Natural Resources Committee on Oct. 2nd, 2024

[The Chair, Liberal, George Chahal]

I call this meeting to order.

Welcome to meeting number 107 of the House of Commons Standing Committee on Natural Resources.

Pursuant to Standing Order 108(2) and the motion adopted by the committee on Thursday, June 6, 2024, the committee is resuming its study of the Trans Mountain pipeline expansion.

Today's meeting is taking place in a hybrid format. All witnesses have completed the required connection tests in advance of the meeting.

I would like to remind participants of the following points.

Please wait until I recognize you by name before speaking. All comments should be addressed through the chair. Members, please raise your hand if you wish to speak, whether participating in person or via Zoom. The clerk and I will manage the speaking order the best we can. I do use these two cards. The yellow is a 30-second warning, and the red means the time is up. I'll try not to cut you off mid-sentence.

Now I would like to welcome our witnesses for today's study. We have, as individuals, David Detomasi, professor, Queen's University; David Gooderham, lawyer, by video conference; and Dr. Trevor Tombe, professor of economics, University of Calgary, by video conference. From Project Reconciliation, we have Stephen Mason, chief executive officer and senior managing director.

You'll have up to five minutes for opening remarks, after which we will proceed with rounds of questions.

I will begin with David Gooderham via video conference.

You have five minutes, sir.

[David Gooderham, Lawyer (Retired), As an Individual]

Thank you to the committee for inviting me to appear today.

Canada's declared goal of achieving net-zero emissions by 2050 was incorporated into law in June 2021.

Mr. Chairman, I submit that the existing legal framework is wholly inadequate to address the extreme gravity of the challenges we are facing. That is the framework of the existing legal set-up. Canada's net-zero plan envisions that by 2050, Canada's remaining annual emissions will be offset or balanced by carbon capture and storage and by carbon removal, or CDR, technologies that will have the capability to remove massive amounts of CO2 from the atmosphere by negative emissions.

A crucial unknown in this scheme is the level of Canada's remaining emissions in 2050. The plan is based on the presumption that by 2050, the remaining emissions, whatever they are, will be fully offset by CCS and CDR. The political promise is that large-scale CCS deployment, for example, will allow us to defer any near-term deep cuts in Canada's oil and gas production.

Developments since 2021 compel us to reconsider this policy framework and its assumptions. The International Energy Agency released its global “Net Zero by 2050” scenario in May 2021. The IEA concluded that to give us any realistic chance to limit increased warming to 1.5°C, global oil production must decline 50% by 2040 and 73% by 2050.

The Canada Energy Regulator's 1.5°C-aligned scenario published in June 2023 accepts the accuracy of that finding by the IEA. The CER acknowledges that to align with 1.5°C, Canada's oil production must decline from 5.5 million barrels in 2030 to 2.8 million barrels by 2040.

Further, in the fall of 2023, the IEA and several other research bodies published a series of new studies that have examined in detail the feasibility of achieving, by 2050, large-scale deployment of envisioned carbon dioxide removal technologies. They conclude that on a global scale, annual CCS capacity could possibly increase to as much as three billion by 2040 and as much as six billion per year by 2050. With respect to envisioned CDR technologies that have the capacity to remove CO2 from the atmosphere, the IEA has cautioned that the annual removal of 1.7 billion tonnes per year are likely close to the upper bound of what is practicable by 2050. Other sources accept that it might be as much as three billion per year.

In contrast, the annual level of emissions from oil, gas and coal use reached 37 billion tonnes CO2 in 2022. Under the IEA's steps scenario, the projected annual level declines only slightly by 2050, to 29.5 billion tonnes. Measured against those numbers, negative emissions in the range of six billion to eight billion tonnes per year are inconsequential.

The opaque character of the net-zero emissions concept has unfortunately allowed us to put aside any detailed public scrutiny of the hard reality, which is that meeting net-zero by 2050 pledges, in the absence of deep near-term reductions in oil, gas and coal production, would require deploying CDR technologies on an extraordinary scale by 2050—a scale that the IEA has described as “inconceivable”.

I would urge this committee to undertake a full reconsideration of whether Canada's legal framework for net zero by 2050 should now be redesigned. The existing single goal, which subsumes both future reductions and removals, would be disaggregated to provide separate goals. Targets and timetables for achieving negative emissions would be separately and explicitly set out, leaving us with a separate emissions reduction target for 2050.

To conclude, promises that the CCS and CDR deployment in Canada can protect our children from warming above 1.5°C while we continue to increase our oil production in line with rising global demand are untethered from the reality we are facing.

The essential and immediate requirement to give us any remaining chance to limit warming to 1.5°C is that global oil production must be sharply reduced by 2040. Equivalent cuts must be achieved in the case of natural gas.

To conclude, if that does not happen, no feasible amount of CCS technology or CDR deployment can alter the outcome.

Thank you, Mr. Chairman.

[The Chair, Liberal, George Chahal]

Thank you for your opening remarks.

We'll now go to Dr. Trevor Tombe.

You have five minutes, sir.

[Dr. Trevor Tombe, Professor of Economics, University of Calgary, As an Individual]

Thank you, Mr. Chair and members of the committee, for the opportunity to speak with you today about the Trans Mountain pipeline expansion.

I'm going to focus my comments today on the financial and economic implications of the project. This expansion was a considerable undertaking that took about 11 years from initial application to completion, more than six years behind schedule. It also came with significant cost overruns, rising from an estimated $5 billion in 2013 to about $34 billion today.

It's such a high price tag that the question really is: Was it worth it? In my view, the answer is clear: Yes, it was, and it's not even close. There are really two key reasons why I say that.

First, taxpayers are not on the hook for the pipeline in the way that many fear. I'll clarify that in a moment. Second, the pipeline's broader economic benefits to Canada far exceed its costs.

Let me start with the impact on taxpayers. There has been widespread concern that taxpayers will suffer significant losses from the government's ownership of the pipeline given those cost overruns, but recent financial data suggests otherwise. Oil producers will cover a material portion of the cost overruns through higher tolls of roughly now about $11 per barrel. While that's much higher than initially expected, to be sure, it's still better than relying on more expensive rail transportation options, which were the alternative.

Also, much of the cost overruns for the project were financed through debt, and that's important for two reasons. First, any future buyer of the pipeline would not need to literally pay the full $34 billion to prevent taxpayers from losing money. The buyer instead could assume those debt obligations. Second, the interest on this debt is manageable relative to the pipeline's projected future revenues. It's anticipated to generate about $3 billion in annual revenue soon, with operating expenses well below $500 million. Even after covering the $1.6 billion in interest, there is still enough left over to start paying down that debt. Over time, interest rates will fall, revenues will rise, and the pipeline's profitability will increase for many years to come.

In valuing the pipeline today, I think we need to account for the time value of money. If we apply, say, a discount rate of 8% on future projected earnings from the pipeline's recent financial filings through the CER, it suggests that earnings—depending on the scenario that you look at over the next 20 years before depreciation and interest—are valued at between $26 billion and $38 billion. If you subtract expenses, interest payments, debt repayments and so on, it leaves you with a residual of between about $4.2 billion at the low end to $8.6 billion at the high end at the end of that 20-year horizon. Again, that's in present value terms.

There are risks with any forecasts, of course, but even with the cost overruns, the pipeline could quite easily, depending on the scenario, be worth more than the $4.5 billion that the government paid for it in 2018.

The broader economic benefits of the pipeline for Canada are also substantial. As a piece of critical infrastructure, these broader economic benefits cannot be neglected. For oil producers, the advantages are obvious. The expected pipeline can now transport nearly 900,000 barrels per day, and that's the equivalent of about 1,300 railcars. That provides lower-cost access to international markets, and that tends to boost prices for Canadian producers.

Even producers not directly using the pipeline will benefit from the narrowing of the price differential between Canadian oil and global prices, and it's difficult to say exactly by how much. I'm not going to provide my own estimates here, but recent analysis from the CER estimated that adequate pipeline capacity could shave about $9 per barrel off that differential. Given Canada's daily oil production, these gains add up fast.

Using the 2016 energy future report, for example, from the CER, you can estimate that, between now and 2040, the cost to Canada's economy would be nearly $240 billion in today's dollars if we hadn't expanded pipeline infrastructure, so projects like Trans Mountain avoid those large costs. These economic gains suggest that the pipeline will more than pay for itself in terms of higher GDP, and those benefits accrue far beyond Alberta as well.

In closing, Mr. Chair, I'll note that none of what I've said here justifies the major cost overruns, and investigations into the causes to avoid repeating the same mistakes are important to undertake. Despite the delays and added costs, the pipeline remains an incredibly valuable asset and a crucial piece of infrastructure for Canada's economy.

Thank you. I look forward to the questions and conversations to come.

[The Chair, Liberal, George Chahal]

Thank you for your opening remarks.

We'll now go to David Detomasi.

You have five minutes, sir.

[Dr. David Detomasi, Professor, Queen's University, As an Individual]

Thank you again to the committee for inviting me here and allowing me to speak.

My name is David Detomasi. As mentioned, I'm a professor at the Smith School of Business at Queen's. I recently published a book entitled Profits and Power: Navigating the Politics and Geopolitics of Oil.

It's within the context of that book that I'm writing my second one, and will offer the comments to you today based on what I'm writing now. I would like to begin speaking about why our economic bounty in Canada offers us a luxury of choice that most other countries in the world simply do not have.

There are clearly many people in Canada, many Canadians, who either wish we perhaps did not have them or we didn't develop them. I would like to offer some insights into the global system that they might consider while they make those judgments. I would like these arguments to be put in the record for our consideration of Trans Mountain.

First of all, there's the reality of the current energy system, which I think increasingly means that Canadians need to focus on the world around us. Canada's current abundance in energy, along with its abundance of food, timber and other resources, is a historical rarity. The idea that we would voluntarily constrict them is as modern an idea as our idea of restricting food intake to reduce obesity. Almost nobody else in the world has this concern.

I would argue that the biggest problem the world energy system has today is that far too many people have too little energy—not enough of it. Of the world's eight billion people, two billion live in dire energy poverty on a day-to-day basis. There are four billion people in the world who have access to energy, but it's not regular, it's not predictable and it doesn't allow them to develop their full potential.

If an overriding general goal or a Canadian value is the alleviation of human misery, then any progress toward that goal must pay attention to solving the energy problem for the world's poor and the increasing energy demand from the rapidly industrializing world.

To do that, we need to recognize some clear facts. Energy use is going to grow, and I believe carbon energy will grow in volume, as well. Many parts of the world, including the continent of Africa—with two billion people—are just beginning their growth and industrializing journey. My last figure says the entire continent of Africa uses less energy than the state of California.

India's energy profile today resembles what China's was in the year 2000, and it shows every intention of following China's path. In 20 years, its energy use will likely be very close to what China's is now, and China will continue to grow.

Carbon now sits at about 83% of the world's energy mix. Even if we're able to reduce that percentage to, say, 70% by 2050, or 60%, it would still be a large percentage of a very large pie. Carbon use is not going anywhere in the world. In fact, it's going to increase substantially.

Third, energy production is a critical element of geopolitical competition. Canada's impact on the broader geopolitical affairs might seem modest—we only have 40 million people in our country in a world of eight billion—but we punch way above our weight in hockey, in maple syrup and in oil and gas development.

Recent world events in Ukraine, particularly, as well as others, indicate that the security of energy supply is paramount both to the people I've just mentioned and to our allies, who have asked us repeatedly to provide them that security. Countries that are well supplied with energy worry less about acquiring more of it, worry less about their neighbours, spend less money on defence, fight fewer wars and have fewer civil conflicts. I can show you the research to back all of that up.

Energy production is critical to the economic welfare of our country, which is showing some worrisome signs currently. I'm sure the committee is very much aware of Canada's lagging productivity challenge. The value of our output per worker is dropping. The problem is recognized by our current finance minister in repeated budget documents, and the deputy governor of the Bank of Canada recently went so far as to label the productivity problem as a full-blown national crisis.

To put it clearly, 20 years ago, Canada's productivity level generated an income per capita that was roughly equivalent to that among the wealthier American states. Today, we are slightly behind Alabama in GDP per capita, which is one of the United States' poorest states. Generating high and growing living standards with Canadian energy development, I think, is a key part of that puzzle.

We're losing ground in the ability to generate wealth and prosperity. At present, the Organization for Economic Co-operation and Development predicts that Canada will be the worst-performing economy of its member states and will remain that way for the next three decades. Our debt levels continue to rise, our debt servicing costs are growing, and even former Bank of Canada governor, David Dodge, has drawn attention to this being worrisome at best.

Canada's most productive and profitable export-driven industry is oil and gas and mining. These generate the highest amount of wealth per hour of labour worked, and they are also by far our most valuable export. As recently reported by Jock Finlayson in The Globe and Mail, without energy exports, our cumulative trade deficit over the past decade would measure well over a trillion dollars, but with oil and gas we are more or less at balance.

Exporting resources generates the earnings we need to purchase the benefits of goods and services the world over and helps generate the money we need to fund the social programs that Canadians increasingly rely upon across the country. If we do not have these industries and we do not develop them effectively, the results will be devastating for the Canadian economy and our social programs.

The final point I'll make is that developing natural resources responsibly can be an expression and reaffirmation of Canadian values. Simply, Canadians clearly want economic activity to occur in a sustainable, environmentally aware way, one that acknowledges and respects the rights of indigenous peoples. Let me be clear: This is not always the case in oil and gas development around the world. In fact, it is rarely the case this is so. Increasingly, as people become wealthier and as—

[The Chair, Liberal, George Chahal]

Mr. Detomasi, I would ask you to wrap up. We are over time.

[Dr. David Detomasi]

—our capacity to export the things we have learned in the production of the Trans Mountain pipeline and our relationship with indigenous peoples will serve Canada well as we export and work our magic abroad.

Thank you.

[Mario Simard, Bloc, Jonquière, QC]

Mr. Chair, I would like to kindly remind our witnesses to speak a little less quickly, because it can pose a challenge for interpretation.

[The Chair, Liberal, George Chahal]

Thank you, Monsieur Simard, for that reminder. I think it has been pretty good overall, but I would ask the witnesses to slow down for interpretation purposes.

We will now go to you, Mr. Mason. You have five minutes.

[Stephen Mason, Chief Executive Officer and Senior Managing Director, Project Reconciliation]

Thank you, Mr. Chair and members of the committee, for the opportunity to speak to you today about the future of Trans Mountain.

As I was introduced, I am the founder and managing director of a vision called Project Reconciliation, which has been, for seven years, looking at a need to change the model of how, under the constitutional duty to consult, to get major infrastructure projects like Trans Mountain permitted. It's not a conversation about promising jobs while we're building and that go away once the project's built, but it's a conversation about having material equity ownership.

I'm also the chair and CEO of a company called Reconciliation Energy Transition. We hold a major carbon hub in the Calgary area, and all of that has material indigenous partnerships.

Project Reconciliation has a clear and bold vision in that we are finance-, governance- and ownership allocation-ready to facilitate up to 100% indigenous ownership of Trans Mountain. This is about creating a path towards economic reconciliation, where indigenous communities are not just participants, as I just pointed out, but leaders in major projects through material equity ownership.

Project Reconciliation will have no ownership of Trans Mountain. We are ready to facilitate the purchase from Canada at commercial value—and I underline “commercial value”. This is not an ask to give this to indigenous peoples. The indigenous peoples—and we are finance-ready—will purchase this asset from the federal government at commercial value, and this is to go to 120-plus impacted nations. This would establish a foundation for indigenous generational wealth, weaving indigenous governance with corporate governance to foster economic independence and stewardship.

Our plan ensures that indigenous communities impacted by the pipeline will benefit economically. The sale of Trans Mountain to indigenous ownership is not just an economic transaction: It is a significant step towards financial sovereignty for indigenous nations. This ownership would enable communities to reinvest in housing, education, social services and the training and development of indigenous youth, and to invest in other infrastructure projects, addressing long-standing challenges as well as the reinvestments.

At the heart of this vision is the indigenous sovereign wealth fund. It was a vision that came...that the ownership would lead to a generational wealth base. Much like what Norway did in creating the Norwegian sovereign wealth fund, this would be the creation of a generational indigenous sovereign wealth fund whereby indigenous populations thrive and all Canadians benefit. Prosperous indigenous communities strengthen local economies, contribute to a more robust workforce and foster national unity. By enabling the indigenous participation early in major projects, we ensure that development is sustainable, inclusive and aligned with Canada's broader goals of economic growth, social justice and environmental responsibility.

I tabled the first offer to purchase 51% of Trans Mountain on July 2019 to former finance minister Bill Morneau. I had the National Bank of Canada and the chairman of Project Reconciliation with me at the meeting. Minister Morneau liked the proposal that was addressing a commercial value transaction, an ownership model that gave an allocation of ownership reflecting the individual nation's proximity to the right-of-way and a population weighting, and a governance structure that provided the voice at the table. Minister Morneau basically stated the Government of Canada was going to just build it first and then look to divest it, and here we are, seven years later. Well, actually, if I do the math, it's five years later—seven before we got ready to table the offer. He stated that material equity ownership needed to be the solution.

The divestiture of Trans Mountain is an opportunity to not only fulfill a commitment to reconciliation—and, really, to make an active verb out of that noun “undelivered promise”—but also to create a future in which indigenous communities are full economic partners in Canada's prosperity. Real economic reconciliation will take all of us, indigenous and non-indigenous, working together to create indigenous capital for future projects. In doing so we can change the existing business model, grow annual distributions, and support community services for future generations.

As TheFutureEconomy.ca report notes, closing the gap in opportunities for indigenous communities would boost Canada's GDP by $27.7 billion annually, which is an increase of 1.5%.

This sale is more than just an economic benefit. It's about building a new table where indigenous communities are leaders in decision-making, helping to build a stronger and more inclusive Canada.

While Project Reconciliation has been in a holding pattern, waiting for the completion of the pipeline, we have moved forward with Reconciliation Energy Transition as the basis to facilitate material indigenous equity partnerships and energy transition projects. RETI was awarded the CCS project for the greater Calgary area. The project also includes a sustainable aviation fuel project that will provide sustainable aviation fuel to Calgary International Airport. RETI has partnered with Sumitomo Corporation of the Americas in the hub.

[The Chair, Liberal, George Chahal]

Mr. Mason, I'd just ask you to wrap up. You're at the end of the time.

[Stephen Mason]

I'm done.

[The Chair, Liberal, George Chahal]

Thank you.

To all our witnesses, I'll just remind you again at the end of the meeting that if there's anything you missed, you can provide a brief to the committee clerk as well.

We'll now proceed with our first round of questioning. We'll begin with Mrs. Stubbs.

You have six minutes.

[Shannon Stubbs, Conservative, Lakeland, AB]

Thank you, Chair.

[Stephen Mason]

For anything in French, we're not getting any translation.

[The Chair, Liberal, George Chahal]

We'll suspend for a moment.

[The Chair, Liberal, George Chahal]

We are back.

Now we'll proceed with Mrs. Stubbs.

The floor is yours.

[Shannon Stubbs, Conservative, Lakeland, AB]

Thanks, Chair.

Thank you, all of the witnesses, for being here today.

Thank you in particular to the witnesses who spoke so eloquently and powerfully about the way that TMX, pipelines in general, and oil and gas development benefit all of Canada. This essential infrastructure is crucial to Canada's national interest and is also crucial to helping support allies around the world.

Thank you for so accurately explaining the ways in which energy development in oil and gas is absolutely critical to human flourishing around the world and also for outlining the reconciliation opportunities related to this essential infrastructure.

Dr. Tombe, I might start with you related to the cost overruns, given your focus in your presentation.

As you have outlined, of course, the government has overseen just a staggering, ridiculous cost overrun on the expansion, which started with a private sector estimate of about $5.4 billion and, as you explained, has ballooned to $34 billion today.

Could you give the committee some insights on how these cost overruns occurred and how this estimate got so out of whack?

If you have any comments on any of the government's anti-resource development policies that contributed to those cost overruns, which ones were they and how did that happened?

[Dr. Trevor Tombe]

It's great question. I won't be able to provide a precise quantitative answer to that.

I think much more investigation is warranted into what the precise factors were behind those cost overruns, and there were many. I think of the regulatory barriers that have ratcheted up in recent years. I say this not just because of recent changes in federal policy, but early on in the pipeline's efforts to get off the ground, there were challenges with the British Columbia provincial government, for example, as Kinder Morgan was trying to get that project over the line.

There were non-regulatory barriers as well. The simultaneous construction of Site C and Coastal GasLink, for example, does represent some competition for resources and skilled labour, if you will, that can increase costs of all of those projects together. Conditions on the ground also turned out to differ significantly from those initial estimates.

On top of all of this, COVID-19 and associated rapid price increases for certain key materials in the construction sector overall are also a factor.

I'd say that a lot of unfortunate challenges did face the project, but regulatory delays are certainly a big one. These kind of very large projects do incur considerable costs prior to any construction activity at all. Thinking about not just the regulatory burden that proponents need to overcome, but also the rapid and uncertain changes in the regulatory environment also make it more difficult to plan and navigate these kind of large infrastructure projects well.

[Shannon Stubbs, Conservative, Lakeland, AB]

Thank you, Dr. Tombe.

Of course, one of the key failures was that the government could have declared the Trans Mountain expansion in the general advantage of Canada. There were certainly things the federal government could have done to clear the way for that pipeline, which had been approved to get built by the private sector in the first place. I thank you for that insight and your comments on the issue.

I also noted you made a comment about adequate pipeline capacity. I'd ask you if you think Canada has enough pipeline capacity right now—and, of course, we common-sense Conservatives are very pro-pipeline on this side, and we know there actually isn't sufficient pipeline capacity right now to continue to be able to expand production and exports.

Could you expand a bit more on this issue around tolls? They're expected to be charged to recoup costs. Can you give any insight into how much higher you expect those tolls to be? The CER has said they won't be finally decided on until 2025. If they're expected to be higher, what factors and impacts will drive that?

[Dr. Trevor Tombe]

That's a complicated question. I won't speculate on where the final tolls will end up.

Right now, the interim tolls, at about $11 per barrel for a full shipment from Alberta to the coast, are roughly double what the initial estimates were. A portion of that is tied to the construction cost increases. For certain components of the project, there is scope to pass through construction cost increases to producers in the form of these higher tolls. What the CER is going to look at, to dramatically oversimplify it, is what the tolls need to be to ensure the viability of the pipeline itself. That's typically how we approach these kinds of regulated assets.

[Shannon Stubbs, Conservative, Lakeland, AB]

Could you expand on your comments about implications for taxpayers, either out-of-pocket or in tax revenues?

[Dr. Trevor Tombe]

Sure.

The debt that was used to finance the construction does represent a risk to taxpayers in the form of future revenues of the pipeline not being enough to cover the interest and repayment obligations of that debt. I do tend to be fairly optimistic for the oil and gas sector in Canada overall and anticipate that this is a project that will be used for several decades to come. If the pipeline is used, then it will generate sufficient revenue to cover these debt costs, both interest and future repayment.

If we use the pipeline, then taxpayers will not be on the hook directly for these increased costs. That really will be shifted, in large part, to producers in the form of higher tolls.

[The Chair, Liberal, George Chahal]

Thank you, Dr. Tombe.

We'll now go to Viviane Lapointe.

The floor is yours.