Natural Resources Committee on April 10th, 2014

[The Chair, Conservative, Leon Benoit]

Good morning, everyone.

We're here to continue our study on the cross-Canada benefits of the oil and gas sectors of the Canadian economy.

Today, we have three witnesses with us. Before I introduce the them, I want to remind the committee that probably after about an hour and ten minutes, we will suspend the meeting and go in camera for a future business meeting. Until then, we will hear from our witnesses and open up to questions and comments from members.

Today we have with us from TransCanada PipeLines Limited, John Van der Put, vice-president, energy east pipeline. Welcome to you and thank you very much for being here today, sir.

We have by video conference from Calgary, Alberta, from the Canadian Energy Research Institute, Peter Howard, president and chief executive officer. Welcome to you, sir, and thank you for being with us today.

We have by video conference from Saskatoon, Saskatchewan, from 3twenty Modular, Bryan McCrea, chief executive officer. Welcome to you, sir. Thank you for being with us by video conference as well.

We'll get into the presentations. I'd ask all the presenters to keep their presentations to seven minutes.

We'll start with Mr. Van der Put. Go ahead, please, with your presentation, sir. You have up to seven minutes.

[John Van der Put, Vice-President, Energy East Pipeline, TransCanada PipeLines Limited]

Good morning. My name is John Van der Put, TransCanada's vice-president, energy east pipeline. I am responsible for developing and implementing the stakeholder engagement strategy for TransCanada’s energy east pipeline project.

I would like to take this opportunity to thank the Standing Committee on Natural Resources for the invitation to represent TransCanada’s energy east pipeline and to participate in today’s panel for the committee’s study on the cross-Canada benefits of developing the oil and gas industry of the energy sector.

I would like to thank the Standing Committee on Natural Resources for the opportunity to discuss the East Energy pipeline project and its economic spinoff.

With more than 60 years of experience, TransCanada is a leader in the responsible development and reliable operation of North American energy infrastructure, including natural gas and oil pipelines, power generation, and gas storage facilities. We're developing one of North America’s largest oil delivery systems. That includes the Keystone pipeline, which moves crude oil from western Canada to refineries in the U.S. Midwest and gulf coast, and several projects under development, including the energy east pipeline.

In August 2013, TransCanada announced the energy east pipeline project, a $12-billion project that will carry approximately 1.1 million barrels of crude oil per day from receipt points in Alberta and Saskatchewan to existing refineries in Montreal and Lévis, Quebec, and in Saint John, New Brunswick. The project will also include deliveries to two export marine terminals, in Cacouna, Quebec, and Saint John, New Brunswick.

By connecting western production to eastern markets, energy east will help eliminate Canada’s reliance on crude oil imported from overseas, as eastern Canadian refineries currently rely on foreign imports for 86%, or 700,000 barrels per day, of their feedstock. In addition to laying the foundation for energy independence, this cross-Canada connection also allows Canadian producers and refineries to realize greater value for their products as producers gain access to new markets and refineries displace higher cost imports.

Another innovative feature of energy east is in repurposing a section of TransCanada's existing natural gas mainline pipeline to crude oil transportation. This converted section makes up approximately 70% of the total length of the project and minimizes the project’s environmental impact. TransCanada has successfully repurposed natural gas pipelines for oil service before, as part of the existing Keystone pipeline, which has safely transported about 600 million barrels of crude to the U.S. since 2010.

While the benefits presented so far are significant in themselves, I would like to spend some time discussing another important aspect of the project, the jobs and economic benefits that energy east will bring to communities across Canada.

In September 2013, TransCanada released the results of a study by Deloitte Touche LLP, and I have provided a copy of the report to each of you. That report highlighted the significant economic benefits that energy east will generate across Canada in terms of job creation, economic growth, and increased tax revenues. The economic impacts presented in the Deloitte study were independently generated using Statistics Canada’s input-output model, and measure the direct, indirect, and induced economic effects of the project.

The analysis conducted by Deloitte examined the impacts of the energy east project on gross domestic product, jobs, and taxes during the six-year development and construction phase, and over the first 40 years of the pipeline’s operational life. It should be made clear that given the expected market need for the transported crude oil, the actual physical life of the pipeline would likely be in excess of 40 years with regular maintenance.

In terms of gross domestic product, the Deloitte study estimates that energy east will generate a total of $35 billion, with approximately $10 billion during development and construction, and approximately $25 billion during the first 40 years of operations.

In terms of direct job creation per year, the Deloitte study estimates that energy east will generate a total of 2,300 direct jobs during development, 7,700 direct jobs during construction, and 1,000 direct jobs during operations. Examples of direct jobs include construction workers, employees at pump stations and terminals, and other jobs typically associated with pipeline projects.

Including the indirect and induced job impacts, the Deloitte study estimates a total of 7,000 jobs during development, 23,000 jobs during construction, and 4,000 jobs during operations.

In terms of tax revenues, the Deloitte study estimates that energy east will generate additional tax revenues for all levels of government of around $3 billion during development and construction and another $7 billion during the first 40 years of operations.

In addition to GDP, jobs, and tax impacts, the Deloitte study estimates a range of cost reduction in crude oil feedstock that eastern refineries can realize as a result of energy east being built. On a basis of 100,000 barrels per day of feedstock, these cost reductions would lead to annual savings of between $92 million and $336 million for a refinery in Quebec, and between $51 million and $377 million for a refinery in New Brunswick.

A recent article from Business News Network reported comparable cost savings to eastern refineries, further supporting the case for energy east as a positive contributor to other sectors of the Canadian economy.

To conclude, TransCanada’s energy east project will create thousands of jobs and billions of dollars in economic benefits across the country, helping to strengthen Canada’s economic stability and energy independence.

Continued development of Canada’s energy resources is an important driver of the economic prosperity of our nation, as studies by CERI and KPMG have shown.

By the way, I've shared a study from KPMG with you.

We need to ensure that our resources gain safe and reliable access to both domestic and international markets.

Since the beginning of this project, TransCanada has been engaging with various stakeholders across Canada to ensure energy east will be the safest and most environmentally responsible pipeline possible. We have, through our engagement, received enormous support and interest in energy east because this project makes sense for Canadians.

Thanks for your interest in our project.

[The Chair, Conservative, Leon Benoit]

Thank you very much, Mr. Van der Put, vice-president of the energy east pipeline project from TransCanada PipeLines Limited. Thanks again for being here.

We go now by video conference to Calgary, Alberta, to Peter Howard, president and chief executive officer of the Canadian Energy Research Institute.

Welcome again to you, sir. Go ahead with your presentation, for up to seven minutes.

[Peter Howard, President and Chief Executive Officer, Canadian Energy Research Institute]

Thank you.

Good morning. My name is Peter Howard. I am president and CEO of the Canadian Energy Research Institute, CERI.

Founded in 1975, CERI is an independent, not-for-profit research institute specializing in the analysis of energy economics related to environmental issues in the energy production, transportation, and consumption sectors. Our mission is to provide relevant, independent, and objective economic research.

CERI is a fully funded institute, with funding coming from the Government of Canada, the Government of the Province of Alberta, the Canadian Association of Petroleum Producers, and in-kind funding from the Alberta Energy Regulator and the University of Calgary.

My comments today will focus separately on the Canadian oil industry and the Canadian gas industry, starting from their current production levels and examining CERI's forecast for the future, while exposing some of the future challenges.

Facts about the Canadian oil industry for 2013 include: conventional light crude and condensate production averaged 842,545 barrels per day; conventional heavy crude averaged 451,618 barrels per day; upgraded bitumen averaged 961,000 barrels per day; and non-upgraded bitumen averaged 1,019,810 barrels per day, with eastern Canada production averaging 235,566 barrels per day, for a total production of 3,510,643 barrels per day. In addition, Canada imported on average a little over 656,000 barrels per day. We exported 97% of that to the United States at 2,571,000 barrels per day.

From a western Canada perspective, since the future production forecasts are higher than domestic demand, the single biggest challenge for the industry is characterized by the term “market access”. In its simplest form, market access relates to infrastructure, either pipeline or rail, that would allow conventional crude, crude/bitumen, or refined products to achieve unhindered access to refineries and markets either in North America or globally.

Achieving market access refers to the timely development of these infrastructures, such that the flow of fluids does not become capacity limited. Lack of market access refers to the opposite situation, where flows on pipelines or rails are apportioned or curtailed, leading to a decline in the local market price or, to express it another way, an increase in the differential dollars per barrel between the Canadian benchmark crude of Western Canadian Select and the U.S. benchmark of West Texas Intermediate, or WTI.

As pipelines and rails are added to the transportation infrastructure, the narrower the differential becomes. As pipelines and rail are not added, the wider the differential becomes. Both of these situations have played out over the past two years, with the historical average range being from about minus $15 to a high of minus $37, reached in December 2013.

Pipeline differentials have affected the relationship between WTI at Cushing, Oklahoma, and the global benchmark of Brent crude. Taking both into account, the WCS/WTI differential and the WTI/Brent differential, the deepest discount for Western Canada heavy crude and the global market was reached in December 2013 at $50.70. That's minus $50.70. Effectively, Western Canada heavy barrels are being discounted at 54% to world markets.

Over the next four years, with no new pipelines under construction with the exception of the enhancements to the Enbridge Alberta Clipper pipeline, rail is the only method of transporting incremental volumes of crude and bitumen to North American markets. The Canadian rail systems linking Alberta and Saskatchewan to U.S. markets are currently capable of loading around 150,000 barrels per day. An additional 750,000 barrels per day will be under construction and coming on stream in the 2015 to 2017 timeframe.

CERI is forecasting that production of conventional light and heavy crudes will grow to 1.4 million barrels per day by 2018, and oil sands, both upgraded and non-upgraded, will grow to three million barrels per day by 2018. Between today and 2018, the export volume levels and the transport capacity will be one and the same, leading to the suggestion that the WCS/WTI differential will continue to show its seasonal volatility. The WTI-to-Brent differential will see some easing as new pipelines come on stream to handle the constriction between Cushing, Oklahoma, and the gulf coast refineries.

After accounting for the diluent required to transport the heavy crude by pipe and the addition of some Bakken U.S. crude to that pipeline system, the projection for crude and bitumen exports out of western Canada in 2018 will reach 4.5 million barrels per day.

The export projection post-2018 will totally depend on the level of pipeline development or rail development, with a maximum potential of five million barrels per day by 2020 and 7.5 million barrels by 2030. Keystone XL, Trans Mountain expansion, energy east, and northern gateway are required to reach these levels.

On facts about the gas industry in 2013, on a marketable gas basis, Alberta averaged 9,537 million cubic feet per day, British Columbia 3,647 million cubic feet per day—

[The Chair, Conservative, Leon Benoit]

Excuse me, Mr. Howard, you have about a minute left. I have a copy of your presentation and you have a long way to go. Could you make a quick summary, please.

The committee members at some point will get these presentations. They can't now because they're in English only and we have to get them translated.

Could you wrap it up in about a minute, please. Thank you very much.

[Peter Howard]

That would be fine. Thank you.

I will skip forward and go right to the end on the gas system.

The health of the gas transmission system in Alberta will also have implications on the petrochemical business, especially as it relates to ethane.

On facts about the Canadian petrochemical business, in 2012, ethane recovered 214,000 barrels per day. CERI is forecasting that, based on the decline in the export volumes of gas, the supply of ethane will decline to 144,000 barrels per day with only slight recovery by the 2030 timeframe. This will be augmented by the Vantage pipeline bringing ethane in from North Dakota. However, the volumes will still fall short of the ethane capacity.

On the Canadian oil and gas industry as far as capital investments is concerned, in 2012, exploration and development accounted for $39.7 billion, operation expenditures were $18 billion, royalties were $8.5 billion. On the oil sands side, capital investments were $27.2 billion, operating costs were $20.1 billion, and oil sands royalties were at $3.7 billion.

The oil and gas industry faces stiff challenges relating to market access, with the biggest risk being the lack of pipeline access to North American and global markets. The fallout from not solving this issue is a continuing of the WCS/WTI differential volatility, leading to the dampening of growth of the oil sands developments post-2019.

Thank you very much.

[The Chair, Conservative, Leon Benoit]

Thank you, Mr. Howard, for your presentation.

We go now to Bryan McCrea, the chief executive officer for 3twenty Modular, from Saskatoon, Saskatchewan.

Go ahead please, Mr. McCrea, for up to seven minutes. Thanks again for being with us today.

[Bryan McCrea, Chief Executive Officer, 3twenty Modular]

Thank you for having me, and good morning, committee members, fellow witnesses, and guests.

My name is Bryan McCrea. I'm the co-founder and CEO of 3twenty Modular. I'm pleased to have the opportunity to share my insights and experiences as they relate to the cross-Canada benefits of developing the oil and gas industry of the energy sector.

For some background, 3twenty Modular is a designer and manufacturer of modular structures. We build workforce housing, offices, complexes, lavatories, and custom enclosures for the mining, oil and gas, and construction industries. We are headquartered in Saskatoon, Saskatchewan.

The perspective I am sharing is that of a young entrepreneur who has had the opportunity to start a business, grow a business, create jobs, and support tens of millions of dollars of economic development largely because of the opportunities provided by the oil and gas industry.

I have summarized my insights of the benefits of developing the oil and gas industry in three key points.

Number one is enabling entrepreneurship. Oil and gas companies do not develop their projects and resources alone. They rely on thousands of vendors in their supply chain who have developed specialized expertise, products, and services to support a project's life cycle. As such, the oil and gas industry provides vast opportunities for enterprising individuals to be a part of the supply chain. It is undeniable that the oil and gas industry has enabled thousands of entrepreneurs to take an idea or an opportunity and turn it into a business—much like our story.

As the world's population continues to grow, so do the pressures on the oil and gas industry to provide. As such, the industry seeks innovation that helps improve productivity, reduce cost, and minimize the environmental impact of the activities. Entrepreneurs tend to be a major source of this innovation. Entrepreneurs are usually the ones developing a better widget, improving reclamation technology and processes, and improving safer methods of transporting oil to export markets.

My second point is growth and reduced risk. Initially 3twenty Modular's close proximity to uranium, gold, and potash developments in Saskatchewan made Saskatoon an attractive location to build our business. However, with unfavourable commodity prices resulting in changing economics for many of our customers, we have been forced to expand, diversify, and ultimately focus on the oil and gas industry. Calgary, Edmonton, and Fort McMurray and area are now considered our primary markets for growth. In fact, in a year when major capital expansions were concluding in Saskatchewan's mining industry, we were incredibly fortunate to be able to refocus our business quickly to supply the Alberta market. As a result, in 2013, 75% of our revenue came from the Alberta market. Oil sands production is expected to double by 2025, and as such, we do not see this market focus changing. The Alberta oil sands market has become a primary growth target for our organization.

The oil and gas industry's continued growth has provided us with certainty to plan our business's growth and invest capital into additional infrastructure, human resources, and R and D. Without the oil and gas industry, expansion and investment would seem risky and unattractive. Financial institutions and private equity capital have been more willing to fund start-ups in Saskatchewan given our proximity and accessibility to Alberta's oil and gas industry.

Additionally, Canadian manufacturers are constantly competing against the economics of offshore procurement strategies. In the oil and gas industry, proximity to projects, customer service, and timelines are as important as, if not more important than, price. As such, offshore manufacturers may be able to provide a more cost-effective nut, bolt, or small widget, but when it comes to large material, buildings and equipment, local manufacturers like ours have an obvious advantage. The oil and gas industry helps sustain and grow a healthy Canadian manufacturing industry.

That brings me to the third and perhaps most obvious benefit: economic development. The oil and gas industry without doubt has a profound impact on the economy. We see this through business start-ups, employment creation, training and development, supply chain spinoff, and community investment. An industry that represents 25% of the value of the Toronto Stock Exchange, employs well over half a million Canadians directly and indirectly, and has attracted $55 billion in investment in 2012 is undeniably one of Canada's major economic engines.

The oil and gas industry is particularly important to the economic development of rural and semi-urban areas. In Saskatchewan, for example, oil and gas development has had significant impact on towns and cities, including but not limited to Kerrobert, Kindersley, Swift Current, Estevan, and Weyburn, and could eventually extend further north into such communities as Île-à-la-Crosse should the Saskatchewan oil sands be developed.

This industry has helped keep many of Saskatchewan's rural areas healthy and vibrant. No longer do young families need to move to the city to prosper. Now, thanks to the oil and gas industry, they can be employed, start a business, and raise a family in a town where they were born and raised.

To conclude, it is imperative that Canada continue to support the development of its oil and gas resources in a responsible and aggressive way. Continued growth will stimulate training and development, employment, entrepreneurship, and economic development for decades to come.

Thank you for the opportunity to share my insights as an entrepreneur building a business in the oil and gas industry.

[The Chair, Conservative, Leon Benoit]

Thank you very much, Mr. McCrea from 3twenty Modular.

Those are the presentations. Thank you, all. They were very helpful indeed.

We'll go now to questions and comments. In the seven-minute round, we have Ms. Block, followed by Ms. Leslie and then Mr. Regan.

Go ahead please, Ms. Block, for up to seven minutes.

[Kelly Block, Conservative, Saskatoon—Rosetown—Biggar, SK]

I want to thank all our witnesses for joining us today. I know those of you in Alberta and Saskatchewan had to wake up very early to join us for 9:00, and I really do appreciate the testimony we've heard from all of you.

Mr. McCrea, I'm hoping to get to you in the seven minutes I have, but I truly do appreciate what you've shared about Saskatchewan. I am a member from Saskatchewan, and I represent the riding of Saskatoon—Rosetown—Biggar, just a little short of Kindersley, but I have seen some of the growth in my riding as a result of the exploration in the oil and gas industry taking root there.

Mr. Van der Put, I have a few questions for you. We understand that TransCanada submitted its project description in March and that this is the first step in the NEB process.

I took some time to look at the NEB website last night, specifically on project descriptions and their process. We know that a project description describes a project on which a company expects to file an application later. It is written by the company, TransCanada in this case, and submitted to the NEB, which is an independent arm's-length organization. It provides preliminary information, which allows the NEB to prepare for the application and begin outreach activities. It is my understanding that all project descriptions are publicly available on the NEB website.

Can you describe TransCanada's project description process? Was it a thorough process? What does one do after a project description? Can you walk us through the NEB process?

[John Van der Put]

Yes, thank you.

Project description is a summary of what the company intends to propose to build. As you mentioned, it provides the National Energy Board the opportunity to prepare itself for its regulatory review of the project. The actual filing of the application to the National Energy Board is expected to come this summer, so TransCanada at the moment is working on completing its environmental impact statement that will accompany its application for authorization for a certificate of public convenience and necessity, to ultimately build the energy east project.

What will happen after that is that the National Energy Board will begin its actual review process. It is a legislated 15-month process that includes a process of public hearings and thorough examination of that environmental impact statement.

Following that 15-month period, the National Energy Board will make a determination of whether it is or is not in the public interest, at which point my understanding of the process is that the cabinet has three months to make a final decision with regard to the project.

[Kelly Block, Conservative, Saskatoon—Rosetown—Biggar, SK]

Thank you.

Could you tell me a bit more about the process surrounding the environmental impact statement? What goes into that process?

[John Van der Put]

The environmental impact statement is a rigorous assessment of all of the potential impacts of the project, but also the benefits of the project from a socio-economic standpoint. It looks at all of the aspects of the environment, biological, physical, the human environment, and, as I mentioned, the socio-economic impacts, and also the safety and security aspects of the project. All of those are dealt with in the environmental impact statement.

The various components of an environmental impact statement are prepared by independent consultants, independent firms that specialize in those kinds of assessments. They will assess the valued environmental components, for example, and will make a determination of significance of impact, with the consideration of anything that TransCanada in this case would be proposing to do to mitigate any of those impacts.

Ultimately, the National Energy Board, through its staff and members, will review that environmental impact statement. It will be made available publicly, and will certainly be the subject of review as well during the public hearing process.

[Kelly Block, Conservative, Saskatoon—Rosetown—Biggar, SK]

Thank you.

[The Chair, Conservative, Leon Benoit]

You have about a minute and a half.

Ms. Block, I'd like to remind you that the study is about the cross-Canada benefits of the oil and gas sector, so could you make sure that you tie that in to your questioning?

[Kelly Block, Conservative, Saskatoon—Rosetown—Biggar, SK]

Absolutely.

Mr. Van der Put, could you tell me how many barrels per day of crude the pipeline would carry and how many jobs might be created with this pipeline?

[John Van der Put]

Yes.

The capacity of the pipeline is 1.1 million barrels per day. In terms of the jobs, we have the Deloitte study that I referred to, as I mentioned, prepared by an independent firm, using the input-output model from Statistics Canada. What the results of that report indicate—I'm just talking about direct jobs—is that during the development phase of the project, which is the phase we're currently in, up until the point where we would receive authorization to begin construction, it's estimated that there are 2,300 direct jobs during this current phase.

During the construction of the project, which would take place, according to our current schedule between 2016 and 2018, it is estimated by Deloitte, based on the Statistics Canada model results, that there would be 7,700 jobs during that period. Then, once the project goes into operations, there would be 1,000 jobs involved.

The Deloitte report, by the way, breaks down those jobs into each of the provinces that the project goes through, and there are six provinces that the project will be going through.

[Kelly Block, Conservative, Saskatoon—Rosetown—Biggar, SK]

Thank you.

[The Chair, Conservative, Leon Benoit]

Thank you.

Thank you very much, Ms. Block, Parliamentary Secretary to the Minister of Natural Resources.

We go now to Ms. Leslie, for up to seven minutes.

[Megan Leslie, NDP, Halifax, NS]

Mr. Chair, my colleague Ms. Mathyssen is only here for the beginning of committee, so I'd like to offer the first bit of my time to her.

[The Chair, Conservative, Leon Benoit]

Go ahead, please, Ms. Mathyssen.

[Irene Mathyssen, NDP, London—Fanshawe, ON]

Thank you very much, Mr. Chair.

Thank you to my colleague, and thank you to our witnesses.

I don't want to take up a lot of time. My question is directed towards Mr. Howard and Mr. Van der Put.

Mr. Van der Put, I'm looking at the study that you've done and I've noted where the energy east project is. My question pertains to my riding. Line 9 goes right through my riding. The proposal is to reverse that line. A lot of that line goes through very productive class 1 farmland. The concern is that the pipeline is 38 years old and it would be carrying corrosive bitumen. We're concerned about the impact on our community.

I wonder if you could share the concern in regard to pipeline breakdown, leaks, and whether this concern in the community that pipelines are old and may not be reliable would potentially have an impact on your proposal.

[John Van der Put]

I will say that pipelines are the safest way by far to transport petroleum.

For TransCanada, safety is our first priority, so in everything we do in terms of designing, building, operating, and maintaining a pipeline, that's always at the forefront in everything we do. Ultimately, what we're aiming for is that there be no incidents through all of those measures.

Specifically with regard to the age of a pipeline, a pipeline that is well maintained can be operated safely indefinitely. Particularly with today's technology, that's certainly something that is achievable.

The last point I'd like to make is with regard to our discussions with stakeholders, discussions with the public. We're currently at the stage, on the energy east pipeline project, where we are doing public consultation, engaging with stakeholders across the country. As a matter of fact, right now we are conducting a round of public information sessions across the country. Those provide us opportunities, not only to provide information to the public with regard to our project, but also to listen to them. We're really after two-way communication because we want to find out what's of concern to them. Oftentimes there are very specific things with regard to specific communities that we need to be aware of and we need to take into account when we ultimately finalize the design for our pipeline system. That's the stage of the project where we are right now.

[Irene Mathyssen, NDP, London—Fanshawe, ON]

Thank you.

I will turn it back to my colleague.

[Megan Leslie, NDP, Halifax, NS]

Mr. Howard, I have a question for you about CERI and the work that you do.

I've been on your website and have taken a look at your mission and who your researchers are. You certainly do some impressive work. My husband is an economist, so I know when you're looking at benefits through an economist's lens it's really very much about numbers. I see your staff has impressive credentials in engineering, accounting, economics, and things like that. I wonder if through any of your research, especially when it comes to things like the oil sands or pipelines, you do any of that more social science oriented research that looks at things like community acceptance or social licence. I think about, for example, the proposed fuel directive in Europe. That's not an economic proposition; that's a political proposition. That's about what communities or consumers are saying is or is not acceptable. It has nothing to do with just the raw numbers.

In a few provinces we have feed-in tariffs, and I know economists look at the idea of feed-in tariffs and think that doesn't work. But communities sometimes really rally around feed-in tariffs. In Nova Scotia we have the community feed-in tariff and people are wildly excited about this. I'm not able to find anything on your website about that kind of social science research looking at the impacts and what some of the possible barriers or hurdles are. Do you do any of that kind of work?