Natural Resources Committee on April 10th, 2014

[Pierre Dionne Labelle, NDP, Rivière-du-Nord, QC]

Does the amount also include the tax increase on your operating profits?

[John Van der Put]

The amount represents taxes on revenue. If I've understood your question correctly, the answer is yes.

[Pierre Dionne Labelle, NDP, Rivière-du-Nord, QC]

Thank you.

[The Chair, Conservative, Leon Benoit]

Thank you, Mr. Dionne Labelle.

We go now to Mr. Calkins, followed by Monsieur Jacob, and then Mr. Leef.

Go ahead, please, Mr. Calkins. You have up to five minutes.

[Blaine Calkins, Conservative, Wetaskiwin, AB]

Thank you very much, Chair.

Mr. Van der Put, you talked about jobs, 2,300 direct jobs, 7,700 construction jobs, and 1,000 operation jobs in terms of energy east.

Can you give us the difference between what a repurposed pipeline would do, insofar as economic benefits, versus brand new construction? There are several other pipelines on the books across Canada that would not be repurposing an existing pipeline, but would actually be new construction. Do you have any information that you could provide this committee on that? Both of them provide economic benefits, but could you tell us what the difference would be between a repurposed project and a new project?

[John Van der Put]

I can't give you exact numbers, but certainly the investment involved in a new pipeline is greater than the investment involved in a repurposed pipeline.

For a repurposed pipeline, there are new components, including new pump stations. All of the shut-off valves have to be replaced. The ones in existence for the natural gas system are only designed for natural gas service, so they have to be replaced. There is also some cost involved with isolating the pipe from the original gas system and creating the new oil system. But I can't give you exact figures in terms of what the difference would be between a repurposed pipeline and a new pipeline.

[Blaine Calkins, Conservative, Wetaskiwin, AB]

Either way, any pipeline, repurposed or new, obviously creates economic benefit. I think that goes without saying, so I appreciate that.

I wonder if you could elaborate a little more on the tax components. You talked about $3 billion or so for the implementation of the repurposing of the pipeline and then the ongoing taxes of several billion over the next 40 years of the operation of the pipeline. Could you give us the breakdown? Do you have any information on the breakdown insofar as what would be royalties and what would be payments to provinces or taxes in the workforce? Do you have a breakdown? You got a total from somewhere. I'm just wondering if you could give us the breakdown statistics on that.

[John Van der Put]

All of the results that I quoted there and the figures that you're describing are outputs from the Statistics Canada input-output model. I don't have a breakdown on hand in terms of what portion of that is income tax versus sales tax versus property tax. It's all of those kinds of taxes. I can certainly go back to Deloitte if it's of interest to the committee and see what I can do in terms of getting a further breakdown of those figures.

[Blaine Calkins, Conservative, Wetaskiwin, AB]

If it comes from those reports or if it comes from StatsCan, I would imagine that we can probably get that information. We can ask our analysts to look that up for us. We don't need to use up your time on that.

Mr. Howard, I'd like to talk to you about the petrochemical side of things.

I represent the riding of Wetaskiwin in central Alberta and all of the chemical sites associated with Joffre, which I'm sure you're probably very aware of. I'm concerned about the natural gas market insofar as production decreasing.

As you know, polyethylene plants need the sources, the wets, from these gas wells. If the production is going to go down and consumption is going down.... Could you tell the committee how important this is, not just for the purpose of heating homes, or for the other common uses of natural gas, but also for what some of the economic benefits are when it comes to the value-added component of the natural gas stream and that loss in natural gas production due to a lack of availability of markets in the United States? How important is the diversification of our markets in order to sustain not only the production of natural gas but also the value-added chain that natural gas provides?

[Peter Howard]

The petrochemical business actually has two centres in Canada, one in Alberta, primarily in the Joffre and the Edmonton area, and the other in Sarnia.

Probably of more concern are the Alberta facilities. As you indicated, because of the reduction in the flows on the export pipelines, the recapture or the stripping of the ethane molecules out of those streams is going to go down with those gas flows. I would suggest that this is a concern for Alberta, but the petrochemical business is actually in a position to try to recapture some of that ethane. As I indicated, some new molecules are coming on the Vantage pipeline, which will bring ethane from North Dakota into the petrochem business in Joffre.

There are several producer-led initiatives that are building deep-cut facilities in the fields and the gas plants, which will capture the ethane molecules in the field before that goes to the straddle plants. That will contribute to improving the ethane supply to the petrochem business or at least to maintaining it.

The third element is something that has been talked about but not advanced, and that's what they call streaming of the fluids. In essence, what you end up doing is sending the gas streams out to the straddle plant operations at the border locations, stripping out the ethane, propane, and butane, sending the drier gas to market, and then bringing the residual gas back into Alberta and up to Fort McMurray to feed the oil sands. That's the ethane side of the equation.

On the propane and butane side of the equation, the decline in flows is not as significant in the field operations, because we do need gas in Alberta to feed the oil sands, so there is a bit of an uptick in the demand in Alberta. As far as the C5 components go, again, that's a field operation, and we don't see significant loss of volume there, because the field plants are being enhanced and stuff like that.

One other thing is that our drilling programs are basically moving to the wetter resources, so today we are actually producing gas that has more liquids in it than it did five years ago. The liquids can be recovered even though the gas streams are falling off.

[Blaine Calkins, Conservative, Wetaskiwin, AB]

That's good news.

[The Chair, Conservative, Leon Benoit]

Thank you, Mr. Howard and Mr. Calkins.

We will go now to Mr. Jacob, for five minutes, and then there will be a few minutes for Mr. Leef.

[Pierre Jacob, NDP, Brome—Missisquoi, QC]

Thank you, Mr. Chair.

I want to thank the witnesses for joining us this morning.

I am letting you know that I will be sharing my time with my colleague, Ms. Leslie.

My first question is for Mr. Howard.

During its study, the committee has learned that inflated costs and stretched timelines of oil sands projects have resulted in lower production than what was forecast in 2004. One witness told the committee that the more recent forecasts for oil sands production and associated economic benefits were underpinned by unrealistic assumptions about cost. Could you please comment on that argument?

[Peter Howard]

I'm not sure I totally understand the question, but maybe I can just answer it this way.

The energy east pipeline is a vehicle where western Canada landlocked crude-based systems can access global markets, so if the Keystone XL pipeline is disallowed, then the energy east pipeline becomes one of the major conduits to get crude and crude bitumen out to market.

Our assumptions with regard to increased oil sands production, especially anything above that four million barrel level, is predicated on one or two of the pipelines being authorized. The energy east pipeline is definitely one of the major pipelines that would allow sustained oil sands growth to feed that pipeline.

[Pierre Jacob, NDP, Brome—Missisquoi, QC]

Thank you, Mr. Howard.

I have a second question, after which I will turn the floor over to Ms. Leslie.

Have the high costs of oil sands projects affected CERI's assumptions about the future of the industry and its economic impacts?

[Peter Howard]

The oil sands are the marginal barrel production. They're very expensive to produce. I agree with that. They require a lot of human capital, a lot of technology, a lot of innovation to produce those. In the absence of a pipeline or any kind of pipeline, that development would not take place.

That's probably all I can add to that.

[Pierre Jacob, NDP, Brome—Missisquoi, QC]

Thank you, Mr. Howard.

Ms. Leslie will now take over.

[Megan Leslie, NDP, Halifax, NS]

Is there any time left?

[The Chair, Conservative, Leon Benoit]

Yes, go ahead, Ms. Leslie. You have under two minutes.

[Megan Leslie, NDP, Halifax, NS]

My question is for Mr. Van der Put.

Representatives from TransCanada have said many times, both in relation to Keystone but also here in Canada with reference to energy east, that pipelines don't lead to greenhouse gas pollution. The argument is that the oil is coming out of the ground anyway, so pipelines don't spur new oil sands development.

Whether I agree or not with that argument, that is the argument, but if that is the case, then when TransCanada is building a picture of the economic benefits of a pipeline, the benefits that TransCanada lists go well beyond the actual operation and construction of the pipeline, so I see a contradiction there. How do you resolve that contradiction?

[John Van der Put]

The point I'd really want to make with regard to greenhouse gas emissions is that TransCanada is committed to doing its part to reduce greenhouse gas emissions. We are, in so doing, addressing the global issue of climate change. Our belief is that the solution lies both in terms of environmental performance, but as well in terms of using technology. Each year we do more to reduce our own emissions. We develop, together with our peers in the industry, technologies that can be brought to bear to achieve those reductions.

One of the specific examples would be this. We have quite an extensive program within our pipeline company to reduce what we call fugitive emissions, which are basically emissions from seals and things of that nature, to first of all, identify those and to take measures to reduce those. That's just one small example.

[The Chair, Conservative, Leon Benoit]

Thank you.

Thank you, Ms. Leslie.

You have two minutes, Mr. Leef.

[Ryan Leef, Conservative, Yukon, YT]

Thank you, Mr. Chair. I'll keep my questions brief.

Mr. Howard, you talked about capacity of railcars and we're having a discussion about pipelines here today as well. Maybe you could provide some information or figures regarding a potential benefit in Canada to other sectors with improved capacity of pipelines, and therefore a reduced reliance on transportation, specifically rail. How might that benefit other sectors' access to rail or other transportation methods if we had a better capacity development of pipeline flow?

[Peter Howard]

One very simple example is it's cheaper to send crude or bitumen through a pipeline than it is by rail. If in fact you do construct pipelines, that would mean there's more money flowing back to the producers, which would by implication suggest that they would then be able to reinvest more money into more drilling, more emissions systems, and innovation and technology.

The other point is I think rail is a system that's being used right now as a bridge to getting these pipelines built. On a long-term basis rail should probably be reserved for other commodities, not necessarily crude.

[Ryan Leef, Conservative, Yukon, YT]

Thank you very much.