:
Thank you very much, ladies and gentlemen. It's a pleasure for us to be here today.
I hope to take you through the presentation of the National Energy Board in the next few minutes, to give you some insight into the role of the National Energy Board and some of the issues that were identified in a recent report that we put forward.
I would first like to offer to you, for your information, the vision of the National Energy Board, which is to be an active, effective, and knowledgeable partner in the responsible development of Canada's energy sector for the benefit of all Canadians.
[Translation]
First, I would mention that the National Energy Board is an independent tribunal that was established in 1959, which reports to Parliament through the Department of Natural Resources. We moved to Calgary in 1991. Our organization has roughly 300 employees with various energy-related skill sets. Ninety percent of our costs are recovered from the industry that we supervise. We are a separate employer within the Public Service Employment Act and Treasury Board guidelines.
[English]
Next I will take you quickly through the areas of responsibility of the National Energy Board; our mission statement on the safety, security, environmental protection, and efficiency of the energy infrastructure; and markets as they relate to energy on behalf of the Canadian public interest within a mandate that is set out for us very clearly by Parliament in the National Energy Board Act.
From a regulatory standpoint, we look after the construction, operation, and integrity of interprovincial and international pipelines and international power lines throughout the full life cycle of their existence, from the initial application for the construction of the infrastructure, throughout the operation of the infrastructure, and eventually through the retirement of that infrastructure.
We regulate the transportation of energy--oil, gas, and electricity--as it moves across these means of transmission. We also set tolls and tariffs for the movement of that energy. We regulate the international trade in oil, gas, and electricity. We also regulate the exploration and production of oil and gas in the non-accord areas where there is no provincial jurisdiction yet enabled to do that.
From an advisory standpoint, we monitor the smooth functioning of energy markets. We provide advice to Parliament when requested to do so. We frequently issue reports that demonstrate the fact that we monitor the smooth functioning of the energy markets.
It's also important to note what we don't do. We do not regulate energy or the development of energy within provincial jurisdictions. We do not regulate interprovincial electricity trade, and we do not regulate energy emissions.
On some of the benefits that have accrued to Canadians in 2005, the NEB monitored the safe transportation of approximately $120 billion worth of energy product. This amounted to some 12% of Canada's GDP. Toll revenues were administered that amounted to some $4.5 billion on behalf of Canadians, and revenue from regulated energy exports was in the order of $70 billion. This amounts to Canada's largest real export.
As we look at the challenges in terms of what has changed, the most recent report looking at the oil sands, released in June of this year, is an update of a more substantial report that was released in 2004. On some of the major changes that have unfolded in more recent times, undoubtedly the global demand for energy continues to increase. We've seen a new pricing paradigm in the order of $55 to $75 for a barrel of oil. There has been recognition of Canada's oil sands as the second-largest global reserve, which is indeed significant for the development of Canada going forward.
There are depleting conventional reserves in the western Canada sedimentary basin. Liquid natural gas is coming on the scene to respond to many of the demands for energy throughout North America. We have before the board at this time consideration for the Mackenzie gas pipeline, and we may play a part in the future in the Alaska pipeline. These are two significant endeavours that offer the possibility of opening up another basin for North America and the world's global energy requirements.
Throughout all of this, what makes Canada most attractive is the fact that it has an extremely stable political climate compared to many other countries around the world.
So these initial remarks provide the backdrop for the most recent report that was released in June 2006.
[Translation]
Since the report was published in 2004, oil sands development conditions have greatly changed. For example, as I said, oil prices have more than doubled, while capital expenditures and operating costs have increased sharply. That's why the Board found it necessary to update its outlook, among other things by emphasizing the most important changes and developments with regard to the oil sands. The Board intends to present an objective and independent evaluation and to encourage public dialogue for all Canadians.
[English]
On the eighth page you'll see the topics that the report deals with throughout. It looked at resources, supply costs, crude oil supply, markets, and pipelines. It sought to identify some environmental and socio-economic concerns as well as the impact that is offered to electricity in the petrochemical industry.
I know that from the briefings you've had from previous witnesses you're familiar with the locations shown on slide 9. Slide 9 shows the primary locations in Alberta, in the Peace River and Athabasca regions. There has also been some examination of oil sands and the potential for oil sands recovery in the Firebag region in the northwest sector of Saskatchewan, as well as in Pasquia Hills in the eastern central area of Saskatchewan.
The table on page 10 outlines some of the most significant changes that have shown the need for re-examining the developments between 2004 and 2006. It points out clearly the changes that are so real in terms of the price of oil per barrel, the price of gas, the light and heavy differentials and how they have figured out, and the exchange rate between the Canadian and the U.S. dollars, all of which have been significant drivers in terms of the continued and enhanced development within the oil sands.
The chart on page 11 indicates that the NEB has identified 46 major bitumen recovery projects, which encompass approximately 130 individual project phases that, as has been publicly announced, will unfold beginning in 2006 and ending in 2015. The blue columns in that chart show the all-up case. In other words, if everything was to unfold as it has been announced, the black line would represent the base case, the tempered case, given the market dynamics and forces that are at play, which are tempering some of the announcements that have been made in the public domain. The base case, then, shows some $94 billion being invested in total, which means in the order of about $9.4 billion or $10 billion per year between now and 2015.
Moving to slide 12, you see again low case, base case, and high case, in terms of how things could unfold in the actual development, and the amount of production that would arise from the oil sands, with the base case demonstrating an eventual growth in production to about three million barrels per day. The low case would be just in the order of two million barrels a day, with the high case being in the order of just over four million barrels per day.
The low case represents a situation in which oil prices might fall to $30 to $35 per barrel, so the economics involved in the projects temper themselves considerably, and obviously it becomes less attractive for the development that might unfold. The high case, obviously, represents continued growth with high returns in terms of the value of oil per barrel, and doesn't, perhaps, recognize many of the other dampening factors around labour and capital costs and things of that nature.
Slide 13 shows that the oil sands require large amounts of natural gas for their development. There is indeed a high-intensity energy requirement for the development of the oil sands, and we could see that reaching about 2.1 billion cubic feet a day by 2015, in comparison to 0.7 billion cubic feet a day as it stood in 2005 at the time the study was developed.
The flattening of the curves as you approach 2010 reflects an assumed start-up of some of the more advanced technologies that will reduce the intensity of the gas requirements. You will see a flattening of the curves as technology continues to mature, reducing the overall demand of gas per barrel of oil as it is developed.
On slide 14 you will see the study went on to examine the requirements for pipelines. If the production does grow in the manner in which it is predicted to grow, there is a need for additional transportation in order to bring the oil that would be produced to market.
This map illustrates the major Canadian-U.S. crude oil pipelines that are currently in place. The Enbridge main line, which originates in Edmonton and extends across the Canadian prairies to the U.S. border near Gretna, Manitoba, connects to a Lakehead pipeline system and then reaches down into the United States and travels back up to Sarnia to reach refineries in the Toronto area.
Kinder Morgan's Trans Mountain Pipeline originates at Edmonton and extends west across British Columbia for delivery to markets in that province, as well as for the export off the Westridge Dock in Vancouver, as well as down into Washington State.
Kinder Morgan's Express Pipeline originates at Hardisty, Alberta, and delivers crude to locations in the U.S. Rocky Mountain area and connects to the Platte system in Casper, Wyoming, for delivery of crude oil into the Midwest United States.
With the reversal of the Spearhead and Mobil Pipelines in the U.S. Midwest in the spring of 2006, western Canadian crude oil is now being delivered to Cushing, Oklahoma, and reaching as far south as the U.S. Gulf Coast as a result of that as well.
On slide 15 you will see a bar chart, the dark bars at the bottom of the chart being the current production that comes out of the western basin. The line that shows growth out and to the right, as you look out to 2015, demonstrates the growth and production of oil that could be coming from the basin, with the smaller bars representing the various projects that are either being considered or are before the National Energy Board at the moment, in order to support the growth in production that would need to be taken out of the basin.
What I would bring your attention to, in looking at that chart, is the time period of 2007, where you will see that production begins to outstrip the current capacity of transmission. This would induce some constraint, obviously, should the production grow in the way it's currently forecast.
Apportionment on some of the pipelines--bidding and trying to win capacity on the pipelines in order to get product out and to the markets--is definitely going to become an issue if there isn't some capacity increase and if everything unfolds as it is currently laid out.
While we don't regulate the environmental issues as they pertain to the considerations that unfold in the province, the study did seek to point out some of the environmental challenges that do arise, given the rapid growth of the oil sands. And as it pertains to water, the oil sands require large amounts of water in order to develop and there may not be sufficient water available during certain periods of the year.
Technologies have become much more efficient in terms of dealing with that, and some areas of the industry have established holding ponds in order to ensure that they have sufficient water stock and to not draw from the aquifers, thus seeking to minimize the impact they will have. These are all measures that are being taken to try to mitigate some of the impact that the demand for water has as the industry goes forward.
In terms of greenhouse gas emissions, the intensity per barrel of oil produced has decreased by over 20% from 2000 to 2005, but the overall rate of growth and production have outstripped those decreases, so the total amount of greenhouse gas that is released does continue to grow over time.
Carbon dioxide capture and carbon dioxide flooding do present viable technologies and viable opportunities to try to reduce the amount of carbon dioxide that is released into the environment. There is considerable promise here as the industry looks to the future as well.
Land reclamation remains an issue as well, as the water is drawn off and there is disturbance. Again, regulated at the provincial and the federal level, they're monitored very closely in order to see that mitigation measures are put in place and monitored pretty closely as the projects continue to develop.
[Translation]
In the oil sands region, certain major factors affect socio-economic conditions. There is a labour shortage. Alberta currently has only a limited number of skilled workers. Not only is the oil sands sector experiencing difficulty finding the workers it needs, it must also attract them to the region. A skilled labour shortage could slow implementation of scheduled projects.
Over the next five years, capital expenditures of $1.2 billion will be necessary to meet public infrastructure needs in the region. These infrastructures will include municipal projects, water supply systems, sewers, road works, recreational facilities and educational institutions, highways, health facilities and low-cost housing.
[English]
On slide 18 you see a chart that shows the growth that is forecast on the base case at the moment, from 1.1 million to 3 million barrels per day at the end of this period, in 2015, which the study examined, with the dampening factors shown above the arrow you see on the page and the factors that tend to precipitate or support the growth that is forecast shown below the arrow: high crude prices; rising, continued global demand for energy; enhancements in technology; a very stable investment climate in Canada; and a large U.S. market. These are counter-balanced by the need for market and pipeline development, rising capital and labour costs, rising operating costs, labour and infrastructure shortages, and the need to manage the environmental impacts that the projects introduce as well.
As I say, ladies and gentlemen, the study really sought to provide an update to the much more in-depth study that was authored in 2004 by the National Energy Board. It seeks to bring balance and to identify all of the issues that need to be considered in order to manage this rapid growth that's unfolding. The report is done on behalf of Canadians in order to bring these issues to light and to encourage debate, and I'm sure they are addressed effectively.
Mr. Chairman, that concludes my comments.
:
The subject of our presentation today is to briefly summarize a study that CERI released in October 2005. The focus of the study was to look at the macro-economic impacts of oil sand development under certain scenarios.
What I'll do today is give a little background about the study and the objective we sought to accomplish. The slides are not numbered, but this is a slide called “Outline”. There's a key finding in that study and some sensitivity analysis that we conducted.
The study background.... Obviously, as Mr. Donihee mentioned, it is one of the world's largest resources, deposits of oil, second only to Saudi Arabia in proven reserves, but the crude bitumen in place is much larger than that, and it's 1.6 trillion barrels. It's equal to or exceeds the total conventional oil deposits in the world. About 11% of that, the total in-place oil, is proven reserves, and 174 billion or 175 billion barrels remain to be exploited. To put it in perspective, this is sufficient to supply Canadian demand for oil for 250 years.
The study motivation.... Projected investment in the oil sands to 2020, over 20 years, is about $100 billion—we will be talking about a lot of large numbers here today—and that investment will result in the production of crude oil valued at $570 billion.
As Mr. Donihee mentioned, the development of the oil sands requires vast amounts of energy, among other inputs and resources, to enable that production. Initial investment of any type, really, would ripple through the economy and produce a multiple of it by the time the interaction with the rest of the economy occurs, and that's really the basis for our study here: to trace the value of the production investment in the oil sands throughout the Canadian economy, even globally, beyond Canada, to see what the macro-economic effects of that development might be. That's what the objective of the study is, really, to assess those economic effects of the oil sands development over a 20-year period at the local, provincial, national, and international levels.
The methodology we use is a CERI-developed model called the input-output model. Those types of models have been used for decades, and really what they portray is the interaction of different sectors in the economy. If you introduce a disturbance or injection in one sector, how does it then flow through the rest of the economy and what might the final impacts be?
We measure the impacts on the economy by four major parameters or indicators: the first is gross domestic product; the second is employment; the third is employment income, labour income, the results from that; and finally, government revenues that result from the revenues that are generated in this sector and in other sectors that are affected by it.
On the next slide, “Oil Sands Production—Unconstrained Case”, we have two cases where we look at the future development of oil sands, and we go to 2022 in this slide.
One case is what we call the unconstrained case or the potential case. All projects are announced and known and proceed as scheduled, with no delays, no resource constraints, and business as usual. Obviously, we think it's not a realistic outlook, but it's what we would see if development proceeded without any constraints. It will be somewhat over four million barrels per day by 2022.
We then apply our expert judgment. We know there are constraints and there'll be issues with projects proceeding. We apply some delays to projects depending on where they are in the development stage, where they are announced only or under construction, at permitting stage, and so on.
Depending on where they are in the development stage, we assign them either a zero delay, if they are well under construction and on their way, or delayed a number years, depending on whether they're announced or speculative. We then apply probabilities to create an expected output. A fraction of 100% of each of those categories of projects are delayed because of resource constraints.
Once we do that, we get to what we call best case investment, which is approximately $100 billion cumulative over the period. Again, the production resulting from that, both bitumen and upgraded bitumen to synthetic crude oil, add to the value of it to $570 billion.
What drives these analyses is really the monetary value. We need to translate the physical output into monetary value to then measure the economic effect.
On the impact that we had estimated in the study, the economic impact first on GDP, the first parameter or indicator is that the total impact worldwide of this development would be $885 billion cumulative, almost a trillion dollars.
About 10% of that will be generated outside Canada, and 90% of it or $785 billion will be generated in Canada. Of that, an increase of $634 billion in GDP over that period will occur in Alberta; $102 billion will occur in Ontario; and $8 billion will occur in Quebec. The rest of Canada would experience an increase of $45 billion in GDP. Outside Canada, other countries would experience an increase of $96 billion, as I said, about 10% of the total.
The reason that the other provinces and the rest of the world are affected by this development is again because the world is interconnected economically. We trade with other provinces, and Canada trades with the rest of the world.
To the extent that the inputs used in the oil sand development are imported, the development of the oil sand will then have a positive impact on the economies where those inputs are imported from, be they within Canada or outside Canada.
Percentage-wise, on the distribution of GDP impacts in total, 72% of it will occur in Alberta; 11% will occur in Ontario, equal to the effect on economies outside Canada; another 11% occurs outside Canada; Quebec receives 1% of the GDP impact; and the rest of the provinces receive 5% of the total impact, which is about a trillion dollars.
To put that into perspective, the economic impact measured in terms of GDP, over the 20-year period, is cumulatively equal to about 61% of Canada's GDP in 2004.
On the annual GDP impact in Alberta, in the year 2000, the beginning year of our analysis, the oil sand impact on GDP accounts for about 9% of Alberta's GDP. That is projected to increase to 20% of annual GDP in Alberta by the year 2020.
For Canada, the annual GDP impact is about 1.5% in 2005 and will rise to about 3% in the year 2020.
I'd next like to talk about the employment impacts. I should say this is the demand for labour that will be created by this development.
This development will require 6.56 million person-years over the entire period, and 5.43 million of that will occur in Canada. Alberta's job creation from this development will amount to about 3.7 million person-years; Ontario's will be about a million person-years; Quebec's will be 125,000 person-years; the rest of Canada will be 612,000 person-years; and 1.1 million person-years will be created in other countries, making up the total of 6.5 million person-years.
On the distribution of this employment across Canada and the world created by this development, 44% of the total employment impact will occur outside of Alberta, with 56% in Alberta. Ontario's share in this employment creation will be about 16% of the total. Quebec's share will be 2%, and the rest of the Canadian provinces will be 9%. For economies outside of Canada, their share of the employment created by the oil sands development will be 17% of the 5.6 million person-years.
We also assessed the employment impact on the local economy. As we said, 68% of the jobs created within Canada will occur in Alberta. In the Wood Buffalo and Cold Lake region, where most of the development will take place, employment will increase by about 780,000 person-years, which will be about one-fifth of the total employment created in Alberta.
Outside of Canada, job creation will be about 1.1 million person-years. It's more than any other province except Alberta, but less than the total provinces combined.
Another thing to understand here is that with the oil sands development, job creation does not occur only in the oil and gas sector; it occurs throughout the economy. In fact, four times more jobs will be created outside the oil and gas sector than in the oil and gas sector as a result of this development. The oil and gas sector will receive about 18% of the total job creation, and the other 82% will be created in other sectors of the economy.
The last thing we measured on the macro-economic impact of development is government revenue from the economic activity created. On the value of output and income that will be created from both business and labour, in addition to different kinds of taxes the total will be $138 billion of tax revenue globally. Of that, $124 billion will be in Canada and the rest will be generated in the economies outside of Canada.
Of the $124 billion in tax revenues that will be generated in Canada over 20 years, we estimate the federal government will receive $51 billion--the largest recipient. The Alberta provincial government will follow with $44 billion. Other provinces and territories will receive $12 billion in tax revenues. Municipalities will receive $17 billion. Outside of Canada, $14 billion of tax revenues will be generated, for a total worldwide of $138 billion.
On the distribution of this $138 billion of tax revenues, the federal government will receive 41%; Alberta will receive 36%; Alberta municipal jurisdictions will receive 9%; other municipal jurisdictions will receive 5%; and other provinces besides Alberta will receive 9%.
The tax revenue comes from many sources, the sources of government revenue that we talked about. The largest portion from which this revenue is generated is personal income tax—25% of all tax revenue, followed by corporate income tax, which is 21% of the total. Next is royalty revenue—and this occurs only in Alberta—20% of the total. Indirect taxes—PST, GST, excise taxes, and all these other non-income taxes—account for 16% of the total tax revenue. Property taxes amount to 18%.
We conducted a few sensitivity analyses on the different prices for oil. For the base case, I used $32, in 2005 dollars, per barrel of crude oil. We then looked at $25 per barrel—I don't know if we'll ever see that again. We also looked at $40 per barrel of oil, for sensitivity. We did that for both what we call the expected, or constrained, case and the potential, or unconstrained, case. Then we looked at a case of increasing the portion of bitumen that's upgraded in Alberta. For this we assumed a base case price of $32 per barrel of oil.
:
Next we have the results of our sensitivity analyses in terms of investment and production. Obviously, the higher the price of oil, the higher the value of production, and thus the higher the economic impacts in all the indicators we measure.
We see that in the central case, for example, total investment and value of production is $632 billion. When we look at $25 oil, the impact on investment and production is lower. In the $40 oil, it is higher.
The more bitumen that's upgraded in Alberta, the higher the economic impact. Imports are usually leakage in economic terms. They create economic impacts and stimulation in the economies outside of Canada. So the less of it that leaves Alberta and Canada, the higher the economic impacts will be.
With respect to the GDP impacts, for the same sensitivities that we've done, when the oil price goes down from $32 to $25, the GDP impacts are reduced by 17%. On the other hand, when we look at the $40 oil, compared with the base case of $32, the GDP would be 17% higher.
In the expected case, we did the same exercise. Looking at the potential case, the higher the price of oil, the higher the GDP impact. The impact we went over earlier could be as much as 55% higher, if the highest development scenario takes place, which is the potential case and a high price of oil of $40. Nowadays, $40 is not really that high. The upgrading of more bitumen into synthetic crude oil in Alberta, or in Canada, would increase the GDP impacts by 23%, or a trillion dollars.
In conclusion, the investment, under the scenarios we described, in the oil sands would be about $100 billion over 20 years, resulting in over $571 billion. It could be as high as 55% more, at the upper end. The GDP impact is $885 billion, and about 6.6 million person-years of employment would be created. Economic benefits extend well beyond Alberta into the rest of Canada and the rest of the world—in job creation, GDP, and tax revenues. The federal government receives the highest share of tax revenues generated from this development.
Mr. Chairman, this concludes my presentation. I would be happy to answer any questions.