Natural Resources Committee on Dec. 14th, 2010

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

We're in the midst of studying energy security in this country. One of the questions we've been putting to various representatives from industry and other stakeholders is whether Canada needs a Canadian energy security strategy. Energy security is about affordability, economic benefits, and some sort of long-term plan. Former premier Lougheed and others have talked about this with respect to Alberta.

What is your group's opinion about the need to have some sort of national strategy to address some of the questions you've raised here today?

[Neil Shelly]

We believe that there actually needs to be a long-term vision. As we said earlier, we've been given this huge national advantage in Canada, and across western Canada, specifically. We have it, and it's almost like we don't know what to do with it.

There are a lot of aspects to energy security. As we mentioned earlier, we're having problems with refining capacity in western Canada. We have diesel supply shortages, because we have underutilized or not enough refining capacity.

Whether it's a national strategy or just a vision, it's a consideration that as we develop the resources, we have to understand that this is multi-faceted. There are a number of factors, other than just pulling it out of the ground, that have to be considered and built into policies.

[The Chair, Conservative, Leon Benoit]

Thank you.

Thank you, Mr. Cullen.

We go now to Mr. Shory, for up to seven minutes.

[Devinder Shory, Conservative, Calgary Northeast, AB]

Thank you, Mr. Chair.

Thank you to the witnesses for coming to help us study energy security in Canada.

My question would be to Mr. Ferguson.

Mr. Ferguson, in your opening remarks you made a comment that shale gas is changing the landscape in the industry and that B.C. is a model for shale gas exploration. You also said that B.C. has an effective and efficient regulatory model and that the B.C. Oil and Gas Commission is recognized as a regulatory leader.

We all know that natural resources are under provincial jurisdiction. We also know that the federal government is leading with several research and mapping initiatives in the field, as well. I also understand that other governments and foreign entities have recently been engaging with Canadian experts with regard to developing their oil and gas exploration and their regulatory frameworks.

My question to you is whether you are aware of any of these jurisdictions. If yes, then I'd like you to elaborate on what you feel Canada has to offer in terms of expertise, both in establishing the proper regulatory framework and with regard to the potential economic opportunities.

[Eric Alexander Ferguson]

Thank you.

We do, as a matter of course, with our fellow regulatory agencies across Canada and the United States, share a lot of information. So we're quite familiar with and understand what each jurisdiction is struggling with and tackling in terms of issues and opportunities. At least we try to share it.

As an example, one of the jurisdictions that both Alberta, as a regulator, and I visited three or four weeks ago was in Poland. The request, other than to have three or four days of a lot of meetings, was to help the Polish government, through the Canadian government, understand what different regulatory models might look like for that jurisdiction, which frankly doesn't have one at this point. Of course, it's a very heavily populated area. There are 39 million people living on a land base a third of the size of British Columbia who have a significant shale gas play in the works underneath them. There's cause for a lot of work on their part to get the resource out using a very well-defined energy security model and to understand, at the same time, how that affects the energy balance for the country.

I think all those types of things, if I use Poland as an example, certainly speak to the kinds of issues we have across Canada, whether they're in Quebec or Alberta, Saskatchewan, the Maritimes, or certainly British Columbia. I think the varied issues across those jurisdictions, as I know them today, offer experience and tools that can be applied and shared with the rest of the countries in the world. I think Canada has a great opportunity to demonstrate leadership in providing that expertise beyond our borders.

[Devinder Shory, Conservative, Calgary Northeast, AB]

That is regarding the regulatory framework.

Are you aware of any comparative studies on the overall economic impact of energy development in Canada and countries like Norway, or any others?

[Eric Alexander Ferguson]

Certainly I focus a lot of my attention on regulatory constructs, and not so much on fiscal and broader government policy issues. I know that Australia has done quite a bit of work in trying to understand and pick apart the competitiveness of their upstream regulatory model. I think that work was completed a year or so ago. It was a fairly extensive piece of work. I think they compared it to other jurisdictions as well.

I believe my favourite province next to us, Alberta, has also been doing a lot of work on a regulatory improvement competitiveness piece that I would point you to. There's probably some good learning there as well.

[The Chair, Conservative, Leon Benoit]

Mr. Anderson, go ahead.

[David Anderson, Conservative, Cypress Hills—Grasslands, SK]

Mr. Ferguson, you mentioned the Interstate Oil and Gas Compact Commission. Can you tell us about it? What role does it play? I assume it's international.

[Eric Alexander Ferguson]

It's international as a name. It is certainly centred and founded in the United States. It is a formally recognized organization of all the state regulatory agencies. They appoint people to it. We and several of the provinces in Canada are associate members--we're certainly not full members. But it is an avenue for those states and us as associate members to get involved and share information.

Our interest is probably more in the regulatory tools and enhancement they're working on and struggling with. It's also an outstanding network of opportunity for learning what's going on.

[David Anderson, Conservative, Cypress Hills—Grasslands, SK]

Is it mainly an advisory commission? Does it have any legislative teeth?

[Eric Alexander Ferguson]

No.

[David Anderson, Conservative, Cypress Hills—Grasslands, SK]

But it's a good avenue for you to get information, and that kind of thing.

Mr. Cullen talked about the land sales, and I know that in my province the land sales dropped off dramatically in 2009. You say royalties are forecast to increase $1.25 billion as a result of natural gas production. Do you want to talk a little more about the longer-term benefits of natural gas production? Do you have any numbers on the kind of impact it's going to make on the economy?

[Eric Alexander Ferguson]

My apologies, but as a regulatory agency I'd have to pass you over to the Ministry of Energy in our province to talk more about those kinds of long-term predictions and value gains. I just quoted the numbers they gave us that are published on their websites.

As far as ultimate value to the crown over time, the only thing I would offer is my knowledge that those are direct revenues only. They are not the indirect revenues from employment and other spinoff opportunities we see throughout the industry.

[The Chair, Conservative, Leon Benoit]

Thank you, Mr. Anderson. We are out of time.

Just before we suspend to get the second panel in place, I'd like to thank very much all of you who presented: Mr. Ferguson; and Mr. Shelly and Ms. Tolmie-Thompson from Alberta. Thank you very much for coming today. You have been very helpful for our study.

We will now suspend for a few minutes as we change to the second panel for the day.

[The Chair, Conservative, Leon Benoit]

We will resume the meeting with our second panel.

From the University of Ottawa we have Serge Coulombe, professor, department of economics. By video conference from Calgary, Alberta, from the Canadian Energy Research Institute we have Peter Howard, president and chief executive officer.

We will have the presentations in the order on the agenda, starting with Professor Coulombe from the Department of Economics.

[Denis Coderre, Liberal, Bourassa, QC]

Repeat after me: Coulombe.

[The Chair, Conservative, Leon Benoit]

Got it. Thank you. I appreciate your tutoring, Monsieur Coderre.

Go ahead, Professor.

[Dr. Serge Coulombe, Professor, Department of Economics, University of Ottawa]

Thank you.

It took the English-speaking economic community in Canada over ten years to properly pronounce my name. It was not easy.

In the few minutes I have here today, I would like to address two subjects. The first is the issue known as Dutch disease, in the Canadian context. The second subject has to with the relationship between oil and gas development and regional increases in productivity.

With respect to Dutch disease, the name comes from an article published in The Economist in the 1960s regarding the Dutch economy. The Dutch manufacturing sector suffered considerably following the discovery of oil and gas in the North Sea. Several theoretical and empirical studies were then conducted. To put it in extremely simple terms, Dutch disease results from the relationship between a booming resource sector and the manufacturing sector.

A booming resource sector leads to rising production costs and an appreciation of the national currency. That is what happened in Holland's case and in many other countries like Australia, Norway and Canada. This increase in the value of the exchange rate decreases the competitiveness of the manufacturing sector.

In Canada, Dutch disease has a very particular regional dimension because, generally speaking, the resource boom is in Alberta and Saskatchewan. The secondary sector, manufacturing, is in Ontario and Quebec. Australia is facing a similar problem.

For instance, during the resource boom of 2002-2007, Canada lost approximately 275,000 manufacturing jobs. In a study I did with some European colleagues, we estimated that approximately 50% of these job losses in the manufacturing sector were caused by the impact of the resource boom on the value of the Canadian dollar.

Clearly, the question we must ask ourselves is this: Is Dutch disease really a disease—a bad thing—or is it simply a question of labour market adjustments? When there is a boom in one sector, jobs must come from elsewhere.

I would now like to quote Mr. Krugman, the 2008 Nobel Prize winner in economics. When he was an economist, and not a journalist, he said: “The worry seems to be that when the natural resources run out, the lost manufacturing sectors will not come back.”

As far as Canada is concerned, it is pretty clear that our oil and gas resources will not run out any time soon. One way to address this problem would be to significantly drop the price of oil, for instance, in the medium and long term. This could also create a problem like the one Krugman describes.

It is worth noting that Canada's manufacturing sector has not always been depressed by the resource sector. Prior to 2002, for about six years, the opposite effect was noted. With a drop in the cost of raw materials and a decline in the value of the Canadian dollar, many jobs were created in Canada's manufacturing sector.

The basic problem with the relationship between Canada's resources sector and manufacturing sector is that there seems to be excessive volatility in the manufacturing sector. This excessive volatility stems from how natural resources affect the value of the Canadian dollar. Thus, it is pretty clear that Ontario and Quebec benefit from having a more stable currency that does not depend on the uncertainties of the recourses sector, therefore, a currency like the euro or American dollar.

My second point pertains to certain facts from a study I am currently preparing for the C.D. Howe Institute on the relationship between Canada's resources sector and regional productivity.

In the study, I compared the strong growth of resources in Newfoundland following Hibernia, so Terra Nova and White Rose, and the growth in Alberta.

Note that productivity in Newfoundland has seen the largest improvement in Canada in the past 25 years, and this is mainly because of changes to the economy's structure. I am summarizing and simplifying, but we have gone from a very low-productivity resource, fish, to a very high-productivity resource.

In contrast, Alberta has seen among the lowest growth in productivity in Canada. Since 2002, productivity growth has been relatively weak in Canada. Note that the level of productivity is still very high, but the growth has been very weak. Basically, this is because we have moved away from oil production using normal standards with relatively high productivity. That source has been partially used up and there is growing reliance on extracting oil from the oil sands, which requires more labour and very high production costs.

I have provided a graph that shows both productivity measures. The graph shows that the oil boom has caused extraordinary growth in productivity in Newfoundland, while productivity in Alberta has actually decreased.

When we look at what is going on in the economy as a whole, we again see the opposite effect. It may seem a little surprising, but in Alberta, productivity growth has been extremely strong in sectors other than natural resources since 2002. Thus, the resource boom in Alberta appears to spread more easily to the other sectors of the economy, while this has not at all been the case in Newfoundland.

So that is basically my second conclusion for you here this morning. We must not assume that oil and gas development will always have the same effect on regional economies. It basically depends on the type of resource.

Thank you.

[The Chair, Conservative, Leon Benoit]

Merci, Professor Coulombe. We appreciate it very much.

We'll now go by video conference to Peter Howard, president and chief executive officer of the Canadian Energy Research Institute.

Go ahead, please, for up to seven minutes.

[Peter Howard, President and Chief Executive Officer, Canadian Energy Research Institute]

Thank you

Good morning. My name is Peter Howard, and as the moderator indicated, I am the president and CEO of the Canadian Energy Research Institute.

Founded in 1975, the Canadian Energy Research Institute, or CERI, as we call it, is an independent, non-profit research institute specializing in the analysis of energy economics and related environmental policy issues in the energy production, transportation, and consumption sectors. Our mission is to provide relevant, independent, and objective economic research.

Members of the institute include the Government of Canada, the Government of Alberta, the University of Calgary, the Canadian Association of Petroleum Producers, and the Small Explorers and Producers Association of Canada.

On the oil and gas industry in Canada, the oil and gas component of the Canadian economy is historically focused on hydrocarbon production, pricing, royalties, and taxation. Success or failure is usually measured by levels of production, the profitability of hydrocarbon exploration and production companies, the royalty, and taxation levels of government. Often absent from this group of companies are the tens of thousands of workers that support the efforts of the E and P sector, namely the oil and gas service sector, or the OGS.

My brief this morning will focus on the economic impacts of the oil and gas service sector and its relationship to the Canadian economy.

Before I start I would like to go over a few definitions. The oil and gas producers are the corporate entities whose business it is to explore and develop hydrocarbon resources in the form of oil, oil sands, natural gas--including conventional, tight, and shale--and natural gas from coal, commonly referred to as coalbed methane.

Oil sands operators are a subset of the oil and gas producers who explore and develop oil sands resources. These companies may or may not have involvement in conventional oil and gas exploration.

The natural gas industry is a subset of the oil and gas industry, which covers all activities related to exploration, development, and transportation of just natural gas from the resource pools to the city gate meter stations. This includes exploration, drilling, production, gathering, processing, and pipeline transportation. The report generated by America’s Natural Gas Alliance, ANGA, in 2008, whereby it states that natural gas activities support more than 600,000 jobs and contribute $100 billion to Canada’s GDP, is an example of this portion of the oil and gas industry.

The oil and gas service sector is made up of the companies that offer products and services employed in direct support of oil and gas exploration and production activities for the oil and gas producers. These activities include exploration, drilling, completion, production, construction, processing, transportation, logistics, manufacturing, maintenance, and fabrication. This activity covers all conventional hydrocarbons, including oil, gas, and coalbed methane; all unconventional activities, including tight gas and shale gas; and all oil sands developments, but it does not include gas transmission in the form of pipelines.

On the oil and gas service sector, wells drilled, production rates, revenues, royalties, and taxes are replaced by words like casing, production strings, tubing strings, bits, wellheads, rig move, rig days, rig release, packers, plugs, fracing, cementing, coring, testing, and abandonment. Engineers, landmen, geologists, and geophysicists are replaced by surveyors, rig crew, drilling supervisor, trucker, loader operator, jug hound, mud man, snubber, well tester, tool push, well site geologist, and safety supervisor.

[Denis Coderre, Liberal, Bourassa, QC]

A point of order.

[The Chair, Conservative, Leon Benoit]

A point of order, Monsieur Coderre.

[Denis Coderre, Liberal, Bourassa, QC]

I just see the fumes coming from the translator right now. Can he just slow it down a bit? That's another form of gas, but you don't want to go there.

[The Chair, Conservative, Leon Benoit]

Could you slow down a little bit with your presentation? The interpreters have trouble keeping up.