Natural Resources Committee on March 7th, 2017

[The Chair, Liberal, James Maloney]

Good afternoon, ladies and gentlemen. Thank you for coming today. We're going to start. We apologize for starting a bit late, but we had some votes in the House to deal with before we made our way over here.

The process for today is that we will give each group up to 10 minutes for a presentation. Each presentation will be followed by a series of questions from around the table. This first session will be about an hour long, so I encourage everybody to try to stay within the time limits. I may have to interrupt you and stop you. If I do, I apologize in advance, but we need to do that to make sure that everybody gets their allotted time.

There's an earpiece available to you for translation. You are encouraged to speak either French or English. You will likely be asked questions in both official languages, so if you need the earpiece, it's right underneath the table and available to you.

Again, thank you for joining us this afternoon. With no further ado, I will open it up to Mr. Thorsen. You look as though you're ready to say something, so why don't we start with you?

[Lyle Thorsen, Director of Strategic Planning, MEG Energy Corp.]

Thank you.

I'll pass it back over to Mikaela to open.

[Mikaela McQuade, Senior Policy Analyst, MEG Energy Corp.]

Thank you, Mr. Chair, and thank you to the committee for the opportunity to appear before you today on a topic that's of particular interest to our company. We're excited to be here and we are unapologetically enthusiastic about what we've been able to accomplish in clean technology in the natural resource sector through our demonstrated commitment to clean technology investments.

My name is Mikaela McQuade. I am a senior policy analyst with MEG Energy. I support our public affairs team and assess and respond to public policy that impacts our business at the provincial, federal, and international levels.

[Lyle Thorsen]

I'm Lyle Thorsen, MEG's director of strategic planning. As part of this role, I lead our short- and long-term financial planning to make sure that MEG has the capital required to support our development plans; this role includes funding our efforts on clean technology innovation, development, and deployment.

[Mikaela McQuade]

Our presentation today, which you should have in front of you, will outline our experience of leveraging innovation. For the focus of your study, we'll provide some commentary on the current federal clean technology innovation policy system as well as on the opportunities that this government has to accelerate innovation within our industry.

The first slide shows a bit about our company. We're an Alberta company that uses Canadian drilling technologies to sustainably produce in the oil sands. We believe that growing the economy and strong environmental performance go hand in hand, and since our first day of production in 2007 we have worked to ensure that our environmental performance is best in class. MEG Energy's current production level is about 82,000 barrels per day.

I'll ask Lyle to walk you through the in situ production process at a very high level and then detail where we're leveraged and invested in clean technology innovation. We will speak to clean technology as the committee has defined it: as more resource-efficient than equivalent products or processes that don't necessarily have a primary use of environmental protection.

[Lyle Thorsen]

For those of you who are unfamiliar with it, I will give a very high-level overview of the in situ oil sands production process MEG uses in its operations, which is steam-assisted gravity drainage, or SAGD. In doing so, you'll quickly understand that our operations are inherently innovative.

In SAGD, horizontal well pairs consisting of a steam injection well and a production well are drilled into the bottom of the reservoir, which at MEG's Christina Lake Project in Alberta is 400 metres below surface. The injected steam heats up and liquefies the solid bitumen, which allows it to flow through the reservoir sands. The liquefied bitumen and condensed steam drain into the producer well by gravity, eventually creating a steam chamber. That's kind of referenced in step one of the diagram that you see.

The hot bitumen, water, and some associated natural gas are then lifted to the surface by downhole pumps and transported by pipeline to the central processing facility. Once at the central processing facility, the gas is separated from the bitumen-water emulsion and reused in operations. That's step two of the diagram.

A light oil, referred to as diluent, is then added to the bitumen-water emulsion to help separate the bitumen from the water, which is step three.

More diluent is subsequently added to the bitumen once it is separated from the water, creating a product called “dilbit”. The dilbit is transported to market via pipeline. The water is treated so that it can be reused to generate steam in both the conventional steam generators and the cogeneration facilities. These are steps four, five, and six.

The steam is injected back into the reservoir via the steam injection wells. A small amount of water, less than 10%, cannot be recycled and is disposed of in deep reservoirs. The makeup water used to replace the disposed volumes is also sourced from deep reservoirs and is non-potable.

As you can see, this is a high-tech business involving sophisticated technologies and the most efficient processes for drilling, reservoir extraction, production, oil treating, water treating, and steam generation.

On slide four, there are two things. The bars on the slide are MEG's production volumes over the last eight years, showing our progression from start-up of operations of our pilot in phase one, which was approximately 3,000 barrels of bitumen a day, up to current production rates of over 80,000 barrels per day in our expansion phases, phase 2 and phase 2B.

Overlaid on the production graph are two lines. The green line shows the industry average of greenhouse gas intensity in tonnes of CO2 equivalent per barrel, and the red line outlines MEG's performance of the same indicator. The graph points to the fact that by integrating cogeneration and proprietary clean technology innovations into our reservoir development, MEG has decreased its steam-oil ratio and has lowered its GHG intensity 30% below the in situ industry average.

Companies like MEG develop and deploy innovative technologies and processes to drive industrial productivity gains and efficiencies, thereby increasing our profitability and achieving superior environmental outcomes, driving further investment into innovation and improving the marketable energy products that bring prosperity to Canada.

I'll provide a quick overview of MEG's existing and emerging clean technology innovation in the hopes of giving you a sense of how to best incent further activity of this nature.

Cogeneration produces electricity and steam from natural gas to power our operations and provide reliable 24-7 base load power to the grid, lowering electricity prices and reducing intermittency. Cogeneration is highly efficient because the waste heat from generating electricity is captured and used to generate steam, maximizing the overall efficiency of natural gas usage at our facilities.

The next two proprietary technologies are implemented into the reservoir and are key to reducing MEG's steam-oil ratio.

Enhanced modified steam and gas push—eMSAGP for short—enables us to replace steam with non-condensable gas and uses infill wells to produce incremental bitumen, increasing resource recovery and reducing operational steam requirements.

The second reservoir technology we're developing is enhanced modified vapour extraction—eMVAPEX for short—a pilot technology that also utilizes infill wells to increase resource recovery and injects condensable gas to replace steam and dilute the bitumen in the reservoir, substantially reducing the amount of steam required for production.

The fourth technology that we're currently developing is HI-Q. MEG has developed and patented the partial upgrading technology that transforms the heavy oil into easily transportable product and eliminates the need for diluent. Compared to traditional upgrading, HI-Q produces 20% less greenhouse gas emissions, uses no water, and occupies less than a third of the land footprint of typical upgrading facilities.

Next is slide 6. Although MEG has demonstrated a successful track record of investing in the research, development, and deployment of innovative processes and technologies that improve operational efficiencies and environmental performance, we believe the Canadian innovation ecosystem could become more efficient. In keeping with the focus of this study, there are opportunities to de-risk these activities, both from a financial perspective and from the perspective of creating an environment of policy certainty.

[Mikaela McQuade]

In order to raise investment for the capital-intensive innovation efforts that we find ourselves using, certainty of deployability is required for our operations. As producers, we need to be able to ensure that if we invest in clean technology, the policy and regulatory environment will ensure stability and predictable outcomes, therefore guaranteeing us a return on investment. This requires very well-coordinated and clearly defined policies and regulations that are implemented in an equitable fashion within and across industries. Recognizing that the environmental performance of our operations is highly regulated at the provincial level, it's also very important to ensure that any federal measures reflect subnational circumstances.

As seasoned participants in the Canadian innovation system, we recommend further coordination among departments, funding agencies, and governments, from both a financial and a policy perspective, to realize meaningful progression of the clean technology innovation agenda in the natural resource sector.

[Lyle Thorsen]

When oil prices are low, it forces our teams at MEG to do what they do best: innovate and think of new ways to operate and grow the business more efficiently. MEG and our industry peers will always continue to innovate, but reduced cash flow caused by the continued low commodity price environment limits the amount of capital available for investment in innovation projects. Therefore, advancing both economic and environmental goals will require government support of and investment in technological innovation within the sector.

In light of the capital-intensive nature of the innovation process, industry often finds itself in the so-called valley of death, in that there is a significant gap between research and development and its revenue-generating commercialization. This is a key area that deserves further policy support. Governments can invest more patiently, with longer return horizons, than private investors. They have the ability to share the financial risk of new technology development through policy and regulatory intervention to achieve long-term benefits.

For small and medium-sized oil sands companies like MEG Energy that operate only in Canada, this is especially important, because we often raise capital to fund innovation projects from highly competitive financial markets, as opposed to internally generated cash flows sourced from international operations or other business units.

If innovation funding opportunities and the efficiency with which they are delivered are maximized, industry will be well positioned to continue to contribute to Canadian environmental leadership. To that end, we are encouraged by this government's emphasis on driving innovation, productivity, and competitiveness in the natural resource sector, recognizing that our sector is an area of Canadian strength and strategic priority.

[Mikaela McQuade]

Further natural resource innovation will position industries like ours to remain competitive and to continue to create more long-term opportunities to grow a thriving and diversified Canadian low-carbon economy. The government has a role in championing innovation uptake to date and encouraging further investment in these activities within the sector. This is what will ultimately allow Canada to remain a globally competitive centre for innovation, while continuing to deliver its natural resources to market and prosperity to Canadians. This will require diligent de-risking from a financial perspective and in the creation of an environment of policy certainty.

We really are innovating to enable our sector to thrive in and drive a low-carbon economy. We're proud of what we've done. We're happy to share it with you today. We're looking forward to partnering with government to accelerate progress towards this goal.

We welcome your questions. Thanks for having us here.

[The Chair, Liberal, James Maloney]

Thank you very much.

Ms. Lawrence and Ms. Miner, I won't presume to guess who's going to go first. I'll leave it up to you.

[Leah Lawrence, President and Chief Executive Officer, Sustainable Development Technology Canada]

Thank you, Mr. Chairman.

Thank you to the committee members for inviting us here today. It's our pleasure to present alongside MEG Energy, which happens to be one of our funded companies. I'll have to give them a shout-out as we go through this discussion.

[Mikaela McQuade]

As we will to you.

[Leah Lawrence]

I'd like to introduce Carla Miner. I don't think she was on the witness list, so I apologize for that. I've been with SDTC for only two years, and so for the longevity and the really tough questions, I'll have to defer to her, because she has a breadth and depth of knowledge that I do not.

I hope many of you are familiar with SDTC. We are an arm's-length federal foundation that invests, with your permission, on behalf of Canadian taxpayers. Over the 15-year history of our organization—which I have had the privilege, as I said, of joining quite recently—we've invested in some 300 companies across Canada, or about a third of the clean tech market in general, with about a billion dollars on behalf of Canadians. All of that money is leveraged significantly through other private and sometimes provincial investment. It's my privilege to tell you a little bit about that today.

One thing I would say is that in addition to MEG, those other 299-plus companies are a significant strategic resource for Canada. They really have developed a core set of clean technologies that are, in some cases, already being exported in large numbers. They are poised and ready to expand that. That's an important thing for the committee and for your members to consider, because that strategic resource needs to be leveraged as we go forward. I would say that the opportunity is short, and I think you know that well. The opportunity is short because clean technologies are a strategic directive imperative for many nations across the world right now, and I'll get to that a little bit more in my remarks today.

Before I get started, I want to talk about two things, kind of definitional things. The first is the word “invention” and the second is the word “innovation”.

Invention is the realm of research and development and pre-commercial technology demonstration. The second part is the mandate you've given to us, and both parts are things that are very actively done by Natural Resources Canada and other departments, including Innovation, Science and Economic Development, as well as many of our sister provincial agencies.

Innovation, on the other hand, is really the commercialization of invention. It's the rubber hitting the road. It's actually getting sales, revenues, and, we would hope, profits. When you're in a business such as the one SDTC is in, trying to encourage environmental and economic prosperity, you really don't get there unless you get the innovation. Unless those technologies are deployed and real emission reductions and economic benefits start to accrue, we haven't been as successful as we need to be. I would start with that as a message for you today: if we only get to invention and we don't get to innovation, we really haven't gone far enough.

I'll move to the global context that we're talking about.

As I mentioned, time is short. Countries such as China, the United States, South Korea, and Germany are actively supporting their domestic innovators to get into that innovation space, to commercialize technologies they think will lead in the next 10, 15, 20, or 50 years as we tackle large challenges such as climate change, water security, food security, and the like. They have been in this space for a number of years and they're moving very quickly.

In 2015, clean energy—the topic for this committee—attracted $329 billion in global investment. This compares to about $810 billion for the oil and gas industry in the same year, so it's a significant component of the global economy even today. Given the intense global competition in clean tech, SDTC, along with other partners and a venture capital company in Montreal named Cycle Capital, asked ourselves what Canadian companies can do, where we might be leading, and how we might take advantage of this expanding market globally. I'll draw your attention to slide three in the package we gave to you, because it starts to give you some of the results of the research we've been doing in this area.

When we look at Canadian companies, we see they're very good in a number of areas. We asked ourselves how that looks, where they could expand, and where they sit globally. The first question, then, is in an ideas economy—

Oh, was it not distributed?

[Kim Rudd, Liberal, Northumberland—Peterborough South, ON]

Does anyone have one?

[Leah Lawrence]

I'm sorry. I thought it was distributed a couple of days ago. Let me not speak to the slide, then; let me just tell you.

We did a study with Cycle Capital, as I said, that looked at this idea of invention and innovation. If we know that the global economy is moving quickly in clean technologies, where might Canadian companies lead, and how might we identify that? What we did was to look at research and patents for both universities and firms in Canada to see—in each of the clean tech sectors or verticals—where they might be leading.

We got some interesting results. The first thing we found out is that on a per capita basis, Canadian researchers are leading the way in clean technology. We are publishing more papers than would be expected in comparison to countries like the United States, Germany, and China, and that's an exciting thing. It means we have a strong base to build upon and an ability to grow. Where we are challenged, though, is when we look at the patentability of that research; there, we aren't doing quite so well.

Research converted into patents in academic settings lags the world on a per capita basis, behind the United States and, more importantly, China, which is really leading the way, and I'll get to that in a second.

In industrial patenting of clean technologies, we're a bit better than we are in the academic conversion, but we're still not where we'd like to be. What we see in that realm is a lot of multinationals that have offices here in Canada leading the way, but we don't see a robust mid-term and smaller company sector providing a lot of leaders in all the clean tech verticals, which would allow for a more robust, competitive market to be able to function. What we have is a lot of small companies—often the ones that deal with us—and a lot of large companies, but very few—like, for example, MEG Energy Corp.—that are operating in the in-between. That's what we see.

An interesting thing that I'm sure you might have heard from some other presenters is that since about 2010-2011, we really started to see the might of China in clean tech. What you see is a really strong surge in the expansion of patenting, particularly in the academic sectors. In fact, I'm told there was a policy put forth by the Chinese government that encouraged academic researchers to patent and that actually gave monetary incentives to do that. You see translation from academic to patents in academic settings, and you're also seeing it in industrial patenting.

What's interesting there is you also start to see gaps in other places. I can provide this at a later date, but in clean technologies related to agriculture, there is very strong patenting by both academia and industry in China and some of the other Asian nations, while in Germany, the United States, and Canada, that patenting is less frequent. That's not an area where we're necessarily making a lot of headway in patenting.

You might say, “So what? Why does patenting matter?” It matters because when we're trying to go beyond selling resources in their primary state to selling the valuated technologies associated with those productions in a more environmentally friendly way than might have been done historically, the ownership of the ideas related to those technologies is only paid for if you own the patents or the licensing. As we try to grow into that space, we want to make sure we expand in that area.

A key and important thing there, a second message, is that we're doing very well in research and probably leading in many sectors, but we need to convert that into patenting, both in the academic and the industrial sectors.

The next thing I would say—and this gets to a little of what MEG said already—is that we've been really good at getting those 300 companies to a certain point of pre-commercial demonstration and then saying “Go, run. Be free,” and they're not quite ready to run and be free.

What we know from experience in other countries—the United States, Germany, and others—is that the first, second, third commercial applications are really challenging. First of all, it takes a long time to get to that point and do those first, second, third commercial applications, so companies with SDTC are with us for eight to 10 years on average. Then they go to their first commercial application. If you're pre-revenue or low revenue because you haven't quite got to commercial sales, translating to commercial is very challenging. Patient capital that can wait around for eight, 10, or 15 years is something that's missing in our market.

That's not clean tech alone. McKinsey did a study a little while ago that looked at oil and gas in general, and it found that from idea to commercialization, on average, can take 31 years for any technology in that sector.

It's because it's high capital, hard to do, and hard to finance.

To close, then, as the chairman has asked me to do, I think there are some key things we need to think about when we think about clean technologies. We know that we are doing really well in creating research and ideas and in financing that research and development in early-stage pre-commercial demonstration. The next step is to think about the tools for commercialization.

I'll give you a couple of things here. The first is that government has a very strong ability to think about procurement, both in terms of its own procurement and in terms of the incentives it can provide to other people in the industry in their procurement. Someone told me a while ago—and this is ancillary to natural resources, but it relies on natural resources at its base—that some 60% of construction materials are procured by some municipal, provincial, or federal government. If you think about where the resources come from for those construction materials and the life cycle of those materials, you can see that it is quite key for government to encourage environmental procurement along that value chain.

The second thing is that we need to think about strategic and intellectual property management and how government and these companies that are developing it can work together to make sure that, as Canada, we are benefiting from the public investment we're making into strategic IP.

I'll give you an example. The Standards Council of Canada came to see us recently to talk about the different committees at the international standards organization that are focused on clean technologies and to look at the membership of Canadian companies on those technology committees. Now, why does that matter? It matters because any international standard often comes down into national standards and then allows for companies to sell within any kind of jurisdiction. We found again that China is leading in those spaces, but Canada less so. As a result, we're working with the Standards Council to think about how we move forward on strategic regulation. That's just a first example that you could consider as you think about the day-to-day and long-term regulatory vision and strategic regulations that you're debating in this committee.

To close, SDTC thanks you very much for the privilege and the honour of working on your behalf and getting to work with companies like MEG Energy and the other companies we've invested in across the country. We look forward to continuing that work and we look forward to supporting them, with you, as we think about how we can help them to accelerate and scale and get from just invention to innovation as well.

[The Chair, Liberal, James Maloney]

Thank you very much.

First is Mr. Lemieux.

[Denis Lemieux, Liberal, Chicoutimi—Le Fjord, QC]

Thank you, Mr. Chair.

I want to thank the witnesses for their presentations.

Ms. Lawrence, your organization is helping to bring clean technology to market. You invest in world-class Canadian businesses whose work benefits the environment in a tangible way and benefits Canada's economy.

How is the Canadian industry faring when it comes to the development and deployment of new environmentally friendly technology in the forestry sector?

[Leah Lawrence]

In the forestry sector there are a number of key technologies that we have been looking at and that are important. In a second I'll give you some examples that we're quite a bit excited about in Ontario and in Quebec, and in British Columbia as well.

As you will see when we are able to distribute our slides for you, SDTC has invested about $50 million over our life in the forestry sector, and that's been leveraged with private sector monies. It has in many cases gone to projects that look at how you might improve energy efficiencies at existing facilities or to develop biofuels from waste forest residue or other things. I think of a specific example, AE Côte-Nord, which is in Port-Cartier. It is a project by Ensyn in Renfrew, Ontario, just outside of Ottawa here. They take waste wood materials and they transfer them into a bio-oil, which is being sold into the northeastern United States to municipal infrastructure such as hospitals. They're just expanding that facility to, I think, 1.5 times more output. They're just finishing the construction. This is a facility that we're very excited about, and it should go online here in about nine months from now.

The exciting thing about that facility is that already sales are quite successful in the United States. They want to see if they can work with CanmetENERGY and with other federal agencies here in Canada to see if they can displace diesel and other products. It's a great Canadian example that has potential to sell globally.

We have several others. Carla, did you want to add any that you can think of?

[Carla Miner, Senior Manager, Sustainable Development Technology Canada]

I'm just going to take the question in a different direction.

There are opportunities to use forest products in areas that aren't what you would have thought of in advance. An example would be the creation of nanocrystalline cellulose, a nanoparticle derived from the lignin in wood. It is finding applications in a number of different fields, whether it's in a biocomposite or in fluids that are used in drilling oil wells. This is a case of a resource being turned into something that's quite unexpected. This is just one example of that sort of opportunity.

[Denis Lemieux, Liberal, Chicoutimi—Le Fjord, QC]

Mr. Chair, my next question is for the two groups of witnesses.

How are you dealing with the new prices that the government has implemented for carbon credits in Canada?

[Mikaela McQuade]

Sure. Regardless of the policy or regulatory design of carbon pricing or emissions reduction regulations in Canada, we're supportive of regulations that incent what we're speaking to today, that incent those industrial productivity gains that allow for our sector to reinvest in the efforts that have gotten us to where we are today with respect to our greenhouse gas emissions intensity.

Any policy design, as we said earlier with policy certainty and investment certainty, has to guarantee that we can deploy whatever we are developing so that all the efforts that we're undertaking today as we continue to innovate will basically pay back the Canadian economy and continue to drive towards that low-carbon economy.

[Leah Lawrence]

In terms of public policy, for our companies, it's important to think about not just the macroeconomic policies that might encourage transition to a low-carbon future but also those micropolicies that might encourage the adoption of technologies. Those might not be evident at first, because they might not necessarily be environmental.

I'll give you an example. Most of the companies we deal with make less than $10 million in revenue, but they often will have interprovincial activities. They might manufacture their pressure vessels and have their head office in Montreal and in the Montreal region, and they might have a site facility in Lloydminster, Alberta, for example, or in Fort Saskatchewan, Alberta. By the nature of the clean tech industry, they're already interprovincial, and they're already dealing with the challenges of working interprovincially.

I remember one company gave the example that just the transportation of the vessels and being able to site them in the Alberta jurisdiction was much more challenging than it first envisioned because it hadn't done it before, although you guys would probably know much better about that than this company. One thing is to be able to have information to understand in advance what the barriers might be and to be able to deal with them. This helps in terms of the overall prosperity of that company and its ability to deliver on its clean technologies versus other things.

I think I'll just leave it at that. When thinking about the deployment of these technologies, it's important to talk to the companies directly and actually hear what their barriers are. What are their challenges to business and deployment? Then we can try to think about what might be done in that regard.

[The Chair, Liberal, James Maloney]

Thank you.

Mr. Barlow is next.

[John Barlow, Conservative, Foothills, AB]

Thank you very much, Mr. Chair.

Thank you, Mr. Lemieux.

Thank you to the witnesses for being here.

We have a great committee here. We work very well together, and I don't want this to come across as the perception of the committee members, but I think all of us would accept that the perception of the oil and gas sector by many Canadians is that it's dirty, it's behind the times, and it's not innovating unless it's forced to.

Mr. Lemieux brought up the carbon tax, but, Mr. Thorsen and Ms. McQuade, that's what you've been talking about with HI-Q, and your GHG emissions are 30% lower than the industry average. You've been doing these things without a carbon tax in place. You've been innovating since day one without punitive taxes, when people say that without these taxes, you would not innovate. That's obviously not the case.

What has been driving your innovative decisions to invest in research and technology? You've been doing this until now without any influence or without government getting in the way, so what has been the driving force behind that within MEG up until now?

I want to pick up on some questions he was asking as well.

[Lyle Thorsen]

The way I look at it, my career spanned about 20 years in the oil sands industry. As a young engineer, I was working on one of the first pilots of the technology 20 years ago, so my entire career has been innovating and developing technology. When you look at SAGD in general, it has only been about 20 years since this technology has come to market and operators have been implementing it. There came a time from moving beyond the AOSTRA, an underground test facility, an Alberta-supported initiative, to piloting within industry, and then beyond that, probably in the last 15 years it's become commercial.

That's the way I look at it. It's been continual innovation, and we're very proud of what we've been able to accomplish from that. Even just figuring out how to get the bitumen out of the reservoir has been a huge thing, unlocking billions of dollars in value for Albertans and Canadians. Especially on our oil sands part, I think it's inherent that we're continuing to innovate just to get the bitumen out of the resource most efficiently, and we want to do things right as well. I think that's the other thing here. As well, it's an energy-intensive industry, so doing things energy efficiently also helps reduce our costs.

That's probably one of the nice fits that we have here. We're continuing to strive to reduce our steam-oil ratios so we can use less natural gas to produce each barrel of bitumen. There's a lot of innovation in the reservoir technologies. That helps reduce our costs and also helps reduce energy intensity. I think it's a natural fit out there as well. There's a combination of multiple things, but we're innovating to keep driving our costs down and get better as well.