Thank you, Mr. Chairman and committee members.
Recently we completed some work at the School of Public Policy, looking at the amount of what we call “headroom”, that is, the price spread in world markets that could accommodate additional revenues or additional netbacks to Canadian producers.
We were looking at the difficulties, in world markets and in actual transfer capacity, that limit some of the access of Canadian products to world markets and that prevent Canadian producers from collecting the full rent available in those markets.
I'll review for you some of the findings. The first, and perhaps most important, is that in trying to get to tidewater ports, whether in Houston, Kitimat, Burnaby, or even on the east coast, the pipeline capacity is critical. This is the capacity to get all the way to a tidewater port without interim support from rail or barge or trucks, which support adds tremendously to the cost.
In respect of the United States, when we work around the current constraint at Cushing, Oklahoma, which prevents our products from getting to a refining facility, we give away a lot. In the Houston market, in moving down to that gulf coast market, we give away about $10 a barrel in potential headroom to producers. In the California market, where the reserves of heavy crude are declining in the California basins, we give away even more, up to about $13 a barrel, depending on conditions.
Our report suggests that trying to improve that access is critical, which means that getting access to more pipeline capacity is at the heart of things. But more important, getting long-term contracts to address those markets is key to their stability.
The second piece of our puzzle is trying to understand how this world is changing, and how fast. I'll go to the world price first and suggest that the current reliance on Brent crude, as a price differential from West Texas intermediate, is changing very rapidly. The new standard is likely to be something called light Louisiana sweet, LLS. When we can imagine our products priced against that, the attraction is much greater for actually getting to tidewater ports, like Houston, where the product doesn't actually leave the coast but gains access to what's known as Padd III, where there is a large reserve of refining capacity. This means that a world price for our heavy crude products is actually a smaller differential than Brent crude, which is based on what's happening in Europe today. The new standard is based more on a North American standard than a European one. It makes it more attractive for our products. It also shows that we can get a higher price if we can get access to the refining markets capable of processing our crudes.
The same phenomenon is present on the west coast. Getting access to California crude refining, where there is excess capacity, can improve the netback and the returns to our producers.
Again, the world is changing rapidly. Right now there is a surplus of natural gas from unconventional sources. That's likely to mark what happens in the future. We don't want to be behind that market. We want to make sure that we're planning for new reserves of resources like natural gas. This is going to support an electric market that is going to demand a different kind of infrastructure, not just pipes. It's going to demand an electric infrastructure that we have to anticipate. If we look forward, we'll see that the movement of natural gas, especially on the east coast, is likely to be from south to north, at least in the near term and quite possibly in the long term as well.
Some of the questions of energy security that were brought up earlier are really going to be solved, or at least addressed, by looking long term at a gas market instead of an oil market.
Looking at these issues regionally, we can see that we need a very diversified strategy for investment in hardware and infrastructure, as well as an understanding of the scope and structure of those markets.
Thank you.