Natural Resources Committee on May 2nd, 2013

[The Chair, Conservative, Leon Benoit]

Good afternoon, everyone.

We're here to continue our study on market diversification in the energy sector. Today we start with our first group of witnesses on product diversification.

First, as an individual, we have Jeff Rubin, economist and author. Welcome.

We have from First Nations Summit, Grand Chief Edward John, political executive member. Welcome to you.

We also have, by video conference from Vancouver, British Columbia, Stephen Brown, president of the Chamber of Shipping of British Columbia. Welcome to you, sir.

We'll have presentations of around seven minutes in the order listed on the agenda.

We'll start with you, Mr. Rubin. Go ahead with your presentation, please.

[Jeff Rubin, Economist, Author, As an Individual]

Thank you.

The problem of market diversification is, in my opinion, a mis-specification of the issue. The issue is not to find new markets. The issue is to get paid for what we're taking out of the ground, and that's something we haven't been able to do.

Western Canadian Select, which is the benchmark export price for Alberta oil to the U.S., has traded at anywhere from a 20% to a 50% discount to world oil prices, which is the Brent crude price. When you consider that we export two million barrels a day, at that kind of discount we're talking anywhere from a $10-billion to $30-billion annual subsidy to our U.S. customers.

Of course, I could add parenthetically that U.S. motorists never see that discount. U.S. motorists pay the same for their gasoline whether the feedstock is West Texas Intermediate, whether the feedstock is coming from Saudi Arabia, or whether the feedstock is coming from Alberta bitumen.

Who captures that margin? The refineries. Crack spreads in the Midwest—by “crack spreads” I mean the petroleum refinery margin, the difference between the input and the output, which typically is gasoline or diesel—can be as much as four to five times as great as it is on the gulf coast, where refineries pay Light Louisiana Sweet, which is a Brent derivative.

The issue, really, is not to get to another country. This issue is the way we supply the U.S. market, because we supply the U.S. market quite differently from how other people supply the U.S. market. We supply the U.S. market through pipelines. Other people export their oil to refineries on the coast.

You don't have to go to China to get Brent. You just have to get to an ocean to get Brent. It doesn't matter if it's the Pacific; it doesn't matter if it's the Atlantic; it doesn't even matter if it's Hudson Bay, because once you get it to an ocean, you can take it to any refinery on the Atlantic coast or the Pacific coast or the Gulf of Mexico and get that Brent equivalent.

When you combine the fact that Canadian producers are being saddled with a 20% to 50% discount to world oil prices and have one of the highest cost structures in the world, it makes the resource kind of problematic. I think we're finding that in the inability of Canadian producers to expand production and to finance expansion. The economics of the tar sands is now challenged by two pinchers: the rising cost curve, and the fact that we're getting a 20% to 50% discount from world oil prices.

How do you get there? You get there by building pipelines. But people don't like pipelines. You might say that Keystone XL is a pretty circuitous way to get to the ocean if you're starting off in Hardisty, Alberta. You might think that a much easier way would be to go over British Columbia, and of course there are proposals to do that: Kinder Morgan's Trans Mountain, and Enbridge's Northern Gateway.

The only problem is that while it's very attractive for Alberta, picking up anywhere from $20 to $30 a barrel, what's in it for B.C. other than the cleanup costs? So it ain't going that way.

I think we're going to learn from the Keystone XL example that it's problematic to go through another country's territory, even a friend and ally, to get to world oil prices. That leaves one other route.

I think there is a cogent argument to take oil east. Eastern Canada imports about 600,000 barrels a day, ironically much of it Venezuelan heavy crude, which isn't that different from the product from our tar sands.

I will just point out—if I haven't exceeded my seven minutes—that yesterday I was speaking at the Williston Basin Petroleum Conference. The Williston Basin, also known as the Bakken, is probably the hottest oil play in North America. North Dakota has gone from nothing to producing 750,000 barrels. Even Saskatchewan, which gets a little tail of the Bakken, is now producing 70,000 barrels of shale oil, or tight oil.

They have exactly the same problem. Without pipelines, they're a stranded asset. Folks in North Dakota are loading it on rail. For $16 a barrel transport cost, you can go from Williston, North Dakota, to a refinery on the east coast or a refinery on the west coast.

That doesn't seem to be on anybody's radar screen as far as the environmental movement is concerned. While there is great opposition to pipelines, there doesn't seem to be any opposition to moving oil by rail. I suspect, however, when three to four million barrels of oil a day start getting railed around North America, the laws of probability suggest we're going to see a spill and we're going to see that get on people's radar screens.

The bottom line here is that without pipeline access—and this is not just true of the tar sands; this is also true of the Bakken, or Eagle Ford in Texas—it's a stranded resource. That means we're not going to see the kind of development production-wise that people like the International Energy Agency or the Energy Information Administration in the U.S. are predicting.

We're not going to see the tar sands go from 1.7 million to four million barrels. We are going to see the tar sands continue to produce. I'd say before worrying about getting three million barrels a day out of the ground, let's get paid for the 1.7 million we're digging out.

Thanks very much.

[The Chair, Conservative, Leon Benoit]

Thank you, Mr. Rubin.

As our second witness today, we have Grand Chief Edward John, political executive member of the First Nations Summit. Go ahead, please, Grand Chief.

[Grand Chief Edward John, Political Executive Member, First Nations Summit]

Honourable members of the committee, ladies and gentlemen, thank you for inviting me to submit a presentation to your committee. Two documents have been submitted to the clerk of the committee and those, I believe, have been circulated. They are the speaking notes I will be referring to, as well as a more detailed 11-page submission.

I want to refer to the comments made by my fellow witness, Mr. Rubin, the economic side of the equation in particular, and the costs relating to extracting the resources and the question of the infrastructure that may be necessary, whether it's going to the east, the south or the west. I want to talk about those particular infrastructure facilities and then the cost of that relative to the cost of aboriginal rights, title, and treaty rights—the economic value of that—and those legal rights which exist and which are recognized in the Constitution of Canada.

The six questions you presented to me, as well as the recommendations that you make, are important to first nations in British Columbia. I know they are also important to the Treaty 6, 7 and 8 chiefs, those particular first nations, in Alberta as well. Developing a just resolution in British Columbia on the land question is essential, but it requires our full and collaborative role and involvement in the resolution of that process, as well as the standards of free, prior, and informed consent for the extraction of those resources that Mr. Rubin was talking about.

These are important to us: the question of energy supply sources, the lands where these resources are being extracted, as well as export market diversification. Again, it's going to mean moving these products by rail or pipeline, and whatever it is, it will have an impact. I think the comment he made is that the feeling generally is that if it's to the west, British Columbia will be left with the cleanup bill. That's an underlying and overriding concern that many first nations communities have.

These are our recommendations on the six issues that you're dealing with. They impact on our communities, our people's social, cultural, and economic well-being and dignity, and the environment, lands, and resources we rely on, and which continue to support our way of life and the traditional ways of our people. They also underline aboriginal and treaty rights, including aboriginal title, which we have inherited from our ancestors and which the Constitution of this country recognizes and affirms.

Our people, communities, and constitutional rights are considered by many, including, I have to say, governments, industries, and people in the public, as risks, barriers and obstacles which create uncertainty for development. To assume or even to suggest that puts our people and our rights in an adversarial position.

We do not see ourselves as risks, obstacles or barriers. We have a right and a responsibility to protect ourselves, our well-being and dignity, as well as our lands, resources, and environment. Because no one else is doing that, we have to do it.

During this past winter, the protection and promotion of these rights and responsibilities were key in ldle No More, the grassroots protest movement among first nations and aboriginal peoples. The steps taken by the federal government in Bill C-38 and Bill C-45 to limit or eliminate environmental standards and safeguards have in no way provided the necessary assurances to first nations who continue to practise their traditional way of life, and who provide for their livelihood by relying on the lands and resources in their respective territories. Because of this, there has been very strong and widespread opposition to the significant risks associated with the proposals, such as those being advanced by Enbridge and Kinder Morgan, and in mining by Taseko and others.

Mechanisms such as political advocacy, action on the ground, and litigation have all been used with varying degrees of effectiveness by first nations in advancing and protecting their rights, supporting their communities and peoples, and defending their lands, territories, and resources.

I believe this committee has an important responsibility to recommend to the government changes to the nature and tone of the negative perceptions and dialogue about first nations peoples. As the saying goes, a tone starts at the top, and I believe that applies here.

The diversity and richness of the cultural and linguistic background of first nations in British Columbia is truly immense, and in my view, absolutely wonderful and worth celebrating. We have some 30 tribal groups with seven linguistic families representing about 5% of the population.

Many different things have had an impact on us, but the 17 or 18 Indian residential schools have had a cumulative intergenerational impact, in fact, on our families and communities and languages as well. In fact, if nothing is done, some languages will become extinct in a generation or two.

What relevance does this have to a discussion about oil and gas and energy resources in this country? I think it's entirely relevant, because we're talking about the people's lands and territories and their well-being. As we see past impacts continuing to build and continuing to mount, first nations have less and less space in their territories, which they rely on to be who they are as indigenous peoples.

We have been developing directions, strategies, and actions. We've taken proactive measures and actions, and we have created community, tribal, and provincial institutions and initiatives to overcome these difficult odds.

We think it is important for you, as members of Parliament, to recognize that the federal government should support these significant steps to improve the quality of life. We are doing that, and we need the support of governments to do it. It is our view that in time the changes we need will happen.

As I said, one of the very significant issues involves the inherent legal and human rights that first nations have to and in their respective lands, territories, and resources. This is the so-called land question. I refer to the economic value of these constitutionally based rights that we have.

The history in British Columbia, I think, is pretty clear. In the mid-1800s colonial authorities, without our peoples' agreement or consent, appropriated these lands and resources to crown sovereignty, ownership, and jurisdiction. At that time, the underlying assumptions about our first nations were that we were not civilized enough to have ownership of or authority over our traditional lands, territories, and resources, and that the civilizations of the new colonies were superior to those of our people.

These underlying assumptions have been categorically condemned internationally, including in the UN's Declaration on the Rights of Indigenous Peoples.

[The Chair, Conservative, Leon Benoit]

Chief John, could you wrap up as quickly as you can, please; you're a little over time.

[Grand Chief Edward John]

Yes.

As we move forward, one of the significant issues that needs to be considered is the development of a framework in this country, at least in the province of British Columbia, that will allow for the proper resolution and reconciliation of the land question as part of the larger framework for the social and economic well-being of Canadians.

I recently had an opportunity to listen to leaders in the European Union and was invited by the International Labour Organization to attend the ninth session of the European regional meeting. Leaders from all of the European states and Central Asia, as well as from labour and industry, talked about these very same issues, in respect of the economic well-being of that region of the world, and precisely the well-being of peoples.

In our case, in British Columbia and in Canada, if you look at any demographic index regarding the well-being of people, first nations peoples are always at the bottom looking up.

Thank you.

[The Chair, Conservative, Leon Benoit]

Thank you, Grand Chief Edward John.

We have now, by video conference, from Vancouver, British Columbia, Mr. Stephen Brown, president of the Chamber of Shipping of British Columbia.

Go ahead, please, Mr. Brown, for about seven minutes.

[Stephen Brown, President, Chamber of Shipping of British Columbia]

Thank you very much, Mr. Chairman.

Obviously, speaking on behalf of the marine industry here in British Columbia, we have a certain perspective on the diversification of Canada's economy and, in particular, the natural resources, and the challenges and opportunities that this presents for our industry.

As the representative of the Chamber of Shipping of British Columbia, I represent more than 180 members right across the marine sector, including many foreign shipping companies and shipping agents, the ports, the pilots, the tug companies, and the supply and service companies right across the marine spectrum. We bring within ourselves different points of view, but the common point that I think we share is this: whatever we do in the marine industry with our colleagues all over the world, if called upon to move Canada's resources, we will do that safely. We have a long record of executing our responsibilities safely, and we will continue to do that.

As a marine industry, we cannot be judgmental about what moves or what does not move. We don't try to be judgmental. However, whatever we are called upon to move, we will do that well. We will do it with the utmost of care, and we will prolong a long tradition here in British Columbia of moving all our commodities off the coast, to wherever they go, to very high standards by any measurement in the world today.

The development costs of Canada's resource diversification are of concern. We're very cognizant of what's happening in other parts of the world today, such as the review that's taking place of projects, for example, LNG projects in Australia, where the high cost of resource diversification and development is causing a lot of strains. Most certainly, as a marine industry, we want to be a part of the solution in overcoming some of those, because the opportunities that Canada has and that will run through British Columbia will probably only come once. If we don't do it well, if we don't align ourselves both federally and provincially and as a marine industry to execute whatever we're called upon to execute, then we will fail.

It's very important that we get this right. It's unfortunate that the marine industry, when it comes to moving Canada's resources, has been called into the discussion in some forms in a negative way. The marine industry, as most people are well aware, moves more than 90% of all world trade today. We do so very, very quietly. We go about our business very, very professionally.

Of course, we don't mind being challenged, but the discussion that we are brought into today with respect to western access is to some extent I think one of trying to blur the argument about whether or not we believe in resource development. If your opinion is that resources should not be developed, then you will of course try to block pipelines, and you will of course try to discredit the marine industry, and we've become quite accustomed to that over a period of time.

I think we have a very strong record that speaks for itself, far stronger than I can speak to you about today, in terms of going about our business professionally and very safely. For that reason, any suggestions that spills of oil are inevitable in the marine environment of British Columbia are, in our view, misplaced.

It's also important to recognize that as we go about our business futuristically here in British Columbia, one of the notions is that we have a crowded waterway, and that is not the case. We have a very low level of traffic here on the west coast of Canada, by any world standard, and we can certainly accommodate an awful lot more traffic, and we can do so very safely.

As a marine industry, we very much look forward to participating in diversification of Canada's energy sector. We are absolutely confident as an industry that we can play a very positive role in achieving that successfully.

Thank you very much.

[The Chair, Conservative, Leon Benoit]

Thank you, Mr. Brown.

We'll go now to questions and comments.

I just want to remind members that our topic for today is diversification in the energy sector, and we're dealing with the product diversification aspect of that now, so I want the questions to be related to that. We don't want to go off on tangents.

We start our seven-minute round with Mr. Trost, followed by Mr. Julian and Mr. Garneau.

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

Thank you, Mr. Chair. I guess I have been warned.

We've had quite a concentration of witnesses who have talked about oil, but oil isn't the only thing we're talking about, so forgive me if I try to broaden the discussion a little.

Mr. Brown did mention LNG, and I'm interested in asking for people's opinions as to whether they have any expertise or comments as far as LNG and the potential for Canadian export is concerned, and how it would affect....

Mr. Rubin, seeing the body language, we'll start with you, from the economic perspective. Grand Chief John, could you speak to how it would impact your community? Then we'll hear from Mr. Brown.

Please try to keep your answers succinct so your fellow witnesses have a minute or two.

Thank you.

[The Chair, Conservative, Leon Benoit]

Go ahead, Mr. Rubin.

[Jeff Rubin]

Let me provide a little historic context on LNG.

In my former life, when I was the chief economist of an investment bank, we were involved in a proposal to finance an LNG terminal in Quebec City that would be supplied by Russian gas. That might have been seven or eight years ago.

But just as water does not flow uphill, natural gas does not go from places where it gets $11 per million cubic feet, to places where it gets $4 per million cubic feet. In other words, the whole gas equation has turned on its head. Seven or eight years ago, North America was thinking about being importers of LNG, and now we are exporters of LNG.

Why are we exporters of LNG? The price differentials that I discussed about oil are absolutely dwarfed by the price differentials in natural gas. The reason is that oil, if you can get to an ocean, is a global market. You can move oil all around the world. Gas is a regional market. LNG is a very small percentage of the gas trade.

What has changed? Well, gas is now $4 per million cubic feet—it used to be $9—because of the shale revolution. I mentioned I was at this Williston conference in North Dakota. Well, North Dakota isn't the only place. There's the Marcellus formation, Eagle Ford—a huge advent of shale. There's a shale play in B.C. as well, in the Horn basin.

The cost of gas has come down to $4. It seems on the face of it that there are enormous export opportunities to arbitrage here. Gas is $13 or $14 in Tokyo. The question is whether gas really costs $4 in North America. That's a very interesting question. If you look at the financial performance of some of the largest shale gas producers, like Chesapeake Energy, which almost went chapter 11 last year, does that suggest that perhaps the cost curve is not there?

The point is, are we going to continue to see those huge price differentials? North America is not the only place that has shale gas. If the shale technology, hydraulic fracking, is used in other places, then presumably the price of gas will decline in those places as dramatically as it has in North America and there won't be these arbitrage opportunities.

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

That's much appreciated.

Grand Chief, do you have any comments on what your community would feel relative to LNG?

[Grand Chief Edward John]

LNG generally is less contentious. It is contentious because of how it's produced and how it's brought to the market, and the comments I raised earlier are true to that.

There are first nations communities that are seriously looking at how to participate in that industry and how to make it work in the areas where it's being produced. Groundwater contamination, the use of the water, the volume of water that is being used, are serious issues for the tribes in northern British Columbia.

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

That's on the production side.

[Grand Chief Edward John]

On the production side, in the territories where the resource is located, it's the method of production that is being used, and the volume of water and the impact on the groundwater which communities rely on.

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

Okay.

Mr. Brown, with your industry, while generalized, you did mention LNG.

From your industry's perspective, would LNG be a positive economically? Of course, shipping is a very international business. Would you be willing to engage, and what would your comments be on issues such as safety involving LNG?

[Stephen Brown]

First of all, yes, of course; as I said earlier, we will move whatever needs to be moved. The world LNG fleet, the fleet of LNG carriers, is rapidly expanding. It's about 300 ships now. By 2015 or 2016, it will be about 400 ships. So the capacity to move western Canadian exports, in the time window 2018 to 2020, which is probably what we're looking at, will definitely be there.

It's very important that we do, however, focus on the point that Mr. Rubin was making, which is that the price of LNG will ultimately determine whether these projects go forward. We currently have seven announced projects in northern British Columbia. We have five in Kitimat and two most certain, and probably two more, in Prince Rupert, which would make nine if they all go forward. It's unlikely they will all go forward, but some will go forward.

The difficulty, as Mr. Rubin was alluding to, is that traditionally the price of LNG has been tied directly to oil, and the consuming countries, led by Japan, are seeking to decouple that link. So the potential of much cheaper LNG from the United States will have a very direct bearing on whether these projects are financially viable going forward.

We certainly can't lose sight of that. We do have a provincial government that is banking on a huge revenue gain from LNG exports going forward. We have to be very cautious about that. When you start talking about heavily taxing LNG exports, that will add to development costs. Also, there are other options of course.

What we are seeing today is that one major project in Australia has already been sidelined, the Browse project of Western Australia. It's a $40-billion development project. They're now looking at a floating liquefaction plant, which is a Shell concept, to replace it. The problem that I see going forward in Kitimat is very similar. The development costs, because Kitimat is relatively remote, in getting goods and people into Kitimat to get these terminals developed and up and running will be a significant logistical challenge.

As far as carrying LNG is concerned, we have no difficulties in that. LNG has been transported by sea for almost 50 years very, very safely, almost without incident. The technology that we're building into those ships.... They're very technologically advanced, sophisticated and expensive ships. They are cutting edge in terms of our industry.

So we have no difficulty...although I think it is worth thinking about the numbers. Last year the demand for LNG around the world was 240 million tonnes. By 2020 it will be 400 million tonnes. There's great opportunity for Canada there.

[The Chair, Conservative, Leon Benoit]

Thank you, Mr. Brown and Mr. Trost.

Mr. Julian, you have about seven minutes.

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

Thank you very much, Mr. Chair.

Thank you Mr. Brown, Mr. Rubin, and Grand Chief John. We appreciate your being here today.

It's good to see you again, Grand Chief John.

I'd like to start with you today, because you mentioned very specifically the obligation of the federal government in terms of first nations for free, prior, and informed consent. This, of course, is linked to the whole issue of market diversification because of the importance of having those discussions with first nations. It is extremely important to get that social license for these proposed projects.

Given the changes that have happened in the last two federal budgets around public consultations and consultations with first nations, could you tell us whether you think the federal government is meeting this obligation in any way, or whether you find that the federal government has actually deteriorated in its approach to first nations?

[Grand Chief Edward John]

Thank you, Mr. Julian.

The perception in our communities is that the standards have been lowered for environmental protection, the safeguards for inland fisheries, and the resources that our peoples continue to rely on. As I said, our peoples—for the most part unemployed, with no jobs, no opportunities—continually rely on the lands and the seas and the waters to feed their families. In a traditional economy, people are out there in the summertime making salmon and other fish ready for storage for the winter to feed their families.

In many cases, the only source of income may be seasonal work, or it may be social assistance. That's not very secure. So when you're undermining those rights and comparing the well-being of fisheries, for example, with the economic well-being associated with pipelines, you're making some trade-offs.

Unfortunately, the consequence is negative for our communities. It has been, and we have seen that. We were promised jobs, business opportunities, and all sorts of things. Yesterday one of the tribes in the territory where I come from announced that they were stepping back from a $450-million mine expansion because all of the promises that were being made simply dissipated.

These projects are being sold as creating opportunities, creating jobs, creating businesses, but they're not forthcoming. Even with the existing projects that are there and past projects with which there have been tremendous difficulties, we live with the consequences of those still.

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

If the federal government has diminished the importance of providing for that obligation for prior and informed consent, does that not mean that by making these changes it is actually jeopardizing the possibility of these projects being approved? First nations do have a number of tools open to them if the federal government is not meeting its obligations.

[Grand Chief Edward John]

That's a reality. First nations are saying, “We have these rights. They're recognized and protected in the Constitution. If no one's protecting them, we will”. As you saw in Idle No More, people are standing up. As you see in court case after court case, the courts largely decide in our favour. The government has legal obligations and responsibilities arising from the legal nature of the rights that are at stake. They do have a constitutional responsibility to consult with our communities in a deep way, in my opinion, for any project. For example, some of the projects in British Columbia are being touted as being in the national interest. Surely to goodness the rights of our people must be in the national interest as well, and the just and fair resolution of those should also be in the national interest.

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

Thank you very much for that.

I'm going to move on now to Mr. Rubin, to a quote from the final paragraph of an op-ed you wrote in January 2013. You were talking about Suncor and its value-added approach on market diversification.

You concluded by saying:

The rest of the oil sands industry may need to take a page from Suncor's playbook. Before rushing ahead to double oil sands production to 3 million barrels a day—and sending billions more in de facto energy subsidies to U.S. refiners—investors and the Canadian economy may be better off if producers figure out how to capture more value from what they’re already digging out of the ground.

I'd like you to comment and expand on that. Perhaps you could give us some very clear indications about how the federal government should be approaching the whole issue of value-added production.

[Jeff Rubin]

That's a very interesting question, because within two weeks of when I wrote that op-ed, Suncor said it was walking away from the Voyageur upgrader project and taking the $130-million writedown.

I used Suncor because Suncor was an example of the most integrated oil company, as opposed to, say, Canadian Natural Resources, which was just shipping the raw bitumen. If you're an integrated company, you can get Western Canadian Select, because you capture the margin in the refinery spread. As it turns out, because of developments in the Bakken and the Williston Basin, that no longer made economic sense for Suncor, and as I said, within two weeks of my writing that op-ed, they walked away from probably the biggest refinery project that was on the books there.

Let me point out that there has been a lot of discussion about building refineries and capturing that huge crack spread in Canada because of the huge discount we get on our raw resource, bitumen. If, in fact, Western Canadian Select got what Mexican Maya, another heavy oil, does, believe me nobody would be talking about building refineries here. Generally speaking, refining is a very thin-margin business with huge capital requirements.

Now, if you can buy your feedstock at a 50% discount to world oil prices, it's very attractive. But outside of the midwestern refineries in the U.S., no one can do that. I think you're going to find that if we could get something close to Brent, this argument about building refinery capacity and capturing those crack spreads would quickly dissipate.