Thanks for this opportunity.
As most of you probably know, my organization represents thousands of people who work in and rely upon Alberta's energy economy. I'm here today to tell you that the industry that has sustained our members and created so many jobs for other Albertans and Canadians is an industry that's not just going through a rough patch, but is at a crossroads.
Not that long ago our energy resources made us one of the wealthiest jurisdictions in the world, but the global energy market that fuelled our prosperity has changed in fundamental ways. New technologies like fracking have allowed producers to flood the market with vast amounts of oil and natural gas. This has led to an unprecedented and persistent glut, which in turn has driven down prices. At the same time, demand for fossil fuels has been waning in both advanced and developing nations.
The global oil glut has also been exacerbated by geopolitical forces outside the control of any Canadian government. Most notably, the price war that the Saudis have been waging, frankly, has been having its intended effect: higher cost producers in Canada and the United States are scaling back, they're shedding jobs, and in some cases they're going bankrupt. The final major geopolitical factor affecting oil prices has to do with global warming and climate change. Policies dealing with these issues are necessary, but they are having an impact on the viability of businesses in the energy sector.
All of these factors suggest that the days of oil at $120 a barrel are gone, at least for the medium term, and likely for the long term. This is not a controversial statement. Just today the CBC released a previously confidential study by a government think tank called Policy Horizons Canada. The report, which I'd encourage members of the committee to read, warned that Canada's position as an oil and gas heavyweight is likely to wane much more quickly than expected. The question for policy-makers in government, people like yourselves, and policy-makers in business and, indeed, in labour, and people who are concerned about the future of our oil and gas industry is not if we face a long-term low-price environment. That is pretty much a given.
The real question is: how do the industry and people who are concerned about the industry, including the tens of thousands of people in the industry whom we represent, find ways to prosper in this new, more challenging environment? We submit today that the answer is that we need to fundamentally change the way that we think about oil and gas development in Canada. To put it simply, we need a paradigm shift. The current paradigm is based on ripping our resources out of the ground and building pipelines to ship those resources raw or lightly diluted to new markets. This is what industry and government players are talking about when they refer to gaining access to tidewater. The notion is that by accessing new markets, especially in Asia, we'll be able to get a higher global price—that's a phrase that's often bandied about—that we'll be able to get these higher prices for our resources. However, there are serious problem with this paradigm.
First, it assumes that exporting more Alberta bitumen will lead to higher prices, when the opposite is actually likely to happen. When you feed more product into a market that is already glutted, prices go down, not up.
Second, it assumes that the world actually wants our bitumen, when the reality is that the vast majority of refineries in markets outside North American can't even use bitumen as a feedstock. It's important to remember that refineries are our customers. If our prospective customers can't use our products, how can we ever expect them to buy those products, let alone pay a premium price?
The pipelines as a “panacea paradigm”, to coin an alliterative phrase, was developed at a time when oil prices were twice as high as they are now, at a time when unrestrained development in Alberta was driving up the cost of construction, making homegrown value-added projects like upgraders and refineries less attractive, and at a time when big American refineries were eager to gobble up cheap Canadian feedstock because they had excess heavy oil refining capacity. But now the world has changed. Prices are low, cost pressures in Alberta and across the country have abated, and American refiners have more domestic and international options for feedstock than they ever imagined possible 10 years ago. What might have made sense in 2012 doesn't make sense today.
What do we propose as an alternative paradigm? Well, we think that Canadian governments and Canadian industry should start looking at low prices, and especially low prices for oil sands bitumen, as a potential competitive advantage.
Specifically, we think that low feedstock prices could be the new Alberta advantage that drives investment and job creation in the refining and petrochemical branches of the energy sector. Some companies have already been taking this approach, and they're thriving as a result.
Suncor, which is a heavily unionized company that we have a lot of experience with, is just one example. It's an integrated company with significant investments in both upstream extraction and downstream upgrading and refining. They make money on shipping raw products when prices are high, and they also make money on the value-added products when prices are low. Thanks to lower prices of oil, Suncor is able to do what business school textbooks encourage businesses to do all the time, which is to buy low, in the case of cheap feedstock, and sell high the finished products like diesel, gasoline, and jet fuel.
So what do the Suncor example and the example of other refining companies around the world that are recording strong profits in a low-price environment show us? Not to be too flippant, but the experience of these companies shows us that when the world gives you lemons, you should make lemonade. More to the point, when the world gives you low oil prices, you should take that cheap oil and make it into higher-value products like diesel, gasoline, jet fuel, and petrochemicals.
From our perspective as a labour organization, there are four main reasons the value-added path is the road worth taking. First, we should strive to upgrade and refine more of our collectively owned resources, because jobs in upgrading, refining, and petrochemical manufacturing are good jobs. On average, downstream energy sector jobs pay significantly more than the industrial average. They are family- and community-sustaining jobs.
The second reason that we, as the owners of the resource, should prioritize adding value is that jobs in upgrading, refining, and petrochemicals are stable jobs. Jobs in the upstream section of the energy sector and jobs in construction crash, depending on the price of oil, while jobs in the downstream section of the energy economy remain stable in good times and in bad times. So they are sort of automatic economic stabilizers in low-price environments. As we've seen, companies like Suncor refer to their downstream investments and assets as a hedge against volatility in the oil market. We agree, and we would add that having more value-added jobs should be seen as a hedge against volatility in the labour market.
Third, we should prioritize value-added development, because these kinds of investments not only create jobs directly in upgrading, refining, and petrochemicals but also create other jobs. More specifically, large industrial facilities like upgraders, refineries, and petrochemical plants generate a lot of spinoffs in terms of jobs and business opportunities. A recent Conference Board of Canada report on refining estimates that for every dollar spent on refining, the total Canadian GDP rises by another $3 because refining has very large and very long supply chains.
The importance of construction employment related to the regular maintenance of large facilities like existing upgrading operations and refineries cannot be emphasized enough. In an average year here in Alberta, maintenance projects on existing industrial facilities in our province generate between 15,000 and 20,000 jobs, even when the price of oil is low. These construction maintenance positions, which wouldn't be created if we didn't build more industrial facilities, are over and above the thousands of jobs created and sustained by the day-to-day operations of these facilities.
Fourth, as the owners of our resource, we should take the value-added road because doing so allows us to capture a greater proportion of the true value of our asset. Research conducted by the Government of Alberta shows that the “rip it and ship it” approach that focuses on raw exports allows us to capture less than 40% of the ultimate value of those assets. When we upgrade bitumen to synthetic crude, we capture 70% of the value chain, and when we go another step further to refine products like diesel, gasoline, jet fuel, petrochemicals, and plastics, we have the potential to capture all of the potential value of our resources.
The questions that Albertans, as the owners of the resource in our province, should be asking governments are simple. Why should we be selling low-value products like Western Canadian Select, which can be used as feedstock in only a minority of the world's refineries when we could be selling higher-value products like synthetic crude, gasoline, diesel, jet fuel, petrochemicals, and plastics, for which there is strong demand around the world? To put it more simply, why should we be sending the jobs, profits, and spinoff opportunities associated with maximizing the value chain down the pipeline to other jurisdictions when we could keep all or most of those things for ourselves?
The significance to Albertans of doing more value-added work in our energy economy is clear, but the trends are troubling. From our perspective, we are in the midst of missing out on an historic opportunity for jobs, stability, private profits, and government revenue.
I'll just wrap up by pointing out the statistics. There was a time, not that long ago, when we upgraded about two-thirds of our bitumen to higher-value products. That's dropped to about 50% now, and experts commissioned by the Alberta government project that this will fall to only 26% by 2025.
We think now is the time to turn the ship around. Now is the time to stop shipping good jobs down the pipeline to other jurisdictions.
