Natural Resources Committee on April 30th, 2013

[Gil McGowan]

There are two things that I think have to be realized before you get into policy. The first is that the state of the oil sands as it is right now is actually a result of direct public-policy decisions made primarily by the Alberta government. When people use language like “interfering with the market” or those kinds of negative connotations, the reality is that the oil sands are the product of public policy. In the Lougheed days, it was what I would describe as progressive public policy—that's our role for government—but since the Klein days, it's basically been public policy that gives huge subsidies to the industry in the form of low royalties to encourage investment.

It's important to understand that public policy can be made; it can be unmade; it can be remade. To say, “let the market decide” is a fantasy, because the market hasn't been making decisions about how this industry is developed. So there is a role for government to play in making public policy. The problem is making the best public policy.

The next thing I think people have to realize before coming to a public policy is that there's a difference between the public interest and private interest. In that regard, I take issue with one very small word that was used over and over again by Dr. Mintz, and that word is “we”. He says we have refining capacity in the States. We have unused refining capacity in the States. It's not we. It's private multinational oil companies based largely in the United States that have unused capacity.

I agree with Dr. Mintz when he says that it makes sense for companies like Exxon or even Sinopec overseas to get access to bitumen preferably at the cheapest possible price so that they can buy low and sell high—buy the cheap oil and turn it into a high-value product. That makes all sorts of sense for them. But just because it makes sense for them as private developers, does not mean that it makes sense for us as the owners of the resource. So this is a clear example of where public interest and private interest diverge.

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

I have a quick follow-up question. You led us through what happens over the next 12 years. They go from 65% upgraded down to 23% upgraded at the same time the oil sands expand from 1.5 million to five million barrels. Now obviously what we're talking about is frittering away, giving away, again, tens of thousands of jobs in the way that only a spendthrift Conservative Government could. They gave away half a million manufacturing jobs. It seems to be their raison d'etre.

So how many jobs do we lose over that 12-year period in Alberta as a result of those wrong-headed policies?

[Gil McGowan]

They're all estimates, but they're high numbers.

I find it interesting that when provincial or federal Conservatives have conversations, the conversations are different on either side of the border. When they go south of the border and they're talking to American audiences, whom they want to approve pipelines like the Keystone XL, they talk about the tens of thousands of jobs in upgrading and refining that will be created once our raw bitumen is provided to them as feedstock. Then when they come north of the border, they don't talk about those jobs that are going to be provided to the Americans instead of Canadians. They say we'll create other jobs.

On the subject of jobs, I think this is really important. We heard a lot of big numbers from Dr. Mintz. He was quoting two studies in particular, done by his colleagues Dr. Moore and Dr. Mansell, both from the U of C. They were expert witnesses at the NEB hearings on the Northern Gateway pipeline. We were there as intervenors. I watched as both of those professors had their reports torn to shreds in front of the National Energy Board.

Both reports had numbers about job creation that were based on one factor only, and that was the presumed uplift in price that would result from gaining access to the Asian market. Under cross-examination by expert witnesses, these guys were torn apart. They were forced to admit that there probably will be no change in price at all as a result of access.

The Alberta government's expert witness, working for Wood Mackenzie, basically said that the discount that resulted from filling up the coking refineries and taking that capacity and spilling over to the cracking refineries...the pipeline would only take away that excess capacity for one year. There would be one year, instead of 30 years—which all of their estimates of huge job creation were based on. There would be only one year in which the Northern Gateway pipeline, by accessing Asian markets, would result in prices going up slightly, and then they would go back down again.

Frankly, to throw those numbers around is a little disingenuous after they've been torn apart by experts at the NEB.

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

Thanks, Mr. McGowan. Many of the studies have shown that those figures are fantasies. Oil company lobbyists, rather than dealing with the hard economics, as we've seen, whether it's thousands of jobs—

[Gil McGowan]

Even the energy industry experts themselves, from the oil companies, admitted under cross-examination that they didn't expect prices to go up by accessing the Asian market, full stop.

[The Chair, Conservative, Leon Benoit]

Thank you, Mr. Julian.

We go now to Mr. Garneau for up to seven minutes. Go ahead, please, sir.

[Marc Garneau, Liberal, Westmount—Ville-Marie, QC]

Thank you, Mr. Chair.

I had the pleasure of being on the board of directors of an oil sands company for a couple of years, from 2006 to 2008. Back then everybody wanted to build upgraders. It seems to have changed quite a bit in the last five years.

If I understand the arguments that are presented—and here I'll cite Dr. Mintz—it seems at the moment that companies like Exxon that are in the oil sands want to use unused capacity in Houston to do the upgrading to synthetic oil, and then move on to even more refined products. You brought up Sinopec. China would like to use its capacity there.

Mr. McGowan, are you suggesting that if it isn't the private companies that build these upgraders in Canada because it doesn't make sense for them, and that if somehow governments got involved in building them, there would be a ready market for refined products coming out of these upgraders?

[Gil McGowan]

Yes.

My point is that if the government doesn't get involved, it won't get done. The private sector has been given ample opportunity to invest in upgrading and refining, which is what Albertans want, which is what Canadians want, which will create jobs and revenue. The issues are not—

[Marc Garneau, Liberal, Westmount—Ville-Marie, QC]

Will the market be there, or will our export markets say they don't need this?

[Gil McGowan]

Let me be clear about something. We at the Alberta Federation of Labour and the broader labour movement are not opposed to diversifying markets. We're not opposed to selling to Asia; we're just saying that we're trying to sell the wrong product.

Also, the first thing we should be doing—and I think I agree with several of the other panellists here—is that instead of looking to the Far East for new markets, we should first look to our own east. As it stands right now, 85% of the oil used in the Maritimes comes from Saudi Arabia and Venezuela, countries that are charging what we call Brent prices, which are 20% higher. There's an opportunity to replace those higher costs paid by Canadian consumers in the east with lower cost Canadian oil. It would be a win-win situation. That's the first market.

Keep in mind that's a 750,000 barrel per day market just in the Maritimes. If you include Quebec and Ontario, these are significant markets. We should look at market replacement in Canada, and not close the door on exports, but as I say, we should be looking at exporting the right product.

[Marc Garneau, Liberal, Westmount—Ville-Marie, QC]

That leads a little bit into my second question.

I'm in favour of generating wealth from the oil sands as long as we do it in a responsible way. Now, you said that currently we're producing about a million and a half barrels a day. It's going to be three million pretty soon. There are commitments and money being invested to get up to five million barrels in the medium term, possibly before 2020.

At the same time, the current government has given itself an objective of reducing greenhouse gases by 17% by 2020, below 2005 levels.

Is there a problematic intersection that could be reached in the sense that once the machine is moving towards developing this capacity, and given the fact that the sectoral approach that's been taken by the government will be very sensitive to the oil and gas sector, because there is a limited amount of manoeuvring room with the other sectors, we could say, “Hey, we're not going to meet those targets”, if we are producing more than a certain number of millions of barrels a day?

I'd like to hear from Dr. Mintz on that first, and then from Mr. McGowan.

Then I'd like to hear from Norway on whether they've had to balance their environmental objectives with their production objectives. I'd like to know whether they've ever reached a point where they've had to say, “Hey, we'd better slow down”, or if they've always been able to stay ahead of the curve.

[The Chair, Conservative, Leon Benoit]

Dr. Mintz, go ahead, please.

[Dr. Jack Mintz]

Actually, I wasn't sure whether you were going to ask me or Gil that question.

At any rate, just on that, I think we have to first ask what is the appropriate cost of producing when we get to bitumen and upgrading, then including the social costs, which would include environmental costs.

The difficulty—and this is where I strongly disagree with Gil—is that the first element is getting to the heavy oil and the cost of producing heavy oil. There is an upgrading cost that will then add to the cost of oil. The problem is that we may want to sell refined product abroad, but there may not be a market if it's too expensive, because the costs are higher in Canada.

That goes back to the issue of what's called comparative advantage. The comparative advantage may be that sometimes you're better off to actually produce the bitumen as opposed to going to a higher level because of the additional costs that would be incurred here. Comparative advantage means better trade and a lot of the gains to trade. I'm sure one could go into that.

In terms of the environmental costs, I've been a strong proponent of these over the years, that it's appropriate to price these environmental costs, and that it would be a cost that would be included. The difficulty, of course, is that if your competitors don't price that, then that creates an issue that has to be dealt with, which is a constraint. But if everybody were appropriately costing that internationally, then that wouldn't necessarily impact on the choice between upgrading or not upgrading, etc., because you've already done that appropriate social costing in the price of oil.

In my view, you do raise a very important issue. That is, if we decide to do more upgrading in Canada, we will be counted to have more GHG emissions. Of course, even though from a world perspective it doesn't matter—from a world point of view, it doesn't matter whether GHG emissions occur in the United States or Asia or Canada—when we start getting into the politics of it, of course we're going to saying that we can't hit our targets as quickly, which means we're going to have to do other things in order to make up and get to the targets we want to get to.

[The Chair, Conservative, Leon Benoit]

Mr. Garneau, you have only 15 seconds left of your time. We can stretch that a little bit, but would you like to go to Mr. Wiborg or to Mr. McGowan?

[Marc Garneau, Liberal, Westmount—Ville-Marie, QC]

I'd like to hear from Mr. Wiborg on the balancing.

Thank you.

[The Chair, Conservative, Leon Benoit]

Mr. Wiborg, go ahead, please.

[Rolf Wiborg]

Thank you. I'll try to be brief.

On the upgrading, I'll just remind the committee that the Venezuelans also need to upgrade the Orinoco emulsion before they send it to specialized refineries. The big cost is in the specialized refineries. You are able to refine some on the east coast.

I think looking inside Canada, as Mr. McGowan mentioned, is very important. But you need, of course, a lot of provinces and to change the use of present pipelines.

On Norway, in The Tyee articles you will find reference to the 10 oil commandments—almost biblical. We had to look at the Norwegian needs first. It so happened that the Ekofisk field, the first one we found, produced a lot more oil than Norway's 3.5 million people used.

We built refineries inside Norway, and Statoil was used to do that. We didn't have to import product any more; we could actually export. It was costly in the beginning, but it has paid off today. Statoil expanded and bought refineries in Sweden and Denmark, and gasoline stations in the Baltic countries. They have now sold out of the gasoline stations. We are no longer in the petrol market with Statoil; other people have taken that over.

But we have balanced our activity in oil with the jobs inside Norway. We have created an industry, just like Canada did, which actually supplies the world market. A lot of Canadian businesses in Alberta are excellent exporters of excellent equipment. Some of it also goes to Norway.

You need to look at the whole aspect of how you link business to the electorate, to the voter. That makes them part of the business. Every Norwegian knows we own part of Statoil, and they own 100% of the state's direct financial interest in a company that now is called Petoro. That makes a whole difference in how we discuss things in Norway and how we actually regulate.

[The Chair, Conservative, Leon Benoit]

Thank you very much.

Thank you, Mr. Garneau.

We go now to the five-minute rounds, starting with Ms. Crockatt, then to Mr. Allen, and Mr. Nicholls.

Go ahead, please, Ms. Crockatt, for up to five minutes.

[Joan Crockatt, Conservative, Calgary Centre, AB]

Thank you very much.

We heard from Chris Smillie from the AFL-CIO just recently that the jobs are on both ends of the pipeline and that the refining end is the very low margin part of it. He's not worried about the jobs being in refining, at all. He's says basically that we should go for the highest margin areas, and that's where the most activity is going to be.

Dr. Mintz, Canadians are starting to understand the potential of our energy industry, and it's in the billions of dollars. It's sometimes hard to get our heads around those numbers.

I'm wondering if they understand that there are risks in our not moving ahead, and could you talk about the risks. Are we losing money right now because of lack of market access?

[Dr. Jack Mintz]

First of all, there are risks.

By the way, I want to comment on something that Mr. McGowan said, which I think is not quite correct. I believe Michael Moore was not at the NEB hearings. In fact, when Michael Moore did his paper, he worked with Stillwater Associates and Los Alamos National Laboratory, which are very distinguished organizations in the United States. We, however, also go through a very rigorous anonymous refereeing process, and the referees thought very highly of the paper.

I won't comment any further, but certainly the quality is there. We can have that kind of debate. As to whether Mr. Mansell got torn apart, all I know is that there was a very bizarre argument made by one expert witness who was trying to tear it apart. I won't go into that in detail, but we'll hear from the NEB what they think of the ultimate arguments.

With respect to the risks, they are there. One of the papers I mentioned was a recent one we put out by Michael Moore showing that Asian coal capacity is expanding. There has been a huge expansion in that capacity and planned capacity, and Mr. Moore's comment, based on work he did with Stillwater Associates, was that if we are slow in developing exports to Asia, we could eventually miss the market. There will be other suppliers that will come in.

With respect to the North American market, we don't export right now to California, which is one of the other advantages of going west. There are somewhat higher prices associated with PADD 5 in California compared with prices on the Gulf Coast. Going down south, we have an opportunity, but there are risks there. Tight oil is expanding tremendously in the United States. This doesn't mean it will displace all imports, but there is a fair amount of oil that could be brought in from offshore. If we have changes in Venezuela, there could be a good supply that will come in from there.

If we take our time in dealing with these issues, we risk missing markets. You can see the squeezing of the differences between the Brent price and the West Texas Intermediate price if you look at the recent numbers. Part of that is because a number of issues have been dealt with, including stoppages in the Enbridge line and the reversal of the Seaway Pipeline in the south. But we're going to have new pipelines going between Cushing and the Gulf Coast, and we're going to see those differences disappear quite a bit. This is why the refineries don't see their future as being very good. You're not going to lay down billions of dollars in new refining capacity when you could end up with quite low margins in the future. That has been one of the main concerns.

[Joan Crockatt, Conservative, Calgary Centre, AB]

I'd like to address the international market benefits to Canada. You talked about the geopolitical context, and I'm wondering what benefits to Canada there might be for those who are interested in environmental benefits. What benefits might there be on the geopolitical side of the international market access?

[Dr. Jack Mintz]

I'm not sure. There are different environmental issues. Some apply much more at a regional or local level, things like SOx and NOx, which affect the population in the area. That is one type of environmental issue that we tend to forget about because of the focus we have had on climate change in the last number of years.

[Joan Crockatt, Conservative, Calgary Centre, AB]

Could we affect world climate change by helping the rest of the world get our resources?

[Dr. Jack Mintz]

No, climate change depends on a lot of things that are being done. Actually, this energy study that recently came out in the United States is fascinating if people look at the numbers. Between 2005 and 2011—these are the U.S. numbers—Canada has actually reduced greenhouse gas emissions proportionately more than the United States or Europe, but not as much as the United Kingdom and Germany. That was actually quite surprising.

One of the interesting things is how much time has gone by during that six-year period, which is significantly related to coal production. It just swamps all the decreases that have been going on in the western world. China has had a huge effect on this trend all by itself, never mind adding in other countries, like India, that have also had large increases in emissions. The climate change issue is very much an international one, and the real action is going to have to take place in emerging countries if we are going to have significant reductions in worldwide emissions.

[The Chair, Conservative, Leon Benoit]

Thank you, Ms. Crockatt.

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