Natural Resources Committee on March 4th, 2014

[Blaine Calkins, Conservative, Wetaskiwin, AB]

Thanks, Chair.

I want to go back to that line of questioning I had and I think I was discussing things with Mr. Burt insofar as the North American energy system is concerned.

I've been on this committee for quite a while now and we've talked about the rationalization of the refining sector in North America because the North American marketplace—the refining sector basically provides for the refined products here in North America. We've gone from I think hundreds of refineries—we have some abandoned refineries in Alberta and I know where they are—and we've rationalized down to a very few that are providing. When we get the refining folks in here they say that even the refineries that they have only need to run at about 85% capacity in order to provide for the North American marketplace.

Can you just talk from an economics perspective, because it's been argued here at the table and while it sounds good at the coffee shop...? Could you discuss some of the economic impacts of regulatory or political policy intervention when they interfere in a marketplace, a market-driven approach to providing energy, and what the impacts or effects might be if that's handled badly? If the governments tried to put or force the refineries to happen and force through policy directives like what's being promoted at the table here today, what would the potential impact be?

Ms. Kenny, can you talk a little bit about, from a pipeline perspective, I'm not sure it matters a whole lot to your companies what goes down the pipeline, but I think you have regulatory approval. Certainly you need to go through a NEB process just to switch the direction of flow in a pipeline, which to me is beyond absurd. Can you just talk a little bit about some of the issues you had faced from a regulatory perspective and just from an overall logistics perspective of shipping a known product consistently, rather than changing it up all the time to ship one refined product followed by another refined product and so on? I think there are some costs associated with that and ultimately who would pay that?

So go ahead first, Mr. Burt.

[Michael Burt]

The refining industry globally is set up so products are refined locally. Crude oil is imported or comes from local sources and it's refined locally. It's just the way the industry is set up. It seems to be the best way to do it. Partly it's because we think of gasoline as a commodity and it's not. There are all kinds of different blends even in Canada in terms of how different regions have different requirements—weather affects it, all kinds of different things. So it's not a commodity product and that's part of the reason why it's refined locally, because it's adapted to local markets. That's part of the problem with the proposal of building lots of refineries to make gasoline or diesel products internationally.

In terms of upgrading, ultimately it's up to the industry to decide whether or not they can make money. Really what matters is the price differential between heavy and light oil. Is it worth investing billions and billions of dollars and upgraders to take advantage of that differential? Right now, they're making the decision that they can't make money doing that. That said, there are lots of technological possibilities around less capital-intensive partial upgrading. These are things that are interesting in the sense that there's a way for companies to potentially move to a medium grade oil or at least move away from bitumen, which requires diluting, to a heavy oil that does not need diluting and get more value that way.

So it's around can the businesses—

[Blaine Calkins, Conservative, Wetaskiwin, AB]

That's upgrading. The first stage of upgrading is you peel the simple stuff off and make it more....

[Michael Burt]

So it's around basically if businesses are able to make money doing that. Right now they say they can't. I'm not an engineer, I can't tell you the ins and outs of the price differential and how much they need to make money at it, but that's why you're not seeing investments in upgraders right now.

[Blaine Calkins, Conservative, Wetaskiwin, AB]

Brenda, did you remember my question insofar as...?

[Dr. Brenda Kenny]

You were interested, I think, in the cost structure in the pipeline industry as well as the regulatory requirements if you were to change what's flowing through the pipeline.

Certainly, costs are a factor. When operations become more complex and switching and batching is involved, they cost more.

Some liquid pipelines are designed to do just that. The Enbridge system is a good example of a system that carries many different products. They have about six parallel pipelines that have been built over time. They are run like dedicated highways, and within each highway there are batches. This does cost more.

Ultimately that cost is borne by the overall value chain, and so by the shippers. Of course, when you impact overall cost structures, ultimately it trickles back through to lower tax revenues, lower royalty revenues, and the like. We all have a vested interest in making things efficient and effective to the maximum effect possible.

On the regulatory side, when you change the type of product, regulatory approval is generally required, and sometimes so is renegotiation of land easements and that sort of thing. It is not trivial. My points were simply that in the measure of public interest, which is ultimately the measure that matters most, a repurposing of assets is entirely plausible. It is something that we do in Canada, and it can be effective.

One final comment—

[The Chair, Conservative, Leon Benoit]

Thank you, Ms. Kenny. I'm going to have to cut you off there.

Thank you, Mr. Calkins.

I'll take the next five-minute round.

In my constituency there would be a lot of empty homes in small towns if it weren't for the oil and gas sector of our economy, particularly the oil sands. A lot of people live in small towns that would otherwise be, in some cases, almost ghost towns. If you're working in the oil sands, and often it's on a two weeks in, two weeks out basis or some kind of arrangement like that, you can live anywhere—and not just in Alberta; you can live anywhere across the country.

Just a couple of weeks ago I had a meeting in the constituency, and a gentleman from Newfoundland said, "You might as well roll up the streets of our town", in his colourful Newfoundland dialect, “if it weren't for the oil sector in Alberta.” It was that clear. The impact goes far beyond Alberta. It clearly goes to Newfoundland and other Atlantic Canadian provinces.

Ms. Mitchell, let me get you to comment on that. Have you seen substantial impact from the oil and gas sector in Canada—enough that it would really affect a small town if the activity weren't there in Alberta, in Saskatchewan, in British Columbia?

I know there's not as much impact in New Brunswick, but I want to get a sense of how much impact there is, beyond the engineering companies that you talked about earlier.

[Colleen Mitchell]

Certainly, the idea is to build up the oil and gas sector in Atlantic Canada so that Atlantic Canadians do not have to go to Alberta to work two weeks on and two weeks off. In Newfoundland and Labrador, the offshore oil industry right now accounts for one third of their GDP, and the idea is to continue to build that up so that people don't have to go back and forth.

The biggest benefactors of the out-migration and interprovincial migration are the airlines. From Pascan Aviation, based in Quebec to Air Canada and other small carriers, the transporting of the employees back and forth is one of the largest beneficiaries here on the Atlantic side, along with the airports and the other infrastructure associated with that function.

The toll it takes on the families is significant. The longer-term initiative would be to develop the oil and gas sector here in Atlantic Canada. As I mentioned earlier, Nova Scotia, with its offshore program on the natural gas side, has created more than 1,000 jobs. In Newfoundland and Labrador there are 6,000 jobs.

We'd like to see New Brunswick share in part of that. The 70 trillion cubic feet of proven and probable resources of natural gas in New Brunswick far outweigh what there is in Nova Scotia. That's why we consider the potential of developing the oil and gas sector here in New Brunswick as transformational.

[The Chair, Conservative, Leon Benoit]

Thank you.

In my constituency I have a lot of what we call the refinery role, but in fact it's value added from the oil and gas sector in the Fort Saskatchewan area. There are tens of billions of dollars of investment, and it continues each year. There are thousands of jobs in that area. Still, they pale in comparison with the jobs in the exploration and production and operations parts of the oil and gas sector, but it clearly is important.

In previous studies, in fact, we've had it pointed out very clearly that.... We'd all love more value added, and that's good: the more we get, the better off we all are. But the highest percentage of jobs in the oil and gas sector will remain in the exploration-production-operations ends of the industry.

Mr. Burt, have you done any studies in the past that have dealt with this or had a look at it, and what have those studies found?

[Michael Burt]

Could you repeat the question?

[The Chair, Conservative, Leon Benoit]

The question was on the relative number of jobs, in the oil and gas industries, of the exploration, production, and operations sides of these industries compared with the value-added side—refining and all the other various types of upgrading. It's for value added, I should say.

[Michael Burt]

Looking just at refineries, that's a fairly small industry. It only directly employs a few thousand people across the country, whereas the oil and gas sector employs closer to 100,000 people. That's one reason why, when I was answering questions earlier, I thought it was very narrow to focus on refining. If we want to maximize the value associated with these natural resources, refining is good, but we want to look at the whole supply chain and get a better understanding of how it can maximize our value in all ways.

My favourite example of this is that Toronto's financial sector is a global leader in mining finance. How can we create other industries in Canada for which we are the go-to place if you want to do that sort of activity?

[The Chair, Conservative, Leon Benoit]

Exactly. Thank you.

My time is up. We'll go now to Ms. Duncan, followed by Mr. Regan, if you have questions, Mr. Regan. Then very quickly we will have to deal with the budget, with about five minutes or so to go, unless the bells ring.

Go ahead, Ms. Duncan.

[Linda Duncan, NDP, Edmonton Strathcona, AB]

Did my time start while you were talking, or is my time now starting?

[The Chair, Conservative, Leon Benoit]

Your time is starting now, Ms. Duncan.

[Linda Duncan, NDP, Edmonton Strathcona, AB]

Thank you very much. The time is always so short, and we have great witnesses.

My questions relate to the alleged manufacturing benefits of the sector. Of course, there is no doubt that there are benefits, but the question is who is benefiting. In the Conference Board report, you give us useful information on regional impacts outside of Alberta, but you also talk about the apparent 192,000 person-years of manufacturing employment provided in the United States. We've noticed that there is great consternation in the United States about allowing the massive equipment manufactured in Korea to come across their roadways; then it will go across Alberta roadways.

I'm wondering whether the Conference Board has done any analysis of whether the number of manufacturing jobs for the oil sands sector is increasing or decreasing for Canada, vis-à-vis those offshore.

[Michael Burt]

Vis-à-vis offshore...?

[Linda Duncan, NDP, Edmonton Strathcona, AB]

I mean outside Canada, which would be in the United States.

[Michael Burt]

I understand what you're saying.

I can definitely tell you that the dollar value of what we import from other countries is larger than the interprovincial imports. If you add in what's occurring inside Alberta, it's probably bigger domestically than the—

[Linda Duncan, NDP, Edmonton Strathcona, AB]

Do you know the job breakdown?

[Michael Burt]

Even the U.S. number that you quote is based on some assumptions, because the way the model works is based on dollar flows rather than employment. It makes assumptions around how that translates into jobs in the U.S.

So it is very hard to say.

[Linda Duncan, NDP, Edmonton Strathcona, AB]

So you don't have the figures on it.

[Michael Burt]

No, unfortunately.

[Linda Duncan, NDP, Edmonton Strathcona, AB]

But definitely, part of the economic benefits would be an analysis of what the trends are, what direction we are going in to create these manufacturing jobs.

[Michael Burt]

Yes, there's no doubt that we could expand domestic supply chains. We've done work with the companies in Alberta. Quite often they look overseas before they look to Ontario or Quebec or wherever for their inputs.