Natural Resources Committee on Feb. 8th, 2011

[The Chair, Conservative, Leon Benoit]

Good afternoon, everyone. Welcome.

We are here today to continue our study on energy security in Canada, and we're back to the topic of the oil sands.

We have just one panel today, for an hour and a half. After that we go into future business of the committee.

The three witnesses we have today are Elizabeth Dowdeswell, former chair, Oilsands Advisory Panel. Welcome. We have, from ConocoPhillips Canada, Joe Marushack, president. Welcome. And by video conference from Calgary, we have Peter Tertzakian, chief energy economist and managing director, ARC Financial Corp. Welcome to you, sir.

We will have the presentations in the order listed on the agenda, and we'll start with Ms. Dowdeswell.

Please go ahead, for up to seven minutes, please.

[Elizabeth Dowdeswell, Former Chair, Oilsands Advisory Panel, As an Individual]

Thank you very much, and good afternoon, everyone. It's a great pleasure to have been invited to speak with you today.

One of the most vexing challenges of our times is how to meet ever-increasing energy needs in a responsible and environmentally sustainable way. I think you'd agree that any analysis of the current state of geopolitics and economic development in a carbon-constrained world reveals a pervasive sense of insecurity about future energy supply. So your study is not only timely but of considerable importance.

I appreciate your acknowledgement that any discussion of Canada’s oil sands could not take place without considering the scientific facts and evidence that must underpin any responsible development of this important resource. That certainly was the fundamental tenet that shaped the analysis and recommendation delivered in December by the independent advisory panel on monitoring the Athabasca River and surrounding waterways.

As you know, at the end of September 2010, the former Minister of the Environment, the Hon. Jim Prentice, asked a very straightforward question: does Canada have a world-class monitoring system in the oil sands area? And if not, what changes would we recommend to make it so? This was a 60-day charge, a very short time. But the charge to the panel was a direct response, I think, to serious concerns that had been raised by Dr. Schindler and his academic colleagues at the University of Alberta. Conflicting scientific opinions called into question the availability of credible data that are so essential to sound policy decisions and also to the enforcement of legislation and regulation. It was my privilege to chair that panel, to coordinate and oversee the work of five eminent scientists who comprised it.

In the short time we had, we reviewed an extensive catalogue of documentation, including key peer-reviewed scientific publications. The panel was made aware of but did not attempt to duplicate numerous studies of oil sands development that had been or were in various stages of completion. Nor did we undertake original research to validate the observations and conclusions contained in these studies. All of this documentation was supplemented with interviews and discussions with federal and provincial government experts, representatives of selected first nations, recognized academic experts, industry practitioners, and non-governmental organizations, as well as of course a site visit.

The focus of our very brief study was to try to articulate the principles for design and implementation of an effective monitoring system. Then we wanted to determine whether or not the current system actually incorporated those principles. In other words, would the system help decision-makers make correct choices and sound trade-offs, both now and in the future?

The panel was unanimous in finding the current system wanting. We found fragmentation of effort. We found a lack of leadership and coordination. We found that activities were not integrated. We found that activities were not always credible because they lacked scientific rigour. We also found that raw data and information were not transparent and accessible in a timely manner in order to allow parties to draw their own conclusions and make their own basis for the judgments. We did not have confidence that the current approach was or would be sensitive to a very fast-paced, dynamic, and extensive oil sands sector or to changes either in technology or in climate, for example.

We believe that until these significant shortcomings are addressed, there's going to continue to be debate about the data, and about uncertainty and public distrust, both of industry’s environmental performance but also of government’s oversight.

So our principal recommendation, entirely accepted by the federal government through Minister John Baird, was that a shared vision for monitoring, which would align priorities, policies, and programs, be developed collaboratively among stakeholders, and that a holistic and integrated monitoring system and management framework be developed and implemented. Furthermore, we suggested some key elements of the approach.

We were not naive about the challenges of managing in a multi-jurisdictional setting, but it was our view as a panel that this ambitious vision of a very impressive socio-scientific project was simply too big, too complex, and too important to be undertaken by any one jurisdiction or sector. A new, credible, coherent, and collaborative governance model is required to build public trust. The pace and scope of change in the region and the growing expectations of stakeholders require no less.

The panel observed that Environment Canada has considerable credible science capacity and a mindset that recognizes the reality that environmental systems are integrated and holistic, and environmental media like water, air, and wildlife interact and affect each other. Any responsible monitoring system must reflect this reality.

We were pleased that when we delivered our report in December, the government pledged to respond immediately. Specifically, and appropriately, Environment Canada pledged to exercise the visionary leadership we called for to design the first component of a monitoring system with some urgency within the next 90 days, and to do so in collaboration with the Province of Alberta and other stakeholders. I don't claim to know the details of how Environment Canada is reacting, other than to say I understand that the project is well under way and on track to be completed on time.

It was a genuine privilege for the panel to contribute to this evolving dialogue and policy development about such an important issue. We believe that the establishment of a world-class system is absolutely fundamental to not only long-term environmental sustainability but to economic viability and, most importantly, building trust and confidence in the eyes of Albertans, Canadians, and the international community.

Thank you, Mr. Chairman.

[The Chair, Conservative, Leon Benoit]

Thank you very much, Ms. Dowdeswell, for agreeing to chair the panel and do that work, and for coming here today to talk about it.

Mr. Marushack, from ConocoPhillips Canada, please go ahead with your presentation for up to seven minutes.

[Joe Marushack, President, ConocoPhillips Canada]

Thank you.

Good afternoon, Mr. Chair and members of the committee.

Thank you for the opportunity to be here today to share my company's views on energy security, particularly on the oil sands and the vital role they play in meeting future energy demand.

I know CAPP and others have been here to talk about global demand and that we'll need all forms of energy to meet it in the decades to come. ConocoPhillips shares that view.

Any vibrant and growing economy requires a secure and consistent energy supply. In order to meet our energy needs as a country and as a continent, supply diversity is critical and will entail the use of a combination of many energy sources. These sources must include conventional and unconventional, oil and natural gas, coal, nuclear power, as well as renewable resources.

The Canadian oil sands will play a vital role in helping meet the worldwide need for additional energy.

Because we believe we see increased demand in worldwide energy for the foreseeable future, we encourage governments to ensure a balanced energy policy approach. These energy policies should not discriminate against fuel sources, as all sources will be needed to meet significantly higher global energy demand in the coming decades.

I'd like to give a brief overview of my company. ConocoPhillips is an integrated energy company with interests around the world. We are active in exploration and production, as well as refining oil and gas into usable products.

With a global workforce of about 30,000 people, we operate in over 30 countries, including Canada. Our Canadian operations are headquartered in Calgary. In Calgary, we have a leading land position in the oil sands, and we are one of the country's top three producers of natural gas. We have substantial potential future developments in the Canadian Arctic region, as well as actively working on the Mackenzie gas pipeline project. We are also participating in the current NEB offshore Arctic drilling discussions.

In Canada, we have about 2,000 talented and committed employees. These employees are primarily based throughout Alberta, but with a presence in B.C. We invest significant capital in our Canadian asset base. We've invested between $1 billion and $2 billion in Canada every year for the past four years.

Occasionally, I'm asked what I see as my most important role as ConocoPhillips Canada's president. My most important role is the function that makes sure our employees and contractors recognize working safely as their most important day-to-day goal. We're committed to seeing that we minimize the risk of injury or environmental occurrence. We believe it is impossible to have a truly efficient operation if it isn't a safe place to work.

I also see my role as setting the tone for how we want to develop our oil sands and gas assets.

We're very proud of our Canadian operations. They're among the best in our global portfolio, and we see enormous potential here, especially for our oil sands business.

With regard to the oil sands developments, we're focused solely as an in situ development producer, using the steam-assisted gravity drainage, SAGD, process. We're likely the second-largest SAGD producer in Canada at the current time.

We currently produce about 60,000 barrels per day, net, from our oil sands assets, and we hold some 16 billion barrels of potential resource.

We're the operator of the Surmont developments, holding a 50% working interest in these. We're a 50% co-venturer as non-operator in the Foster Creek and Christina Lake projects, and in addition, we hold leases in the Athabasca region.

We acknowledge there are environmental challenges, and we believe technology is the key to mitigating them. We're investing in improving and applying technology across all aspects of our business.

There has been substantial discussion about the potential of the Canadian oil sands. The oil sands are one of the largest and most reliable long-term sources of energy in the world, second in size only to Saudi Arabia. They represent about 14% of the global oil reserves and about 51% of the world's accessible reserves. They are essential for Canada's energy security.

National security also has to include a view on how the resources will aid in the creation of jobs in Canada. We see the oil sands creating thousands of well-paid jobs for decades to come and adding billions of dollars to the national tax base.

One of the unique international aspects of our Canadian oil sands development is that the government approvals are subject to a rigorous regulatory regime that is open to scrutiny from the citizens of Canada.

I'd like to focus for a moment on the benefits of our local communities in the regions, because we spend a great deal of time and energy creating those direct and indirect opportunities.

We're very active in the local aboriginal communities nearest to our oil sands assets. We work to create capacity to ensure community members fully benefit from the oil sands developments.

In the development and construction of Surmont 1, more than $60 million was spent on services provided by local and aboriginal businesses and contractors. For Surmont 2, we plan to spend $175 million on services provided by local and aboriginal businesses and contractors.

We work to ensure that we have contracts and activities of a size and scope so that local communities can participate in the development of these assets. We believe that in doing so, over time, sustainable businesses will thrive in these communities and they will be able to add capacity and further participate in even larger ways on larger developments. We also provide substantial amounts of funding for community-level programs—

[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]

It's a nice point of order.

Would you speak a little slower? There are some fumes coming out of the translation.

[Joe Marushack]

I would be happy to.

[Denis Coderre, Liberal, Bourassa, QC]

Thank you. That was a nice point of order.

[The Chair, Conservative, Leon Benoit]

Continue, please, Mr. Marushack.

[Joe Marushack]

I will slow down, sorry.

We provide a substantial amount of funding for community-level programs. This includes important local community initiatives and training.

With regard to oil sands technology, we're planning to spend over $300 million over the next five years to advance heavy oil technology for our worldwide operations. A significant portion of this will be spent in the oil sands to improve environmental and economic performance of our projects.

Our technology development is focused on managing greenhouse gas emissions, reducing water use, and minimizing land disturbances. I could cite several examples, and would be happy to do so, but in general, each concept is either focused on reducing the steam-oil ratio, improving recovery, lowering our greenhouse gas emissions, or reducing the size of our oil sands footprint. Improving our environmental performance has a dual benefit in that less water, energy, or land almost always improves economic performance.

Our technology program is exciting, but we're also doing other work to reduce our impact through pioneering best practices. Faster forests is one example. We have planted 130,000 trees so far in this program for reclamation and will be expanding that effort. We have a comprehensive sustainable development portal on the web, and that has many more details about our programs. I invite you to visit it.

In addition to industry's role in the oil sands development, it is obvious that government plays a significant part in securing and delivering the value of these resources. Specifically, we believe governments should support the continuation of a world-class and cost-effective regulatory system and the establishment of fair policies for industry that encourage responsible and economically viable oil sands development.

One of the key attributes of the Canadian regulatory process is its transparency. We believe government policy must ensure access to markets and fair international competition for bitumen. We encourage maintaining competitive fiscal regimes that enable companies like mine to compete for capital within our global portfolios. We believe governments have responsibilities to develop coordinated climate and energy policies that promote energy efficiency. We're open to discussions about how governments can best support and facilitate technological developments.

In closing, ConocoPhillips believes oil sands developments will enhance Canada's economic energy security. Development of these assets can be achieved in a manner that powers our national economy, preserves and creates jobs, and ensures quality of life for Canadians. We're proud to be part of this exciting future. I'm honoured to be with you today and would be pleased to answer any questions you may ask.

[The Chair, Conservative, Leon Benoit]

Thank you very much for your presentation, Mr. Marushack, president of ConocoPhillips Canada.

We go now to our final presenter for this panel, by video conference, from ARC Financial Corp., Mr. Peter Tertzakian, chief energy economist and managing director.

Thank you very much for being with us today, and for your patience. Go ahead with your presentation, for up to seven minutes.

[Peter Tertzakian, Chief Energy Economist and Managing Director, ARC Financial Corp.]

Thank you, Mr. Chairman and the committee, for inviting me to speak.

Just as a quick background, I am chief energy economist and managing director of ARC Financial. ARC Financial has been around for over 20 years. In the past 10 to 12 years, it has raised $2.7 billion from domestic and foreign sources to invest in Canada's energy industry, predominantly the oil and gas business. We are investing mostly in oil and gas and oil and gas services, including the oil sands, and we continue to do so.

The topic today is energy security, in particular with respect to the oil sands. Energy security, as I think of it, has a number of different dimensions. It's a relatively nebulous term. We can think of security as either being our own Canadian security, continental security, or if the world feels secure in its energy needs that makes us all feel secure. To me, it's a rather difficult question or context to be speaking in.

I'm not an environmental expert on the oil sands. My expertise spans a couple of different dimensions. One is understanding how societies evolve with their energy needs and fulfill those energy needs on the supply side, and the changes that occur over time as unsustainable events occur. I translate those trends into investment theses, which my firm then takes and decides how to allocate capital into different types of energy systems and commodities.

I'm also following very closely the Canadian oil and gas business in terms of the financial flows, how it is that the Canadian oil and gas industry has evolved over the last 100 years, and what it is that makes it profitable or not profitable. The oil sands are indeed a very large part of that.

I will speak about the oil sands, but I have to tell you that speaking exclusively about the oil sands is a very limiting conversation. I do believe you really have to look at the hydrocarbon economy in general within Canada: conventional oil, oil sands, and natural gas all together. I don't really think you can disaggregate one of those commodities out of the other, because they all tap into the same labour pools and the same capital pools. So again, it's complex to be thinking about isolating just the oil sands out of the entire industry.

I am going to highlight two big issues that face us as Canadians and the industry. But as a backdrop to that, the sale of all upstream hydrocarbon products—oil, oil sands, and natural gas—amounts now to about $100 billion a year, or $270 million per day. The sale of oil sands products as a total of that $100 billion is about $36 billion per year. It is actually the largest product selling commodity in Canada.

The things that concern not only my firm but also me as a Canadian citizen are that we have made a conscious decision for almost a century to export our hydrocarbons. I'm very concerned that we are not maximizing the value of those hydrocarbons in a global context. In other words, we sell our hydrocarbons at a discount, and we, as Canadian citizens, are not optimizing the value. The principal issue is that we are selling into one market, the United States market, which now has a flat to declining demand. It is also not as wanting of our hydrocarbon commodities as other global players.

If we consider that the discount we are receiving, whether it's on the natural gas side or the oil side...we conservatively estimate that at 10%, that is a $10 billion a year loss of revenue. Every Canadian should be very concerned about this and the royalties and taxes that are mitigated as a consequence of this. The discounts are not narrowing; they're actually widening.

The second big issue I'd like to highlight is that this $100 billion a year that comes into our economy, in particular the $36 billion from the oil sands, which is growing, is a very large sum of capital. And $55 billion of that $100 billion is reinvested back into the oil and gas economy.

We in Alberta in particular are a very small labour pool. That means we are very susceptible to wage and service inflation. And these inflationary pressures are building up again. That is a detriment not only to the oil sands, as costs go up and commodities are potentially priced out of the global market; it's also inflation that spills over into other segments of the economy and certainly into other segments of the hydrocarbon economy. The inflationary forces are something we need to be very concerned about. They spill over into issues such as human resources and how we are going to tap into skilled labour and labour pools going forward.

That's a backdrop to some of my thoughts. As I said, two big issues as they relate to the hydrocarbon economy, in particular the oil sands, are first, not maximizing the value--having widening discounts, which we are seeing for both natural gas and our oil products--and second, the cost inflation we see.

I'm going to leave it at that. If the discussion takes us into other areas of concern, I can highlight those as well. But in the context of the time I have, that's all I'd like to say.

[The Chair, Conservative, Leon Benoit]

Thank you very much, Mr. Tertzakian, for your presentation today from ARC Financial Corporation.

We'll go now directly to questions and comments, starting with the official opposition.

Monsieur Coderre, you have up to seven minutes.

[Denis Coderre, Liberal, Bourassa, QC]

Thank you, Mr. Chair.

I am impressed, once again, by the quality of our witnesses today. Ms. Dowdeswell,

you spoke about lack of leadership and lack of scientific rigour. You talked about the lack of monitoring. And I agree. I myself went out in the field, and that's the first thing you realize. You have the federal government. You have the provincial government. Some in the industry are saying that we should get our act together. There's a role for both to play, of course, while respecting jurisdiction and conventions.

This will sound like a political question, but it's not. Since you feel that the monitoring process is not that accurate right now, if you were able to take a decision...? There is more and more productivity. There are more and more projects. I'm against a moratorium, for the record. Do you think we should slow down new projects and wait for those monitoring processes, for the sake of quality of life or for the sake of the industry itself, so that they might not have a bigger problem in the future? How do you perceive that? With your round table, with your panel, you had those kinds of issues to look at. If the scientific data is not all accurate, of course....

I also met Mr. Schindler, who had some of his data. Like him or not, he's scientific, and he has credentials. I think the best way to address credentials is with other credentials.

How do you perceive monitoring versus new projects?

[The Chair, Conservative, Leon Benoit]

Ms. Dowdeswell, go ahead.

[Elizabeth Dowdeswell]

I believe the panel's approach was to say that there are some fundamental principles that should guide a world-class monitoring system, and while we said the current situation was lacking, we also were very quick to say it could be fixed.

In my mind the primary issue is not one of time but one of willingness to come together in a comprehensive and coherent way so that individual jurisdictions can do what they are mandated to do, but they do so within a framework and with a common vision about what direction they're headed in. That way everyone knows what the ground rules are, and they can also harness the best resources they have. In some cases, on some elements of monitoring in some geographic locations, industry is vital, and the contribution it makes to the development of technology is crucial.

On the other hand, you may in fact want to effectively use the resources you have in a local community, not in an ad hoc way and not as part of a patchwork quilt, but rather with a coherence so that people know what vision they have, what they're working toward, and what part they play in achieving that.

Some of the kinds of principles we suggested had to do with transparency and accessibility, so that in fact each person knows what the others are doing. They don't know now, and consequently there are gaps not only in what we are monitoring but in people's understanding. Consequently, I think the fundamental part, the fundamental premise of our work, was that if we want effective policy for the environment and for the economy and for the well-being of our citizens, we need to make sure we're all operating with good data. You are going to have that data only if you have a sound monitoring system in place.

[Denis Coderre, Liberal, Bourassa, QC]

Who should be in charge?

[Elizabeth Dowdeswell]

I think, as we said in our report, this is a question of multi-jurisdictional complexity and challenge. That's the nature of Canada, and certainly in the environmental field.

[Denis Coderre, Liberal, Bourassa, QC]

I'm from Quebec. I understand.

[Elizabeth Dowdeswell]

We described this as a socio-scientific project that actually does require visionary leadership by all parties involved, and that's why establishing that vision and then deciding who does what part of it best, who has the mandate to do which part of it best, is really the conversation that needs to take place.

[Denis Coderre, Liberal, Bourassa, QC]

Would it be accurate to say that you need a process--monitoring--and you need good principles attached to it through your grid--transparency and accountability? There is kind of a vacuum between some of the jurisdictions.

Do you think you can manage all those issues by having a Canadian national strategy?

[Elizabeth Dowdeswell]

I believe if there is a wish to have a world-class system for the purposes of ensuring we are stewards of our environment, ensuring we are economically viable as a country, and ensuring there is equity for citizens of Canada, then surely, with a common vision, we can in fact design a program, use what we already have, and really build on the resources that are available.

[Denis Coderre, Liberal, Bourassa, QC]

Thank you.

Mr. Tertzakian, regarding competitiveness, do you believe the federal government should get rid of tax breaks and subsidies to the industry and instead reinvest in innovations in the technology? Do you think that with all the money they're making right now, those tax breaks are a necessity?

[The Chair, Conservative, Leon Benoit]

Go ahead, please.