Natural Resources Committee on Dec. 14th, 2010

[Roger Pomerleau, Bloc, Drummond, QC]

Okay.

My next question has to do with Mr. Krugman's statement: “The worry seems to be that when the natural resources run out, the lost manufacturing sectors will not come back.”

Although I am not an economist, I have often used this argument. Perhaps it is a little off track, but it seems to me that if we abandon our manufacturing industry for any reason at all, every year there are 600,000 Chinese engineering graduates who are ready to take them away from us, and the industry will never come back. That is my impression. And India will soon be doing the same thing. If we let the manufacturing sector die too quickly, I'm afraid it will never come back.

Is that what Mr. Krugman means?

[Dr. Serge Coulombe]

Yes, exactly. What Mr. Krugman means is that in order to have a manufacturing sector in any country, a number of fixed costs must already be covered. Research and development need to be done and an international market needs to be developed. Once that sector shrinks or contracts because the national currency has appreciated, it is possible that the sector will be gone for good. There have been many examples throughout history when it became clear that a resources boom destroyed productivity and competitiveness in many other sectors. As a result, it is extremely difficult to have a competitive manufacturing base in an economy that has a strong manufacturing sector. This has been observed all over the world. Countries that have a strong manufacturing base are not generally major exporters of raw materials.

[Roger Pomerleau, Bloc, Drummond, QC]

Exactly.

[The Chair, Conservative, Leon Benoit]

Thank you, Mr. Pomerleau.

Mr. Cullen, for up to seven minutes.

[Nathan Cullen, NDP, Skeena—Bulkley Valley, BC]

Thank you, gentlemen, for your comments.

A brief question to you, Professor Coulombe. In global terms, do other economists and other countries regard the Canadian dollar as a petrodollar now? Is the relationship between the price of oil and gas directly correlated to what happens to our dollar, or is it too weak a correlation to say it is a true petrodollar?

[Dr. Serge Coulombe]

No, there is a very strong correlation. I have myself estimated that around 50% of the evolution of the Canadian dollar is driven by the evolution of the price of natural resources, mainly oil and other energy sources. It is a well-accepted fact. It is even accepted by the Bank of Canada.

[Nathan Cullen, NDP, Skeena—Bulkley Valley, BC]

We've seen this from the IMF, The Economist, and others. Almost out of hand now they say “The Canadian dollar did this today, and that is because energy prices also did this.”

The question we're trying to understand in the so-called Dutch disease is how much effect does that directly have on the manufacturing strength in Canada? Some folks have said that this only has a regional impact, that if there's a boom in the oil and gas sector, if the tar sands create another 10,000 jobs, then it only affects Ontario and Quebec. Is there also an effect within Alberta and B.C., or does it break out regionally that way?

[Dr. Serge Coulombe]

The Canadian manufacturing sector that is exporting to the rest of the world is very concentrated in the Quebec-Windsor corridor. The rest of the manufacturing sector in Canada is intimately related to the natural resource industry. Consequently, it is supplying inputs to the natural resource industry and will generally benefit from an oil boom.

However, the province that will be the least able to export manufacturing goods to the rest of the world will be Alberta. It is extremely hard to export goods that are not related to the oil and gas sector in Alberta because the cost of production there is so high.

[Nathan Cullen, NDP, Skeena—Bulkley Valley, BC]

I think you were here during our previous testimony from Alberta's Industrial Heartland Association. They brought forward figures—and this is for both our witnesses—that showed that for the GDP derived from two million barrels per day, $25 billion of value would come from the actual mining of raw bitumen, a further $50 billion would be added if you upgraded to synthetic crude, and a further $75 billion would be added to the GDP economy if you advanced up the supply chain to petrochemicals.

It seems to me that whether we're talking about the Alberta region's economy or the national economy, if a government were interested in the Canadian economy, they would encourage as much value-added production as possible.

We also heard that the Canadian government actually funded studies to arrive at these figures and to understand the value to Canada's economy. What confuses me is that the Canadian and Alberta governments are both promoting the export of raw materials, thereby forgoing the lion's share of the potential economic benefit in jobs.

Mr. Howard, you folks do research into energy. Is it sound energy security policy for Canada to be pursuing more raw bitumen exports?

[Peter Howard]

I think what you may be looking at is some of the facts of life, I suppose you could say.

The biggest problem with upgrading and refining in Alberta is that the refining business in North America has very thin margins. It's difficult to get corporate interests to step forward and actually construct these types of capital-intensive facilities. The future may dictate or result in the development of further upgrading and further refining to RPPs, but unfortunately the economics of today do not support that idea.

[Nathan Cullen, NDP, Skeena—Bulkley Valley, BC]

You used the term “facts of life”. What confuses me is that when this industry was first created and subsidized by both levels of government, the facts of life were that there was no money to be made in mining bitumen because it was too expensive to do, but the government set up a series of policies for tax incentives and research and development to enable the resource to be developed.

We now hear those inside the industry saying that we need a national energy security strategy because absent of one, we're losing this endowment and we're not maximizing the benefit, as the group from Alberta said. Now we're told that it's just the market.

It wasn't the market when we created this industry in the first place. We enhanced the market, we directed the market, and we gave subsidies to develop this product. Now we're exporting it at the lowest point of profit return for industry in Canada and Alberta. I don't understand why we suddenly say it's laissez-faire time now. We didn't say laissez-faire before: we said we'd like to develop this industry, which we did. That was taxpayer money from across the country.

We're now saying we're going to forgo the vast majority of the profit simply because there's a capacity available in the southern United States and now in China. How is it benefiting the Canadian economy to export raw bitumen to China, contrary to government policy?

[The Chair, Conservative, Leon Benoit]

Mr. Howard, go ahead.

[Peter Howard]

The original research that went into the oil sands was to develop the production of bitumen. The secondary development, which came about as a result of declining conventional oil, was the upgrading of bitumen to synthetic crude oil to promote the transportation of that product.

I don't think the idea of further upgrading of bitumen to refined petroleum products in Alberta has been totally discounted. All I said was that the economics of today probably don't support it, but these types of projects are 30- and 40-year manufacturing systems; eventually the economics will change, and that will probably change as the price of crude moves up. The business sector will come to the conclusion that investing in this industry will in fact make sense.

[The Chair, Conservative, Leon Benoit]

Thank you, Mr. Howard.

Thank you, Mr. Cullen.

We go now to Mr. Allen for up to seven minutes.

[Mike Allen, Conservative, Tobique—Mactaquac, NB]

Thank you, Mr. Chair.

Before I start, I want to make sure I heard this right. I don't think Mr. Cullen was saying that he wants us to subsidize oil to build new refineries, but I might have heard that. I don't know that that's what his leader necessarily supports. Anyway, I just thought I would throw that in.

Professor, I have just a couple questions with respect to a study that was released on October 7, 2010. It was done by the Quebec Oil and Gas Association as well as SECOR Consulting. It talked about the potential economic benefits to the province of Quebec, for example, from the development of the shale gas. Are you familiar with that study at all?

[Dr. Serge Coulombe]

Yes.

[Mike Allen, Conservative, Tobique—Mactaquac, NB]

Okay. It talked about the benefits to Quebec. It said if 1,000 wells were in production at 150 sites, the Government of Quebec could receive $150 million in royalties annually. Under a second scenario with 7,000 wells, that would translate to annual royalties of slightly above $1 billion. The study of the benefits does not include expenses incurred for transportation, distribution of natural gas extracted, or corporate taxes paid by the industries and their suppliers, nor does it integrate the dynamic or structural effects for the economy of Quebec.

With regard to your comment on your C.D. Howe background that you're preparing, following Hibernia, Terra Nova, and White Rose, Newfoundland and Labrador saw the largest improvement in productivity. Doesn't that make the case, when you look at those numbers and this study, that Quebec should be looking at fostering this development of shale gas?

[Dr. Serge Coulombe]

I am not a specialist in the production of gas in Quebec or anywhere in Canada, but I will try to answer the question the best I can.

Regarding this new source of natural gas, I think it is of relatively the same nature as what is going on in Alberta right now with the oil sands with regard to its potential effect on the rest of the economy in terms of stimulating productivity growth, simply because most of the expenditures are not offshore, as they are in Newfoundland. It is underground, and it is spread out in various geographical areas of the economy, and it would also be using inputs that are produced by the economy.

I expect this new source of gas to stimulate productivity at the regional level in Quebec and in Canada. However, the effect overall is not of the same magnitude as what is occurring with the oil sands exploitation in Alberta simply because the rent is not there.

The production of this new source of gas has already pushed the price of gas to a relatively low level, and I expect that it will remain low for a good period of time, as long as we don't know exactly which amount of gas can be produced with this new source. I expect some sort of a spillover at the regional level, but not of the same magnitude, really smaller than what we have in Alberta.

[Mike Allen, Conservative, Tobique—Mactaquac, NB]

I mean, $1 billion economically to....

[Dr. Serge Coulombe]

Absolutely. There could be various spillovers.

[Mike Allen, Conservative, Tobique—Mactaquac, NB]

Okay.

Mr. Howard, looking back, our previous witness, Mr. Ferguson, was talking about some of the development in B.C. and some of the huge volumes of natural gas that are out there. He talked about one reserve having 500 trillion cubic feet. The Business Council of New York had some information on the Marcellus and Utica shales, which are probably two or three times bigger than that actual reserve. They're talking about an economic uplift for the State of New York, somewhere in the area of $92 billion to $123 billion a year from that.

I'm looking at your numbers, where you talk about the oil and gas sector and the service sector. In the analysis you do, do you have any uplift numbers based on how many trillion cubic feet...? What does that mean for the economy and GDP, whether it be for a province or for Canada as a whole?

[Peter Howard]

What I can do is perhaps give you some current numbers.

If you look at the entire oil and gas industry in Canada--this is everything from the producers through to the service through to the pipeliners--that contribution is in the order of $165 billion, or 12.1% of Canada's GDP, and that was in 2006. In 2006 in Canada we generated or produced something approaching 17 billion cubic feet a day, and something approaching 1.75 million barrels a day of crude.

I'm not sure I can relate that to an uplift number. Actually I think that's all I can say about that. I'm not sure I can answer that one.

[Mike Allen, Conservative, Tobique—Mactaquac, NB]

Just following on, but looking at the expansion now with the number of new natural gas reserves that we have, if it was 17 billion cubic feet in 2006, we're talking about tremendous reserves that we could be bringing online.

Of the $165 billion, do you know what share is natural gas? And assuming that we have development of two to three times in the next few years, what would the impact of that development be?

[Peter Howard]

In 2006 the share of natural gas probably would be something around three-quarters of that number.

Let me just throw out one comment.

In the old days when one talked about reserves, reserves were very important because they back-stopped contracts. In today's oil and gas industry, it's not reserves that are the critical issue, it's the number of holes in the ground or the number of wells that you can complete. So having 4,000, or 14,000 trillion cubic feet is a nice number, but what we need to do is drill something in.... Our forecast is now suggesting we will drill 5,000 natural gas wells per year in the coming years. We need to double that in order to regrow our market share in natural gas, and that development of wells is primarily focused on northeast B.C., and in Alberta.

[Mike Allen, Conservative, Tobique—Mactaquac, NB]

That's helpful to link the two articles, so thank you.