Natural Resources Committee on Feb. 7th, 2012

[Christopher Smillie]

Right now the labour supply is tight. We need to train as many Canadians as we possibly can. We need to get them into apprentice programs to address workforce shortages. Between now and 2017, the Construction Sector Council estimates there will be something like 320,000 construction workers who will be required to meet demand due to demographics and economics.

You have these two divergent forces. You have a tightening of labour supply and an expansion of economic investment in a key economy. It takes four years for most construction trades. Canada's employers and the construction unions have an opportunity. It's a real opportunity to add value to the system. If we don't, the labour supply will be even tighter.

I mean, they don't let me near the tools; I don't want to give you that impression. But if you take a look around a work site, most of the folks on that site are on their way out of the workforce. The average age of a construction worker in Canada is mid-forties, but the majority of them are past 50.

What are we going to do between now and 2017 to make sure we are replacing that workforce? It's demographics colliding with the economics of this massive investment. We're at a point where we're grabbing people from all parts of Canada to work in Alberta and beyond on energy projects.

[Joe Daniel, Conservative, Don Valley East, ON]

Okay. Could you expand on your comment that the oil sands are a global classroom for the young Canadian workforce? I didn't quite understand what you meant by that.

[Christopher Smillie]

Sure. We don't have any other areas in Canada where you can look around and there are 25,000 people learning a trade. I view Alberta as a global classroom for Canadians to learn an apprenticeship trade. It's also a place where foreign workers come to work. When the Canadian labour force can't meet demands, people from other countries come to Canada.

You have the experienced folks working in the oil sands teaching young apprentices what to do. In our view, it's an experience.

[The Chair, Conservative, Leon Benoit]

Thank you, Mr. Daniel.

We will go now to Mr. Stewart for up to five minutes.

Go ahead, please.

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

Great. Thank you.

Mr. Smillie, since about 1980 we've lost about one refinery per year in Canada, as well as significant domestic refining capacity. I'm wondering how these types of closures affect your members, such as boilermakers, for example.

[Christopher Smillie]

Any type of closure at an industrial plant that requires ongoing maintenance has an impact on work hours. So if you have 36 refineries across Canada one year, and then the next year you only have 15—which I think are the numbers—over time it absolutely impacts work hours associated with the maintenance of those projects. However, at the other end of the spectrum, it's the extraction that is really the driver for new construction jobs. You can build a refinery and it costs $7 billion to build, but in order to have that refinery you need to get raw materials to it.

So, absolutely, when you close a refinery, it impacts the construction and maintenance crews who go in there and do the maintenance. However, so far that work has traditionally been replaced by extraction increases and pipeline work. So it's a balancing act, but overall work hours and the size of the construction industry in the time period when those refineries were closing have gone from, I guess, 400,000 or 500,000 people to 1.2 million or 1.3 million. In the refining business, you've had shutdowns, but at the same time you've had this enormous growth in the other parts of the construction industry.

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

In a way that's presented as an either/or position, and it doesn't necessarily have to be either, does it?

[Christopher Smillie]

If the question were, would we prefer a refinery or a pipeline, it's kind of a false choice. The building trades and the folks who go to work every day don't have a lot of control over which projects are chosen. It's about filling the need of employers and filling the need of industry. If it's not a refinery, it's office towers in Calgary. It's the same folks who go to work, so it really is about diversification, like any business.

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

Thank you.

Mr. Moore, I'm just wondering if you could comment on the decline in Canada's domestic refining industry. You kind of paint a picture that a North American strategy is needed, but maybe you could focus on what's happening in Canada on the refining side.

[Prof. Michal Moore]

What's been happening in manufacturing and refining reflects some of the shifts worldwide as well as in North America in terms of capacity and in terms of market demand. I'll simply note that in the U.S. the last gasoline refinery was actually built in the 1970s, and that reflects the fact that capacity moved offshore because it was more advantageous to undertake that activity there.

So in part what this reflects is shifts in the marketplace in terms of preferences for products, and the fact that when we build capacity such as a refinery, such as a pipeline, it reflects not only the market at that time but also a commitment to that capital investment that's going to last 30 or 40 years. So you want to get the market right, and you want to be able to change with that market as it evolves, and right now some of the shifts that are taking place are away from liquid fuels and into things like natural gas.

Part of what's happening in terms of our own refining capacity is just reflecting changes in the core market. So part of the North American strategy that I spoke of, and that Ms. Kenny addressed earlier, is trying to be versatile enough to attract enough capital to expand—or in fact contract—responsibly, as changes in that marketplace take place.

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

Over, say, the next 20 years—the domestic refining industry in Canada.

[Prof. Michal Moore]

I think that's a reasonable number, although as an economist I'll tell you that if we look at the energy system itself, we ought to have longer timeframes in mind. I'll just mention one of them, and that's the idea of rights-of-way for new pipeline expansion or new technology that we don't even know is going to exist tomorrow. That timeline is probably 60 to 100 years long if we plan effectively. So we ought to have longer timeframes in mind, including some of the support that we're going to need in terms of government tax policy or even regulatory strategies.

[The Chair, Conservative, Leon Benoit]

Thank you, Mr. Stewart. Your time is up.

Mr. Anderson, you have up to five minutes. Go ahead, please.

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

Thank you, Mr. Chair.

Mr. Mintz, and Mr. Moore, I'd like to just shift a question a bit here. There have been some articles written lately about state-owned companies and state-trading enterprises. I'm just wondering if you have any position on the limits we should have in Canada to allow state-owned companies to participate in our energy sector.

[Jack Mintz]

I'll start with that because we published a paper on foreign direct investment last year, and one of the issues we raised had to do with making sure there are even playing fields in acquisition markets. In other words, in our view, mergers and acquisitions are a very important way of having a dynamic business community, because you make sure you have—effectively—competition in managerial markets, and it is critical to have foreign direct investment as part of that element.

On the other hand, you don't want particular players in acquisition markets to have some sort of government advantage over others—an unlevel playing field—because you could end up with a mismatching of skills required to run businesses versus, let's say, government help that provides some people advantages over others. Two issues particularly concern me with respect to state-owned enterprises: sovereign wealth funds and also even non-taxable pension plans.

One is with respect to implicit government subsidies or explicit government subsidies. This is important with sovereign wealth funds and state-owned enterprises that follow non-commercial objectives but effectively get the support of their governments so they can stray from the goal of profit maximization.

The other is the non-taxability of those entities that allows those entities to buy up companies by offering a little higher price to acquire them, knowing full well they can restructure the company with more internal debt to eliminate corporate tax payments and therefore create more value on their behalf, allowing them to outbid taxables as a result.

I think these are important issues to deal with, and for that reason I think we need to spend a little more time thinking about that unlevel playing field.

I don't know, Michal, if you want to add anything.

[Prof. Michal Moore]

I would just add something very short.

Each province brings with it a comparative advantage in terms of energy resources. If you look at the far west, there is a lot of hydro advantage in the very far west province and a lot of coal and independent power production in Alberta, for instance.

There is a fine line to walk in terms of one province and one public corporation being able to dominate a market and price more effectively than another province and skew long-term investments, or skew that price advantage, especially in the short term.

It exists. Right now we don't have a demonstration of what I'll call monopoly power or market power, but we certainly have to guard against it when we look at long-term resource use, based on what's dominant in any given province.

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

You said “long term” a couple of times in response to Mr. Stewart's question. You were talking about the need for a longer perspective here. I'm wondering where Canada should be looking when it comes to the future. What proposed infrastructure expansion should we be focusing on?

Should it be refineries, as Mr. Stewart has suggested? Should it be pipelines? Should it be the upgrader system?

Where would you suggest we look as we talk about this issue of the future in Canada, and where should we be expanding?

We're expanding our production, obviously, but where else?

[Prof. Michal Moore]

What a wonderful question.

The advantage of having a great production well is that you can enjoy economies of scale in terms of how you produce. When you get to the capital equipment necessary to process it, we're talking about very long timeframes to construct that and a long expected timeframe to use it. Right now, just in the oil market, the capacity to process very heavy oil is dominated by the U.S. midwest and the U.S. gulf coast. They do it very well, and they have a lot of excess capacity today.

That phenomenon is growing in California right now as their reserves go down and they strand a lot of capacity.

In that market it makes a lot of sense to increase pipeline access down to the capacity, but in the future, it may make a lot more sense for us to look at the emerging market, which is unconventional natural gas. There's a lot of it and there are shortages worldwide.

Being able to imagine exporting or processing and then exporting the benefits of natural gas—whether it's transforming it to electricity or transforming it to liquefied natural gas—makes sense. That means that, broadly, diversifying how we imagine investments in capital for refining, processing, and pipelines is very important, and not just slavishly following something that was successful 10 or 20 years ago.

The world is changing very rapidly in terms of the types of fuels that are coming on the market and in terms of the changes in demands.

[The Chair, Conservative, Leon Benoit]

Thank you, Mr. Anderson. Your time's up.

Mr. Calkins, up to five minutes; go ahead, please.

[Blaine Calkins, Conservative, Wetaskiwin, AB]

Thank you, Mr. Chair.

I would like to take my questions on a little bit of a different tack here. I'm going to be talking to you, Mr. Mintz and Mr. Moore.

Some of the arguments we've heard here have seemed to indicate that Canada should be focusing primarily on securing its own domestic supply, which means that every molecule of hydrocarbons in Canada that's consumed by Canadians should be produced here in Canada, rather than importing, as we currently do on the east coast, rather than focusing on our export opportunities off the west coast, say into the Asian marketplace.

From an economic impact analysis, Mr. Mintz, Mr. Moore, have you looked at that? Would that be sound government intervention into what is currently market-driven decision-making policies by the free market, or is that something the government should stay out of? Is it something we should be looking at as part of a national energy strategy?

[Jack Mintz]

Michal probably has a more sophisticated answer than me on this. Just in terms of the economics, and this is really what my comments were earlier vis-à-vis the east coast pipeline, the reversal I think can make sense, and I'm not arguing against that, at least in terms of providing more oil to the Montreal and potentially Atlantic areas.

Just in terms of thinking about building pipelines and whether you go all the way in one direction around North America to get to Asia or you go west and do something else, it all comes down to really the economic advantages of different alternatives. Also, there are very significant advantages of still selling to the United States, particularly to the gulf area.

In my mind, a lot of it is driven by the transportation costs. The netbacks we get in terms of how much we earn ultimately is a payoff to Canada as a whole—when we do get higher netbacks—so the market issues, I think, are critical.

One comment I have to make about upgrading and refining, and I think Michal made this very important point, is that there is a lot of excess capacity in North America, mainly due to changes in what's happening in energy markets, and we have to recognize that. As a result, we also have to remember that our labour force isn't necessarily the largest in the world. When we think about, for example, refining, it's a lot more manpower consuming and capital consuming, as well as upgrading, compared to just selling bitumen to other refineries that are in excess capacity right now. Those are some of the economic issues we have to face. Also, I know that consumers and industry want to have lower energy costs, so we have to remember that keeping our costs down is ultimately very important.

One other final comment is on the natural gas market even in the Atlantic. I think Michal made a very important point that it could be a very important alternative that's going to be available to the Atlantic in the future, particularly in the utility sector as well as in heating and potentially in some areas of transportation. In New Brunswick there are very large shale gas developments, and that could have a very significant impact on development of energy markets in the Atlantic.

[Prof. Michal Moore]

Sir, let me just add one point. You talked about subsidies, and I want to address that. I'll put on my hat as a former regulator and say that we have a lot of history in terms of dealing with subsidies, and we have a lot of history with how effective they can be.

When we intervene in markets to subsidize an industry, we generally have the best success when we do it at the front end to try to get someone into a position where they can compete in a market. We generally have less success when we maintain those subsidies over a long period of time and make that industry more dependent on them and less robust or less competitive over time.

Right now that market in the east, as Dr. Mintz has just pointed out, is shifting pretty rapidly, and when consumers look at energy, they don't really care what the source is. They are fairly indifferent to that, but they are pretty responsive to costs. Most of the time we find that those costs are best reflected in a competitive industry, one that's gotten a start and one that has stabilized and can compete most effectively.

[Blaine Calkins, Conservative, Wetaskiwin, AB]

I appreciate that. Just advancing this conversation forward then, from my perspective, and I think most people would agree with you, Mr. Moore, I don't think they really care where the molecules come from as long as they have received the best price they can for the cost of their energy, which we know is significant.

As interesting as the idea sounds that as Canada is a net exporter, if we were ever in a situation where we lost our export markets or we lost our import markets, I don't think Canada would ever be in a position where it wouldn't be able to provide energy for itself. Do you agree with that?

[Prof. Michal Moore]

I'll qualify that just slightly. Allowing for regional differences and the fact that in the far eastern provinces, similar to Maine, we built in a dependence on various energy forms that today complicate that market, I would say you are correct.

[Blaine Calkins, Conservative, Wetaskiwin, AB]

With the current situation, where Canada has only one export marketplace, and that is the United States, it has been mentioned several times that we take a price hit because we don't have the diversified market. Has anyone done an impact study of not only what the cost is to the industry but what the cost would be to governments for this price differential? Does it affect the royalty regime, for example, in Alberta? What would the revenues be for the particular province, such as Saskatchewan, for example, or any of the other provinces that are oil producing? What would be the bottom-line impact on those revenues and that price differential?