we take on the regulatory responsibilities or the implementation of those policies. Our one-stop format not only brings all the industry requirements together in one place for streamlining; it provides a really good focus for coordinated, responsive decision-making. Part of our role is to inform our decision-making with a range of interests, from environmental to first nations and public concerns.

Our core roles as a commission, a regulatory agency, include reviewing and assessing applications for industry activity, consulting with first nations on every application, ensuring industry complies with the legislation, and cooperating with partner agencies. We don't do it alone. The policy interpretation work requires a lot of back and forth with different government agencies. The public interest is protected through the objectives of ensuring public safety--which is paramount for us, protecting the environment, conserving petroleum resources, and ensuring equitable participation in production for all operators.

As I said earlier, we are a crown agency funded by application review fees and production levies. Our sole shareholder is the Province of British Columbia, and our governing body is a board of directors appointed by cabinet. Regulatory decision-making is vested in me as commissioner. I also serve as the chief executive officer for the crown corporation in terms of keeping the operation running.

Decision-making authority is further delegated--I have the power to delegate authorities into the operation. We have three core operational divisions led by deputy commissioners: project assessment and compliance assurance; engineering, which is a core strength for us; and regulatory affairs and stewardship. Of course, we support that business with a variety of other administrative functions as a functioning business.

Natural gas in British Columbia is significant and growing. With the price of gas lately, it is a bit of a headache for people trying to figure out where that gas will go. But we have an opportunity in the province--it's the ninth year in a row that our reserves estimates have grown. We are one of the few jurisdictions in North America that have had consistent growth year-over-year, prior to unconventional gas discoveries through today.

We certainly have some of the more robust and defined basins for shale gas in Canada. The names of some of those basins are synonymous with anything you hear from the jurisdictions in the States: the Horn River Basin is one in particular; the Montney, in the south part of the Peace; the Cordova Embayment; and the Liard Basin. Those are significant opportunities, world-class shale plays or type gas plays.

The resource estimates for the Horn River Basin, for example, are anywhere between 500 trillion and 1,000 trillion cubic feet of gas. To put that in perspective, currently British Columbia produces approximately one trillion cubic feet per year. Given that one basin alone has upwards of 1,000 trillion cubic feet, we have a significant resource opportunity in front of us. These amounts of course are in addition to the approximately 90 trillion cubic feet remaining proven reserves in unconventional gas. These are reserves that are recoverable from our current technology.

Petroleum and natural gas land sales are a key indicator of industry’s investment in the province. The year 2008 was a record year for us, generating over $2 billion in sales for the province. In 2009 it was slightly below that, at about $893 million for the province. It is anticipated that 2010 will surpass 2009 at this point. This June saw the fifth-highest single sale in the province’s history, at over $400 million. Those are direct revenues to the crown. Royalties are forecast to increase $1.25 billion as a result of natural gas production increase alone between 2009 and 2013, and that trend is going to continue in the long-term forecast.

Coming back to the commission, we are recognized as a regulatory leader. We work well with other jurisdictions, most notably Alberta, our neighbour directly beside us. Our experience is being sought from other jurisdictions where unconventional gas interest is growing, for example, everywhere from Quebec, Atlantic Canada, and even Poland, as of the last few weeks. We're also a member of the Interstate Oil and Gas Compact Commission, a stateside agency that brings regulators together to share best practices. That's been a longstanding relationship we've had with all the jurisdictions across North America, in terms of understanding the regulatory pressures.

The commission maintains a number of working agreements and memorandums with different government agencies in the province. It's our way of properly interpreting the policy and legislation. The agreements we have support the commission’s authority with respect to upholding the values associated with those partner agencies’ mandates. We very much are a taker of their instructions and policies.

Commission employees ensure resources are recovered in the safest and most effective possible manner. We always attempt to ensure that liabilities incurred through these activities are borne by the operators. We interface with industry, first nations, landowners, the public, other government agencies, and of course peers in other jurisdictions.

The shift to unconventional gas in B.C. has been anticipated in the regulatory framework of the province. We recently enacted a new act in the province, the Oil and Gas Activities Act, which was brought into force on October 4 of this year. This legislation reflects a shift towards the future of oil and gas activity in the province, everything from ensuring we have the ability to incorporate technology advances, certainly the interest in unconventional gas and the different methods that are employed there versus the more conventional approach; increased social and environmental expectations—we've raised the bar in terms of addressing public and landowner issues—and also having the flexibility to allow the industry to drive forward.

In developing those regulations we've had extensive consultations over a four-year period with first nations, environmental groups, and industry. We believe we have a very streamlined and enhanced piece of legislation and regulations, reflecting the needs of those people, the environment, industry, and government itself.

On the ground we are certainly a newer jurisdiction, but we are one of the predominant shale gas operators in the country. In 2009-10 there were 557 wells drilled, which isn't a very large number. We're in the early stages of developing the plays.

Approximately 1,100 kilometres of pipeline were built in the province during this last year.

In the same period, on a yearly basis, we issued about 2,700 approvals for different aspects of oil and gas development in the province and we completed 4,300 site inspections with our field inspectors.

In conclusion, I really wanted to leave you with the notion that the success for us in responsibly developing this resource really comes down to four key attributes. One is what we like to refer to as “having the rocks”. We do have the resource. The shale is there and it's world-class. We do have a second component. It's having an effective and efficient regulatory model, which we believe we've slowly started to implement now. Third, it's having a competitive fiscal and policy environment, which is certainly not my mandate as the regulator, but I do see that evident in the province. And of course the fourth is executing well on all those as we go through.

We believe we are on the path to responsible, world-class shale gas development.

Thank you very much.

[The Chair, Conservative, Leon Benoit]

Thank you very much, Mr. Ferguson, for your presentation.

We go now to Alberta's Industrial Heartland Association. Mr. Shelly and Ms. Tolmie-Thompson, go ahead, please, with your presentation, for up to seven minutes.

[Neil Shelly, Executive Director, Alberta's Industrial Heartland Association]

Great. Thank you.

We appreciate the opportunity to speak before the committee here today.

What we'd like to talk about with you today is regarding a very important aspect of our resource development, and that is, adding value to the resources themselves. While we have this tremendous natural resource here in Canada, recent trends are towards exporting our resources out in a raw form and bypassing the economic opportunities for Canada.

Ms. Thompson will provide an overview of what's happening in the area, and then I'll follow up with some trends and facts and figures regarding what we see going into the future.

[Jana Tolmie-Thompson, Economic Development Officer, Alberta's Industrial Heartland Association]

Thank you.

I wanted to give you a little bit of history on Alberta's Industrial Heartland Association, why it came to be. We were actually incorporated in May 1998 and became operational in January 1999. What's important is that prior to that, between 1993 and 1998, we worked very closely with the industry. This in fact was an industry-driven initiative, wanting the municipalities to come together and get some common regulations, guidelines for industries to exist.

We encompass five municipalities, and each municipality at the time had different municipal development plans, area structure plans, etc., and different rules. It was making it difficult for industries that worked in one and had pipelines going to another for the regulations. That was very much a local impact, getting the local industries—and these are mega-players, your Dow, Shell, Sherritt—coming together to incorporate or to have municipalities incorporate this.

I sent a map to you. I don't know if you received it or not. I'm assuming you did. It gives you the geographic outline of the heartland. We are 582 square kilometres, zoned heavy industrial primarily, with of course some conservation area and buffer zones in there.

We presently have 48 industries existing in the area. They employ over 7,500 staff, full-time and contractors, and the majority are very highly skilled and trained employees—the managers, the operators, the PhDs, etc. Based on the multiplier effect of one to four, that's equivalent to about 30,000 jobs directly and indirectly created just due to the industries. That's not including the different positions such as engineering EMPs, the maintenance, the turnarounds, etc.

In terms of value of job creation, revenue generation, it's very important within the Alberta context and of course the greater Edmonton region.

In addition, on the map, we also have 20 land holdings that folks are holding onto. They purchased land back in 2003, 2008. Suncor, Petro-Canada, etc. are looking to build their upgraders. A lot of those have been deferred right now. Hopefully something will happen on those lands as well, because we have the potential of creating another 2,000 to 4,000 jobs, excluding the construction jobs.

We do work very closely with our province, our provincial government, with Alberta Energy, Finance and Enterprise, Environment, and Intergovernmental Relations.

I'll pass back to Neil for an overview of Heartland again.

[Neil Shelly]

Thank you, Jana.

That gives you an overview. In our area, in addition to Sarnia, are some of the major hydrocarbon processing areas. There's been a lot of discussion lately regarding the development of Canada's oil sands resources and their future, but extracting the material from the ground is just part of the story.

The bitumen that is extracted from the oil sands is one of the heaviest forms of crude oil in the world, and, unlike conventional oil, must be upgraded before it can be used in the refining process. The upgrading process transforms this very heavy crude oil into a material called “synthetic crude oil” that has properties as good as, if not better than, light sweet oil and can be used at any refinery operation virtually anywhere in the world. These upgraders are very capital-intensive and create huge economic spinoffs in terms of the construction and operation jobs in the region in which they are developed.

But the upgrading of the bitumen into that synthetic crude oil is just the first step in the process. There are other benefits to upgrading that lead to future opportunities. One material that is produced as a byproduct is actually very rich in the basic chemical feedstocks required for the petrochemical industry.

We've looked at these opportunities and how we can advance further up the value chain. Studies done by us in conjunction with the Government of Alberta and supported by the federal government have identified numerous opportunities to actually take our raw resources more towards a consumer-ready type of product.

The bottom line in our analysis is that, at a minimum, two-thirds of the value of the resource in the oil sands lies in the processing of the materials, and the region that processes the materials is the one that's going to gain the most economic opportunity and diversity from these materials.

This trend towards exporting raw products in a raw form with less processing in Canada is becoming apparent when we look at the refining situation in western Canada. In 2000 western Canada as a region was a net exporter of refined products. If you fast-forward to 2008, you'll see that western Canada is actually now a net importer of refined products. A recent study done by the Government of Alberta indicates that if we don't get more processing capacity, western Canada alone could actually be importing 200,000 barrels a day of refined products into our region to meet our needs.

While the west is sort of becoming what's being considered an energy superpower, the trend is to extract the raw products, ship the materials out of the country, and have somebody else process and refine them. We are then buying back the finished products. Not only does this rob us of an economic opportunity, but it has created a situation where in western Canada we are now running into fuel shortages. It seems to happen just about every year now as we rely upon longer and longer supply chains to get diesel to our farmers, our miners, and our logging operations.

So as we said, while the extraction side of the business seems to be enjoying a resurgence in these last days, we cannot say the same thing for the value-added side of the business. A recent report from Alberta's Energy Resources Conservation Board predicts that by 2020 our share of processing of this bitumen material will go from where it's at currently, at about 64%, down to about 44%, unless something is done. What this means is that the majority of our resources will be shipped out in the raw form and other countries will enjoy the benefits and the economic diversity of processing these into consumer-ready types of products.

The lost opportunity we're looking at by exporting these materials is fairly staggering. Based upon the analysis we've done of five individual projects that may or may not go ahead in our region, the economic impacts amount to $40 billion in capital investments, 50,000 person-years of construction jobs, 10,000 person-years of engineering design work, and close to $1 billion in federal and provincial corporate income tax.

Another aspect of this, as well as the environmental interests associated with upgrading, is that our region, the Heartland region, actually has some very good geology for carbon capture and storage in and around the area. In our area we actually have three projects on the go that are looking at carbon capture and storage, supported by the provincial and federal governments.

By tying the processing into a carbon capture and storage project, we can actually reduce the carbon footprint of our oil-sands-based fuels to standards that would actually meet what's being considered in California for carbon-intensity standards. So when we take a look at energy security for Canada, by processing it here and employing carbon capture and storage technologies, we can actually have control over the environmental factors and help set the agenda around this matter.

So what can and should be done? Well, this is a very complex situation. It's something that we are discussing right now with the provincial government. We feel that it's something the federal government, through its policies and processes, needs to consider as a very important part of the agenda for Canada when we look at energy security and how we maintain the maximum economic opportunity for our country.

Thank you.

[The Chair, Conservative, Leon Benoit]

Thank you very much to both of you for your presentation.

We will go now directly to questions and comments, starting with Monsieur Coderre for up to seven minutes.

Go ahead, please.

[Denis Coderre, Liberal, Bourassa, QC]

Thank you, Mr. Chair.

Mr. Ferguson, it's really interesting to have you here, because of course I'm from Quebec, and there are issues regarding shale gas.

Of course we want to be respectful of jurisdictions. You are a provincial regulatory body, and natural resources are under provincial jurisdiction. Nevertheless, I think that the Government of Canada might have a role to play vis-à-vis the monitoring.

I'm going to ask you a few questions to understand how it works, because clearly, what we've been learning since day one and what we hear every time we're talking about shale gas and the regulatory body is that, frankly, B.C. is a model. I'd like to understand more.

First of all, I would like to know how your organization works. When we talk about shale gas, that involves drilling holes, of course, which can lead to certain situations regarding the public.

How is your organization dealing with concerns between individuals and the industry? Specifically, what is your role? You talked about protecting people and the environment, but when it comes to people, what is your role in protecting the public?

[The Chair, Conservative, Leon Benoit]

Mr. Ferguson, go ahead, please.

[Eric Alexander Ferguson]

Thank you for the question.

Certainly we distinguish between individuals who are public landowners, because we do have operations that are permitted on private land under certain conditions, with the right of entry being one of the preconditions. We do have a significant mediation role, which was set up in legislation 12 years ago, when we were formed, to offer an opportunity for those landowners to be treated fairly, equitably, properly, whether in compensation or in operating practices. We have quite a number of staff up in the north, even though the population certainly isn't anywhere as great as it is in many other jurisdictions, in Quebec for example.

We do have a significant amount of resources applied to liaison with landowners. Quality of life is a pretty significant precursor to other issues that may happen, whether safety-related or not, so we pay a lot of attention to those quality of life issues first and foremost. There is road dust, for example, from increased traffic. We look at what kinds of reclamation standards are applied to the site once it's completed. There's construction--

[Denis Coderre, Liberal, Bourassa, QC]

I guess you're also working closely with environment, because water is an issue there. Is the protection of water and all that under your own jurisdiction, because it all came with...?

[Eric Alexander Ferguson]

Well, there are two levels. With regard to water specifically, we do take our mandate from the Ministry of Environment. We are given the authority to issue short-term water-use permits only, for one year at a time. The Ministry of Environment regulates longer-term, more stable licensing of water use, so ours are typically smaller.

One of the issues we're having now as the industry is starting to grow is how we properly align the Ministry of Environment mandate and instructions for us with an increased level of activity, or what we expect to be an increased level of activity, and demand for those short-term licences.

[Denis Coderre, Liberal, Bourassa, QC]

I understand that the Quebec situation is quite different, because the shale gas would be in the St. Lawrence River Valley, which is where you have two-thirds of the population, so it's not the same as B.C. You have to work, of course, with the first nations. How do you perceive your role? It's not just based on regulations. You also have to apply them and to upgrade. I guess you have an upgrading process to make sure you are connected with reality. How does it work in B.C.?

[Eric Alexander Ferguson]

With respect to first nations, we have contractual arrangements with each of the bands in the northeast part of the province. Those define specific types of applications, consultation periods and process requirements, as well as how we interact, so they're very detailed, spelled-out contractual arrangements. On top of that, certainly we apply a lot of resources to building a relationship over and above that contractual relationship.

I think no matter which business you're in, contractual arrangements are only as good as the relationship behind them. So we try to apply due diligence, both to ensure that if people are unhappy with the contractual process they have another avenue to have those kinds of discussions and hopefully to improve those.

[Denis Coderre, Liberal, Bourassa, QC]

So you've said you're based also on mediation or conflict resolution. Do you have kind of an appeal process, or does the buck stop there? How does it work?

[Eric Alexander Ferguson]

Well, we have a number of appeal processes. Certainly we strive a lot to mediate and get involved with landowner stakeholder concerns with the industry up front. If that's unsuccessful and we do go ahead and make a decision, that stakeholder has a right of appeal external to us in a new appeal tribunal that was formed under the new piece of legislation that I mentioned.

[Denis Coderre, Liberal, Bourassa, QC]

Do you perceive yourself as an independent monitoring process? One of the issues we're looking for is we have to be respectful of provincial jurisdiction. Is there a role for the Government of Canada to play? That's important, how you define yourself, because of course on environment assessment we have a role. Maybe eventually we'll think about, while still being respectful of jurisdictions, kind of a national strategy process where even the minister of Alberta, for example, wants it. So western Canada is very adamant on that. How do you define yourself regarding the monitoring process?

[Eric Alexander Ferguson]

As a regulator, we strive every day to maintain a level of independence from the policy-maker. I think if you talk to any of the jurisdictions through the U.S., it's very important to have that similar level of independence. We do have very good working relationships with the National Energy Board and some relationships for training as well as first-responder type things, because we have more people available within the province on some of those sites. So that level of independence allows us to form those kinds of relationships. But we're very much an on-the-ground, upstream regulator, and we try to maintain our independence as such.

[The Chair, Conservative, Leon Benoit]

Thank you, Mr. Ferguson.

Merci, Mr. Coderre.

Madame Brunelle, for up to seven minutes. Go ahead.

[Paule Brunelle, Bloc, Trois-Rivières, QC]

Thank you, Mr. Chair.

Hello, Mr. Ferguson.

I am also from Quebec, so of course my concerns have also been expressed by the public and are very similar to Mr. Coderre's concerns.

How far are the drill sites from the nearest residences where you are in British Columbia? As we know, in Quebec, they are in the St. Lawrence Valley, which is densely populated. That is also agricultural land. This raises the issue of clean drinking water. It seems to me that, where you are, they are far from any residential areas. How far?

[Eric Alexander Ferguson]

Thank you very much.

We have some regulatory requirements right now. We call them setbacks from residences, and depending on the hydrogen sulphide content of the gas, there's a different distance that we require wells to be set back. Those are established from a longstanding review of the safety issues that have occurred with that distance. We also have a policy setback, we'll call it, which is not regulatory in nature. Right now I think our closest wells we have to residences are in the order of 300 metres distance to a residence. Part of the setbacks are probably more distance-related to issues like noise, light, for drilling. Those kinds of things create more of a setback than the actual safety setback for hydrogen sulphide gas.

[Paule Brunelle, Bloc, Trois-Rivières, QC]

That seems pretty close to me, 300 metres, but I understand the situation better.

In your presentation, you said that petroleum and natural gas land sales have increased significantly. Who owns the land? The subsoil, the resource, should normally belong to the province. Was the land sold to people who live there? Who owns the land?

[Eric Alexander Ferguson]

British Columbia, like most of Canada, has a split estate model. The crown has reserved the subsurface mineral resources. In the process that government has for administering tenure, selling tenure, is giving those certain rights for that subsurface resource. Our job is to enable the surface access as well as the method of functioning to get that subsurface resource.

On private land, the companies will typically enter into a lease agreement for a period of time with the landowner for access to that piece of ground for the well or the road or the pipeline, whatever the case may be. There is a separate process from us for allowing those leases to be executed and managed; it's more of a contractual arrangement between the landowner and the operator.

[Paule Brunelle, Bloc, Trois-Rivières, QC]

Is the value of those leases based on the market, the quantity of gas? Do you become involved in the relationship between the land owner and the company?

[Eric Alexander Ferguson]

It's not in my jurisdiction to mediate any of the commercial issues between the leaseholder and the oil and gas operator. My understanding is that it's very much more of a free market type of approach. The landowners--certainly in my area, and I used to live up there--gather together and share information on what some of the lease values have been and what other kinds of compensation are available.

I know the Province of British Columbia has funded a special office in the northeast for assisting landowners with more advocacy to make sure they get a fair deal in that kind of transaction, but I do not believe the value is totally related to the value of the subsurface resource there. That would be expressed in the company's interest in concluding an arrangement.