:
Committee members, good morning. My name is Christian Houle. I am the general manager for Shell’s refinery in Montreal East.
Sitting next to me is Mr. Oblath, the vice-president responsible for Shell’s merger, acquisition and divestment activities, including those involving Shell’s Montreal East refinery. He is a senior member of Shell who is here to provide information and answer your questions regarding the significant efforts made to sell the refinery, and provide a perspective on global refining.
I will provide information and attempt to answer questions regarding our plans for converting the refinery to a terminal, including the supply of gasoline, diesel and aviation fuel to meet the demand of our customers in Quebec, Atlantic Canada and parts of Ontario.
For the past 77 years, Shell has operated its refinery in Montreal East; that is 77 years of Shell and its employees contributing to the economy and community of Montreal East. Taxpayers, governments, employees, customers, suppliers and Shell have all benefited.
First, please know that this outcome is not our first choice. As my colleague Mr. Oblath will demonstrate, for almost a full year we tried hard to sell the refinery. We realize that its conversion to a terminal will have a significant impact on many people—our employees and their families, as well as those who live and work near the refinery who benefit from our operations. We recognize how difficult this is for all and sincerely regret having to take this step. This was not an easy decision, but unfortunately it was the only viable decision in the difficult economic climate in the refinery sector.
On the matter of supply, we do not agree with the assumption that the conversion of the Montreal East refinery to a terminal will result in interruptions of fuel supplies for our customers. Shell has experience converting refineries to terminals. Within Canada, for instance, Shell converted its Shellburn and St-Boniface refineries into terminals. We learned a good deal through those conversion processes and continue to have a strong presence in those areas as a major fuel provider. We will continue to reliably supply our customers with quality products.
We announced our decision in January. We have since then cooperated with requests from the provincial and federal governments, which asked us to delay dismantling the refinery until June 1 to cooperate with a special committee and consider potential bids.
I should note that by agreeing to the special committee process, we also delayed normal business processes including moving forward with regulatory permits required for the conversion.
Normal permit requests for demolition, construction and operation of terminal equipment are needed. A delay in permitting can cause supply disruptions. Also, Shell needs to start shutting down the refinery in the near future to ensure safety and asset integrity.
I now turn the floor over to my colleague, Mr. Oblath.
:
Good morning, committee members.
At Shell we are deeply conscious that our decision impacts our employees, their families, and others. In regard to our employees, we will treat them fairly, and we appreciate the professionalism they have shown throughout this difficult time.
I hope our attendance here today will provide you with a better understanding that Shell has made substantial efforts to sell the Montreal East refinery in a difficult economic environment and that its conversion to a terminal is necessary to supply our customers.
There have been numerous news articles and public statements regarding our announcement of this conversion. Many of them have been speculative and inaccurate. There are three key issues related to the attempt to sell the refinery: it was marketed to a large number of potential purchasers; a significant capital investment is required to continue to operate the refinery in a competitive and safe manner; and despite a year of effort from a large number of parties who were contacted, many of whom analyzed the opportunity in great detail, no offers were made to us.
We're not the first to end our refining operations in Montreal East. Despite significant challenges, we have continued longer than others.
The business climate has changed substantially, particularly in the past decade as global competition has increased. Several refineries in North America have been closed and a few converted in recent times. New refineries in other parts of the world are coming on stream with advantages that smaller, older refineries such as ours in Montreal do not have. Thus margins are lower as unit costs for a smaller refinery become higher.
Shell continuously reviews our refineries to understand the future investments needed to sustain safe, continuous operations. In the case of the Montreal East refinery, this analysis determined that some $600 million of capital would be needed in the near term, notwithstanding the $400 million in capital expenditures we have spent in the last six years.
Thus in July 2009 we publicly announced our intention to seek a buyer for the site, and more than 25 different parties were contacted or contacted us. From this group, 17 made serious inquiries regarding the site and its operations; six of these parties progressed to due diligence, where they were given very detailed information on the site and its operations. Unfortunately, no one, after this detailed analysis, concluded that the refinery warranted their investment, and this process did not result in one single offer.
As a result, in January 2010 we regretfully announced our decision to convert the refinery to a terminal. We wanted to give our employees proper notice of this decision and ensure we could maintain a supply of petroleum products to our customers.
The government asked us, and we agreed, to delay our conversion plans and work cooperatively with a special committee it had created to seek out potential buyers. The special committee is reported to have made more than 100 contacts. As a result of this effort, five of these parties conducted a more detailed evaluation of the site and had open access to discussions with the Shell personnel responsible for this transaction. Out of all of these, only Delek US, a credible refinery operator, came forward with a viable expression of interest. However, after constructive and good faith negotiations, Delek unfortunately withdrew from the process.
Several factors likely influenced decisions of these many interested parties over the past year, one of which was that any potential buyer had to be able to finance three things: a fair purchase price; the cost of approximately $400 million to $500 million of working capital; and another $600 million of capital investments that would be needed in the near term to sustain the site, keeping it operating in a safe and secure manner.
We understand that the special committee offered advantageous financing, acquisitions of shares in the prospective bidder, and direct cash grants that may or may not have had to be repaid. However, despite all of the extensive efforts made by the special committee, the Quebec government, and our employees, as well as the proposed incentives and investments, not one out of the over 100 prospective purchasers saw an acceptable future for this site as a refinery, and none presented us with an offer.
I would like now to hand the floor back to my colleague, Monsieur Houle.
:
Ladies and gentlemen, I want to begin by thanking the members of the committee for studying the issue of the closure of the Montreal East Shell refinery.
For more than 12 years, I have been the president of the workers' union for this refinery, CEP local 121, which is affiliated with the FTQ. I have worked in the refining sector for 33 years. I am here because I believe that the Montreal East refinery can and should continue to operate, and that it can do so in a profitable manner while serving the Quebec market as it has done for 77 years.
As soon as Shell announced its plans to close the refinery a year ago, indicating that it preferred to sell the refinery, the union supported selling the refinery and protecting jobs.
I want to go over the reasons why the refinery should continue to operate.
First of all, it is profitable and has made money every year for the past 18 years, except in 2009, which was a bad year for the entire industry.
Second, it supplies a stable market with specific products that other refineries do not produce in large enough quantities, such as aviation fuel.
Third, it is directly responsible for 800 jobs and indirectly responsible for 3,500 jobs.
Fourth, it generates $240 million in economic benefits a year.
Fifth, the refinery has undergone upgrades and modernization over the years in order to meet Shell company standards, which are among the most stringent in the industry.
Sixth, closing the refinery could lead to the closure of its Suncor neighbour, which would mean that Quebec would lose two-thirds of its refining capacity.
Seventh, the disappearance of the Montreal East refinery would mean the end of the petrochemical industrial cluster.
Eighth, if the Shell refinery closes, Quebec will lose 25% of its refining capacity. What is worse, the entire aviation, civil and military fuel supply currently provided by the Montreal East refinery is at stake, not to mention the dependence with respect to importing.
That does not include the fact that any scenario put forward by the company based on the on time, on spec arrival by ship of refined products from abroad is the stuff of science fiction. The last three ships that arrived in Montreal were further proof of that. When ships do not arrive on time, it results in shortages at the pump, such as the one experienced by Quebeckers in June.
We are here because despite the fact that Shell received bids that satisfied the conditions set out in its February 16 document, no agreements were reached, contrary to the commitment to sell the refinery that Shell made to the workers, the community and the government.
Furthermore, even though the document put out by Shell on February 16 outlined the conditions under which it would sell the refinery, the company was not all that committed to selling. That is why the committee received confirmation from Shell on four different occasions, from Mr. Williams, Mr. Oblath, Mr. Rathweg and Mr. Marion, that it was prepared to sell if the conditions outlined in its February 16 document were fulfilled.
That confirmation changed the nature of the contract between Shell and the committee, such that if a buyer was prepared to do business with Shell under its terms, Shell had to sell its refinery to the buyer in question. That is the nature of the commitment undertaken by Shell that parliamentarians must consider today.
When Shell began the process to sell the refinery, it did not open the virtual data room, which brought together the refinery's financial documents and conditions of sale, until October 2009, and Shell closed it two months later in late December 2009. It was a fleeting period that should have opened the door to a serious process.
Despite rumours that certain companies were interested in buying the refinery, on January 7, 2010, Shell publicly announced its plans to convert the refinery to a terminal.
The union could not stand by in the face of such a senseless decision, both from an economic standpoint with respect to the 800 families directly affected and from the standpoint of the country's energy security. Our arguments are well-founded, and we have received considerable support from sincere non-partisan parties, initially from fellow union members but also from the Montreal East community. And I would just like to point out that Montreal East Mayor Robert Coutu is here today and has been steadfast in his support since the very beginning.
A coalition of more than 80 companies and socio-economic leaders was formed, and support has come rolling in from every political party, at the municipal, provincial and federal levels. Montreal's city council moved a unanimous motion, and governments sent letters to Shell in an attempt to delay the closure. And Shell delayed the closure for three months, until June 1. As early as February, we helped form a survival committee, chaired by Michael Fortier. It brought together union, municipal, provincial and federal representatives. As a member of that committee, I noticed that every time we took a step forward, Shell would raise the bar higher; I felt as though I had been invited to a silly dinner game.
Throughout the committee process, Shell engaged in doublespeak. On one hand, Steve Rathweg and Christian Houle told us that Shell preferred to sell the refinery rather than convert it to a terminal. On the other hand, however, local management at the refinery did everything in its power to dash the legitimate hopes of workers that the refinery would be sold. Just about every day for the past six months, supervisors and managers told workers the same thing: your RE/MAX agents committee will not find a buyer, it is impossible. If Shell could not find one, there were none. Then, when the committee managed to find five buyers, despite the extremely tight deadline, companies that Shell deemed serious and credible, companies it allowed into the data room, the line that management fed employees was that it would not go any further, that when the potential buyers saw the figures, they would not make an offer.
When two companies and practically a third made offers before the June 1 deadline, management told employees to stop operating one of the refinery's most profitable units, lubricating oils, and to stop protecting boiler 13, which had been shut down on May 18. Seventy-two hours after the offers had been made, management sent employees an email indicating that the two offers had been rejected. At that point, the ministers demanded an explanation from Shell regarding the lack of negotiations.
First, reassurance was given that Shell still wanted to sell, and steps were taken to submit a better offer that satisfied the conditions. And despite that, management continued to send out the same message within the refinery—Shell would never sell and the refinery was worth more than $1 billion to it, which was 5 to 7 times the amount it had told the committee. Certain supervisors and managers were so fervent in getting that message out that the union filed a harassment complaint.
Even though the sale process has ended, the doublespeak has not stopped. The local management has changed its tune and is now saying that the terminal will not be profitable, that the land and facilities are not configured for that purpose and that Shell estimates that the terminal will rank in the fourth quartile in terms of results.
It is our opinion that Shell did not really want to sell the refinery, contrary to what its commitments may suggest. Shell gave the Fortier committee a light pat on the back but never believed that the committee would succeed where it had not. What is worse, Shell probably thought that it would make the refinery so unappealing to buyers that no company would want it. When it was faced with a serious buyer, Shell ended up turning down an offer at the higher end of the range it had itself set. And that was no doubt to hide the fact that it had gone to great lengths to stop the progress of the Fortier committee.
Thanks to this parliamentary committee, we can now get to the bottom of the situation.
We still believe that the refinery can and should continue to operate, that our information shows there is still an offer on the table that meets Shell's conditions and that Shell will speed up the process of dismantling equipment. For those reasons, we have obtained an interlocutory, interim injunction from the Superior Court to stop Shell from rendering the refinery equipment unusable. That injunction is valid until September 10.
During that procedure, Shell submitted its terminal conversion plans, in which it indicated that it would remain open to any offer to purchase its Montreal East refining facility throughout the terminal conversion process. Therefore, according to the document Shell submitted to the department, Shell will be prepared to sell the refinery until the terminal conversion process has been completed.
Members of the committee, it may not be too late.
Thank you.
Mr. Oblath, you came from Houston. I am glad to see you here, but you basically repeated word for word the letter written by Lorraine Mitchelmore, the president of Shell Canada. Shell could have saved itself some money, in terms of conveying its message, or saved on travel expenses. You are not required to repeat the same thing.
Mr. Houle, you started off on a bit of a bad foot by saying that safety is at risk because of this committee, as you do not have the time to complete the permit request necessary to dismantle equipment. I would point out that there is an injunction against the dismantling because you do not have the permits needed to go ahead.
Now, to the heart of the matter. Let us get down to business, whether you want to sell the refinery or not.
The reason we had to ask you to appear before the committee is that we have the feeling that someone is trying to pull the wool over our eyes. We have the feeling that someone is lying to us. We have the feeling that a lot of people worked very hard to make a sale happen, to save 800 direct jobs and 3,500 indirect ones. But today we will talk about saving the energy security of not only Quebec, but also Canada as a whole.
First of all, I would like to thank my colleague Dan McTeague because he got the ball rolling at the time with a motion. It was withdrawn to ensure a proper negotiation process.
Second, I want to thank all of my colleagues because there is no partisanship today: everyone agrees that we need to ask the real questions to figure out how to protect an industry and our nation's energy security. So this affects not only Quebec, but the entire country.
We want to know two things today: whether you want to sell and whether there is a buyer. It is not complicated.
So, first off, we just want to know....
[English]
Mr. Oblath, you were there for the last negotiation with Delek US, if the news is not speculative. Is that correct? You were there at the end in discussions with Delek US, to see if they were a buyer?
:
Mr. Chair, I hope that I have not lost my speaking time.
[English]
We have to watch every minute around here.
[Translation]
You say that you are not here to negotiate with us. I agree with you. However, we are told that you are the seller, and the other party is the buyer. There are figures on the table. If the company asks you today what your conditions are and meets them on paper, are you still for sale? Do you mind if it is Delek?
If the Government of Quebec is prepared to let that company into the province, and if the Atlantic region is prepared to accept Shell selling this refinery, as it wishes, why not sell? You were welcome here for 77 years, but, according to Mr. Rocheleau, as you have not made any money in 2009, you told yourselves that it would be best if you left. The only reason is that Shell could make a lot more money a lot faster. That's the real reason, let's say so.
Otherwise, Shell should say that it has a plan, that it wants to sell the refinery and its service stations and then leave. You would be saying thanks for those 77 years, but you want to move on. It is not for you to worry if there is gasoline or not. Governments will take care of it or worry about it.
Do you really want to sell? Yes or no? If not, are you not just looking to get a profit out of it? You made people believe that you were for sale, but you are actually not. You want to bring us oil from elsewhere and rub our noses in it. That is what you want to do. Isn't that right, Mr. Houle?
:
Mr. Chairman, I am known as someone who says what he thinks. But I really get the impression that someone is pulling the wool over our heads today, because this just makes no sense.
We are being told that there was a desire to sell a refinery which, in reality, was so obsolete that it was worth no more than a scrap yard, and yet you were asking for between $150 million and $200 million for it. Montreal deserves more than to just be a parking lot for gas. Is that clear? That's the major point.
There are no refineries being built elsewhere. Basically you are telling us that you intend to dispose of your current stock and that we will just be at the mercy… Furthermore, now it will be tankers coming in. Shall we talk about the environment? You aren't even capable of complying with Quebec's environmental regulations, given that you have had 25 offences in the last several years. And yet you are here telling us that there is nothing to worry about because tankers will be coming in, what's more, and we will be able to get supplies from the Gulf of Mexico. I guess you intend to work with BP; I can hardly wait to see that. Over there, you don't need to unload anymore; on the contrary, you fill up. All you have to do is scoop up the oil on the beach.
I find that completely unacceptable, Mr. Chairman.
I hope you have an open ticket, because I don't think we'll have finished with Shell today. If another committee meeting is needed, we will call one.
[English]
Mr. Oblath, I'm very pleased that you're here today, but I would like you to table your term sheet, because I don't understand. If you have to put forward another $600 million, and that infrastructure is totally wasted and you will let that infrastructure go...and now you're saying, well, we're still willing to sell. Okay. We'll have Delek tell us later on... Would you be ready to table that term sheet so that we can see what happened? That's the bottom line. It's not just an issue about what Delek offered you. It's what did you tell them? In the beginning we were talking about a bracket just to put up some money to buy the refinery, and now it's more and more. At the end of the day, we understand it's a total waste.
[Translation]
It's not very encouraging for the employees, but nor is it very encouraging in terms of our energy security. We will be dependent on the United States and others, in terms of supply, for the purposes of our own energy security. I can't wait to go to the Shell station at the end of my street and see that the cost of gas has gone up by 10¢ a litre because of our dependency on the United States. If something happens—such as a humanitarian mission, a war or whatever it may be—we will be dependent on another country. What does it mean to be a sovereign country, in your opinion?
It's not just a 25% shortfall in Quebec; it will be 13% all across Eastern Canada.
I am outraged by those kinds of comments. But none of this seems to really bother you, Mr. Houle. Not only that, but it's our fault, because we summoned you to appear at a committee meeting today, which meant that you didn't have time to apply for your permits. However, you did have time to file a motion for an injunction, for example, because you wanted to move ahead with the dismantling before obtaining the necessary permits.
[English]
Mr. Oblath, do you believe that Delek US has the capacity to run Shell's Montreal East refinery?
:
Well, it's time and circumstance. I'm not trying to pick peas with you, but we didn't make an offer; we expressed an interest at a certain price level--since the lawyers would have a problem with the word “offer”. We're prepared to move it to that level, but it's not there now.
You must understand, this turnaround is a major, major, major issue. We were faced with closing regardless of what we did. The term sheet we exchanged with Shell provided that on June 26 we would sign an agreement by July 26; that's 30 days. We've got to move two sets of lawyers and all that stuff and understand the business issue, and it's 30 days. We've worked around the clock on deals and we could do it again; we know how to do it. So in spirit we'll agree; we'll sign an agreement in 30 days.
The other condition was that we close within the next 60 days following that 30. That's a very, very short timeframe to get all the approvals, to get the financing, to do all the things that are necessary. We said we would agree to that and go forward on that basis. How much furnace money we have to put up, recognizing the risk we take on those timeframes--we needed to talk about that. But in terms of the spirit of getting this deal done, we'll do that.
It did not matter if we had met both of those timeframes. That refinery was going to be closed because you could not do the turnaround. Prior to that, we explored with Shell: we'll put up the front money, you get it started; you get it started, we'll pay you back. That was a problem. I'm not questioning that internally it didn't have a right to be a problem; it just was. We explored the ways of trying to hurry up and do it.
Even if we had resolved that, it's not likely, in my humble opinion--well, in my opinion--
Voices: Oh, oh!
Mr. Jim Boles: --that that would have been done. You didn't have time to do the turnaround.
So you had a closed facility. We're not going to pay the purchase price for a closed facility, and we never got to the stage of saying, okay guys, let's agree that we've got a closed facility... Shell had an alternative use here. It wasn't like they had to sell to us, right? They've got an alternative purpose for it, unlike many sellers who just want to sell the asset and the business. So we didn't get to the point of exploring, hey look, let's furlough some employees, let's pay some part pay; you organize the temporary arrangements for the customers and we'll stand by and continue to spend money and time and management effort to get this deal done.
Willing parties can find ways to do that, right? But it was an enormous hurdle for them, because Shell's a big company and they've got plans in place. We respect those plans, and they're moving forward with what they corporately needed to do for themselves, their stakeholders, and, as they continue to tell me, the pain that all this “do we have a deal or don't we have a deal” was causing their employees.
So that's the problem. The turnaround is the biggest problem. There are many other issues, many that need to be resolved, but that's just a day's work, right? We just do it. On this one, time ran out. You couldn't get any equipment, you couldn't get the engineering done, you couldn't get any of that, and if Delek's choice was to buy a closed refinery or go operate a popsicle stand, we were not going to buy a closed refinery. We weren't going to pay the purchase price for a closed refinery.
:
Thank you, Mr. Chairman.
[English]
Mr. Boles, as a start, I want to congratulate you for your honesty and your transparency. This is why we had this meeting today. I feel great about your answers. I know that you're part of the solution. You came and answered the questions straightforwardly, and we are very pleased about that. I think it's important that Canadians know that not only do we have an enterprise that's willing to be part of that solution, but we have good people also who are willing to come here and address those questions straightforwardly. So congratulations.
I just hope that Shell, whose people are still in the room, will listen to what we have said today and your answers, and that there is a buyer if there is a seller. I hope they will listen to that.
[Translation]
The beauty of the Canadian Parliament is that a committee can meet again.
[English]
I understand that if there's a will, there's a way. We have the way, but we have to make sure the will is there.
[Translation]
Mr. Delage, I know that you have been extremely patient today. You have just been listening to the discussion most of the time. However, on the committee, you were the expert and financial lobbyist throughout the time it was conducting its work. In light of what we have heard today, I would like you to explain Shell's attitude. We have a feeling about all this. I have no reason to doubt that this is a serious buyer and that Delek US Holdings is not interested in doing the same thing as Shell—in other words, to create a parking lot for gas in Montreal. I believe the company wants to protect the employees and work towards becoming player or catalyst in the petrochemical industry in Quebec and Canada.
Did Shell really want to sell? In light of your understanding and what you experienced in this process, would you say that Shell would be prepared to go back to the table for further talks? What were they like at the time?
Mr. Chair and members of the committee, thank you for the opportunity to appear before you this morning as part of your study of Shell Canada's recent decision to close its Montreal refinery.
My name is Richard Bilodeau, and I am the acting assistant deputy commissioner of competition for the Competition Bureau's civil matters branch. I am accompanied today by Martine Dagenais, assistant deputy commissioner of competition for the bureau's merger branch. We look forward to assisting the committee today in its deliberations.
As the committee members are aware, the Competition Bureau is an independent law enforcement agency that is headed by the Commissioner of Competition. The bureau administers and enforces the Competition Act, which is designed to maintain and encourage competition in Canada in order to promote a number of objectives, including increasing the efficiency and adaptability of the Canadian economy and providing consumers with competitive prices and product choices.
The act applies, with very limited exceptions, to all sectors of the Canadian economy, including the petroleum sector, and sets out criminal and civil penalties for a variety of anti-competitive practices. These include, for example, entering into agreements with competitors to fix prices, allocate markets, and restrict output; abusing a dominant market position; and engaging in misleading advertising and deceptive marketing practices.
[Translation]
The Bureau takes its enforcement responsibilities very seriously, and is acutely aware of the importance of promoting competitive markets in the petroleum sector.
As committee members may recall, the Bureau announced in June of 2008 that criminal charges would be laid against 13 individuals and 11 companies which conspired to fix the price of gasoline at the pump in Victoriaville, Thetford Mines, Magog and Sherbrooke, Quebec. Those charges, which so far have resulted in almost $3 million in fines and jail terms totalling 54 months, arose from the largest criminal investigation in the history of the Competition Bureau. Investigators seized over 100,000 records, searched 90 locations, and intercepted thousands of telephone conversations over the course of their investigation.
Very recently, on July 15, the Bureau announced that new criminal charges had been laid against an additional 25 individuals and three companies with respect to this same price-fixing case, bringing the total to 38 individuals and 14 companies accused. Price-fixing is widely considered to be among the most egregious forms of anti-competitive conduct. And we will pursue these criminal activities to the fullest extent of the law.
[English]
The committee members may also recall that in July of 2009, the bureau completed an extensive review of the merger of Suncor and Petro-Canada. Ultimately the bureau entered into an agreement with the parties to resolve concerns that the merger would lessen competition substantially, which we concluded could lead to higher gasoline prices. The agreement required the companies to sell 104 retail gas stations in southern Ontario as well as significant storage and distribution network capacity in the greater Toronto area for ten years. In securing these remedies, the bureau not only preserved competition in those markets where concerns were identified but also facilitated entry by new and vibrant competitors.
With that background, I will now turn to the specific topic that is before this committee today, the impending closure of Shell Canada's Montreal refinery.
As the bureau has stated in previous appearances before this committee, our overriding concern in all cases is whether the conduct in question amounts to a violation of the Competition Act. The bureau obtains information on possible violations of the act through its own monitoring activities, from complaints by those in the market, and from firms that assist the bureau in its investigations in exchange for immunity from prosecution or leniency in sentencing. Where evidence establishes a violation of the act, the bureau does not hesitate to take appropriate action.
[Translation]
Provided that conduct does not contravene the Act or any other applicable law, businesses are free to determine how they operate. In that regard, generally speaking, a unilateral decision by a firm to discontinue the use of a manufacturing or other facility does not raise concerns under the Competition Act. The Bureau presently has no basis on which to be concerned that Shell's closure of its Montreal refinery triggers any concerns under the Competition Act.
If, instead, Shell ultimately were to decide to sell all or part of the refinery, the Bureau would likely review the transaction pursuant to the merger provisions of the Act. Any such review takes into account a variety of factors, including the parties' market shares, the level of economic concentration in the relevant industry, the effectiveness of remaining competitors and barriers to entry.
Where the Bureau determines that a merger is likely to lead to a substantial lessening or prevention of competition, the Bureau may apply to the Competition Tribunal for an order to prevent, dissolve or alter the merger.
[English]
Participants in the petroleum sector and Canadians in general can be confident that the bureau takes its work very seriously and recognizes the importance of competition as a key driver of growth, productivity, and innovation in the petroleum sector and in the Canadian economy more broadly.
With that, Mr. Chair, I thank the committee for its time and welcome any questions from committee members.
:
Thank you, Mr. Chair, and thank you, committee members, for the opportunity to present to you today.
I have a number of opening remarks and a power point presentation that accompanies the remarks. I will reference particular slides as I move along.
My name is Jeff Labonté and I'm the director general for the petroleum resources branch of Natural Resources Canada. I'm joined today by two of my colleagues, Claude Gauvin and Mike Rau, who both work in the same branch as I do.
My areas of responsibility include the monitoring of oil and gas markets and the development and implementation of oil and gas policy in Canada. As well, I have oversight for advice pertaining to crude oil, refined petroleum products, and natural gas south of 60 degrees. I'm here today to speak to the committee on a number of specific points.
I'll be talking to two particular purposes today. The first would be to outline Natural Resources Canada's role as it relates to the Canadian refining sector and the domestic supply of petroleum products in Canada, as well as giving the committee some brief overview on the petroleum refining and distribution market in Canada over the past number of years and its relationship to regional economies and international events. More specifically, my remarks will cover NRCAN's role, the product supply chain, regional differences, and realities affecting Canada's refining industry.
With respect to oil and gas, NRCAN covers the following areas. First, in response to energy supply disruptions of national significance, NRCAN could act on a temporary basis to ensure Canadians have access to energy. This is in the context of Canada's market-based approach to energy policy where private sector supply and demand and investment choices are made in relation to market fundamentals and demand.
Second, NRCAN ensures that Canada honours its international obligations under the International Energy Agency's treaty. Should the IEA declare an emergency of any sort in the face of a supply disruption, Canada is obliged to act in support of that treaty.
Third, we at NRCAN provide Canadian consumers with information on Canadian oil and gas markets, and we provide policy support and advice to the government on oil and gas markets as well.
In terms of legislation, the issues from an energy security perspective, at this point in time it is NRCAN's view that the potential conversion of the Shell refinery does not pose a risk of a supply disruption on a national scale. Therefore NRCAN has no particular role to play with respect to this instance of this particular conversion. However, I would like to point out that there are two pieces of federal legislation that provide the government the authority to temporarily intervene in the case of a severe energy supply disruption of national significance. Under the Emergencies Act, if a national emergency is declared the Governor in Council can declare a public welfare emergency, which authorizes special and temporary measures to ensure safety and security during a time of national emergency. This could include the disposal of property, including energy commodities such as gas, oil, and crude and refined products.
The second piece of legislation is the Energy Supplies Emergency Act. If a national emergency has been declared, an energy emergency could be declared and the Energy Supplies Allocation Board could be activated. It has the ability to temporarily allocate energy supplies in Canada and could redirect crude oil to ensure that all refineries in particular regions of the country experience similar and manageable shortages and access to petroleum products, or draw down stocks to meet limited supply interruptions.
Moving to the next slide, which is a fairly complicated one, I'll draw attention to a number of aspects of Canada's refinery marketplace. A key point to make, as has probably been presented previously to the committee, is that the upstream crude oil extraction and transportation business and the downstream refinery and retail business operate as two independent segments in the petroleum marketplace. In other words, companies working in one market segment versus another may or may not have decisions that are independent of one another.
If you refer to slide six and you look at the map of Canada, you see a quick snapshot of what are the orbits or areas supplied by particular refineries. The map identifies that there are 16 major refineries in Canada that are each regionally located. Virtually all of the petroleum supply comes from these 16 refineries located across the country. You will note in the map that Canada exports and imports crude oil as well as refined petroleum products. So some of the equation is that Canada is both an import and export nation and that at the net scale Canada exports more crude oil and more refined petroleum products than it consumes.
It is because of transportation economics that the Canadian petroleum marketplace is also quite regional in nature. Drawing into these regional issues and variations, moving to slide 7 and going from west to east, the western provinces and territories are predominantly served by domestic refineries, with Edmonton being the largest centre. These refineries process Canadian crude oil, which is predominantly produced from Alberta as well as Saskatchewan. The region is also a small net importer of refined petroleum products from the western United States.
Southern and northern Ontario rely predominantly on refineries in Sarnia and Nanticoke, which process predominantly domestic crude, which is piped from Alberta to Ontario. However, there are some imports in this area as well, both crude and petroleum products, which come to this region via pipeline from Montreal. The region is both an importer and exporter of petroleum products.
Moving to eastern Ontario and western Quebec, petroleum product markets are supplied by domestic refiners in the province of Quebec, as well as petroleum imports from other countries. It is important to note that the refineries in the region largely process imported crude oil.
The maritime provinces and northern Quebec are supplied by refineries in Quebec, Newfoundland and Labrador, and Nova Scotia, and by seaborne petroleum products; that is, by petroleum-based products imported by ship and transport. Again, refiners in this region predominantly rely on imported crude oil, with the exception of the offshore production in Newfoundland and Labrador, which also supplies refineries in Atlantic Canada as well as other international markets.
The domestic industry in Canada operates, very clearly, in an international marketplace. Due to economies of scale, the global refining industry has been undergoing a rationalization over the last number of decades. Global demand for refined products is growing and is driven by emerging markets such as China, India, the Middle East, and Latin America, while North American demand for petroleum products has been fairly stable or declining with the impacts of the recent recession. It is not expected that demand in North America will grow significantly either, when one looks at the trend over time.
Larger and more efficient refineries are part of the rationale for this particular context, where we see overseas refineries coming onstream that are more efficient, larger, and that produce product at a cost that's difficult for North American refineries to compete with.
We see that this has had an impact on domestic investment choices. In keeping with global trends, the rationalization of the refining industry has been taking place in North America. In Canada alone, we have seen the number of refineries go from 44 in the late sixties to 16 today, while at the same time the overall domestic refining capacity has actually doubled. Most of this rationalization took place because of the oil shock in the seventies, as well as increasing economies of scale in competing nations. For example, in the early 1980s there were six refineries in Montreal; by the mid-1980s, four of those refineries had closed. These refineries were typically small in scale, and all of them had less than one-third the capacity of the Ultramar refinery that is operating near Quebec City today.
Domestic capacity has been on the rise while throughput has been declining. The current realities of the Canadian refining sector pose a challenge for profitability. From 2000 to 2009, domestic refining capacity has increased to roughly 2 million to 2.1 million barrels a day, with production refineries decreasing to the point that capacity and utilization rates have been hovering at around 80% as recently as 2008-2009 and the first two quarters of 2010. I should point out that a capacity rate, generally speaking, of 95%-plus is considered full capacity and generally viewed as optimal.
To put the degree to which Canadian refinery equipment is underutilized into perspective, in 2009 the idle capital in Canada's refining sector was close to 300,000 to 400,000 barrels of oil per day.
There has been a downward trend in refinery profit margins in Canada over the past number of years. Refining margins represent the differential, of course, between crude oil and the price refiners sell their products at on the wholesale market. Margins must meet and cover all costs. It's important to note that expenses are more or less fixed, and changes in refinery margins directly affect the profitability of the particular firms operating.
In summary, I'll reiterate the following two points.
First, from an energy security perspective, the potential conversion of the Shell Montreal East refinery does not pose a risk to the supply of national scale.
Second, the total capacity to Canada's refineries has increased over the past number of decades, even though the number of facilities has decreased, as has the utilization rate. This reflects part of a North American and global trend towards rationalization and increased competition.
Thank you.
:
I don't know where to begin, Chair.
Thank you, witnesses.
I'm going to start with you, Mr. Labonté. I have a document that you didn't bother to offer, but I did introduce it to one of the previous witnesses. It's from NRCan. It's from your oil division annual survey of refiners. It's on your website. It says:
Refinery utilization rates close to 100 per cent, along with growth in demand for petroleum products, have created a need for significant additions to refinery capacity in Canada. Without investment in new refining capacity, supply interruptions could become more frequent and increasingly difficult to manage.
Due to the high demand for petroleum products in the Northeastern United States, refiners in Atlantic Canada export considerable volumes of petroleum products to that region.
You also seem to minimize, whether you've discounted this or not—I think it's rather significant for this committee—that it was written following the shutdown of the Bronte Petro-Canada refinery. You've also shown in your matrix here that the refinery in Montreal is regionally intensive and significant. Cast against the rest of the country, yes, when you have two million barrels being produced a day, that makes it, what, 6% or 7%? But when you put it in terms of the actual market, it turns out to be much higher than that, somewhere close to between 12% and 15%.
You also didn't take time to consider the fact that North Atlantic Refining sells zero gas throughout eastern Canada, except for its gas stations in Labrador and Newfoundland.
You failed to mention, although you know, that most of Irving's capacity of 300,000 barrels per day goes to the United States, thereby limiting and exposing Canada to a much wider prospect of competition or of product coming at a premium price from elsewhere.
Given that you don't have a weekly petroleum monitoring report, you have no idea of the inventory on a week-to-week basis. Given that NRCan provides some of that information to our American friends as to what the picture is here in Canada, how can you possibly conclude that there isn't a problem here?
To use your terms: “While rationalization has resulted in fewer refineries, domestic capacity has grown significantly--this is a worldwide trend that is expected to continue”.
It seems to me, sir, that what you've written in one and what you've written in the other are contradictory. Is it a lack of resources or just oversight?
:
Thank you very much, Mr. Chairman.
[English]
Good afternoon, and thank you.
We had Shell in earlier--we had a number of players in this morning--and as a corporation, Shell's goal is to maximize profits. Whether it's in the terminal or in refining, it doesn't really matter. It doesn't matter to us either, and we shouldn't be judging it. They're looking for results for their shareholders--good results. That's business. There's nothing wrong with that. That's part of a healthy business.
As elected officials, on the other hand, it's our responsibility to ensure that capacity, or supply, is there for the country. We want to make sure that there is that supply there. Right now we're talking about 13% of our eastern refining disappearing. It's gone. It's not being shifted somewhere else. Well, it's being shifted somewhere else; we're relying on another country to supply it.
Now, when we look at production in the United States, it's somewhat stalled. They have an economic downturn. We're okay right now--we can get it from them--but it's going to turn around at some point. They're going to use up the supply. That causes me concern. When the economy picks up, demand for U.S. oil and products that are byproducts of oil are going to be sucked up somewhere, and we're going to have a problem. Supply is not guaranteed for Canadians. If it's supplied on the ground here, we have some control of it.
I know that people say that the free market will take of everything, and supply and demand will drive up the price, but when you can't get the product....
I come from northern Ontario. Heating oil is very essential. When you're in northern Canada, heating oil is an essential service, something that we should be protecting nationally. I'm not hearing that right now.
Maybe we're talking to the wrong people. I'm really not sure whether we're dealing with the right people. I would think that the Competition Bureau would be the group that would look at that.
So the question is very simple: are we speaking to the right people? We're seeing competition, but it's more on a macro level. Are you the right ones we should be speaking to?
:
Mr. Chair, I have one question, in addition to that.
It's more of an instruction and perhaps advice to some of our witnesses. I take it from Madame Dagenais and others that they've already made a decision with respect to whether this constitutes potentially an area that would allow the Competition Bureau to examine further.
I'm a little concerned, though, about the terms and conditions of conversion from the refinery to a terminal, which could have the effect of freezing out non-branded players, could have the impact of shutting down the entire energy supply to places such as Nunavut, could have an impact on price to consumers, could make us potentially more vulnerable without the concomitant power of investigation or oversight with respect to who owns the terminals and the pipelines.
I'm concerned about the lockstep pricing in a number of major cities across Canada, 2% to 4% above world price in most of those cities for the cost of fuel.
All of this is to suggest that I want the bureau to tell me here and now if market restriction, refusal to deal, or any one of those requests made will be taken seriously, or is it a foregone conclusion?
If it is a foregone conclusion—and bear in mind that I've been around this issue for some time—in 1986 the then Conservative government under Mr. Mulroney decided that they were going to invite McMillan Binch to rewrite the Competition Act. That would be McMillan Binch whose main client was Imperial Oil. If that is the case....
Sorry, Mr. Chair, I want to go to my question.