Natural Resources Committee on April 23rd, 2013

[The Chair, Conservative, Leon Benoit]

Good afternoon, everyone.

We're here to continue our study on market diversification in the energy sector. We have four groups of witnesses today, but before we get to that, could we quickly pass the budget for the committee so we can pay for witness costs and that type of thing and the lunch at the back?

Mr. Julian.

[Peter Julian, NDP, Burnaby—New Westminster, BC]

Mr. Chair, we've examined it and don't see any problems.

[The Chair, Conservative, Leon Benoit]

Okay, is it agreed that we pass the budget?

[Peter Julian, NDP, Burnaby—New Westminster, BC]

Agreed.

(Motion agreed to)

[The Chair, Conservative, Leon Benoit]

Okay, we have the budget. Thank you. That is passed.

It was the committee budget just for this study, not for the whole year.

We'll now focus on our business of the day.

We have as witnesses today from the Montreal Economic Institute, Youri Chassin, economist, and Germain Belzile, economist. Welcome to you, gentlemen.

From the Macdonald-Laurier Institute, we have Philip Cross, research coordinator. Welcome to you.

We have Céline Bak, president of Analytica Advisors, and co-founder of Canadian Clean Technology Coalition. Welcome to you again.

From the Canadian Auto Workers, we have Jim Stanford, economist, and Fred Wilson, assistant to the president, Communications, Energy and Paperworkers Union of Canada. Welcome to you, gentlemen.

We will have presentations of, hopefully, seven minutes. Please try to keep it to that, in the order listed on our agenda for today, starting with the Montreal Economic Institute. Go ahead with your presentation, gentlemen.

[Germain Belzile, Economist, Montreal Economic Institute]

Since I speak faster in French, I will read my statement in French.

Let me start by thanking the Standing Committee on National Resources for the invitation issued to the Montreal Economic Institute.

Our organization is dedicated to economic research and education. We are an independent, non-partisan and non-profit group. We accept no government financing.

The Montreal Economic Institute supports the diversification of the Canadian oil market for the following four reasons. Canada and the world will need oil for a long time to come. Diversification will help maintain and create well-paid jobs across Canada. It will reduce the prices paid by refineries in eastern Canada. Diversification can be done with respect for the environment.

I will begin with an overview of the energy situation. I will then discuss the advantages of diversification in oil markets. I will end my presentation with some suggestions.

Canada, which has a highly diversified energy portfolio, is a major oil producer and exporter. Oil production is important for the Canadian economy and for ensuring a high standard of living and well-paid jobs for Canadians. Moreover, 41% of Canadian energy consumption consists of oil products.

At the global level, the International Energy Agency forecasts that the quantity of oil consumed will rise by 14% between 2010 and 2035. Therefore, an initial conclusion may be drawn: Canada, as a whole, like the rest of the world, produces and needs various forms of energy. Oil is one of those needs. The shale oil revolution in the United States has helped lead the country from a continuous decline in domestic production to a rapid increase since 2008. This is occurring at the same time as a rapid increase in Canadian production.

The investments required to increase oil shipment capacity—especially through pipelines—have yet to be made. Therefore, producers—whether American or Canadian—find themselves with production surpluses in relation to their shipment capacity. The result is a lower relative price for this resource. Western Canada Select oil is selling for $17 less than WTI, which in turn is selling for $15 to $20 less than Brent crude. The extremely low market price of Canadian oil is endangering investment in oil production, which accounts for about 15% of investment in Canada. Therefore, it is crucial to address the existing bottlenecks.

Settling this problem will enable Canadian oil to bring greater benefits to Canadians. A better flow of oil products in Canada and North America would have a number of impacts. It would reduce the price gap between western oil and world levels, enabling Canadian producers to obtain a higher price. That would stimulate investment in this sector and increase private and public revenues. It would also reduce the prices paid by eastern Canada refineries, which are currently supplied with more expensive imported oil.

A recent poll conducted for the Montreal Economic Institute found that 73% of Quebeckers prefer to consume Canadian oil over imported oil. A better price would enable the two refineries in Quebec and the single refinery in New Brunswick to remain competitive and to maintain highly paid direct jobs and employment in manufacturing. That would also protect producers from a breakdown in the distribution chain, such as the problems that have recently led to a broadening of the gap in crude oil prices, to Canada's disadvantage.

Finally, by opening up the industry to fast-growing Asia, we would reduce risks by keeping Canada from having to put all its eggs in the same basket, especially in light of the oil industry renaissance in the United States.

Every day, the equivalent of 15,000 truckloads or 4,200 tanker cars of oil is being shipped by pipeline in Canada. Pipelines are much safer than other means of transportation. They use less energy, and they cost less to operate.

What can the federal government do in this area?

We believe that the federal government can directly help create added value and oil-related jobs in four ways.

First, it can inform the public of the advantages of a flourishing Canadian oil industry. A Montreal Economic Institute poll shows that people in Quebec and across Canada are poorly informed, but that their attitude becomes supportive of the Canadian industry when they are better informed.

Second, the government can facilitate investment to extend the existing pipelines eastward and to build other pipelines. Pipelines are safer, environmentally sounder and less expensive to operate than currently used rail or road transportation.

Third, it can continue to make representations to Washington for the Keystone pipeline to be approved and to defend the Alberta industry.

Fourth, it can continue to apply environmental standards that are among the toughest in the world.

We will now be pleased to answer the committee members' questions.

Thank you for your attention.

[The Chair, Conservative, Leon Benoit]

Thank you very much for your very concise presentation. It's very much appreciated.

We go now to the Macdonald-Laurier Institute, and Philip Cross, research coordinator.

Welcome, Mr. Cross. Go ahead, please, with your presentation.

[Philip Cross, Research Coodinator, Macdonald-Laurier Institute]

Thank you. Before I joined the Macdonald-Laurier Institute I was chief economic analyst at StatsCan. We'd often be called to these types of committees to provide some background before people got into discussing the issues to get the basic facts right, so I thought I'd take a few minutes to go over some of the basic facts of natural resources and then the specific questions about the current situation. We can elaborate if you have further questions for me.

Looking at the role of natural resources and Canadian economic development generally, Statistics Canada produced a paper that looked at the contribution of natural resources to Canadian incomes over the last 100 years. It found, on balance, we were 18% richer measured by GDI than just GDP because our export prices have risen more than our import prices.

There was a theory going around in the 1950s and 1960s that in the long run the price of manufactured goods would rise and the price of commodities would fall. In fact, the exact opposite has happened over the longer term. It's not just in one decade. This is decade after decade you can see the rise in our terms of trade, with a particularly big push over the last 10 years. The arrival of China and other developed countries in the world markets radically depressed the price of manufactured goods and boosted the price of commodities.

That's one thing to keep in mind. Canada has certainly enriched itself substantially from its natural resources over time.

Second, it's a bit misleading to talk about the current commodity price boom as one entity. The increase in commodity prices has been sequential, not synchronized. Commodity prices don't all move together.

Just this week, for example, I'm sure you all heard about the sharp drop in the price of gold. At the same time, recently we've seen a substantial recovery in the price of lumber, and the price of natural gas has done well. If you look at the four large commodity groups over the boom you see energy take off first, then it levels off, then metals take off, they level off and decline, then agriculture picks up and it starts to level off, and more recently forestry has started to pick up. So they're not moving together. They're not synchronized. They don't all go up and down as one. That provides some diversification with our natural resource base.

The third point I'd make that a lot of people don't appreciate is how much we import natural resources. We aren't just exporting raw materials and importing finished goods, which is the old story. I was just calculating this this morning. Over the last decade, our volume of imports of natural resources has risen 31%, and our exports only 7%. We import things like bauxite to make aluminum. We import gold, refine it and export bullion. We import crude oil and export refined petroleum products. So that's another myth surrounding the natural resource sector that should be corrected from the beginning.

The final point I'll make about resources is a lot of what's happened in the last decade too is repairing damage we did to our resource base in the 1990s. We severely under-invested in resources in the 1990s. Our capital stock literally started to rust away. We hired next to no young people into the industry, employment generally fell, and I would argue that actually laid the basis for the shortages we're seeing today: that we chronically under-invested in resources and weren't prepared for this boom when it took off.

What happened basically in the 1990s was manufacturing led growth and resources were the laggard. We had a bit of a reversal of that in 2002 to 2008 where natural resources took the lead and manufacturing fell behind. Now, since the recovery began, we're seeing both increase, and I think that's the best balance, the best equilibrium for the economy.

To look at the specific question about the energy prices and the benefits of diversification, it's worth noting that in natural gas large divergences in the international price of gas are normal. There's one market in Europe. There's another in Asia. There's another in North America. Prices diverge for long periods of time. There may be some point to taking advantage of that.

In oil it's much more unusual. There's usually one international price. It's very unusual what happened two years ago when the price for western Canadian oil fell relative to the world price. It would be interesting to see if that continues in the longer term or whether that is just a temporary situation. Already we've seen that differential narrow substantially from over $40, or near $40 in the winter, to near $10, so I'm a little more skeptical about whether there are great benefits to be gained from diversifying oil.

Put another way, for decades we exported oil only to the U.S. and it didn't make any difference because there's one price of oil in the world. We may be going back to that. Obviously Keystone’s being approved would help with that.

I would just be careful that diversification is not a goal in itself. Maximizing the value we get from a resource should be the goal.

I don't know how I'm doing on my seven minutes.

[The Chair, Conservative, Leon Benoit]

You have two minutes left.

[Philip Cross]

Another matter with product is, it's not clear that product diversification is the best. There's always a lot of talk that we should be upgrading and refining more in this country. It's a very unusual situation now because of the price differential between what Canadian oil is getting in the Midwest and what refineries are paying in eastern Canada.

The refineries in eastern Canada are not very profitable. One was closed in Montreal last year and another one is for sale in Halifax. So when people say, “Let's refine more in Canada”, it depends on where you're going to be refining. I think it would be very difficult to get the industry to make the huge investments needed to expand capacity and upgrade their refineries to refine more in eastern Canada.

In western Canada, it's a different story. Those refineries are quite profitable now. Because the price of western Canadian oil is low, they can refine it. They have a different problem. We just saw the cancellation of the Voyageur project a couple of weeks ago. It was decided that with the cost of building a new refinery out there—we're talking about $10 billion—there was not enough confidence that those price differentials would remain long enough to recoup the investment. So it's easy to say, “Let's diversify our markets; let's diversify our products”, but it's not at all clear that's a goal in itself.

Thank you.

[The Chair, Conservative, Leon Benoit]

Thank you very much, we appreciate that.

We go now to Céline Bak, the president of Analytica Advisors, and co-founder of Canadian Clean Technology Coalition.

Welcome back to our committee. Go ahead, please, with your presentation.

[Céline Bak, President, Co-Founder, Canadian Clean Technology Coalition, Analytica Advisors Inc.]

Thank you very much, Mr. Benoit.

We are very happy to be here today, and I am honoured to represent the Canadian Clean Technology Coalition.

I'd like to focus on three major things in my presentation today.

The first is to address the question of how significant Canadian clean technology exports can be over the next five to ten years as part of energy innovation and the diversification of our energy products. The second thing I'd like to highlight is the relationship between those exports and those of SMEs within our overall merchandise exports. The third thing will be the actual markets that Canadian companies are interested in exporting to, which are not necessarily what one would expect.

If you'd like to refer to the materials that have been provided, I am going to start with page 3. There is a graph that projects under both a mid-growth and a high-growth scenario that Canadian clean technology exports have the potential to grow to either $10.6 billion or $17.5 billion from their current base of about $5.2 billion. These are conservative estimates insofar as we've taken a relatively small or a mid-size approach to the global markets. For those of you who are visual, there are some graphs to demonstrate that.

I'd like to set the Canadian clean technology exports in the context of SME exports, because obviously these are SMEs and it's an area that is not that well understood.

If you'd like to refer to the graph on page 4, you'll see the value of all non-resources SME exports versus that of exports of energy-related natural resources. You'll see that these two graphs actually converged over the period of 2002 to 2005-06, and since then have really diverged. It might be worth spending a moment to understand what some of the causes for that divergence may be.

Natural resources energy-related exports obviously follow the price of oil and gas, and SME non-resources exports have grown notwithstanding the rise of the Canadian dollar. These are companies that are small but are still able to export, notwithstanding the fact that the Canadian dollar is very strong.

What they don't cope with very well, as was seen in 2007, is a global liquidity crisis. You can see indicated in green on the graph that there is quite a substantial decline from 2007 to 2009. This refers back to my comments in the committee meeting of March 7 when I referred to the need for some thinking and policy discussion around access to debt for these companies, because their projects are going to need to be financed, and their ability to access debt will be a significant driver in terms of their ability to grow and to export.

For those of you who would like to continue to follow the graphs, I suggest you refer to page 11, which brings together the value of SME exports and adds to the graph the value of the Canadian dollar. You can see that our Canadian SMEs are quite capable of exporting, notwithstanding the rise of the Canadian dollar. This is not necessarily widely known. I have to say that the green line on the graph is the product of some relatively new data, which was obtained through a new data set that Statistics Canada has produced, which is by size of firm, so it is something to consider.

I'll close by saying that if you'd like to refer to page 15, Canadian clean technology companies are quite ambitious in terms of the countries to which they wish to export. You see on this page an indication of the top five countries in terms of their interest for exports. They are in order: U.S., Germany, U.K., France, and Brazil. These are obviously very sophisticated difficult markets to export to. The top five countries in terms of demonstration projects—this is technology that is perhaps at an earlier stage—are: U.S., Germany, U.K., France, and Mexico.

Those are some indications of the priorities for diversification of markets.

If you wish to refer to how Canadian companies think of the BRIC countries for exports and BRIC countries for demonstration projects, they're indicated on that page as well.

You may recall that the Canadian Clean Technology Coalition thinks of the industry through 10 different sectors. This information, in terms of which countries are priorities, is available for each of those 10 sectors. I have provided three copies of the report, one for each party, and I have the pages that refer to the sector priority markets, so for each of those 10 sectors, which countries are the priorities. That does vary from one subsector to the next.

With that, I'll close my remarks.

Thank you very much.

[The Chair, Conservative, Leon Benoit]

Thank you very much for your presentation.

We go now to the Canadian Auto Workers, to Jim Stanford, economist, and to Fred Wilson, assistant to the president, Communications, Energy and Paperworkers Union of Canada.

Go ahead, please, gentlemen with your presentation, for up to seven minutes.

[Fred Wilson, Assistant to the President, Communications, Energy and Paperworkers Union of Canada, Canadian Auto Workers]

It's agreed that I'm going to start.

Good afternoon, everybody. I'm very pleased to be here with my colleague, Jim Stanford. I should say at the outset that our joint presence here is part of something new in the Canadian labour movement because our two unions, the CAW and the CEP, by Labour Day of this year will be a new Canadian union. It will be the largest private sector union in Canada when we come together. It will be a new union with a new name, and it will bring a lot that's new, hopefully to your tables as well, because we intend to be a stronger voice on Canadian industrial policy than either of us has been until now.

For those of you who don't know much about CEP, we are Canada's largest energy union. We represent over 35,000 workers in Canada's energy sector, in the upstream, in Fort McMurray, and in the Newfoundland offshore, on the platforms, and in the downstream in most Canadian refineries, gas plants, petrochemicals, and natural gas distribution.

I'm just going to make a few brief points about the subject at hand today, diversification. We are strongly for diversification, diversification of production and markets. The takeaway point that we have for the committee is we want to make the case that the current development model we're pursuing in Canada, we believe, is antithetical to those goals. In fact, our current development model is producing the opposite, increasing focus on a single product to a single market. The more export pipelines that we build, the worse that problem becomes.

I'm going to make three brief points before my colleague Jim takes over.

First of all, with regard to increasing dependence on a single product, bitumen, just as Mr. Cross said, we do import more crude oil, but we are not exporting refined products; we're exporting bitumen, fundamentally.

The basic facts are this. Since 2002 until today, oil sands production has increased by two and a half times, but the percentage that was upgraded or refined has declined from 60% to 47%.

Looking forward, most studies show, over 2025 to 2030, a further threefold increase in oil sands production, but the projection is for the percentage of that production to be upgraded in Canada to decline from our current 47% down to 35%.

The second point is that this focus on export pipelines to export various forms of bitumen blends, fundamentally to American markets, comes at the expense of diversified markets, and in the first place, our own Canadian marketplace. I'm sure there will be discussions about Line 9. We support Line 9 and can answer questions about that.

At this point I'd like the committee to take a reality check on diversification of markets even within Canada. The reality check is this. If Keystone XL is built, export pipeline capacity will exceed all new Canadian production until 2025.

Throw on Kinder Morgan or Gateway and we are going to be seriously overbuilt in terms of projected growth. I'm talking about caps figures...the most optimistic figures of increasing production to three million barrels and above.

This is at the expense of Canadian production. We've already lost two refineries in eastern Canada, most recently in 2010, in Montreal. Even more important, we're really missing the boat on jobs in Alberta itself.

I want to draw to the committee's attention the new study by Alberta's Industrial Heartland Association and Alberta Plus on the advantages of upgrading and diversification in Alberta. I've given you links to that. It's a very important study.

It's important for another reason. It uses the figure of 18,000 jobs that could be created in Alberta by upgrading and value-added processing of our resources.That, by no coincidence, is the same figure which CEP, our union, gave to the National Energy Board in 2006 when we opposed Keystone I. We put forward information by Informetrica that if that product were upgraded and refined in Canada, it would amount to 18,000 jobs.

My last point is with regard to our marketplace in the United States. The development model we have is utterly unsustainable. There is no way Canada will ever meet any climate target if we go to five million barrels a day from the oil sands. Our obsession with unsustainable growth and raw material exports is undermining our very market in the United States.

I'd ask the committee to reflect on this. Why is it that four years after our board approved Keystone XL in 2009, four years later, we still have an army of lobbyists in Washington trying to get this through? What is this about? Is this about dysfunctional American politics? Is this about our diplomatic failures? Or is it about our own deeply flawed regulatory process, which doesn't even take into account the very core issues that the Americans are dealing with, namely, the downstream greenhouse gas impacts in the United States and elsewhere?

We think there is a problem preventing diversification of markets. It's our problem, not others' problem, and it has to do with our regulatory process and with our policy framework.

With that, I'll turn it over to Jim.

[The Chair, Conservative, Leon Benoit]

Mr. Stanford, perhaps you could take one minute to briefly outline what you're going over. Then, in questions, the members can get to the meat of your input.

[Peter Julian, NDP, Burnaby—New Westminster, BC]

On a point of order, Mr. Chair, I think there may be some confusion. We submitted actually the CAW and the CEP, which are two separate unions, as two separate witnesses, so I think—

[A voice]

[Inaudible--Editor]

[Peter Julian, NDP, Burnaby—New Westminster, BC]

Well, they're not together yet.

We did submit them as two different witnesses, so I'd ask for some flexibility to allow Mr. Stanford to make a presentation.

[The Chair, Conservative, Leon Benoit]

Mr. Julian, they did ask to appear together as one group of witnesses.

But if you would, Mr. Stanford, I will give you one or two minutes to quickly go over what you want to say. Then I'm sure the members will draw the rest of the information out of you.

Go ahead, please, sir.

[Jim Stanford, Economist, Canadian Auto Workers]

Certainly, sir. Thank you for your flexibility.

I just want to add one point to the comments my colleague Mr. Wilson made about the economic impacts, direct and indirect, of Canada's exports of unprocessed or barely processed natural resources, or what's known in the literature as staple products.

There's long been a concern in Canadian economics about the structural relationships between export-oriented resource industries and the rest of the economy, including manufacturing, including other tradeable industries like services, and including the non-tradeable sector.

Both of our unions have important numbers of members whose jobs depend on resource industries, so of course resource industries are going to be a continued pillar of our prosperity. At the same time, our interest is in preserving the longevity of those jobs and extracting as much value-added opportunity in Canada as we can from them.

The goal of our research should be to better understand the interactions, the positive and negative implications, of staples exports. The goal of policy should be to enhance the net benefits of those.

I want to refer you to a study called The Bitumen Cliff, published earlier this year by the Canadian Centre for Policy Alternatives and available on their website. I'm one of the co-authors. It contains a detailed discussion in a modern context of some of the risks of staples dependence.

This is not a new problem for Canada. In fact, it shaped our economic history, the successive waves of staples development, export-oriented, each of which eventually petered out and left costs in its wake. The latest of those waves, obviously, is the bitumen industry.

We think there are vulnerabilities associated with an undue dependence on staples export and production. The environmental costs, of course, have been well debated. I'm more interested in the economic costs and the risks that we face resulting from changes in foreign demand, changes in technology that use the staple export, changes in the technology that produces the staple or substitutes to the staple, and the unintended consequences of a boom in staples exports on other sectors of the economy, or what I've called resource-driven deindustrialization.

The handout that's been given to the committee in both languages is an extract from this longer report about the economic evidence regarding resource-driven deindustrialization in Canada.

On the question before this committee about diversifying exports, more pipelines—I'm in concurrence with Mr. Wilson on that—will actually reinforce our dependence on unprocessed staple exports, with the resulting negative side effects, including the deindustrialization.

If we do want to diversify our economy using the resources as a successful stage for that, we should focus on adding more value upstream and downstream to the resources we extract and making our economy less reliant on volatile changes in global demand for staples.

That's where I think the second and third dimensions of your question, that is, how do we diversify the products that we're producing, and how do we diversify the energy supply base for our own industries, are more promising and where we would be in concurrence with Mr. Wilson's views about Line 9 and other options for extracting Canadian value from those resources.

Thank you for the extra time.

[The Chair, Conservative, Leon Benoit]

Thank you, Mr. Stanford.

We go now to members of the committee. For the seven-minute round, we have Mr. Allen, Mr. Julian, and Mr. Hsu.

Go ahead please, Mr. Allen. You have up to seven minutes.

[Mike Allen, Conservative, Tobique—Mactaquac, NB]

Thank you, Mr. Chair, and thank you to our witnesses for being here.You made very good presentations, and we got a lot of good information.

Mr. Belzile, I'd like to start with you, please.

In an article in a study you did on the benefits of oil production and development in Quebec, the statement is made that “Even presuming that only a tenth of Quebec's discovered oil reserves are recoverable, this would still represent a resource worth the impressive sum of 400 billion dollars".

I'm wondering how you built up to that number. In the context of the diversification of our market, I would assume that to achieve that big a value you would have to have exports associated with it. It would be a tremendous amount plus what we have in western Canada.

Can you tell us how you developed that benefit, and what the total benefit would be to Quebec? What are some of the multipliers in that?

[Germain Belzile]

This number is not from the Montreal Economic Institute. We simply took a look at the numbers from the companies who did les prospections.

I'll switch to French. I can find the right words more easily in French.

Some companies have carried out exploration work. What we do know is that those figures are fairly conservative. We are talking about approximately 40 billion barrels. At 10% of the recoverable production—and that may be a conservative estimate—we would be talking about 4 billion barrels at $100 a barrel, for a total of $400 billion.

That resource is very small compared to the one in Alberta, but I think serious thought should be given to the development of that resource in Quebec. I think that will come as people realize how valuable the resource in Quebec is.

I think that Quebec will eventually become an oil producer, but maybe not under the current government.

Have I answered your question?

[Mike Allen, Conservative, Tobique—Mactaquac, NB]

Yes, part of it. The next piece of it is, with that amount of investment that we'd have and this extra oil that would be coming on the market, what does that say about the importance of pipelines?

One of the comments you made here was that some of the help you said would be needed would be facilitated investment in pipelines. What are some of the specific things you would suggest when you say government needs to facilitate investment?

[Germain Belzile]

What we had in mind was to facilitate the transport of oil from the west to the east coast. We're not looking at the production of oil in Quebec right now; maybe in the future, but not right now. At the moment, we have a big problem. In Quebec, we're buying our oil from Algeria, from the U.K., and from Venezuela. This oil is very expensive, and because of that, our two remaining refineries and all the rest of the petrochemical industry in Quebec, in Montreal, are in grave danger right now with this. We need to get access to a reliable supply of oil and at a good cost. That's western oil. We believe it would be a very simple thing to reverse the direction of the flow of oil, the east to west flow we have right now.