Natural Resources Committee on March 4th, 2014

[The Chair, Conservative, Leon Benoit]

Thank you, Mr. Calkins. Your time is up.

We go now to Ms. Moore, followed by Mr. Leef.

Go ahead, Ms. Moore. You have up to five minutes.

[Christine Moore, NDP, Abitibi—Témiscamingue, QC]

Thank you. Mr. Chair.

My questions are mainly for Mr. McGowan.

I would like to know if there are economic diversification plans for places where the oil sands and natural gas are the main economic drivers. Are there strategies to relocate workers once we have fewer resources and the number of jobs drops dramatically? If not, are companies just extracting oil and gas without any kind of plan for that?

In places where the economy relies heavily on extracting oil from oil sands, do young workers have access to financial advice and enough help in that area? For example, do many young workers spend most of their income on cars or big trucks without bothering to save a little money? If they have a workplace accident or go through a difficult situation, those young people could end up broke. Are those two elements in place in regions that are reaping the benefits of oil from the oil sands?

[Gil McGowan]

Let me begin by addressing some of the points that have been raised, which will relate to some of your questions.

We've heard from several of the witnesses today who've repeated this figure of $50 million lost per day. This is based on the assumption that if we were to get better access to markets, such as the American market or the international market, we could get parity for our prices for bitumen.

I just want to make it really clear that this is kind of a fantasy. This $50-million-a-day number is based on a fantasy that we could get for bitumen the same price that lighter oil, under WTI, gets. The bottom line is that our bitumen that comes out of the ground is not really oil. It needs to be upgraded at heavy cost.

In some ways, we should look at the low price we get for bitumen as opportunity, because if we're upgrading, that means the input costs might be a little bit lower. We see this with companies that are what we describe as “integrated” companies. They have upgrading sides and they have export sides. These are companies like Cenovus and Suncor. Oil prices go up and down; that's inevitable. But if you're an integrated company that has an upgrading side, you actually benefit on both sides. When the price for bitumen is high, you can make money on your export side, but when it's low, you get a low-cost input that allows you to produce a higher-cost product like synthetic crude—which, by the way, trades at pretty much parity with WTI.

It's in the interest of Alberta and the Canadian community to have a more integrated approach to developing the resource rather than simply ripping it and shipping it. Otherwise, someone else will benefit on the upside when the price is low, and that will be foreign countries with refining capacity.

Our question is this: we own the resource, so why shouldn't we benefit on both sides of the price spectrum in terms of upgrading or refining when the price for bitumen is low, and then benefiting on the export side for raw bitumen when the price for that product is high?

I'm sorry if I didn't answer your questions directly, but honestly, I'm running out of time and I wanted to get some of that on the record.

[Christine Moore, NDP, Abitibi—Témiscamingue, QC]

Okay.

Do you think we are ready to deal with a drop in prices? That could have a significant impact on a region or certain kinds of development. Are we ready to deal with that kind of situation? If not, will people pay the price because we have no action plan and because the economies of some regions are almost exclusively or uniquely based on oil and gas? We would not be able to take action and avoid a crisis if there were market instabilities.

[The Chair, Conservative, Leon Benoit]

You have 15 seconds for an answer, please, Mr. McGowan.

[Gil McGowan]

This is yet another reason why we prefer value-added production over what I described as rip-and-ship production. If you build an upgrader or a refinery, it's an existing piece of industrial infrastructure. The jobs that are created in those kinds of plants are much more stable through the economic cycle. Whether it's a boom time or a bust time, the jobs remain. That's been our experience with our upgraders in Fort McMurray and our refineries in Edmonton. They ride out recessions, whereas on the extraction-only side, when there's a bust everyone loses their job.

That's why we're looking over the long term. If we want to maintain stable employment, if we want to keep those economic spinoffs running, it's in our best interest to move up the value chain rather than...and then go down.

[The Chair, Conservative, Leon Benoit]

Thank you, Mr. McGowan.

Thank you, Ms. Moore.

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

[Ryan Leef, Conservative, Yukon, YT]

Thank you, Mr. Chair.

To Mr. Burt, we've heard some hypothetical questions being asked, but is there any indication that we need to be addressing the hypothetical situation that there will be an absolute crash in the oil and gas sector that would leave hundreds of thousands of Canadians unemployed?

[Michael Burt]

Are you asking what the probability of that happening is?

[Ryan Leef, Conservative, Yukon, YT]

Yes. We've been hearing hypothetical questions around that, but where's the reality of that?

[Michael Burt]

Well, to a certain extent the gas industry has already experienced that. Natural gas prices in North America are actually reasonably good right now just because we've had a very cold winter. For years they've been very low, and investment activity in natural gas has been quite weak in Canada as a result. The oil side is a little different story. Ultimately it is a commodity. It's subject to risk. We did see prices collapse during the financial crisis in 2008. It did come back up. We do think that $80, $100 oil is the normal now, as opposed to $20, $30 oil, but it doesn't mean that it couldn't go back to that level.

To address some of the comments of—sorry, I don't remember your name, in Alberta. But when there is a crisis or when there is a collapse in prices, what you do see is a drop-off in investment. Basically the businesses pull back on the investments they're undertaking, but you don't necessarily see a drop-off in production because the investment has already been made. You do see job impacts on the investment side in terms of the development, the drilling, and all that sort of stuff, but you don't necessarily see production impacts during weak economic periods.

[Ryan Leef, Conservative, Yukon, YT]

I'm from the Yukon. I certainly see a number of my constituents who enjoy economic opportunities in Fort McMurray, Fort Nelson, and areas in northern British Columbia. Obviously as we're exploring opportunities in the territory, one of the things that we're doing is heavily investing in trades training. The Centre for Northern Innovation in Mining is a good example of that.

What we're seeing is that those skills and investments by the federal government are highly transferable. So an investment in the education is great for the economy, great for development, and it's highly transferable. In my mind, that is preparatory work so people can work in the oil and gas sector but then take their trades and skills that they're learning through federal government investment into other sectors of the workforce should there be downturns in a particular economy.

Ms. Kenny, are you seeing that with people employed in the pipeline sector who are coming and going, ebbing and flowing? As there are opportunities, they move into it; as there are not, they're able to find secure, gainful employment in other sectors.

[Dr. Brenda Kenny]

Certainly pipeline construction has a lot of transferable trades, as you're describing, and also a lot of sustained employment because, in addition to new construction, there's ongoing maintenance and that also involves many of the same trades. These big operating systems are maintained regardless of the current economics. So the numbers that are provided in the report I submitted to the committee are absolutely steady and a part of the backbone of the Canadian economy on an ongoing level as well.

[Ryan Leef, Conservative, Yukon, YT]

Mr. Burt, we're trying to study the cross-country benefits and we've talked about the current benefits today. Do we ever conceptualize or comprehend, just for the sake of perspective, where Canada would be today without the current situation in the oil and gas sector? Do we have indication of what that picture would look like?

[Michael Burt]

I can't say we've done that exercise. I mean, it would be a difficult thing to do because it would have profound implications across the economy in terms of what we're doing, where, and how we're doing it. As I said in my opening remarks, for Canada-wide it's more than 5% of our economy directly, without even including all the secondary impacts that we've been talking about today. It's a huge impact in terms of jobs, a very large impact in terms of GDP, and a big impact in terms of fiscal. So it's very hard to disentangle what it would be without that industry being there.

[Ryan Leef, Conservative, Yukon, YT]

How significant is that compared to potential in other sectors? We've heard suggestions that we could replace that entirely with tourism. Now, I'm a big proponent of not putting all your eggs in one economic basket, having a really nice cross-section of investment. How does that compare to the other opportunities that we have in the absence of oil and gas?

[Michael Burt]

Jobs-wise, as I said, directly it's about 100,00 jobs, so it's not that big. You compare that to, for example, manufacturing: directly it's about 1.7 million jobs. For construction, I forget the number off the top of my head, I think it's about 2 million jobs. Jobs-wise there are other industries that are bigger. But its impact is more on the GDP side and fiscal side. That's where it would be more difficult to replace just because it's....

[Ryan Leef, Conservative, Yukon, YT]

Because of the bouncing buck....

[Michael Burt]

Yes.

[The Chair, Conservative, Leon Benoit]

Thank you, Mr. Burt.

Thanks, Mr. Leef.

We go now to Mr. Julian, followed by Mr. Calkins.

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

Thanks very much, Mr. Chair. It's a very interesting discussion.

I'd like to come back to you, Mr. McGowan. You mentioned in your introduction the disturbing royalty gap in Canada, in Alberta. It's obviously a provincial jurisdiction. The royalties that Albertans receive for the resource are much less than countries like Norway and Russia. And you mentioned Angola, even third world countries, where what they've done is actually put into place a royalty regime that makes a lot of sense. I'm acutely aware as well of the gap in sovereign wealth funds, and Norway is often given as a great example: the same level of production as Alberta over the same number of years, and the social democratic government in Norway has now put away, I believe, $683 billion. Those are resources that will go into the long term, transitioning to clean energy, of course, but also to provide for a wide array of social programs and environmental programs. In Alberta, I believe it's considerably less than that.

Can you comment on the royalty gap, on why in Alberta and Canada we're simply not getting the benefits of royalties, and what that gap may be, and also, on the gap in best practices around sovereign wealth funds?

[Gil McGowan]

Well, the Alberta government made a political decision in the mid-nineties that we're still paying for. At the time, Premier Ralph Klein and his cabinet decided that in order to develop the oil sands, which at that time was considered somewhat of a marginal resource, we had to sweeten the pot, and so he introduced the famous penny-on-the-dollar royalty, called the generic royalty at the time. It was designed to basically have the public pay for the construction of oil sands projects in the form of forgone royalty until all the capital costs had been paid off.

As I said in my remarks, there's no other industry in Canada that's been given a sweetheart deal like that. But at the time, oil was trading at about $15 a barrel and we were coming out of a recession, so it may have made some sense at that time. But the general outlines of that royalty regime have not been changed even through periods of dramatically increased oil prices. The Parkland Institute, which is affiliated with the University of Alberta, did a study and said that even if the Government of Alberta had hit its own very low targets in terms of royalty collection over the last 10 years, they would have generated $65 billion in extra royalty revenue for the Alberta government.

Contrast that to the situation we've had with the province. We have six years now of deficits which are being used to justify cuts to education, health care, universities, and colleges. By any measure, we're the richest province in the country, but you wouldn't know it by our services. Our politicians say the cupboard is bare, but the reason it's bare is that they made a decision not to collect revenue from the sale of our resources. So the gap is huge, and for some reason, it's taboo in our province for politicians to talk about increasing the royalty, even though it's clear that it's having huge impacts.

Sorry, that was the royalty question. What was the second part of the question?

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

Well, it's around the sovereign wealth fund. In Norway and Alberta, we've seen two varying degrees of approaches and how Norway has managed to benefit from the same level of production over the same number of years as Alberta.

[Gil McGowan]

Yes, for those who don't know, the numbers in Alberta are shocking. Peter Lougheed introduced what we call the heritage savings trust fund back in the seventies and he put in an initial influx of money, and it's shocking to imagine that despite all the vast increases in production of oil from the oil sands and from other energy resources, our sovereign wealth fund, the heritage fund, is actually worth less now when you adjust for inflation than it was when Lougheed established it back in the seventies. So we haven't saved a cent—not a cent. The people of Alberta should be shocked and angry, and the people of Canada.... I think the rest of the world would probably laugh at us if they realized how poorly we'd handled our wealth fund.

[The Chair, Conservative, Leon Benoit]

Thank you, Mr. Julian. Your time is up.

We go next to Mr. Calkins.