Natural Resources Committee on April 30th, 2013

[The Chair, Conservative, Leon Benoit]

Good afternoon, everyone. We are here to continue our study on market diversification in the energy sector. We're looking at diversification in the markets that Canada does, and could, ship our product to. We're also looking at diversification in the products themselves, products that can be developed in Canada from these natural resources.

We sent the witnesses five or six questions for them to consider in making their presentations. I would encourage the witnesses, as much as possible, to try to deal with and answer those questions and, certainly, to stick to the topic of diversification in the energy sector.

With that, we'll get right to the presentations. Today at our committee, we have as an individual Dr. Jack Mintz, the director and Palmer Chair in Public Policy at the School of Public Policy at the University of Calgary. We have from the Alberta Federation of Labour, Mr. Gil McGowan, the president. We have from the Canadian Chamber of Commerce, Mr. Scott Willis, the director of natural resources and environmental policy. We also have via video-conference from Stavanger, Norway, as an individual, Mr. Rolf Wiborg, an engineer.

Welcome to all of you. We'll have the presentations as much as possible in the order they appear on the list, starting with Dr. Mintz.

If you are ready to go ahead with your presentation, you have about seven minutes. Go ahead please, sir.

[Dr. Jack Mintz, Director and Palmer Chair in Public Policy, School of Public Policy, University of Calgary, As an Individual]

Thank you very much.

Let me, first of all, thank you for inviting me to speak on the issue of what I'll call energy market growth and diversification. It's certainly a pleasure for me to be before this committee again and to have an opportunity to discuss a number of issues that are on your mind. So I'll just make a few brief remarks for that reason.

It's not a surprise to you that currently Canada's oil and gas is exported primarily to the United States. It is my belief that there are significant economic and geopolitical gains to Canada if we both extend and diversify our exports to other markets besides the United States. My purpose today is to explain those benefits to Canada and to argue that pipeline capacity must be improved if we are to take advantage of these immense benefits.

Let me start with the economic case. As is well known, economic growth has emerged in many Asian, Latin American, and African countries, with less growth coming from Western economies. Even on a longer run basis, it is viewed that most energy demand will come from the emerging economies and less so from North America. It is in the Canadian interest to expand our energy production to meet international demand.

The economic case for energy market growth and diversification is clear-cut and supported by several credible economic studies. These studies have suggested the following aggregate benefits.

First, additional pipeline capacity of 700,000 barrels per day, if built, would increase GDP by over $100 billion from 2016 to 2030, due to the expansion of pipelines to the United States, as well as by reducing discounted oil prices. This is work done by my colleague Professor Michael Moore at the School of Public Policy at the University of Calgary. In the same study, new capacity of 500,000 barrels per day would increase GDP by $16 billion from 2016 to 2030, with oil sold to the Californian and Asian markets.

Second, overall new oil pipeline capacity of close to 1.2 million barrels per day would increase Canada’s GDP by 1% annually over the period 2016 to 2030. Again, this is from the work done by my colleague Professor Michael Moore.

Third, federal and provincial government revenues would increase by over $25 billion in the next 15 years from the additional pipeline construction and shipment of 1.2 million barrels to the U.S. Gulf Coast, California, and Asia. Again, this is from the work done by Professor Michael Moore.

Fourth, the economic effects of the Northern Gateway would provide $125 billion in net benefits to the Canadian economy during the period 2010 to 2048, as pointed out in the work of Robert Mansell and Wright, due to the expansion of exports and the oil price uplift, with the discounted value ranging from $42 billion, with a 5% discount rate, to $16 billion with a 10% discount rate.

Fifth, the Northern Gateway pipeline project is estimated to increase government revenues by $81 billion over 30 years.

These are exceedingly large numbers associated with energy market expansion. Whether the numbers are off, let's say, plus or minus by as much as 20%, doesn't matter to the substantial economic gain realized from energy expansion. Add natural gas expansion, and the numbers become even bigger.

It would be a major loss to the Canadian economy, investment, jobs, and government revenue if pipeline expansion does not take place. Professor Michael Moore estimates, in his scenario, that additional pipeline capacity would increase jobs by 650,000 employment years. The additional tax revenues would increase by close to $1.7 billion annually, helping pay for roads, hospitals, and schools.

A number of criticisms on the economic side have been made about pipeline expansion, which I would like to address. The first is that other regions of Canada would not benefit from the growth of oil and natural gas. Yet, studies would suggest otherwise. For example, Professor Moore estimates that Ontario would realize a pick-up in GDP of $3.5 billion in the next 15 years. He also estimates that Quebec would benefit by $777 million.

Generally, typical studies tend to use an analysis that's based on input-output tables of the Canadian economy. With growth in one part of the economy, it feeds through other parts of the economy through more demand for products and services. Also, governments receive more revenue from taxing goods and services, workers, and profits. The federal government itself would receive over 40% of the revenue from expansion.

I believe that such studies likely underestimate the gains to the rest of the economy from pipeline expansion. The reason is that they do not account for changes in the prices of products and inputs. The growth in the west arising from more energy production pushes up wages and prices in those regions. Other parts of Canada become more competitive, resulting in a shift of production to cheaper jurisdictions. This in turn will push up real wages and incomes elsewhere. This is partly offset by the rising exchange rate, which will affect export-intensive industries; but overall the Canadian economy is richer, in terms of its purchasing power, to buy international commodities.

Another issue is with respect to the social costs of energy production, including environmental costs. Pricing these costs, such as a cap-and-trade regulatory system or an emissions tax, rather than limiting selected business activities, best deals with these issues. These pricing issues are tremendously complicated, as in the case of climate change, which relies on international coordination, not just on one country.

As a recent U.S. energy department study shows, carbon dioxide emission increases in China, primarily due to coal production, have swamped reductions in the United States, Canada, and Europe during the years 2005 to 2011.

Let me now turn briefly to the geopolitical case. As I've argued in many earlier writings, there is another element to market diversification that goes beyond the economic case: improving our bargaining position relative to the United States. Canada, being one-tenth the size of the U.S. economy, simply does not have that much leverage when it lacks alternative markets for our products.

For example, we've had years of difficult negotiations with the United States with respect to softwood lumber exports. This is now changing due to market diversification. Canadian exports of forest products to the United States have dropped from nearly 80% in 2001 to 60% in 2011, with growing demand in Asia. Our ability to export to other markets strengthens our hands in negotiations.

While our relationship with the United States is critical, given our economic and cultural ties, at times it is stressed, whether a result of trade restrictions, Buy American regulations, or border levies. In the case of energy, the United States is increasing its own fossil fuel production and importing relatively expensive offshore oil and cheap Canadian oil. With pipeline capacity expanded from Cushing, Oklahoma, to the Gulf Coast, the U.S. would be able to substitute cheaper North American oil for more expensive and less reliable Venezuelan and Mexican oil, which is subject to stoppages. Without alternative energy markets, we begin at a disadvantage in negotiating better terms for our energy exports.

Taking this a step higher, there's a significant advantage to market diversification in terms of not just economics but also geopolitics. If the United States prefers our oil to that of less stable countries, we can command a premium, whether taken in higher prices or in some indirect way. This, however, will arise only if we have a credible threat, which will only come from having other markets to trade with.

Thank you.

[The Chair, Conservative, Leon Benoit]

Thank you, Dr. Mintz.

We go now to the Alberta Federation of Labour, Mr. Gil McGowan, president.

Go ahead, please, sir, with your presentation. You have around seven minutes.

[Gil McGowan, President, Alberta Federation of Labour]

Thanks, Mr. Chairman. Thanks to the committee.

In order to make the most efficient use of my limited time, I'm going to present you with a series of numbers or groups of numbers that illustrate important points about Alberta's oil sands industry. Once I finish with the list, I'll connect the numbers to your discussion about market diversification and I'll suggest a few policy conclusions.

The first set of numbers that I want to start with have to do with oil sands production: 1.5 million, 3 million, and 5 million. The 1.5 million represents current production from the oil sands. Three million is about what we expect in four or five years, and five million is what many industry observers expect over the medium term.

I'll move to the second set of numbers, which are 65%, 72%, 55%, 47%, and 23%. The 65% is the traditional amount of oil sands bitumen that has been upgraded in Alberta over the years; 72% is what former Alberta Premier Stelmach described as his government's aspirational goal for upgrading; 55% is today's reality; 47% is what the Energy Resources Conservation Board predicts will be upgraded in Alberta by 2017; and 23% is what the consultancy Wood Mackenzie predicts will be upgraded by 2025 because almost all of the new production is going to be exported in raw form.

The next number is 22,000. This is the number of Albertans currently employed in upgrading, refining, or petrochemicals. There was a report recently released by the petroleum sector council that predicts that the number going forward will remain at 22,000. Basically, no new jobs in upgrading in Alberta are predicted for the medium- or long-term future.

Next is 17,000 versus 17. Seventeen thousand is the number of jobs that would be created—from a GDP analysis prepared by the Alberta Federation of Labour—if the volume of bitumen exported by the first Keystone Pipeline to the American Midwest were instead upgraded in Alberta. Those are direct and indirect jobs. The number of real jobs that were created by the pipeline over the long term, long-term jobs, was 17. Call me crazy, but given a choice between 17,000 and 17, I would choose 17.

Similarly, for the Northern Gateway pipeline our GDP analysis suggests that if the same volume of bitumen expected to be exported down the Northern Gateway were upgraded in Alberta, we would create 26,000 jobs, indirect and direct, versus 104 permanent jobs, by the industry's own admission at the Northern Gateway pipeline hearings.

Here's another set of numbers: 1.6, five, and seven. The 1.6 represents the number of jobs that are created in extraction-only oil sands development for every million dollars of investment, versus five jobs for every million dollars of investment for upgrading, and seven jobs created for every million dollars in petrochemicals and higher-product refining.

Five hundred million is a number that came from a company called North West Upgrading. They estimated that if their very small upgrader were in operation last year—it's only 37,000 barrels per day—it would have generated $500 million in government revenue in one year from this very small plant, but it's only because it's an upgrader and upgrading to diesel.

In terms of market access, here are some important numbers: 50% and 25%. Only 50% of refineries in our major market, the United States, have the capacity to upgrade unrefined bitumen. They are what we call coking refineries that can take the heavy oil sands and turn them into high-value transportation fuels. The remaining refineries are what we call cracking refineries that cannot process bitumen into high-value transportation fuels. So only 50% of the American market is available to us. In China only 25% of refineries have coking capacity.

The next number is $8 per barrel. In testimony to the National Energy Board on the Northern Gateway pipeline hearings, the expert hired by the Alberta government, a vice-president of Downstream Consulting for a firm called Wood Mackenzie based out of Houston, estimated that we lose $8 per barrel on the sale of our oil from Alberta every time we fill up the coking refineries in our major markets.

So as soon as those 50% of refineries become filled up, they spill into the cracking refineries, which can only turn bitumen into low-value products like asphalt. As soon as that happens, every single barrel that we sell is discounted by $8 per barrel. That's not just the ones that go to the cracking refineries; it's all of them, because the managers of the coking refineries realize that—pardon the pun—they have us over a barrel and they pay less.

Our federation of labour got access to documents previously not released by the Alberta government dealing with upgrading and its implications. The total number of pages was 8,000. There were two documents that we got our hands on. The first one was called “Alberta’s Value Added Oil Sands Opportunities” from two years ago. What it shows is that when we export diluted bitumen, or dilbit, we capture only 35% of the potential value chain. If we upgrade to synthetic crude we capture 70% of the value chain. With gasoline we capture 85% of the value chain. With petrochemical production we capture virtually 100% of the value chain.

The next numbers I will refer to are 40% and 30%. Forty percent was the price differential between the price of west Texas intermediate light sweet crude and the price fetched by Alberta dilbit when our current premier, Alison Redford, started to complain about the bitumen bubble, saying that the growing differential between the prices of the two products was causing a crisis in Alberta.

That leads me to the second document that we got in our freedom of information search. It was a document called the “Oil Sands Fiscal Regime Competitiveness Review”, done by the Alberta government. It demonstrates that over the last 20 years, the differential has actually been about 30%, so the differential is nothing new. The report also showed that when the differential reaches 23%—another important number—upgrading in Alberta actually becomes profitable. So the high differential is actually a good thing for the Alberta economy because it improves the economics of Alberta-based upgrading. Low bitumen prices are actually a real competitive advantage for Canadian upgraders.

Another number I want to draw your attention to is 30%. That is the volume of diluent that needs to be added to bitumen in order to make it flow down pipelines.

I'm going to wrap up with my conclusion. The conclusions based on these numbers—and there are more of them—is that low bitumen prices are not the result of lack of market access. They have to do with several factors. First is the low quality of our oil. Bitumen is not oil; it is a different product. As a result, it fetches a low price, and the overproduction floods our small market. When we fill those 50% of refineries in the States, that's what results in the discount.

Second, low bitumen prices are actually nothing to fear. Low-cost feedstock can actually be seen as a competitive advantage.

Third, producers are not troubled by the low prices for bitumen. If they were, they would be reducing production forecasts. They are not. What this shows is that they can make good profit even with lower prices.

Fourth, many producers, especially with American-based refining capacity, actually prefer low prices for bitumen because it allows them to buy low their feedstock and sell high the value-added product. I would submit to you that's what we should be doing as Canadians.

Fifth, we're selling the wrong product and we're looking at diversification in the wrong way. Instead of looking at geographical diversification of markets, we should be looking at product diversification, which would lead to market diversification. When we sell diluted bitumen, we sell only to the people who have coker refineries, and it's a small number. When we sell synthetic crude, we sell to all refineries in the world because they can handle the capacity. When we sell gasoline, diesel, or other high-value transportation fuels, we sell to everyone who has a car, a truck, or equipment to operate.

To conclude, when we prioritize value-added production over raw exports, everyone in Canada wins. Canadian producers get better prices. Canadian refiners get access to cheaper feedstock. Canadian workers get long-term jobs, some of the best in the economy. Canadian governments get revenue. The only ones who don't win when we prioritize value-added production are Chinese and US refineries, and I submit to you that that should not be this government's priority.

[The Chair, Conservative, Leon Benoit]

Thank you, Mr. McGowan.

Our third presenter is from the Canadian Chamber of Commerce, Scott Willis, director of natural resources and environmental policy.

Please go ahead, Mr. Willis, with your presentation of around seven minutes.

[Scott Willis, Director, Natural Resources and Environmental Policy, Canadian Chamber of Commerce]

Thank you, Mr. Chair.

Members of the standing committee, ladies and gentlemen, thank you for the opportunity to address you here today.

I'm here on behalf of the Canadian Chamber of Commerce, Canada's largest industry association. We speak for 450 local chambers and boards of trade and represent 200,000 Canadian businesses on matters of federal and, in this case, national importance. My testimony will be more of a qualitative nature than a quantitative nature.

On the topic of market diversification in the energy sector, we believe that there are three primary issues at play that are helpful to understanding the situation in which we find ourselves.

The first is that we as a country don't know what it means to be an energy nation in the 21st century. There's a need to foster a real dialogue that can better inform our project and policy choices both at the federal and the provincial level.

The second is that we find ourselves too reliant on a single consumer for virtually all of our oil and gas exports. This impacts government revenues and consequently each and every Canadian citizen.

The third is that we have an opportunity as a western energy exporter to demonstrate leadership on the global stage when it comes to the way we extract, process, and export energy products and to balance that responsibility with appropriate regulation.

The Canadian Chamber of Commerce is of the view that the absence of reliable tidewater access for Canadian energy is among the primary competitiveness barriers facing our economy. Raising awareness of this issue among Canadians is at the forefront of our priorities for 2013.

Most Canadians would be surprised to learn about the 110,000 kilometres of transmission pipeline currently operating in this country and doubly so about their safety record of delivering in excess of 99.999% of their product to its intended destination. Most probably don't realize that the Line 9 originally ran from west to east or that we move hundreds of thousands of barrels of oil every day by train.

The energy renaissance currently under way in the United States has profound implications for North American dynamics because, while we as a nation are refocusing west towards Asia, we find ourselves constrained by infrastructure that points south. This disconnect between opportunity and ability has significant implications for our economy.

Our inability to service overseas markets is slowing investment and development in our resource sectors. Global energy demand is set to rise by one-third by 2035 with as much as 90% of this new demand being driven by non-OECD nations, particularly in Asia. Even Asian countries such as Japan have made policy choices that place our natural resources squarely in their sights.

This is not an argument against increasing our energy exports to the United States, but simply provides an indication of why being a supplier to Asia is a top strategic priority for the Canadian energy sector. That is why a fact-based national conversation about energy is vital at this point in time.

Oil and gas represent over half of the global energy supply and power virtually 100% of transportation. This sector is responsible for nearly a fifth of world GDP and is prominently involved in every other type of economic activity.

This consideration takes on heightened importance if we examine the world's proven reserves of oil and how they are controlled. Roughly four of every five barrels of oil is under the management of a state-owned enterprise. The largest of these firms, Saudi Aramco, is estimated to be worth four times as much as ExxonMobil and the rest of the top 10 publicly traded global energy companies combined.

With so much of the world's energy supply under the control of state governments, Canada's role as a market-driven, energy exporting nation can be used to our advantage.

An equally important consideration is to ensure an environmentally aware population of the safety provisions of modern day ships operating off the coast of British Columbia. Most are likely unaware that these ships have been redesigned with safety in mind, that they are dual-piloted and guided by local captains when they come into port and depart under the watchful eye of multiple tethered tugboats.

Obviously no system is perfect or without risk, but we believe this system is safer than many others that we rely on every day.

Canadians should have a better appreciation for both sides of this discussion. I believe we have a responsibility to examine each of the market diversification options that are on the table at this time on the basis of its merits, with an informed evaluation of their risks and respectful of any regulatory review.

Better information will enable us to elevate the dialogue on energy issues in this country. We need a discourse that properly balances risk with the scope of the issue. Canadians need to appreciate that whether or not another foot of pipeline is ever laid in Canada, global suppliers will ensure that hydrocarbons are made available to satisfy that demand.

A CIBC report issued earlier this month stated that Canada lost $25 billion in 2012 due to oil price differentials. A barrel of oil from western Canada has the same greenhouse gas emission profile regardless of the price it fetches on the global market. In a time when governments at all levels are being asked to do more with less, leaving $25 billion on the table makes us all poorer.

It becomes easier to act in our own self-interest when we can point to the great efforts we are making to become one of the world's most responsible producers of energy. We have an opportunity to leverage our resource endowment and to properly invest the proceeds in initiatives that elevate our status as a nation. One need only look to the Norwegian sovereign wealth fund or to the work being done by Masdar in the United Arab Emirates for an appreciation of the benefits that can accrue to countries with well-articulated resource strategies.

We want Canada to make investments that properly leverage our resource endowment while respecting the environment. Smart climate policy helps our natural resource sectors to thrive. It encourages efficiency, it breeds competition, and it lends legitimacy to the pursuit of profit. It also expresses the will of the people, satisfies their need for social license to operate, and to grow. Just as our firms have a fiduciary responsibility to maximize profit, our leaders have an ethical responsibility to future generations.

Properly sited infrastructure can address the former and continuing to raise the bar in addressing climate change can address the latter.

Thank you.

[The Chair, Conservative, Leon Benoit]

Thank you, Mr. Willis.

We go to our final witness for the day. By video conference from Stavanger, Norway, we have, as an individual, Mr. Rolf Wiborg, an engineer.

Go ahead please, Mr. Wiborg, with your presentation.

[Rolf Wiborg, Engineer, As an Individual]

Thank you, and good evening. For me it's actually the evening, but good afternoon to you in Ottawa.

Ladies and gentlemen, I appreciate this opportunity to try to repay some of my debt to Canadian society. The education given to me by the University of Alberta has proven really useful in my work here in Norway and, as already referred to, in creating Norwegian wealth, our pension fund abroad, as we call it these days. As a matter of fact, the Alberta heritage fund from the 1970s is the model.

I have read all the reports and some of the recommendations provided to the Alberta provincial government and the federal government in Ottawa, and to the committee. In my opinion, the information you have provided only strengthens the argument I made to the journalist who came from Time magazine and interviewed me in August, 2012.

Canada has the resources, as already mentioned by all the other witnesses. You have the natural wealth. You have the competent people. You should be a winner in the energy business in the coming years. The question in my mind remains with you and the provincial governments, that is, with your political leadership.

I think we have already heard that maybe the Canadian electorate could support politicians who would make the nation and the provinces work toward a common goal of improving the life of many Canadians, to provide jobs, as Mr. McGowan talked about, and to provide income, taxes, and recreate the Alberta dream that I lived in the seventies when I was a student from 1973 to 1975 in Edmonton.

I understand that you have the same problem in Canada as we in part have in Norway. There are Norwegians who look at the energy industry as the enemy, as the polluter. However, in Norway the majority know that it also provides the jobs and the income and the ability for a nation that used to be among the poorest in Europe to be among the richest in the world today. The problem I have is to see whether you can sell to the nation and the provinces and people the concept of again investing in your own country and own industries, or whether you will continue to let foreigners, including the Norwegian Statoil—the company that I as an individual in Norway participate in—invest in business in Canada and, as already mentioned by witnesses, take away fairly good profits, at least after an initial risk phase.

I hope you appreciate that I speak tonight as an individual, reflecting my love for Canada and Canadians. I even have family still in Canada. I sincerely believe, as already mentioned by other witnesses, that you should be able to get a better deal from your business partners, both nations—not least the United States of America south of the border—and the companies operating in Canada. However, that will require government employees and politicians who are willing to look into the business and understand it better, as you are trying to do tonight. You are regulating and you are taxing, but most oil-successful nations in the world in the energy business have done like Norway did: they're also investing. You had Petro-Canada but then you dismantled it.

Canada is an exporting nation. It's an OPEC type of nation. Why not apply that type of logic and thinking to your country as the rest of these countries have done? Mr. Mintz mentioned the need to diversify and get to the Asian market to improve your bargaining position. I totally support that. However, it requires you to go through British Columbia, which is not easy, from what I'm reading in the newspapers.

You also need to improve your relations and your negotiating position with the U.S.

Venezuela, with their Orinoco emulsion—their version of the tar sands bitumen—went ahead and invested in the refineries in the U.S. You could do the same.

There are more ways of diversifying other than building your own upgraders, although I agree with Mr. McGowan that you probably need to upgrade more. The question always is, how much diversification? This becomes a judgment of the market.

I believe today that people going to Alberta and investing in the tar sands, like Statoil did, are taking a political risk, which includes your system, the federal government and the provinces. It's also a risk on price.

The tar sands need about $95 to $100 a barrel to be profitable in most of its operations—at least the new ones, with having to pay back the capital. It's already been alluded to by the witnesses that the oil market could drop. The United States of America is definitely not interested in paying more than they have to, so you need to find a way out of that predicament.

Thank you.

[The Chair, Conservative, Leon Benoit]

Thank you very much, Mr. Wiborg.

Thank you, on behalf of all the committee, for taking this time to be with us today—tonight there. We appreciate it very much.

We will now go to questions and comments from members, starting with a seven-minute round.

We have Mr. Trost, followed by Mr. Julian, and then Mr. Garneau.

Go ahead, please, Mr. Trost, for up to seven minutes.

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

Thank you, Mr. Chair.

Thank you to all the witnesses.

Just for clarity's sake, I've heard a few witnesses like Mr. McGowan talk about how we need to have more upgraders, and maybe refineries, and so forth. I'm not quite sure of the mechanism that they're looking for to do it.

I'd like just a brief response from Mr. McGowan. To get more refineries built in Canada, what is a concrete policy step that your asking us to take? Are you asking for a crown corporation to build them? Are you asking for an export tax? What are you asking for specifically?

Unless we interfere in the market, from what we've heard there are currently not too many players who are willing to put billions of dollars at risk. What do we have to do? Do we have to mess with the market somehow to get this done? What is the specific concrete step you're asking for?

[Gil McGowan]

The short answer is that I think we need to take a page from Peter Lougheed's playbook.

Back in the 1970s, when he formed the first Progressive Conservative government in Alberta, he was faced with a very similar situation that we're faced with today, but with a different resource. At the time it was natural gas and it was being exported in raw form. He wanted to add value. In order to do that he used a mix of regulation and direct public investment, to establish public-private partnerships that led to....

So the short answer is, yes, the private sector has been given an opportunity to do what Canadians want, and which I would argue they need, and it has failed.

We need public action, we need a crown corporation, and we need public investment. On that subject, make no mistake, we're already investing in this industry because with the low royalty, we're paying for existing—

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

I have this right, then, that crown corporations and regulatory...?

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

A point of order.

[The Chair, Conservative, Leon Benoit]

Mr. Julian has a point of order.

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

He's just answering the question.

I would appreciate it, Mr. Chair, if you could just allow our witnesses to respond to the questions they've been asked.

[The Chair, Conservative, Leon Benoit]

Mr. Julian, in my judgment, Mr. McGowan had completed the answer to Mr. Trost's question, and Mr. Trost was asking follow-up questions.

Go ahead, please, Mr. Trost.

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

I was just summarizing your two basic points, sir.

Basically, you're asking for regulatory requirements for a certain percentage, etc., of upgrading, and a crown corporation to support the development of refinery upgrading—

[Gil McGowan]

Exactly. That's what governments in this country have done to great effect in the past, and what governments and other oil producing industries have done.

The last point I was trying to make is that in a sense we are already spending, in the form of low royalties, a lot of money to develop the oil industry. The penny on the dollar royalty from Alberta basically means that all this oil sands development is paid for by the public in the form of foregone royalty revenue. We're already paying for it. I say we should own it.

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

Mr. Mintz, I'm going to guess that you may not quite totally agree with Mr. McGowan's remarks just watching the odd thing and having seen you before.

For a different viewpoint, could you perhaps respond why you might not agree, if I'm guessing correctly, with Mr. McGowan's analysis or solution?

[Dr. Jack Mintz]

First, let me say I wish I could agree with Mr. McGowan, because it would be great to have more jobs in Canada. We have to remember that as you do more in Canada, you're actually creating an even bigger energy industry that's absorbing more resources in the Canadian economy. Unfortunately, I would totally disagree with a lot of the information provided or the understanding provided of how the market is currently operating.

First of all, we have to remember that upgrading can make sense, especially with existing refineries. That's because the cost of doing the upgrading is much less in those cases. For example, there is a potential increase in upgrading if we build the eastern pipeline, where you could actually do more with the Irving plant in New Brunswick. Certainly, there's an argument for more western Canadian feedstock to go to Quebec refineries as well as Ontario refineries. Even the Edmonton refineries could take some more capacity, and there is some potential increase in upgrading.

The problem is that what we're really talking about is building new upgraders, which could be very expensive. The problem is that in the United States—this is where I don't agree at all with Gil's comments—we've had a tremendous change in refining capacity utilization in the past 20 years. If you go back to the early nineties, capacity utilization in the refineries in the United States was roughly 70% just after the recession. Then it climbed in 2005 and 2006 to over 95%. There was a lot of tightness in the market. That's the reason oil prices partly went through the roof in those years.

What happened after the recession in 2009 is that there has also been a tremendous shift in the market at the same time. The view is that we may actually have seen the maximum amount of refining capacity we will need for some time. Now utilization is down to 70%. It's actually a lot cheaper to do the upgrading where you do have excess capacity. That's the reason why shipping bitumen down to the United States to do the upgrading there makes sense compared to doing it here.

Let me just finish with one very quick point. There's one upgrading project in Alberta that's been going ahead. That's a northwest upgrader. The market risk, because the margins are not expected to be that high in the future, is being absorbed by the Alberta government. There's a toll charge that's being paid to the operator.

I don't know, but maybe, Gil, you would like to put money into an upgrader in Alberta, putting it at your own risk. But I think that's an issue that has to be dealt with, because right now there's no profitability in the future for market [Inaudible--Editor] upgrading.

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

Could I then ask, what would be the follow-on effect of a regulatory requirement that a certain percentage of oil be upgraded in Canada, as Mr. McGowan says? He seems to think it would be positive and he has some good arguments for that.

What would be the effect on production and other elements of the pipeline if there were a regulatory requirement that the industry in total or every producer has a certain percentage upgraded in Canada: 72%, 65%, whatever?

[The Chair, Conservative, Leon Benoit]

A very brief response, please, Mr. Mintz.

[Dr. Jack Mintz]

I'm not sure which level of government would be putting in that regulation. I would assume it would have to be the Alberta government, or whatever, because there's provincial ownership of the resource. You could potentially drive out investment in oil sands altogether, because you may not be able to make any money.

[The Chair, Conservative, Leon Benoit]

Thank you, Mr. Trost.

Mr. Julian, for seven minutes.

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

Thank you very much, Mr. Chair.

Thanks, witnesses. This is very interesting information.

I'd like to start with you, Mr. McGowan. I know that you are an extremely proud Albertan. I know from all the door-knocking I've done in Calgary and Camrose and Red Deer and Edmonton that Albertans are coming around to the idea that resources can't just be frittered away. You raised the important point about Northern Gateway and Keystone. I just wanted to come back to those figures. Here we have a government that has interfered with the market. They've gutted the environmental assessment process and gutted the public consultation process around pipelines with a strong reaction from Canadians.

So they interfered with the market to provide an economic incentive for export. You've given us the figures: 17 full-time on-site jobs for Keystone, 104 for Northern Gateway—they raised that from 78 initially—as opposed to 17,000 for Keystone if the same product were upgraded in Canada, and 26,000 for Northern Gateway. So we're talking about 43,000 jobs as opposed to 121. I think most Canadians get that.

The issue is if the government is interfering with the marketplace, trying to gut everything that Canadians hold dear to try to push particularly Northern Gateway through over the objections of British Columbians, and thereby threatening thousands of jobs that depend on a clean environment, what would the forward-thinking value-added policy framework look like in 2015 when there's a new government? What should that government do to put in place something value-added so instead of frittering away those thousands of jobs, we're actually having those jobs here in Canada and reducing our dependence on foreign supplies of oil?