Natural Resources Committee on Feb. 2nd, 2012

[The Chair, Conservative, Leon Benoit]

Good morning, everyone. We're here to continue our study on the current and future state of oil and gas pipelines and refining capacity in Canada.

We have with us today three groups of witnesses. The first is from Suncor Energy Inc. We have with us John Quinn, general manager, integration and planning, refining and marketing.

Welcome.

From The Kent Group, we have Michael J. Ervin, vice-president, director of consulting services, MJ Ervin and Associates.

Welcome.

From the Communications, Energy and Paperworkers Union of Canada, we have with us Joseph Gargiso, administrative vice-president, and Keith Newman, director of research.

Welcome to you, gentlemen.

We will have the presentations today in the order that you're listed on the agenda. After the presentations, we'll go directly to questions and comments from members.

We'll be starting with John Quinn, general manager, integration and planning, refining and marketing, for Suncor Energy Incorporated.

Go ahead, please, sir.

[John Quinn, General Manager, Integration and Planning, Refining and Marketing, Suncor Energy Inc.]

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

On behalf of Suncor Energy, I would like to thank you for the opportunity to attend this morning’s meeting, and I look forward to discussing with you how we view our refining business and some of the challenges and opportunities we are facing.

I’m going to focus my opening remarks on three areas: one, to provide you an overview of Suncor's Canadian refining business and its impact on jobs and the economy; two, to outline what we have been doing to ensure the competitiveness and ongoing viability of our refineries; and three, perhaps most importantly, to share with you our view of the future for the refining sector here in Canada.

Suncor Energy is the largest integrated energy company in Canada and the fifth largest energy company in North America. We are, of course, best known for our leading position in oil sands production and development, but we also have extensive operations in refining and marketing, North American natural gas production, and oil and gas production both off Canada’s east coast and internationally.

But I’m here today to primarily represent our Canadian refining business. We have four refineries in Suncor. Three of them are located here in Canada: one in Edmonton, Alberta; one in Sarnia, Ontario; and one in Montreal, Quebec. Our fourth refinery is located in Commerce City, just outside Denver, Colorado.

The combined crude capacity of our three Canadian refineries is roughly 350,000 barrels per day. Our refineries are closely integrated with the other businesses inside our refining and marketing division. Those businesses include our retail business, with 1,500 Petro-Canada sites here in Canada, entirely operated by independent business men and women; our wholesale business with over 200 Petro-Pass locations and a base of more than 26,000 wholesale customers; and we also have a world-class lubricants facility located in Mississauga, Ontario. That facility sells more than 350 highly specialized products in more than 70 countries around the world.

We run an extensive distribution and product terminal operation across the country, and we also have Canada’s largest ethanol plant located just outside Sarnia, Ontario.

The divisional headquarters for these combined businesses is in Mississauga, Ontario. In total, our refining and marketing business has 3,300 full-time employees and creates thousands of jobs directly in our retail and wholesale associate networks and indirectly with contractors and suppliers across the country.

I also want to mention that our upgraders in Fort McMurray, although not quite refineries and not managed within our refining and marketing division, do produce some high-quality diesel fuel. Their primary purpose is to upgrade bitumen to higher-quality synthetic crude, but as part of that process there is some diesel fuel produced as well. We currently operate two upgraders at Fort McMurray, and between them they produce about 25% of our western Canada diesel supply.

With that quick overview of our refining and marketing business, let me refocus on our Canadian refinery operations.

As I think you are aware, they are a significant contributor to the economy. A recently released report by the Conference Board of Canada, which studied the Canadian petroleum refining sector, estimates the contribution made by this sector to be at about $2.5 billion of real GDP in 2009. Based on our refinery capacity, Suncor represents about 20% of that sector, and I expect we contribute at least our share of that economic impact.

I think it’s also important to note that the industry does employ highly skilled workers, and accordingly we pay well above average wages and salaries. That same Conference Board report states that refinery workers now earn 50% more than workers in the overall manufacturing sector in Canada, and this wage premium has continued to grow over the years.

We are highly committed to all of our refineries and will continue to operate them as long as we can do so in a competitive and profitable manner.

We also recognize the importance of building sustained relationships with all our stakeholders. Our refineries are actively engaged in their local communities through our community liaison committees, with organizations like the United Way, and our extensive support of educational, training, and scholarship programs.

We're also a highly regulated industry, so we work closely with policy-makers and regulators at all levels of government to try to ensure regulations impacting our industry are clear, harmonized, and science-based, while still meeting the needs of Canadians. However, we are in a business that must compete globally, and we must continue to work together to ensure that playing field is as level as possible.

So what have we been doing to help secure the long-term competitiveness and profitability of our refineries? We work particularly hard on those areas of the refining business that we control directly, such as safety, efficiency, and reliability. We have made substantial progress in each of these areas in recent years, and we will continue those efforts.

We also make significant investments in all of our refineries: investments that allow us to improve their safety, reliability, and environmental performance, fuel quality, and also adapt the refineries to the changing composition of Canadian crude oil.

I'd especially like to highlight the multi-billion dollar investments we’ve made in recent years at Edmonton and Sarnia to adapt those facilities so they can run 100% western Canadian crude oil, and in the case of Edmonton, 100% oil-sands-derived crude oil. These investments have positioned those two refineries to move away from the declining availability of conventional light western crudes and to take increasing advantage of the growing oil-sands-based crudes.

At this time, Montreal is our only Canadian refinery that is not linked to western crude oil. It does source approximately 25% of its current crude supply from Canada’s east coast offshore oil production, but the remainder of its supply is foreign sourced. It's capable of running some western crudes today, but there's no pipeline connection to allow that to happen at a cost-effective level. So we are supportive of the reversal of Enbridge’s line 9 crude pipeline. If reversed, that line currently running from Montreal to Sarnia would allow our Montreal refinery to connect to western crudes. That, in turn, could foster possible investments at Montreal to allow it to more fully adapt to those crudes. We believe that would help secure Montreal refinery’s long-term flexibility, its performance, and its viability.

With regard to how we see the future of our refineries in Canada, as I said, we're committed to our plants as long as they are competitive and profitable, but the reality is that currently Canada is a net exporter of refined petroleum products. Recent reports I have read certainly also suggest that in 2011 the United States also became a net exporter of refined petroleum products, for the first time in sixty years.

According to the IEA’s World Energy Outlook, although there will continue to be growth in world oil demand for many years to come, and some modest growth in diesel in North America, overall gasoline and diesel demand in North America and the other OECD countries is forecast to decline. The current surplus of refining capacity in North America, coupled with declining demand, does not easily support the expansion of domestic refining capacity.

Refinery capacity will certainly be needed in the developing world; it will almost certainly be built there. However, we do believe that our refineries are well positioned to compete in their local markets, and we will continue to work hard to make the necessary investments to support that, but our current view of the future does not support significant capacity expansions at our refineries here in Canada.

Having said that, Suncor does have plans for a 200,000-barrel-per-day expansion of its crude oil upgrading operations in Fort McMurray, targeted for completion in 2017. This will result in an increase of about 30,000 barrels per day of additional diesel supply at that site. We are currently in the process of assessing how we will market that increased supply.

In closing, we look forward to continuing our work with governments to ensure that necessary conditions are in place to support a sustainable refining industry in this country and to ensure we are able to compete on a level playing field with our global counterparts.

I'd also like to extend an invitation to any of you on the committee, any of the other members of Parliament, or whoever is in the audience here today who might be interested, to tour one of our refineries. I'd be happy to make arrangements for that.

Thank you, and I look forward to your questions.

[The Chair, Conservative, Leon Benoit]

Thank you very much, Mr. Quinn, for your presentation and for your kind offer. There may be some discussion on that. We'll see.

Now, from The Kent Group we have Michael J. Ervin, vice-president, director of consulting services, MJ Ervin and Associates.

Go ahead please, sir, with your presentation.

[Michael Ervin, Vice-President, Director of Consulting Services, MJ Ervin and Associates, The Kent Group]

Mr. Chair and members of the committee, good morning. Thank you for your invitation to appear before this committee on the subject of the current and future state of oil and gas pipelines and refining capacity in Canada.

My firm, MJ Ervin and Associates, which is a division of The Kent Group, is a petroleum consultancy that specializes in the downstream, or refining and marketing, side of this industry. Our clients span a broad range of interests, and I believe we are well regarded for our unbiased views of this industry. My remarks today will focus on the refining sector and its current and future state.

The North American refining sector has seen a significant decline in the numbers of plants, having dropped from over 360 in the 1970s and 1980s to less than 140 today, of which the Canadian refinery population has dropped from over 40 to its current level of 15 refineries capable of producing a broad range of fuel products. One might guess that this declining demand might have been responsible for the decline in refineries, but in fact during that time petroleum demand in North America was steadily climbing. Instead, the closure of about 200 refineries since 1970 was a consequence of poor returns on capital, which in turn was a consequence of excess capacity and poor crack spreads.

A crack spread is the difference between the revenue per barrel that a refiner sees from the sale of a product, such as gasoline, and the cost of the crude oil that went into making that volume of gasoline. It is really the key performance indicator used by industry, financial, and investment analysts to determine the health of the refining sector.

So why did we see so many refinery closures? In that time, crack spreads were insufficient to sustain smaller and less efficient refinery plants, as their returns on capital did not justify their continued operation. One might argue that once a refinery is built, return on capital is less important a factor in deciding its fate. But due to a progression of fuel quality mandates, such as those for reductions in lead, benzene, olefins, vapour pressure, and sulphur—all of which have had beneficial effects from an environmental and quality of life point of view—many smaller refineries could not justify the multi-million-dollar investments needed to comply with these mandates and they were forced to close.

It was only in the mid-1990s that crack spreads began to achieve rates of return that actually attracted capital investment beyond that required by fuel quality mandates. In fact, due to a steady increase in petroleum demand, North American refineries began to experience utilization rates well above 90%, and many expanded in order to meet this growing demand and take advantage of improved crack spreads.

For a few years leading up to 2008 the refining sector began to experience profits that met objective thresholds for additional growth investment, and a few North American refineries even announced plans for new greenfield refineries. Since then, of course, we have witnessed a global recession that has led to a large drop in the demand for refined products in the United States and other regions, and to a lesser extent in Canada. Where a few short years ago refineries were all running at full capacity, we are now witnessing refinery closures and the shelving, if not total abandonment, of previous plans to build brand-new refineries.

That brings us to the present. What about the future?

A number of factors will contribute to a long-term decline in demand for gasoline in North America, all as a result of changing consumer practices, improving automotive technologies, or future government interventions such as the recent mandating of renewable content in gasoline and diesel fuel. Gasoline is the most commonly produced petroleum product in North America, comprising about 40% of the barrel. So its decline in demand will have a significant influence on the U.S. and Canada's net refinery throughput, even considering the likely improvement in diesel consumption once the U.S. economy gets back into full swing.

In light of these demand projections, and considering the spate of recent refinery closures in North America, there's virtually no chance, in my opinion, of North American refiners considering major capacity expansions in the foreseeable future.

I sometimes hear speculation that the building of more Canadian refineries would lower the price of wholesale and retail fuels for Canadian consumers. It is important to understand, however, that Canadian refineries are really just part of a North American capacity pool, and lower wholesale prices in Canada brought about by more capacity would quickly attract U.S. wholesale buyers, thus negating any hopes of sustained lower prices in Canada.

Another topic that may be relevant to this committee's work is the matter of bitumen upgrader capacity. To be clear, as Mr. Quinn has said, we don't define upgraders as refineries, so when I project a lack of demand for more refinery capacity, there will be a need for continued expansion of upgrader capacity as the production capacity of Canada's oil sands continues to increase.

One school of thought suggests that a considerable opportunity might exist to make Canada a significant exporter of refined petroleum products instead of exporting Canada's growing production of bitumen. This would have the benefit of creating and retaining more highly skilled jobs in Canada. While that prospect is appealing, it would create the paradoxical situation in Canada of undertaking a massive expansion of refinery capacity, concurrent with the United States undertaking a massive downsizing of its refining infrastructure. To say that such a scenario would be an inefficient use of capital is a gross understatement.

I will conclude by pointing out some wild-card factors that could have a significant impact on future refinery capacity in Canada, and indeed in North America. First, it is a certainty that in the next decade there will be an expansion of refinery capacity in some regions, notably the so-called BRIC countries. This, combined with a glut of capacity in North America and Europe, will likely keep crack spreads depressed for the foreseeable future.

Similarly, the building of one or more of the Keystone XL pipeline and the Northern Gateway pipeline, or the possible re-reversal of line 9 will improve access by mid-continent crude oils to world markets, thereby bringing those crude prices back up into parity with waterborne crudes, such as Brent. While this will be good news for Canada's upstream industry, it will have the effect of reducing crack spreads on the downstream side for those refineries that currently process crudes from the western Canada sedimentary basin.

Finally, any future product specification mandates will have the inevitable consequence of necessitating more capital investment that does not increase capacity, and will therefore reduce the sustainability of the more marginal players in this industry.

All of these add up to a prognosis that we are unlikely to see any significant expansion of Canadian refining capacity in the next decade and perhaps beyond. Depending upon the outcomes of those wild-card factors I mentioned, it may even lead to a contraction of capacity. All of those factors are beyond the control of refiners, and all but one are beyond the control of Canada's policy-makers, the one exception being product specifications.

Thank you for giving me the opportunity to share my perspectives with this committee. I look forward to the ensuing discussion.

[The Chair, Conservative, Leon Benoit]

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

We will now go to the final presentation of this morning from the Communications, Energy and Paperworkers Union of Canada. We have Joseph Gargiso, the administrative vice-president from Quebec; and Keith Newman.

Go ahead, gentlemen, as you have planned, for up to 10 minutes.

[Keith Newman, Director of Research, Communications, Energy and Paperworkers Union of Canada]

Mr. Chair and members of the committee, I would like to thank you for inviting us here this morning.

My name is Keith Newman, and I am the director of research for the union. We have some notes, but we will provide the committee with a translation later. Once again, thank you.

The Communications, Energy and Paperworkers Union would like to thank the committee. We represent 120,000 workers in Canada, including 30,000 in the energy sector: in offshore oil and gas extraction at Suncor and in oil refineries, gas plants, petrochemical plants, and gas distribution all across Canada. We are vitally concerned with the provision of fossil fuels to Canadians in ways that are safe, environmentally sound, and that provide—and this will be the focus, I believe, today of what we have to say—a secure supply to Canadians in an uncertain world.

In recent years, with respect to refining, there have been two major refinery closures in Ontario and Quebec that have pushed us into a position of dependency on foreign suppliers for refined petroleum products, gasoline in particular. Many people in eastern Canada now depend on the goodwill of strangers to drive their cars and trucks.

At the start of 2005, Petro-Canada shut its Oakville refinery in the Toronto area. Annual production of refined petroleum products in Ontario dropped by nearly 20%, forcing Ontario into a position of dependency on other regions. Prior to the closure, Ontario's production of refined products was in balance; that is, domestic consumption was equal to production. After the shutdown, the balance was lost and Ontario had to rely on surplus production in Quebec and foreign countries to make up its shortfall of about five million cubic metres yearly of refined product.

The refinery closure also cost 350 highly skilled, well-paid workers their jobs. That was only part of the impact. Thousands of additional jobs were lost by contractors and suppliers, and people in the community lost out because the spending of these other workers was lost.

While the shortfall in Ontario's production could be made up by excess capacity in Quebec about equal to Ontario's deficit, Ontario was still in a precarious position. In 2007, a fire broke out at the Imperial Oil Nanticoke refinery near Hamilton, and southern Ontario faced a gasoline shortage for several weeks as a result. It was widely understood the tight supply in the province was the main cause of the shortage. Not only did Imperial Oil have to close 100 gas stations, one-quarter of its total, but Petro-Canada also closed 30 stations and imposed rationing at another 80. Shell, too, had to close five stations, and gasoline prices rose 10¢ to 15¢ a litre during the time of the shortage.

Since October 2010, about a year ago, the situation has grown worse. On October 1, 2010, Shell Canada closed its refinery in Montreal, now forcing the Quebec-Ontario region as a whole into a situation of dependency on foreign supply. Prior to the closure, Quebec produced about five million cubic metres of refined products above its consumption and was able to supply Ontario's deficit. With the recent closure, Quebec is barely self-sufficient. Again, when the Shell refinery shut, hundreds of workers were thrown out of highly skilled, well-paying jobs, and many additional direct and indirect jobs were lost.

Based on a study by the Institut de la statistique du Québec, a department of the Quebec government, the CEP estimates that at a minimum of 2,000 jobs were lost. A recent study by the Conference Board of Canada dated October of last year, 2011, studied the effects of the closure of 10% of Canadian refining capacity, what it would mean to the Canadian economy. They estimated that over a five-year period, if 10% of refining capacity were closed, 38,300 person years of work, $4 billion of cumulative GDP, and $508 million of provincial and federal income taxes would be lost.

In the study, they note you can use their results in a linear fashion. Doing that, we calculate that the closures of the Oakville and Montreal refineries produced a loss over a five-year period of 25,000 person years of work—I should point out again this is direct, indirect, and what they call induced jobs—$2.6 billion of GDP, and $330 million in lost taxes, both federal and provincial. Now Ontario and Quebec are at the mercy of supply disruptions in Europe because that's where the excess supply or the shortfall must come from. It's made up of a flotilla of tankers heading down the St. Lawrence Seaway into Montreal. The Port of Montreal had a record year last year. Of course, given the extra tankers going down there, there was more environmental damage because of spills.

Ontario, however, still remains vulnerable to supply disruptions because it's short—still. Last August they experienced gasoline shortages—again. In the summer of 2011, a few years after the ones in 2007, they experienced shortages. This was because—now get this—the repairs at the Shell refinery in Sarnia took longer than expected. This was not some kind of odd accident. This was routine maintenance that took a bit longer than expected. People in the greater Toronto area, Sarnia, and London experienced shortages.

We believe this is the new normal in Canada—at least, that is to say, in eastern Canada. The supply of product is now so tight that a disruption at home or in Europe, a refinery accident or other serious event, will cause shortages and rationing of gasoline. We've allowed ourselves to get into a very awkward, even dangerous, situation.

[Joseph Gargiso, Administrative Vice-President, Quebec, Communications, Energy and Paperworkers Union of Canada]

I will continue.

My name is Joseph Gargiso. I am the administrative vice-president of CEP as well as the union's bargaining program coordinator for the oil sector.

Since the document is in English, it will be easier to read it in English rather than translate as I go. But we will send you the French version.

In regard to oil supply, Canada is blessed with remarkably large deposits of oil and natural gas. Most is extracted from western Canada, but the Atlantic region also extracts significant quantities. On paper, we are self-sufficient in oil, but in practice we are not. Despite our apparent abundance of fossil fuels, we could face serious shortages—even rationing—in the future.

The biggest problem we face is reliance on imports of crude oil in eastern Canada. The Atlantic provinces, and Quebec in particular, import most of their oil from overseas. Quebec refineries receive only 13.5% of their crude oil from Canada. The rest is imported from foreign sources, principally Algeria, the North Sea, Kazakhstan, and Angola. Some of these countries have experienced political turmoil and even civil war in recent years. Fortunately, oil supply was not disrupted, and we hope our luck holds.

As with Quebec, the Atlantic provinces receive only a small percentage of their crude oil from Canada—a modest 17%. The rest is imported from foreign sources. About half is from OPEC countries, such as Saudi Arabia, Nigeria, Iraq, Venezuela, and Angola. The remainder is sourced from the North Sea and a variety of other countries, such as Russia, Brazil, and Equatorial Guinea. Some of these countries have experienced political turmoil and civil war in recent years. Fortunately, the oil supply was not disrupted, and we hope this continues.

Finally, while Ontario also imports a significant quantity of its crude oil from foreign sources, it does enjoy the most secure source of oil of the eastern provinces: Canada. Nearly 80% of the oil refined in Ontario is sourced within Canada, but the energy security of the province remains uncertain because its inadequate refining capacity leaves it dependent on foreign sources for refined products.

In regard to misguided pipeline proposals, two pipeline projects recently have been proposed that CEP believes are contrary to the public interest as they would lock Canada into dependency on foreign suppliers for our basic energy needs. If built, the TransCanada Keystone XL pipeline to the United States and the Enbridge Northern Gateway pipeline to the Pacific coast would commit Canada to exporting large quantities of raw bitumen from western Canada for processing out of the country. We should not export this energy source before ensuring our own energy independence and security.

It is unimaginable that the United States, any European country, or China would ever allow themselves to be dependent on other countries for their energy supply if they could avoid such a potentially difficult and even dangerous situation. Our energy security is already partly compromised by NAFTA's proportionality clause requiring Canada to export the same proportion of its energy to the U.S. even if we experience shortages at home. We shouldn't make matters worse by building more U.S.- or Asia-bound pipelines.

There is also the matter of jobs. Michael McCracken, the CEO of Informetrica and a leading economist who is very familiar with the Canadian oil industry, has estimated that for every 400,000 barrels of raw bitumen exported out of the country for upgrading and refining, 18,000 jobs in Canada will be lost—18,000 well-paid jobs, as you heard from the representative from Suncor, the kinds of jobs we have in this industry.

That is a very conservative number, because Mr. McCracken did not estimate how many jobs would be foregone in downstream activities such as the manufacture of chemicals, petrochemicals, plastics, or other derivative products. It is clearly not in the interest of Canadians to export this raw bitumen, for reasons of both energy security and job creation.

We understand that oil companies, foreign- and domestic-owned, want to maximize their short-term profits by exporting raw bitumen out of the country, but allowing thousands of jobs to be shipped to the United States or China smacks of the most elementary excesses of our colonial past. We should process our natural resources at home. It is high time our federal government spoke for Canada.

In regard to energy independence and security for Canada, it is a truism that we live in an uncertain world. In recent months, this has been underlined by talk of a military attack on Iran. If such an attack were to occur and were Iran to shut the Strait of Hormuz in retaliation, as it has threatened, 40% of oil from the Middle East would be cut off.

Can we reasonably believe we would be first on the list to receive our full share of a much smaller overseas oil supply from our foreign suppliers? The reality is that if a disruption were to occur, we would be forced to cut back drastically. If the disruption occurred in the winter, we would face rationing of heating oil, and many thousands of people would need to be moved into shelters.

Would Europe, facing severe shortages of oil at home, continue to supply us with the refined products we were importing, or would it supply itself first? To pose the question is to answer it. Eastern Canada would be cut off from European supply and face rationing and economic disruption.

The regions most vulnerable to a disruption in oil from the Middle East are the Atlantic provinces, which currently rely on that region for one-quarter of their oil supply, and Ontario, through its dependence on refined products sourced from foreign countries themselves dependent on the Middle East.

Some of our suppliers have faced civil strife in the past. If such problems flare up and intensify in the future, our oil supply could be adversely affected, with serious consequences. Let us hope this does not occur, but to rely on good fortune is not prudent policy.

There is also uncertainty of a less dramatic nature with respect to imports of refined products from Europe. Currently Europe is experiencing a glut of gasoline production and is happy to sell its excess production to us. However, in the medium term, European refiners may try to reorient away from diesel and push for higher consumption of gasoline, or, failing that, they may shut their gasoline capacity entirely. Either way, their exports to Canada could be jeopardized in the medium term, at least at a reasonable price.

There was one potentially hopeful development in 2011. Enbridge proposed the reversal of its line 9 between Sarnia and Montreal to bring western crude oil to eastern Canada. If this proposal is accepted and the oil is refined in Canada, it could reduce eastern Canada's reliance on foreign oil by 20% to 25%. This would be a positive step toward energy independence, if it goes ahead.

Just to conclude, in short, CEP believes Canada should strive for complete energy independence and security for fossil fuel supplies, and eastern Canada must source its oil from western Canada. An east-west pipeline that joins Alberta to Ontario already exists: the TransCanada natural gas pipeline. We need an all-Canadian oil pipeline as well. It is the only way to be certain our oil supply will not be disrupted by competing interests in a time of crisis. Prior conditions to building the pipeline must be that aboriginal rights are fully respected and more stringent environmental standards are met.

To conclude, CEP calls on the Standing Committee on Natural Resources to recommend that the federal government ensure Canadian energy independence and security by re-establishing our independence in refined petroleum products in the Quebec-Ontario region by offering incentives to expand refinery capacity there; reducing our reliance on foreign oil by supporting the reversal of Enbridge line 9; and imposing the condition that the crude oil from western Canada be used to replace imported oil, thus ensuring complete Canadian energy independence and security by having a cross-Canada oil pipeline built to bring western crude to eastern Canada, conditional on the full respect of aboriginal rights and the highest environmental standards.

Thank you for your patience.

[The Chair, Conservative, Leon Benoit]

Thank you all for your presentations.

We'll go now to the seven-minute round, starting on the government's side with Mr. Trost for up to seven minutes. Go ahead, please.

[Bradley Trost, Conservative, Saskatoon—Humboldt, SK]

Thank you, Mr. Chair, and thank you to the witnesses for being here.

Mr. Ervin, I'd like to turn to you as a consultant and someone who looks to the broader industry. I'm trying to reconcile a few things I've heard here today and the previous day.

There is talk about Canadian refinery capacity not being at the optimal 95%, somewhere about 80-some percent at times, and our two witnesses here from the union have just pointed out some shortages that have happened in the recent past in Ontario. I'm not endorsing Ralph Klein's old views about Ontarians and letting them freeze; we don't want that to happen.

Could you reconcile this thing about refineries not being fully used and yet we're having problems and shortages in Ontario? This at times has got people very concerned.

[Michael Ervin]

When a refinery goes offline unexpectedly, it certainly does create a disruption in supply. Refineries so affected have to very quickly scramble for makeup supply, which they will achieve by importing from the United States, bringing in product from other regions, often by rail, or borrowing from their next door neighbours within the same region. I've never seen a case of cars stranded on the 401 for lack of being able to get gasoline. Although we certainly have, in Canada, witnessed rotating closures of gas stations as a result of these shortages, generally they have been associated with the early stages of these supply disruptions before makeup supply could be put in place.

The fact is that certainly up until 2008, the consequences of unexpected supply disruption, whether it's refinery or pipeline, have created problems. With supply capacity now being a little further removed from actual demand, the consequences are not as severe as they used to be. Although that has an effect on crack spreads, making them not as attractive for investment as when refinery capacities are running at full, I really don't see that as being a problem, with spare capacity being available now.

[Bradley Trost, Conservative, Saskatoon—Humboldt, SK]

One of the other things is that it was being pointed out that we have.... We're exporters of petroleum products, both refined and unrefined, in this country as a net basis, even though it's been pointed out that eastern Canada imports in areas.... If we are going to expand our refinery capacity in Canada, that would then be for export market. We would have to sell that abroad because we export already, which leads me then to wonder where our cost-competitive structure would be versus the BRICs. I know in Saskatoon, where I live, labour costs have gone up quite a bit over the last few years for things like construction and the trades.

Could either Mr. Quinn or Mr. Ervin give me an idea of what would be the capital cost comparison for a country like Canada versus a country like Brazil, Russia, or India for building a new refinery? Say I want to build one on the Pacific coast in Canada. How much more or less would I pay to build it there, against some of my competitors around the world?

[John Quinn]

I probably don't have the answer you are looking for in terms of the numbers. It's certainly something we could.... There is lots of literature out there on this. Certainly, we would be at a cost disadvantage in Canada relative to BRIC countries for sure in terms of labour costs and in terms of the northern operation of our facilities, which is more of a challenge in terms of energy efficiency and the heat required in our refinery operations. I think we would directionally be at a disadvantage.

Where we do have an advantage, however, is on source of crude. We are close to good crude sources, so that is helpful.

[Bradley Trost, Conservative, Saskatoon—Humboldt, SK]

Mr. Ervin, would you have any idea about the cost structures we would be facing?

[Michael Ervin]

No. Relative to BRIC countries I don't, although certainly we already have seen countries such as India building very large, very technically advanced refineries—Reliance Industries Limited being one, for example. They are building. The refinery configurations they are putting in place are very capable of exporting gasoline, for example, that does meet North American standards.

[Bradley Trost, Conservative, Saskatoon—Humboldt, SK]

To the gentleman from the paperworkers union, I heard you point out that the Enbridge line reversal is one thing you are in favour of. I assume, from what you say, that you'd also be in general agreement that the Canadian production in the oil sands, the back-in, and so forth, would be a good thing to increase Canada's energy security.

With that in mind, the question I have for you is this. How do we increase Canada's energy security without going to a national energy program too? As you may guess, western Canadian MPs have a fairly bad memory of that—Alberta ones in particular, but Saskatchewan lost $10 billion by some estimates. We get fairly nervous when we hear about things that might restrict our ability to export to make a good profit off our product. How would you increase Canada's energy security without damaging the export profits that Alberta and Saskatchewan enjoy and, through equalization, spread to the rest of the country?

[Joseph Gargiso]

I think what we don't have right now as a country is a national energy strategy. There is an absence. What I mean by that is that it's as if the left hand doesn't know what the right hand is doing.

If all of a sudden we became number two in the world, after Saudi Arabia, with proven reserves, and became an oil powerhouse, how would we use that status to maximize economic benefits? The larger question, and I'm not talking just about this plant making a profit, is how, as a country, we maximize.

If I have an undisputed study that says that if I take raw bitumen and don't upgrade it.... I'm not talking about already refined products. I'm talking about not even separating the sand from the bitumen, which is the first upgrading. If I export 400,000 barrels of oil a day, that's 18,000 jobs. These are not trickle-down jobs. They are direct, well-paid jobs. We're talking about jobs that pay $40,000, $50,000, and $60,000. People who earn that pay taxes and spend money and so on and so forth. What am I doing? The raw bitumen is destined for the refinery capacity that was built on the gulf coast of the United States, which we want to feed. That's where it's going.

So what are we doing? We have a resource, and we're going to create the jobs elsewhere. I'm not saying that we're not going to make any money by selling this natural resource, the raw bitumen. I agree, but we're not maximizing.

When it comes to refining capacity, be careful. If we're not careful, if we don't do the right thing, we're going to close some of the refineries that we have presently.

[The Chair, Conservative, Leon Benoit]

Thank you very much.

Thank you, Mr. Trost.

We'll go now to Mr. Stewart, for up to seven minutes. Go ahead, please.

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

Thank you, Mr. Chair.

Welcome to the witnesses, and thank you very much. It's been very illuminating testimony over the last two sessions, and I look forward to the next two.

The NDP introduced the motion to study refineries and pipelines for three reasons. First, we're really concerned about the decline of Canadian-based refining. Second, there is much talk about pipelines, and we're interested in getting to the bottom of the benefits and risks associated with pipelines, especially new pipelines. And probably most important, the Minister of Natural Resources promised that he would produce an energy strategy for Canada. He talked about this last June, but it hasn't yet materialized.

The NDP is using the information you're providing to us over these days in our own research. We have a large team working on our own energy strategy, which we'll be presenting later this year. We'll be focusing on domestic oil security, export markets, our climate change response, and, perhaps most important, how to move to greener energy sources.

I will just move to a first question about refining. Statistics presented at our last session show that since 1980, the number of refineries operating in Canada has dropped from 39 to 15. That's about a 60% decrease. At the same time, our refining capacity over the same period has declined from about 2.2 million barrels a day to about 1.9 million barrels a day. That's a decline of about 15% over that period. To us the outlook for domestic refining capacity seems pretty bleak.

To all three of our guests today, what would be your outlook for the oil refining industry in Canada over the long term?

[Michael Ervin]

I'll take a crack at that first.

[The Chair, Conservative, Leon Benoit]

Go ahead, Mr. Ervin.

[Michael Ervin]

As per my comments, I think the outlook is generally towards the continued decline of capacity as a result of what is inevitably going to be a declining gasoline demand. Given that gasoline constitutes about 40% of production of all petroleum products, that is going to be weighting the overall decline.

Diesel demand could very well increase in North America, but again, that does not constitute the majority of the barrel at refineries. Diesel is also going to be made, and is being made, by upgraders. That's going to take, again, some of the demand off the refineries for making diesel.

The outlook really is for lower demand, not just in Canada, but in North America. Given that, BRIC countries will be building capacity—probably ahead of their expected demand—in order that as demand continues to grow with those growing economies, the refinery capacity will already be in place.

Over the next decade in particular, therefore, I would see a glut of capacity brought about by that very factor, in addition to those factors I have mentioned.

[John Quinn]

Let me just talk about Suncor's experience here. Previous to that, of course, we merged with Petro-Canada a few years back and with what the Petro-Canada experience was.

The Oakville closure was brought up. That was a refinery in Oakville, Ontario. It came down in 2005. That was a very tough decision. I've been involved over the years in several of those refinery closures, which started as the industry began to rationalize back in the eighties. They are not happy decisions. We looked at Oakville every imaginable way to see how we could save that plant, but the problem is we're not immune to the economies of scale in the world. It was a small plant, and it was facing a massive investment in order to reduce sulphur in gasoline and in diesel specifically.

It just got to the point that the plant simply couldn't sustain the level of investment that was needed. We chose instead to expand Montreal, and we did expand Montreal. We didn't expand it so it had the same production capacity for light oil that Oakville had, but it was pretty close. We replaced all of the production capacity for diesel and about half for gasoline that Oakville had had.

The reason we didn't go all the way on the gasoline replacement was that, given the configuration of the Montreal plant, the cost of taking that extra increment on gasoline production capacity would have meant another major step change in the investment we needed to make there.

We were also concerned, even back in 2003 and 2004 when we were looking at this, about the long-term decline in gasoline demand in North America, which has been predicted for a long time now. We thought we would be better to import a small amount of our supply into eastern Canada, rather than building the capacity and finding out that we couldn't take advantage of it over the long haul.

That strategy has actually worked out very well for us, and we feel that's one of the reasons Montreal continues to be well positioned to face the future. Diesel supply is probably okay. Diesel demand is not bad. We're well positioned to absorb reduction in gasoline demand, and if we could—and I'll come back to support—with a line 9 reversal.... There's no guarantee western crudes will stay less expensive, necessarily, but that option sure gives us flexibility. The more places we can source crude from, the more viable plants are.

It may be a long way around.

The other piece is that I don't want to ignore—because we don't shorten our refining stats—the upgrader capability of producing diesel, which is where the growth will be, if anywhere, in Canada.

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

Following on that, we've heard that as we pipe the high-end products like jet fuel and gasoline, the longer the pipeline is, the more you might get some kind of contamination.

If you're looking at diesel, though, do you have the same kind of contamination problems with diesel as you do with...?

[John Quinn]

We sure do.

In fact, diesel is probably the one we're most concerned about, because it has a tolerance of only 15 parts per million of sulphur delivered into the customer's tank.

We actually produce diesel at our sites with probably around five parts per million of sulphur. We inject in the lines. We have our own internal specifications to inject into pipelines at eight, and it does tend to pick up sulphur because it's batched with other products in the line, with different levels of sulphur in each of those various products. We protect the diesel even more closely than all the products. Part of the challenge in moving around refined products versus crude is the requirement to maintain product specifications at the end where we deliver it into our terminals and where we ultimately deliver it to the customer.

There is a lot more handling required and a lot more care around product movement and pipelines than there needs to be. Forget safety and reliability; those are important whether it's crude or products, but product specification on refined goods is much tougher to deal with.

[The Chair, Conservative, Leon Benoit]

Thank you very much, Mr. Stewart.

We go to Mr. McGuinty, who has up to seven minutes.