Natural Resources Committee on Feb. 2nd, 2012

[John Quinn]

I hear this capacity thing all the time. It isn't necessarily that the plants are sitting idle. The capacity reflects the amount of time the plant has been down. A capacity of 95% would be a lovely place for a refinery to operate all of the time. Most refineries don't get there over the long term.

When you see low-capacity utilization statistics, it's because plants have typically had problems. It's not because there isn't enough demand out there to fill. We don't typically have spare capacity sitting around.

Refineries make all their money on the last...pick a number. It depends on the refinery. It depends on the region. It depends on pricing at the time. The last 10% or 15% of throughput, maybe, that goes through that site is where you make your money. There are high fixed costs to cover and high investment costs to cover. You have to keep your plants full to make money. If they have idle capacity sitting around, I guarantee that those plants will not make money. They are not sustainable.

We are carrying a little more inventory in western Canada right now. The issue with strategic reserve, whether it's refined products or crude, is that it's frequently in the wrong place for where you need it when the event occurs. We have strategies in place. Import plays a bit of a role in helping to keep things balanced. It gives you the opportunity to source from far broader locations. For example, if there is a problem on the prairies, we will increase imports into Vancouver and into the Lower Mainland. We will take product out of the pipelines that was going down to Vancouver. We will hold that back on the prairies.

There are mitigating strategies for this, but it's a tight business. It is tough to make money and leave idle capacity sitting around.

[Blaine Calkins, Conservative, Wetaskiwin, AB]

Okay, good.

Mr. Ervin, just switching up a little bit here, in your testimony you cited the rationalization of the industry. One of the factors for the rationalization of the industry was environmental regulation. Precisely, you said it was progression of fuel quality standards, which are basically environmentally driven, such as those for reductions in lead, benzene, olefins, vapour pressure, sulphur, and so on. I think most Canadians would agree that this was what needed to happen. We all want a clean environment. We don't want various things in our atmosphere. We don't want the NOx and SOx gases and volatile inorganic compounds and so on.

Yet our friends Mr. Newman and Mr. Gargiso just testified that Canada should always be striving to achieve the highest-level standards, and even perhaps, referring to the Irving plant, which was actually in New Brunswick, to overachieve the national standards that are being set. Yet it seems that every time we impose a further mandate on this, it causes further rationalization of the industry and the shrinkage of various refining locations, which creates situations where we have the tightness you just referred to. If you have an incident when you have 40 plants versus an incident when you have 15 refineries, there is a big difference in the effect.

Do you think, Mr. Ervin, Mr. Gargiso, Mr. Newman, Mr. Quinn, or anybody who wants to address this, that we actually have the right balance? Does industry have the ability to strike the right balance without too much government interference? How much more government interference should we have in dictating or mandating, basically, a market-driven sector?

[The Chair, Conservative, Leon Benoit]

We have very little time for an answer.

Mr. Quinn.

[John Quinn]

I'll go really quickly.

Clearly, we don't want more intervention. We think we're well set up. I'll come back to Mr. Ervin's comment that people are not freezing in the dark. Cars are not pulled over at the side of the highway for lack of supply. It's localized. There might be some sites and some retail sites. Yes, prices can spike when there are short-term supply issues, but the supply is there, and it is available.

[The Chair, Conservative, Leon Benoit]

Thank you, Mr. Calkins.

We'll go now to Mr. Stewart, for five minutes.

[Kennedy Stewart, NDP, Burnaby—Douglas, BC]

I'm a little bit disturbed to hear the news about the Chevron refinery, which is in my riding of Burnaby—Douglas, and that we've curtailed capacity there. The possibility of it closing is also something we have to consider. I'll leave that topic for the moment.

I'd like to move to looking at what the U.S. government has done. Perhaps we can get some information about the policy actions they have taken to modernize the refining industry in the U.S. Maybe we can start with the representatives from CEP. And any other knowledge would be welcome.

[Keith Newman]

You are saying specifically the U.S. I'm not that familiar with what their action has been.

[Kennedy Stewart, NDP, Burnaby—Douglas, BC]

Would the other witnesses have any idea of what they have done in the U.S.?

[Michael Ervin]

I'm not sure that there have been any specific initiatives on the part of the government to modernize the refineries. Much like in Canada, there are considerations towards, for example, making even more stringent the sulphur limits in fuel products. That, if done, would bring about modernization, if you want to call it that, but also certainly a great deal of additional investment in the refining sector to comply.

[Kennedy Stewart, NDP, Burnaby—Douglas, BC]

I have read that the gulf coast refineries have been upgraded so they can take oil sands crude or unconventional crude, but our refineries haven't necessarily been doing that. That's the direction I'm going in. Was there anything the government did to facilitate that upgrading in the gulf coast, or was it just private incentive?

[John Quinn]

It's private. Again, we have spent billions of dollars at Edmonton and Sarnia to allow us to manage oil-sands-based crudes, to provide upgrading of those crudes at those sites, and we've spent enormous sums of money to create upgrading capacity at Fort McMurray to produce those kinds of crudes.

The bottom line in North America is that there is a length of upgrading capacity today.

[Kennedy Stewart, NDP, Burnaby—Douglas, BC]

Did you do that as a company because of the way your company is structured? I don't want you to speak for the other companies, but is that perhaps why others haven't done that? You have many links in the chain, but they are more stand-alone—for example, Chevron.

[John Quinn]

Each of our businesses stands on its own, but there is some strategic integration that makes sense. But we were making those investments in Petro-Canada at Edmonton before we had the full-blown integration we have today with the Suncor oil sands business.

Again, it's a tough business. You have to choose where you're going to invest and the efficiency of your capital investment. And where is that—

[Kennedy Stewart, NDP, Burnaby—Douglas, BC]

Would you care to speculate, though, on why the other companies haven't chosen to upgrade their refineries?

[John Quinn]

Shell, in the west, at Scotford, has significant upgrading facilities at that site.

I'm not going to comment on all the others, but part of the east's issue would be access to the crudes.

[Kennedy Stewart, NDP, Burnaby—Douglas, BC]

Okay.

Mr. Gargiso—

[The Chair, Conservative, Leon Benoit]

Yes, a short answer. I keep forgetting we changed the meeting time until quarter to ten, so the meeting is almost over.

A short answer, please, Mr. Gargiso.

[Joseph Gargiso]

Briefly, Shell was supposed to build an upgrader in Sarnia way back in 2004-05. They ditched that plan and they actually closed the Montreal refinery and used the capacity in their other refineries to supply our own market. That's where we got the raw deal.

[The Chair, Conservative, Leon Benoit]

Okay, thank you very much.

Thank you, Mr. Stewart.

Thank you all for your questions and comments today. And thank you especially to the witnesses, from Suncor Energy, Mr. Quinn; from The Kent Group, Mr. Ervin; and from the Communications, Energy and Paperworkers Union of Canada, Mr. Gargiso and Mr. Newman.

Thank you. The meeting is adjourned.