Natural Resources Committee on April 23rd, 2013

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

In your view, as part of this, does that open up the idea of the long-term sustainability of the refinery in Montreal, but potentially the Ultramar refinery in Halifax as well?

[Germain Belzile]

I have talked to people in the refineries, in the companies. They think that getting their hands on a less costly resource would be a main factor in maintaining jobs and the companies in Montreal. I haven't talked to people in Atlantic Canada though. The two refineries in Montreal believe that if something is not done, there's a big danger of closing refineries in Montreal.

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

Thank you.

Mr. Cross, I want to pick up on an article in the Financial Post of February 26, 2013. It talks about The Bitumen Cliff and the report that demonizes Canada's resource boom. One of the comments in there, disputing some of the comments that were made says, “The authors say an increase of only 16,500 jobs in oil and gas and 5,000 in mining in the last decade 'would seem to be the extent of the direct employment impact'...”.

You also said that ignores the large and lengthy construction required to build oil sands plants before they produce the first barrel of oil.

Would you say the same thing is implied with the pipelines that would be required? From the numbers I've seen, there seems to be significant employment created with those pipelines to bring oil west to east.

[Philip Cross]

Yes, certainly these estimates of the direct impact of output in the oil and gas industry don't include the benefits or the jobs created in the years of construction it takes to build these oil sands plants. It doesn't take into account the spinoff jobs in transportation and pipelines. I'm just a little nervous about evaluating the utility of these projects solely on their impact on employment.

I remember I did a counterfactual calculation one day. Because refineries are so capital intensive, I was looking at the question of what happened to employment in Montreal when this refinery closed. Using the input-output models, you can trace through the impacts on employment. What I found was that employment would actually go up if you closed the refineries in Montreal and imported the oil, and you get this rather weird result because you hire more longshoremen, more people working on the docks, to unload the oil than you do from refining it.

That doesn't mean we should go around closing refineries to create jobs—that's not the implication at all—but I find that if you just do a narrow-minded focus on job creation, you can come up with counterintuitive results like that. So I advise against focusing too much on just the job-creation aspects of these projects. Look at the broader question of where value is created.

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

We talk about direct jobs, but has either of your institutes done any work with respect to the induced jobs and what some of the multipliers are?

[Youri Chassin, Economist, Montreal Economic Institute]

We haven't, actually.

[Philip Cross]

Oh, yes. I've probably written more about multipliers than any other subject. They're one of the least understood things that Statistics Canada produces. The usual multiplier that people calculate is the ripple effect in other industries. What that rewards is industries that have a lot of linkages to other industries. Manufacturing is the poster boy for having lots of linkages to other industries. Manufacturing also imports in the auto industry and ICT goods half their inputs. Manufacturers buy their inputs from all over the world, all over the country. Construction or oil and gas don't. They have very low multipliers.

When you build a home, you're basically paying the guys who build your home. There's a little bit of materials, but there are very low multipliers. That's the problem with multipliers. They reward industries that have linkages to other industries.

The better way to look at it is the GDP multiplier: what your impact on GDP is, not what your impact on other industries is. When you look at that—I did a paper on this three or four years ago; I can dig out the results for you—you find that manufacturing in fact has the lowest GDP multiplier, and industries like oil and gas and construction have the highest GDP multiplier.

[The Chair, Conservative, Leon Benoit]

Thank you very much, Mr. Allen. That was very interesting.

We go now to Mr. Julian for about eight minutes.

Go ahead, please.

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

Thank you very much, Mr. Chair.

Thanks to all our witnesses. I'd love to ask you all questions, but it'll come through the course of the meeting, I'm sure.

I just want to thank CAW and CEP for being here. CAW workers, of course, are very hard-working people in my community in Burnaby—New Westminster, as are the CEP workers up in the oil sands. As an NDP group, we've been up a number of times over the past few months. The CEP workers know their business. They're very talented and they've been very open and accessible in answering our questions. I'd like to thank both of you and your unions for being here today.

I want to get back to the issue of value-added, Mr. Wilson and Mr. Stanford. You both raised it.

Starting with you, Mr. Wilson, what we've seen under both the federal Conservatives and the provincial Conservatives in Alberta is a downgrading of upgrade and refining capacity. You mentioned it going from 60% of Alberta product being upgraded and refined down to 35%. What we're looking at is a loss of jobs. We've seen across the country the loss of family-sustaining jobs. Good full-time jobs are being replaced by part-time jobs, temporary jobs, and temporary foreign workers. So the economics of the current government simply don't make a lot of sense.

I'd like to have you answer the question of how many jobs we're losing by this focus on exporting raw resources rather than looking at and putting in place policies that bring upgrading and refining capacity here to Canada.

[Fred Wilson]

As I said, the 35% is where we would be in 2035 according to the National Energy Board's latest projection. That would be if we went to five million barrels a day, which we do not endorse for a whole number of reasons. I think it's utterly unsustainable. But if we did, we would be at 35% being upgraded.

You could look at the value-added part in two ways. You can look at it in the economic models, and Jim is better at it than I am, for sure. That's why we hired Informetrica back in 2006 just to take the volume that was going to go down in Keystone I. We asked Mike McCracken what it would mean in terms of jobs if this was upgraded and refined in Alberta. He came up with the 18,000 figure. You can always run an economic model to see how those are going to play out.

In a more practical sense, in the business world, there's only so much capital and there's only so much readily available resource. How is the model being built? The problem with having pipelines driving the development model is that first of all, the export capacity is created and then the producers expand to fill the capacity in the pipeline. There's an idea that somehow pipeline capacity is trying to catch up to production. In fact, it's not that simple. They are very much linked together. Nobody is going to spend millions of dollars opening up a new field if they don't have a ready market for it. The model is being built for bitumen export. Capital is being diverted that way. For example, right now there's a proposal for a 150,000 barrel a day upgrader to make diesel fuel in the North West refinery in Alberta. It's a great idea. What they need is the capital, and they also need a partnership with a producer.

Thank you.

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

Thank you, Mr. Wilson.

I'd like to move on to Mr. Stanford.

We've lost half a million manufacturing jobs on this government's watch. Tens of thousands of those lost jobs have been in Alberta and British Columbia and so we have a real fundamental problem. You've referred to it as resource-driven deindustrialization.

What kind of policies does the federal government need to put in place so that we actually look at more family-sustaining jobs being created instead of the few temporary and part-time jobs that have come from the policies of the current government? How do you think the federal government should be approaching the whole issue of product and market diversification in energy resources, both green and traditional, so that we can contribute to those good family-sustaining jobs?

[Jim Stanford]

First of all, it isn't only manufacturing that has lost jobs through this process that I call resource-driven deindustrialization. As a result of the indirect impacts of a staples boom and then the financial market implications, particularly through the exchange rate of that boom, it's also affected any other tradeable industry in Canada. Manufacturing has been especially hard hit, for sure, but tradeable services industries have lost work. Tourism, actually, has been hit proportionately worse than manufacturing because of the overvalued currency, which in part—not exclusively, but in part—is clearly related, empirically, to the boom in Canadian petroleum and mining exports.

The net impact across the goods-producing sector as a whole has clearly been negative. Yes, there are new jobs associated with export production in petroleum and some other mining industries, but the number of those new jobs, given the limited labour intensity of that production, is more than outweighed by jobs that have been lost in other export-oriented, goods-producing industries.

Part of the problem there is that the employment intensity of production in the petroleum sector is uniquely low. Each $1 million of GDP in the petroleum extraction sector supports only half a job. Compare that to other goods-producing industries, such as manufacturing, which is more like 10 jobs per $1 million of GDP, and even more in tradeable services.

The net impact of shifting our exports from a more diverse composite of value-added products and services, more increasingly into staples, mineral extraction, has clearly been negative on the employment side.

How do you manage that situation? What is the policy response? I think in part it is to control the pace of resource development. No one at this table, as I'm aware of, is going to shut down the oil sands—far from it—but to more carefully regulate the pace of development and export, to take measures that would enhance the Canadian value-added content of the inputs and supplies that go into the petroleum sector. For example, we purchase billions of dollars of machinery and equipment to work those mines. The vast majority of it is imported internationally. In fact, an increasing share of it is imported from the U.S. and elsewhere. There has been no concerted strategy to enhance the Canadian value-added linkages.

We talk a lot about how there are spinoffs felt by all the provinces, but in fact the data we have, which isn't very good, suggests manufacturing inputs from the rest of Canada to Alberta have in fact shrunk significantly, even as the oil boom continued along, in part because of a lack of policy response.

In addition, we'd like to see a policy strategy to enhance value-added at the downstream, in terms of using the resource, processing it, refining it, including upgrading, including refining, including petrochemicals. This is where the logic of the position to use more of the production in Canada comes from.

Finally, we need a strategy to manage the macroeconomic effects of it all. In particular, I think the key link between the oil boom and the overvalued exchange rate is experienced not through trade effects per se, but more through capital market and financial market effects. My suggestion in policy has been to more carefully regulate foreign investment in the resource sector as a way of breaking the link, in the minds of currency traders, between the price of oil and the Canadian dollar.

I think there's a range of policy tools that could be taken to enhance the benefits and reduce the side effects or unintended costs of the resource expansion.

[The Chair, Conservative, Leon Benoit]

Thank you very much, Mr. Julian.

Mr. Hsu, you have eight minutes, please.

[Ted Hsu, Liberal, Kingston and the Islands, ON]

Thank you.

Mr. Wilson, I looked at your statement about the NEB hearing process not sufficiently considering the upstream and downstream processes.

Could you list some of the upstream and downstream impacts you think the NEB should be considering when it's doing its calculation of overall benefit to Canada?

[Fred Wilson]

When our unions first started appearing regularly before the National Energy Board, believe it or not, the board in it's decision on Keystone I said that the evidence we gave on job creation as a benefit was not relevant to the public interest. Believe it or not, that's the case. Because we appealed to the cabinet, the next time the NEB dealt with a hearing, the union was there and they did consider job creation to be part of the public interest. But at the first hearing in 2006—it's there in black and white—they said that jobs were not relevant to the public interest considerations of the board. So in the economic area, we're dragging them kicking and screaming to look at these things.

In the environmental area it's much worse. Simply put, climate change is a non-issue before the National Energy Board. It's not a factor. They do an environmental impact study. The environmental impact that they do on any pipeline project is whether the pipes are solid, what's going to be the impact on groundwater, important things. Environment Canada produces a report to the board on every pipeline assessment.

But the impacts of that project on overall development, on greenhouse gas emissions and Canada's ability to meet its international commitments are not considered at all. In our marketplace, in the United States, when they're asking whether they're going to consider Keystone XL, those are exactly the issues that are before the EPA and the Department of State, and those are the very issues they're arguing about today.

We've been asking the board, appealing to the board, to broaden its concept of environmental assessment. We've also been appealing to cabinet and to the government to fill in the policy vacuum and to connect energy strategy in Canada with our climate change goals. Until we do that, we're going to have continuing problems in our marketplace. It's only going to get worse and all the lobbyists in the world aren't going to change that.

I would end on this point. Ambassador Jacobson pretty much said that to us last February when he linked the Keystone debate in the United States with Canada's performance on greenhouse gases. I don't know how much blunter they can be, and I don't know when Canada's going to really listen to what our American market is saying.

[Ted Hsu, Liberal, Kingston and the Islands, ON]

I know that you would like to see refining jobs in Canada instead of having the bitumen exported through pipelines, but it seems to me that Suncor's cancellation of the Voyageur upgrader project means that this kind of thing is not financially viable. I wonder if you could help me sort out the economics of it. If the company is saying this is too risky and they can't make money from it, why would you be advocating this? Who would you get to do it if it didn't seem to be economically viable after you do a risk-reward calculation?

[Fred Wilson]

What you're seeing with Suncor is a very disappointing decision. The Voyageur upgrader was on, then it was off, then it was on, and now it's off again. That project was around before the Suncor and Petro-Canada merger, and it's gone through these iterations. I think what we see is the marketplace working in a policy vacuum. It's very disappointing. It was a massive capital project.

In its absence, what will we do next? Maybe it will be smaller upgraders. Maybe it will be off-gas projects that are going to do petrochemicals. Perhaps Suncor will revive its coker project in Montreal if Line 9 is approved. It is a setback to value-added, the cancellation of the Voyageur project. We're very disappointed. It underscores why we need a policy framework for value added.

[Ted Hsu, Liberal, Kingston and the Islands, ON]

I'm trying to think of it in terms of economics. If there's money to be made, if there's value to be extracted, why wouldn't a private firm be willing to take that on? Maybe it is too risky. Maybe now is not the right time or something.

[Jim Stanford]

There's another dimension to the economics of upgrading, in the western Canada context, in the sense that again, the outlet for the production there is constrained to that U.S. Midwest market, which has been oversaturated in part with our own supply. When Suncor calculates the economics of that upgrader, they're comparing the differential on one product whose price is depressed in the U.S. market, namely bitumen, against another product whose price is also depressed in that same U.S. market, namely Canadian heavy oil. It's that differential within the same saturated market that is driving the economics of their project.

If there was a different policy framework where we had a concerted strategy to use our own resources first to meet our own needs, then as part of a strategy to get western oil to eastern Canada, you could look at a different scenario entirely, because now you'd be comparing the price of bitumen versus the comparator price in eastern Canada, which is something very different. It's not the depressed western Canada select price; it's the world price, adjusted for the quality of the fuel, etc.

Again, to reinforce Mr. Wilson's point about the need for this to be within the context of a policy that commits us to a Canadian energy strategy, and value-added within that strategy, an east-west outlet for the production could change the economics of the project itself.

[Ted Hsu, Liberal, Kingston and the Islands, ON]

I have one minute left. I don't know if I should ask this last question.

[A voice]

Go ahead, do it.

[Ted Hsu, Liberal, Kingston and the Islands, ON]

All right.

This is for Mr. Cross.

You talked about the fact that what's important is to maximize the value that our resources represent. That should really be the goal. The means might be diversification of markets, but that's not a goal in itself. My question to you is whether there should be more diversification in the time direction. Companies, and the managers who manage them, and the people who get bonuses for good performance, they're very interested in short-term returns. I think they discount a lot more than society, as a whole, the future value of the natural resources, energy, accruing to people living in the future. We know that rapid development of the oil sands, for example, means that we're paying a lot for each job that we create. Wages are quite high. We know there are technological advances in the pipeline that will make oil sands extraction a lot cleaner, but in the future because it takes time to build your pilot plant and scale up. We know there's a social cost, which a former premier has talked about.

Is there a sense in which society's value extracted from the oil sands could be maximized if we diversify a little bit more in the time direction?

[Philip Cross]

I don't know how to answer that directly.

What I will try to bring to the member's attention is there seems to be a lot of confusion between extracting maximum value, which you noted is what I want to do, with moving further down this stage of processing. Often, they're not the same thing at all. For example, when we're talking about oil, the maximum value-added comes from the crude part, the bitumen part. Where margins are the most narrow and where people are very reluctant to invest is in the refining part, the one that's further down that we classify at Statistics Canada as manufacturing.

More generally, we talked about how what changed in the world in the last 20 years was that as the developing countries became integrated into the world economy, they especially were ferocious in competing in the manufacturing sector. Why would you want to divert resources to that one sector where you're going to meet a great deal of foreign competition and divert resources from the resource sector where they're not competing with us?

[The Chair, Conservative, Leon Benoit]

Thank you very much, Mr. Cross. I'm sorry, I have to cut you off there; Mr. Hsu is well over time.

We go now to Ms. Crockatt, followed by Mr. Anderson, and then Mr. Nicholls, in the five-minute round.

Go ahead, please, Ms. Crockatt.

[Joan Crockatt, Conservative, Calgary Centre, AB]

Thank you to all of you for being here. It's great to see you.

I wanted to focus on one thing Mr. Cross said and drill down a bit. It was that maximizing the resource should be the goal. I'm thinking in terms of dollars into the economy, dollars to government that pay for important programs, and jobs, and human benefits. It's in that regard I wanted to refer to an article by Brian Lee Crowley and Ken Coates, and they've written a couple recently, on the benefits to aboriginals.

One of the things that Brian Lee Crowley said is that we're at a major moment of transition for aboriginal people and we're moving from the era of protest activism to the phase of action. He said that there's a new generation of aboriginals that wants to move forward and sees that dependence on Ottawa isn't a long-term solution and that they don't have many options in a lot of the remote communities they live in other than resource development. He also spoke about how there have to be real and tangible benefits to aboriginals.

I wondered if you could give us a picture of what impacts and benefits you might see of market diversification of energy to Canadian aboriginals.