Evidence of meeting #13 for Natural Resources in the 42nd Parliament, 1st Session. (The original version is on Parliament’s site, as are the minutes.) The winning word was pipelines.

A recording is available from Parliament.

On the agenda

MPs speaking

Also speaking

Shelley Milutinovic  Chief Economist, National Energy Board
Jim Fox  Vice-president, Integrated Energy Information and Analysis, National Energy Board
Gil McGowan  President, Alberta Federation of Labour
Richard Sendall  Chairperson, Senior Vice president of MEG Energy Corp., In Situ Oil Sands Alliance
Patricia Nelson  Vice-Chair, In Situ Oil Sands Alliance

4:25 p.m.

Vice-president, Integrated Energy Information and Analysis, National Energy Board

Jim Fox

Our understanding, or at least my understanding, is of work that actually goes on in a different area. I'm not an engineer and I don't have the technical capability to do the assessments myself, but what I'm told by our engineers is that accidents happen less often with pipelines than with other modes of transportation, so we think pipelines are the safest way, the least accident-prone way of transporting large volumes of oil and natural gas to markets.

That said, we're not really in a race with anyone. We're not trying simply to be better than rail. What we're trying to do is to provide the safest pipeline infrastructure for Canada, and so we're continually working to make the pipeline system safer, and safer yet, and safer yet again, and then to be prepared for to respond to an accident quickly, if one does occur, and to be able to clean up the accident and reduce its effects and to do those things in the most appropriate way.

4:30 p.m.

Liberal

TJ Harvey Liberal Tobique—Mactaquac, NB

Okay, perfect.

I guess the context of my question, and where I was going with this, follows from your earlier remarks that Canadian oil production is scheduled to grow by 56% by 2040, if there are no constraints in the system, and that LNG would grow by 22%. Has there ever been a study measuring the environmental impacts of not building a pipeline? I ask because if you were not going to build, say, Energy East or Trans Mountain or Pacific Northwest LNG, that would result in a substantial increase in rail traffic in Canada. What would the environmental impacts be on the environment in Canada as a result of not having access to pipelines, if we were to go it alone on rail? Furthermore, have any financial studies been done on the availability of rail, and whether there would even be enough rail capacity to meet that need and, if there weren't, what infrastructure would have to be employed to meet those needs and what the overall environmental and economic impact would be in Canada?

4:30 p.m.

Chief Economist, National Energy Board

Shelley Milutinovic

We haven't seen a study comparing the environmental impacts that would fall out of that constrained case.

When we look at the 1.2 million barrels a day for rail, we have rail loading capacity of just under 1.1 million barrels a day now. And that has been added since 2011, when essentially there was nothing, so it's very quick to bring it on. But there are other issues, including rail cars, and congestion on the line, etc. That's certainly one of the uncertainties, but it looks like a very feasible number.

4:30 p.m.

Liberal

TJ Harvey Liberal Tobique—Mactaquac, NB

Just from looking at it initially, we would need to have a substantial increase in the amount of infrastructure to allow a 56% increase in oil production to be transported to our clients by rail. I point this out because historically there have been shortcomings in rail that have been directly correlated with something that's near and dear to my heart, agricultural commodities, as well as mining commodities and mineral exploration. That's the reason I'm asking this question. I really believe that we should consider the overall environmental impact when we're talking about a project as big as Energy East or Trans Mountain. We need to look at those overall environmental impacts and look at the entire picture, because we're not really getting a true picture by simply saying that we're comparing pipelines with rail when we're not even taking into account whether or not the present rail infrastructure would meet that need. I'm guessing that it probably does not.

4:30 p.m.

Liberal

The Chair Liberal James Maloney

You're going to have to answer that yes or no, unfortunately.

4:30 p.m.

Chief Economist, National Energy Board

Shelley Milutinovic

A yes or no does it? It doesn't look like an unrealistic forecast to have 1.2 million barrels a day moving by rail, but there are uncertainties to it.

In North Dakota they are moving—

4:30 p.m.

Liberal

The Chair Liberal James Maloney

We are out of time, unfortunately. I apologize.

Mr. Cannings, over to you for three minutes.

4:30 p.m.

NDP

Richard Cannings NDP South Okanagan—West Kootenay, BC

I have one quick question regarding Energy East. Now that we've had the application I assume that hearings will be upcoming. Is there any sense of how those hearings might differ from, say, the Kinder Morgan Trans Mountain expansion hearings in terms of what community groups might be able to access them hearings and how they would do so?

4:30 p.m.

Vice-president, Integrated Energy Information and Analysis, National Energy Board

Jim Fox

Energy East is in front of a panel right now, and so I can't make anything other than a generic comment that the board always looks at its most recent experiences in hearings and looks to improve the hearing process to make it both efficient and effective to allow people to appropriately engage and understand, to learn about the project, and to engage in the hearing if there is a possibility. Beyond that, I'm not sure I can say anything more.

4:35 p.m.

NDP

Richard Cannings NDP South Okanagan—West Kootenay, BC

I have one more quick question to follow up on Mr. Harvey's question on rail. He was saying that oil production would increase by 56%. I assume that not all of that 56% would be going by rail if there were no pipelines built, because there is some expansion in existing pipelines whether they go to tidewater or not?

4:35 p.m.

Chief Economist, National Energy Board

Shelley Milutinovic

That's correct.

4:35 p.m.

NDP

Richard Cannings NDP South Okanagan—West Kootenay, BC

It would just be 1.2 million rail shipments per day, and did you say there's the capacity now for 1.1 million?

4:35 p.m.

Chief Economist, National Energy Board

Shelley Milutinovic

There's rail-loading capacity for 1.1 million.

4:35 p.m.

Liberal

The Chair Liberal James Maloney

Thank you very much to both of you for joining us today and again for being so patient in making this day happen.

I'm now going to suspend the meeting very briefly while we get the new witnesses ready, but in the interim we're going to go in camera and have a very brief discussion.

4:35 p.m.

Vice-president, Integrated Energy Information and Analysis, National Energy Board

Jim Fox

Thank you for having us.

4:35 p.m.

Liberal

The Chair Liberal James Maloney

Thank you very much again.

4:35 p.m.

Liberal

The Chair Liberal James Maloney

We are resuming now. We're going to be able to go until 5:30 today, so I'm again going to cut right to the meat of this.

I want to thank our witnesses that we have with us. We have from the Alberta Federation of Labour, Mr. Gil McGowan, the president of the AFL. He's joining us by video conference from Edmonton, Alberta. Thank you, sir, for being here.

Also with us we have Richard Sendall, the chairperson and senior vice-president of MEG Energy Corp., and Patricia Nelson, the vice-chair of In Situ Oil Sands Alliance. It's nice to see you both again and thank you for joining us here today.

I'm going to turn the floor over to, collectively, the two of you at the end of the table, and individually, you, sir, for a presentation of up to 10 minutes.

Why don't we start with you, Mr. McGowan.

4:35 p.m.

Gil McGowan President, Alberta Federation of Labour

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.

4:50 p.m.

Liberal

The Chair Liberal James Maloney

Thank you, Mr. McGowan.

I'll now turn it over to the two at the end of the table for up to 10 minutes.

May 30th, 2016 / 4:50 p.m.

Richard Sendall Chairperson, Senior Vice president of MEG Energy Corp., In Situ Oil Sands Alliance

Thank you, Mr. Chairman, for extending the invitation to us to present before this committee.

As you mentioned, my name is Richard Sendall. I am the chair of the In Situ Oil Sands Alliance, and I am also the senior vice-president of strategy and government relations at MEG Energy. I have with me Pat Nelson, our vice-chair of the In Situ Oil Sands Alliance, and also Alexandra Taylor, who is going to help us run the slide presentation.

Before I get started, I would like to recognize those still dealing with the Fort McMurray wildfire and reconstruction efforts now under way. The support from Canadians across the country has meant a great deal to the residents of the area working through this difficult time. IOSA members are assisting their local and indigenous communities, and together, we will come back stronger than ever. We will rebuild Fort McMurray.

IOSA is an alliance of Canadian oil sands developers dedicated to responsible development of our country's oil sands using in situ technologies. “In situ” means “in place”. Our members remove the oil using low-impact drilling and production processes while leaving the sand in place.

IOSA members manage the development of over 30 billion barrels of oil resources. We fund our operations and innovation through financial markets rather than from internally generated cash flows. As we are reliant on those financial markets, we represent the barometer upon which to judge investor confidence in our sector. Successful investment in innovation and the development of the oil sands are key factors in maintaining investor confidence. As we are land-locked to a single U.S. market, it remains crucial that we access higher-value markets for our products. We must reach tidewater from which we can distribute our products worldwide.

Our members are environmentally responsible, committed to Canada, cost-effective, and leaders in innovation. Our low-impact drilling technology accesses oil deep underground, leaving 85% to 90% of the land undisturbed. The water we use is sourced from deep non-potable sources, and over 90% is recycled within our operations. We are focused on meeting the greenhouse gas emissions challenge at every stage of our operations. In Situ members are Canadian companies focused on local job creation. We believe that the solid relationships we have built with our local and indigenous communities are a key component in the successful development of the resource. We are invested in Canadian resource development. Our livelihoods are based here. We are here for the long term.

In situ projects can be developed in smaller, incremental stages, relative to traditional mining operations, providing lean project execution and corporate cost structures.

Our industry is built on research, development, and commercialization of technology. IOSA members are technology companies focused on finding innovative solutions to improve efficiencies, enhance oil recovery, and reduce greenhouse gas emissions. Small to medium-sized companies, like the IOSA members, are critical to fostering further innovation for a lower-carbon future. For us to continue innovating, we need certainty that investments in technology today will be deployed and the resulting production will reach global markets.

Canada has a world-leading resource. We have the third largest oil reserve globally, 97% of which is in the oil sands. In fact, because the oil sands are open to private sector investment, they represent 50% of the world's free enterprise oil.

Canada also has world-leading environmental regulations. Of the top oil reserve holders, only Canada is covered by world-class, stringent environmental regulations and oversight. It is the only major oil-producing jurisdiction with comprehensive greenhouse gas regulations. As the world demand continues to grow, Canada’s environmental and socially responsible production will be an important source of supply; the world needs more Canadian energy.

The future of the oil sands is in situ production. Eighty per cent of the oil sands resource will be developed through advanced drilling technologies. Steam-assisted gravity drainage, or SAGD, is a primary recovery technology used for in situ production. It is a low-pressure process that extracts oil while leaving the sand in place. With SAGD, the landscape remains intact with no tailings ponds. The process uses non-drinkable water, 90% of which is recycled. SAGD innovation continues beyond initial SAGD; we now use infill wells and non-condensable gas injection to increase the efficiency of resource extraction while reducing the energy required for production.

The innovation doesn’t stop at the resource extraction stage. Our operators use the latest technologies for better environmental outcomes in water recycling, air emission controls, and heat integration within our facilities. Producers have also integrated cogeneration technology to further increase efficiencies and reduce greenhouse gas emissions.

Cogeneration produces two energy products, electricity and the steam we require for resource extraction, from one energy source: clean natural gas. Cogen is the most efficient use of a fossil fuel. Electricity from oil sands cogeneration produces one-third of the greenhouse gas emissions of Alberta’s electrical grid. Excess electricity that is not consumed on site is offered to the power grid. This electricity helps coal-fired power plants retire sooner while supporting renewables. It also lowers electricity prices for consumers. Canada is a leading jurisdiction worldwide on the use of cogeneration to curb greenhouse gas emissions.

Combining in situ production with cogeneration results in one of the greenest barrels globally. With cogeneration, emissions per barrel of production are below the range of common imports to the U.S. and eastern Canada.

IOSA members are also integrating other technologies to reduce greenhouse gas emissions, such as the application of solvents and electromagnetic heating. These technologies further reduce emissions per barrel of production. This innovation also extends to upgrading, the stage where our product is prepared for refining. MEG Energy’s HI-Q technology reduces greenhouse gas emissions by a further 20% from traditional upgrading processes. We are committed to a low-carbon future. Further innovation will be driven by small and intermediate companies like the members of IOSA.

To enable innovation our investors require confidence, and in turn require certainty that the regulatory systems will provide clarity of conditions to be met in a predictable and timely approval process. Additional costs such as taxation and environmental levies must consider our competitiveness with respect to other top oil-producing jurisdictions. The cumulative cost of these policies needs to be taken into account.

Ensuring further innovation also requires new transportation infrastructure to tidewater. The economics of both production and further innovation improve as Canada gains access to tidewater and higher global pricing. A predictable and timely regulatory process for pipelines is essential for the industry and Canada’s prosperity.

Thank you, Mr. Chairman, for the opportunity to discuss in situ technology and the future of the oil sands.

5 p.m.

Liberal

The Chair Liberal James Maloney

Thank you very much, sir.

I'm going to open the floor up to questioning. The first question goes to Mr. Harvey.

5 p.m.

Liberal

TJ Harvey Liberal Tobique—Mactaquac, NB

I'd like to start with Mr. McGowan. Thank you very much for being here today.

I'll also take this opportunity right now to thank Mr. Sendall and Ms. Nelson for being here, as well. It's always a pleasure and the pleasure is all mine, of course.

Mr. McGowan, I am wondering if you could elaborate a little bit on how you feel your organization and members can benefit from ensuring that natural resource development happens in a sustainable way both in Alberta and in other jurisdictions across the country. I'm going to ask you two or three questions, but that's one.

The second is that you spent quite a bit of time elaborating on refining capacity, building refining capacity within Alberta, and how that can help create jobs and drive the economy within Canada. However, there's a fair amount of refining capacity within Canada already that's not necessarily situated within Alberta. What do you feel would be the best way to access that refining capacity, recognizing that those are Canadian jobs?

5 p.m.

President, Alberta Federation of Labour

Gil McGowan

The first question is about how our members would benefit from sustainable resource development. I would begin to answer that question by acknowledging the basic fact that here in Alberta we have petroleum resources. That is our competitive advantage. People have talked about the Alberta advantage in the past as being some product of government policy, perhaps low-tax regimes. However, the reality is that what has given us a real advantage and really underpinned our prosperity and our ability to create sustained jobs is our resources. The main benefits of developing these resources are job creation, economic development, and profits for corporations so that they can reinvest, and government revenue.

To put it simply, these are the resources we have, and in that respect we're not really that different from any other Canadian province. We're a resource-producing country, and we have to take advantage of what we have, and what we have are natural resources in Alberta. We have petroleum resources. We would be foolish not to develop them.

On the subject of refining and upgrading, as I said, we support moving up the value ladder, because it creates more jobs, better jobs, spinoff jobs, and jobs that are more impervious to the ups and downs of the price of oil and economic conditions. I want to stress that point. When you have an upgrader, if you have a petrochemical plant, the statistics show that they are economic stabilizers.

In the upstream of the energy sector, when the price of oil drops—as it has over the last year-and-a-half here in Alberta—jobs are shed very quickly. But in the downstream that doesn't happen. If you look at the number of people employed in Alberta in upgrading and refining, it's pretty much steady, whether the price of oil is high or low. This is an advantage for us, obviously, because it helps us to ride out recessions. But I would also argue that it would be an advantage that could be enjoyed in any other province where refining, upgrading, or petrochemical manufacturing took place.

As an Albertan and someone who represents Alberta workers, I'd like to see the resource we own collectively as Albertans used to better the interests of our members, but if it's not going to be an Albertan—

5:05 p.m.

Liberal

TJ Harvey Liberal Tobique—Mactaquac, NB

The only reason I really asked the question is that the majority of refining resources within Canada aren't in Alberta. They're in British Columbia, Saskatchewan, Quebec, New Brunswick, and Newfoundland. That's the reason why I'm—

5:05 p.m.

President, Alberta Federation of Labour

Gil McGowan

Actually, I would take some issue with that. The Edmonton area is actually the biggest refining hub in the country.