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I call this meeting to order.
This is meeting 70 of the Standing Committee on Finance. Our orders of the day, pursuant to Standing Order 108(2), are for a study of the impact of low oil prices on the Canadian economy. This is our first meeting on this topic.
I want to welcome our witnesses here in Ottawa. We're also expecting a witness in Edmonton for this first panel.
From the Canadian Association of Petroleum Producers, we have the president and CEO, Mr. Tim McMillan. From the Canadian Fuels Association, we have the president and CEO, Mr. Peter Boag. From Encana Corporation, we have Mr. Richard Dunn, vice-president. From Suncor Energy Inc., we have the executive vice-president, Mr. Steve Reynish. Welcome to the committee everyone.
We are expecting Gil McGowan, the president of the Alberta Federation of Labour, in Edmonton. Hopefully he will arrive in time for his presentation.
You each have five minutes maximum for your opening statement, and then we'll have questions from members.
We'll start with you, Mr. McMillan. Please begin.
Thank you to the committee members for inviting CAPP to be part of this presentation.
I'll start off by introducing CAPP briefly. Then I'll move on to the effects of the current price environment on our industry and the effects we think that will have on Canada.
CAPP represents the upstream oil and gas producers in Canada; 90% of all the oil and natural gas produced is from the members of the Canadian Association of Petroleum Producers. We are by far the largest private sector investors in Canada. In 2013 we had about 74 billion dollars' worth of investment in building the Canadian economy, and in 2014 about $70 billion. Out of that we've seen $18 billion a year, on average, contributed to governments for taxes and royalties over the last several years.
We make up 20% of the stock market, or at least we did until six months ago. With the current price environment, that has reduced to about 12%. We are 20% of Canada's exports. We employ over half a million people. Our supplier network reaches really across the country with more than 2,500 suppliers to the energy sector.
Price volatility in the commodity market is the norm, not the exception. Our industry has been through high and low price environments in the last several decades. We as an industry are actively positioning ourselves right now. You will see those effects really across Canada to ensure that we can be successful in the medium and long term, and Canada can maintain its strong position as a supplier of choice in the world for energy products.
The Bank of Canada came out in January and made some statements around the effects of the low price environment on the Canadian economy. I'll quote the bank, “The considerably lower profile for oil prices will be unambiguously negative for the Canadian economy in 2015 and subsequent years.” The effect of the low price we think will be felt across Canada—through our supplier network, through the employment that is sourced from across the country, and through the taxes and royalties that are paid to really all levels of government and across the country.
Getting into the specifics of what our expectations are, we put out an interim report in January updating our annual report on investment expenditures. In January we said that we saw a 33% reduction in capital expenditure in 2015. We've seen that further eroded in the last few months. With those public statements from January, we would break it apart to about a 40% reduction in conventional oil and gas and about a 25% reduction in oil sands investment. The reason for this is that oil sands investments are multi-year and larger projects. Projects that are in years two, three, four, or five will get ongoing investment and will be brought into production. The western tight oils will have a production profile that is higher at the front end and declines more rapidly, and the time from drilling to production is so much shorter that it can be far more elastic with price sensitivity.
We also want to be clear that even with the lowering of investment by 33%, going from over $70 billion to below $50 billion, we will still be by far the largest investor in the Canadian economy. The effects that will have on production in the short term I think are clear to point out as well, because they aren't always obvious. We would expect to see a reduction in production from what we had predicted, but the Canadian energy sector is going to continue to grow production even in the current environment, even with the lower investments. The numbers we put out in January predict about a 150,000 barrels a day increase in 2015, and in 2016, roughly 190,000 barrels a day. As I said, those were a snapshot in time in January, but we are looking to increase production regardless of the current price. We want to ensure that our industry is strong in the long term and that Canada maintains its position as a supplier of choice around the world.
Thank you for the time here this morning.
:
Thank you, Mr. Chairman.
Members of the committee, good morning, it's my pleasure to be here today.
I represent the refining sector, which is an integral component of Canada's petroleum value chain. Refineries are the manufacturing intermediary between crude oil and refined products. Canada has 18 refineries located in eight provinces, with a total capacity of two million barrels per day. They contribute $5.6 billion in direct GDP and employ more than 18,000 Canadians.
The refining process simply separates, breaks, reshapes, and recombines the molecules of crude oil into value-added products such as gasoline, diesel, and aviation fuel. These transportation fuels typically account for 75% of refinery output, the remaining 25% comprises heating oil, lubricants, heavy fuel oil, asphalt for roads, and feedstocks that the petrochemical industry transforms into hundreds of consumer goods and products that Canadians use and rely on every day, from plastics to textiles to pharmaceutical products.
Crude oil is the single biggest cost input for refiners. Over the long term, refined product prices for gasoline, for example, generally track movements in crude prices although other factors can come into play. The difference between crude oil and the price of gasoline at the pump comprises three components: the refiner margin, the marketers' margin, and taxes. The decline in crude oil over the past six months has been accompanied by a significant decline in retail fuel prices. The current Canadian average retail price of gasoline is about 20¢ per litre lower than it was a year ago.
I've handed out a document, the Natural Resources Canada “Fuel Focus” report. It's from last Friday, March 6. If you look at figure 1 on page 1, it shows on a national basis how retail prices for gasoline have closely tracked crude prices into February of this year. The overall trend line for refiner and retail margins has not materially changed over the past months.
If you look at figure 5 on page 4, and I'm looking specifically at the chart in the upper left, it shows that beyond typical, short-term variations in refiner margins, and that generally reflects seasonal demand changes and other short-term gasoline supply and demand dynamics, there's been a modest downward trend in refiner margins over the past two and a half years, on a national basis. The retail margin trend, again on a national average basis, has slightly increased. As you can also see from the chart, refiner margins significantly dipped in January. Gasoline margins were under significant downward pressure over this time not only because of seasonal demand changes but also because of a surge in production resulting from North American refineries running at very high utilization rates.
Relatively inexpensive crude prices and a refined product futures market indicating higher future prices compared to current spot prices caused refiners to process more crude and store more refined product for future sale. This resulted in bulging gasoline inventories that were well above their seasonal norms, accompanied by lower margins. In the past month, the national average refining origins on gasoline have increased materially. There are several factors behind this: a confluence of recent refinery-related issues, in particular, strikes at several facilities in the U.S.; a major, unplanned outage at a major U.S. west coast refinery; and weather-related issues at several refineries in the eastern U.S. and Canada. Combined with short-term maintenance shutdowns, normal at this time of year, the supply side of refined products has tightened significantly leading to an increase in wholesale prices and refining margins. Another major factor is the record refined product exports from the U.S., in particular for gasoline in the last two months.
However, increasing wholesale prices and refining margins for gasoline are common at this time of year. Despite all the refinery and supply-related issues this year's seasonal increase in refining margins is consistent with historical norms. Current refining margins for gasoline aren't materially higher than they have been throughout the first quarter of the previous three years. Diesel prices have also generally tracked the change in crude prices, although to many this may have been masked by the recent price difference between diesel and gasoline.
Disparities between retail gasoline and diesel prices are normal phenomenon driven by different seasonal demand patterns of two very distinct commodities. Gasoline demand peaks in the spring and summer, while diesel demand peaks in the winter due to its close relationship with heating fuel.
Since 2008 Canadian diesel prices have averaged nearly 7¢ per litre more than gasoline during the period of November to February, while averaging nearly 4¢ per litre less than gasoline from May through August.
Seasonal disparity between the two products has been much more pronounced in recent months and that's largely because of the significant decline in gasoline margins that I previously mentioned. In fact, diesel refining margins remain virtually unchanged from where they were at this time last year, and the gap between diesel and gasoline has already begun to narrow as we move from winter into spring.
In conclusion, lower crude prices have resulted in lower fuel prices. Moreover, according to Statistics Canada's most recent data on consumer prices, overall transportation costs declined 5.3% in the 12 months to January 2015 as fuel prices declined.
Thank you and I look forward to your questions.
:
Thank you, Mr. Chairman.
Good morning. I'm Richard Dunn, vice-president of government relations for Encana. Encana is a significant upstream producer in Canada. Thank you for the opportunity to speak today on how the global oil price decline has impacted Canada's energy sector, and the challenges and the opportunities we see going forward.
The current low commodity price brings into sharp focus the importance of industry and government working together to ensure Canada maximizes the long-term economic opportunity presented by our natural resources. To do so demands a partnership approach with industry continuing to adapt and innovate, and government continuing to take steps to ensure economic competitiveness.
As Tim McMillan of CAPP noted, the impacts of a low price environment are being felt across Canada. The Bank of Canada estimated that energy-related capital investment declined significantly in 2015. Already, energy companies, including Encana, have reduced their investment by billions of dollars, affecting the bottom lines of governments, businesses, communities, and individuals across the country.
No one has a crystal ball; however, some observers believe the market may begin to rebalance toward the end of 2015. The question remains, what's the new balance point?
Just as we did not believe that $100 oil was sustainable, we don't believe that $50 oil is sustainable either. Collectively, industry and government need to find ways to thrive at a range somewhere in the middle and to transition to a more realistic long-term modest oil price environment.
Industry will continue to respond with versatility and innovation. In Encana's case, we have exercised strict financial discipline, increasingly focused our investment on our core strategic assets, and lowered our costs through operational efficiencies, technological innovation, and working with our supply chain. We've exercised financial discipline by reducing our 2015 capital investment by some $700 million, $300 million of which is in Canada.
As part of our focus on efficiency and operational excellence, we are employing new technologies to maximize production and minimize our environmental footprint. This includes pad drilling, which optimizes our land uptake, and the use of saline water sources for hydraulic fracturing, thereby minimizing our fresh water use. To be clear, operating in an environmentally responsible way is non-negotiable. Put another way, responsible development will not be compromised in a low price environment.
These are just some of the ways in which Encana is dealing with $50 oil, and I might add, dealing with a sub-$3 natural gas price environment as well. We have an opportunity to work together to meet the challenges of the low commodity price cycle and ensure that Canada prospers over the long term.
I've talked about what industry is doing. I'd like to touch upon the pivotal role that government plays.
I believe it's more important than ever for government to find opportunities for Canada to increase its competitiveness by focusing on critical infrastructure, a competitive fiscal environment, regulatory efficiency, first nations engagement, and public acceptance for resource development. I'll touch on those points.
Canada must continue its strong efforts to put in place critical infrastructure for global market access, including LNG, in order to realize our full resource potential. For companies, there is an urgency attached to capital decision-making, and in order to maximize Canadian investment going forward, it is crucial we expedite these infrastructure projects.
We must continue to focus on the fiscal environment. The federal government's recent announcement of a tax reclassification for LNG projects is a great example of a fiscal measure that positions Canada as an attractive and competitive place to invest.
On the regulatory front, we encourage the government to continue to address legislation and regulations that risk putting Canada at a competitive disadvantage. In order to carry on with our shared mandate of responsible resource development, we need to maintain the right balance of environmental protection and economic competitiveness in policy and regulation. This is not about lowering environmental standards but rather about ensuring that our regulatory review processes are as efficient as possible.
With respect to first nations, ongoing government leadership is imperative on a number of fronts, including bringing greater clarity to the consultation process and improving first nations capacity. Government leadership is essential to creating an environment of shared economic prosperity, one which will provide greater investment certainty while at the same time creating opportunities for aboriginal communities.
Finally, and importantly, together we need to continue to earn public trust for resource development. Both industry and government have leadership roles to play in bringing balance to the discussion. Our shared voice must help the public understand how the energy sector's success translates into success for all Canadians.
In conclusion, we believe the time for collective and unified industry and government action is now. A low commodity price environment affects people across the breadth of this country. This is a national issue with national implications and nationwide generational opportunities.
Working effectively together, we can play our parts in ensuring that all of Canada benefits and prospers in this low commodity price environment and is well-positioned for the anticipated price recovery.
Thank you.
:
Thank you, Mr. Chairman, and good morning, everyone. I appreciate the opportunity to appear before you today. My name is Steve Reynish and I'm with Suncor Energy.
As I'm sure you know, Suncor is one of Canada's leading integrated energy companies, employing thousands of Canadians from coast to coast. Our operations include oil sands development and upgrading in northern Alberta as well as conventional and offshore oil production. We own and operate refineries in Edmonton, Sarnia, and Montreal, as well as a lubricants plant in Mississauga. We are also active in renewable energy with interests in seven wind farms, and we operate Canada's largest ethanol plant in Sarnia. Many Canadians know us as “Canada's gas station” through our 1,500 Petro-Canada locations.
I think the first point I'd like to make is fairly obvious to everyone in the room. The world has changed significantly, with oil prices having dropped something like $50 per barrel over the last number of months. I see this morning that WTI is trading again under $50 a barrel. There's no doubt that this will have an impact on the industry and the Canadian economy. For Suncor, every $10 change in the price of oil per barrel equates to over a billion dollars in cash flow.
At Suncor, we've been preparing for this downturn in prices, and what we see is a return of volatility to these markets. We think we are positioned reasonably well thanks to a clear strategy. The fundamentals of that strategy are simple: optimize our base business, pursue profitable growth, return cash to shareholders, and be an industry leader in sustainability. This strategy is underpinned by a commitment to capital discipline.
We've been taking a hard look at our costs for the past couple of years, and these lower prices have caused us to accelerate those efforts. We've reduced our capital budget for this year by a billion dollars, and we're looking for $600 million to $800 million in operating budget savings over the next two years. I think you may have seen that we've also announced a reduction in our workforce of a thousand positions. Let me emphasize that these reductions were made in a way as not to jeopardize safety or environmental performance.
Others in our industry with higher debt or limited cashflow may not be in the same financial position. Their situation highlights the very real effects of the downturn on the Canadian economy. Let me just run through a few examples of that.
With respect to the oil supply-demand balance, lower prices will stimulate demand for energy—and we've seen this particularly already in the U.S.—but producers' cashflow obviously will be negatively affected, forcing cost reductions.
On the employment side, declining revenues will also limit our ability to sustain a stable labour force. Our strategy, however, remains to look for local labour first, then regionally, then nationally, and then only as a last resort do we look internationally. The current environment has allowed us to source closer to home, and we are reducing or eliminating higher cost fly-in, fly-out labour to our operations. Significantly, lower prices have rationalized the most expensive labour option for us, which is temporary foreign workers.
In terms of capital investment, companies are shelving projects in light of the new price environment. That of course impacts engineering, construction, and the operation of projects. The declining Canadian dollar softens the blow somewhat for Canadian operators but does not completely offset the decline in oil prices. For us at Suncor, a lower dollar is a double-edged sword. Our earnings are in Canadian currency but our debt is largely denominated in U.S. dollars.
Regarding the supply chain, lower prices also impact spending in other sectors including transportation, manufacturing, hospitality, tourism, and high tech. I think in Canada's case that list is a long one. Of course, depressed oil prices also result in lower taxes and royalties.
Overcoming this challenge will require a sustained effort for all of us. For us in industry, it means focusing on reliable, safe operations, and reducing costs. For contractors and suppliers, we are looking for them to help us find creative ways of reducing costs. For government, we think it means ensuring a strong, cohesive policy framework is in place to facilitate future development. We're particularly interested in any potential cumulative effects of taxes and regulations.
I'll leave it there. Thank you, Mr. Chair.
:
Mr. Chair, I've done this before so I know how quickly the time goes. I'll dive right in. I have six observations and seven recommendations.
Observation number one is that the fall in oil prices has been precipitous. There's no doubt about that, but no one should be surprised. Oil prices go up and they come down, and you can't say that something is a crisis or an emergency if you knew it was going to happen sooner or later.
Observation number two is that we are not in uncharted territory here. If you adjust for inflation, the average price for oil over the last 40 years has been actually $50 a barrel, almost exactly where we are today. Any company that assumed prices would stay at $100 a barrel forever, frankly, was being unrealistic.
Observation number three is that we probably need to get used to this price range. The factors that led to the current glut are still in place. International demand is low. Production is still high and showing no signs of slowing. Of course, we have new technology that is reshaping the oil market in the same way that similar technology reshaped the global and regional natural gas markets about a decade ago, which resulted in long-term price declines for natural gas. We can expect something similar in terms of oil.
Observation number four is that the drop in the price of oil has been bad for some Canadians, but good for others. It really depends where you work and where you live. Obviously, it's good for consumers because the price of energy is down. It's also good for some manufacturers because of the lower dollar. That cannot be lost in this discussion.
Observation number five is relates to the labour market in Alberta. The effect of oil prices on jobs has been variable, even in Alberta, and even within our energy sector. The reality is that our energy sector is actually a grouping of industries, at least three different sectors within a sector, so drilling and oil field service, for example, have been hit very hard because companies always respond to low prices by ramping down capital investment very quickly. We've seen that and that's already resulting in dramatic job losses for drilling and oil field service.
The second sector within a sector is oil sands-related construction. Our concern for our members is not right now. Most of our members are working on projects where funding was approved before the price of oil dropped. The big question is what will happen for the next generation of oil sands projects if the price remains where it is right now, but for now, most of our guys are working.
The third sector within the sector is downstream value-added production, so upgraders, refineries, and petrochemical. One of the things we always point out is that during periods of low oil prices, employment in these downstream sectors remains very stable. It's one of the reasons why we always encourage more investment in the downstream because it provides stability even when prices are dropping.
In addition, a lot of our members in construction are finding work this year in what we call shutdowns and turnarounds, which are basic maintenance on existing energy facilities like upgraders and refineries. This just happens and the timing is very good as this happens to be a year with a lot of shutdown and turnaround work, so it comes at a very good time. There's also a lot of commercial work in Alberta right now, so the effect of oil prices on the construction sector is muted.
Observation number six is that I urge members of the committee not to put a lot of stock in what I describe as disaster rhetoric. Winston Churchill famously said that you should never waste a good crisis and that's what's happening with some people who are speaking out with a lot of gloom and doom about the oil sands right now. For example, we heard the president of Canadian Natural Resources talking about a death spiral in the oil sands one day and the next week he was announcing $3.9 billion annual profits. We also hear our premier singing from the doom and gloom song sheet.
I would argue that things are really not that bad and people like our premier and the president of CNR are simply using this crisis as Winston Churchill suggested to take advantage for their own self-interests. In the case of Canadian Natural Resources, they're trying to use the crisis to squeeze contractors. When it comes to the premier, he's trying to squeeze public sector workers.
In terms of recommendations—
:
Thank you very much, Chair.
Thank you to everyone for being here. Thank you, Mr. McGowan, for being up a couple of hours even earlier.
All of us politicians like to think we're more influential than we are. I'm reading the quote from the former MP from Fort McMurray who said that he'd like to see it all slowed down, that they have two-hour waits in the morning and the oil sands aren't going anywhere. He said, “Let’s manage it properly.”
If I were to try to find a theme through what I heard this morning, it's that there's a change in the profile for the companies in terms of investment decisions.
I want to start with you, Mr. Dunn. From your company's perspective, from Encana's perspective, this is a time when extras are being taken off the books. You're looking to save money. You're looking to keep things nimble and lean. Is that a fair assessment in terms of where the company is at?
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Let me respond to that in two ways.
First, when it comes to job creation, the kinds of projects you're building matters. Certainly, if you're building pipelines, jobs will be created, but in much smaller numbers and for a much shorter period of time than if you were building a big industrial plant such as a refinery or an upgrader. It depends on the project, but when you're building a pipeline you are talking about hundreds of construction workers over a period of a year or two, whereas when you're building a refinery you are talking about thousands.
In addition, once you've built a refinery you're creating long-term employment over the life of that facility, not just for the people in operations but also those in construction maintenance. I talked about turnarounds and shutdowns and regular maintenance. We employ literally thousands of construction workers—plumbers, pipefitters, and electrical workers—every year to maintain the existing plants. If you don't build the plant, that ongoing construction work is not there; it's missed.
I take issue with the argument that building pipelines to access new markets will automatically increase the price you get for the oil that you sell. Talk about bumper sticker arguments. That's a bumper sticker argument we have heard from the Alberta government and organizations such as CAPP for years and years. I have talked to economists and have sat through hearings in front of the National Energy Board hearing from experts, and it is not a given that, just because you connect our supply with the market overseas, the price will go up.
Look at the Asian market, for example. When you send bitumen over there, only 25% of their refiners can actually accept it as a feedstock, because they are what we call cracking refineries rather than coking refineries.
The market is really not as big worldwide as we've been led to believe. Light sweet crude oil can be used in every refinery in the world, but our product—bitumen—cannot be. Just sending it overseas does not guarantee a higher price. That is especially true now that there's a glut not just in the United States but on the global market. It seems ridiculous to me to say that dumping more product into a glutted world market is going to get us a higher price. I think most people would agree that dumping product into a glut is just going to maintain the price at a lower level for a longer period, whether it's Alberta doing it or OPEC.
:
Thank you very much, Mr. Chair.
Thank you to all of our witnesses. I very much appreciate your sharing your perspectives with us this morning.
One that was a recurring theme for many of you was the volatility in the industry. A few decades back, when I was articling at Price Waterhouse in the eighties, people were leaving homes in Alberta because of the market volatility. Obviously this isn't a new factor, notwithstanding some recent comments.
I want to tie that to the job perspective, because as a member of the Conservative government I take enormous pride that our government has created more net new jobs, and good quality jobs, than any other member of the G-7.
Suncor is a big industry. It's one in a very complex industry, but you mentioned that you have 1,000 fewer people now. I would love to find out, with the volatility, do you have a plan to bring back...? Is there an opportunity for these people to...? I would suggest that you have clearly invested in these people over the years, so how are you recouping that investment?
:
I'd like to talk to that as well.
It's not simply the workers at our company. What's changed since the 1980s, I think, is the breadth of the impact of the industry on Canada. Whereas, as you said, in the eighties you would have seen an industry that was much more based in Alberta with its manufacturing and such, and the rigs. Now what you're seeing is an industry that is coast to coast, and this is through a conscious effort of companies.
There are some 2,300 suppliers across Canada that supply the oil and gas sector. These suppliers in manufacturing, whether it's valves outside of Montreal, tubulars in Ontario, or legal and professional services out of Toronto as well, are much more of a national industry. These reductions in activity go beyond simply employees in our company but broadly impact the services and supplies we get from the breadth of Canada. That's a significant difference from the 1980s.
:
As I indicated in my opening remarks, over the long term retail fuel prices do in fact generally track price movements in crude. Certainly, as we've seen over the last two and a half years, while there has been volatility in the price of crude oil there has been relative stability in refiner margins and retail margins. The prices at the pump have generally reflected movements in crude prices.
This is not to say that there are not short-term variations. Largely those display seasonal implications, as the supply and demand balance changes with the changes in seasons, as well as short-term supply and demand disequilibrium, whether from a demand spike or a supply shortage brought about by unplanned refinery outages or the kinds of situations we've seen in the U.S. recently, with a number of refineries shut down because of a strike. It is a North American market, not a uniquely Canadian market. Canada is 10% of what is a much larger North American market.
Going back to the 2008 experience, what you saw there was that while oil was going up as a global commodity, the price of fuel in North America was declining as a North American commodity as the impacts of the recession were starting to bite, particularly in the U.S. At one point in 2008, margins had dropped to zero and in fact were negative on the refining side because of supply and demand dynamics for gasoline that differed from the supply and demand dynamics globally for crude oil.
Thanks to the witnesses.
It's always interesting. I used to have a retail gas station in Edmonton, about 25 years ago when the price was 39.9¢, and I have friends and family in Alberta, where the price was 60¢ over the last month. I was trying to figure out why, back in the Okanagan, we always have higher prices, and that's something we will continue to debate. But today we're here interested in discussing supply and world economic impacts on global pricing.
The first question is for Mr. Boag. You mentioned that there are 18 refineries in Canada, in answer to Mr. Cullen's question. There was a study done in 2012 by the Standing Committee on Natural Resources here in Parliament, “Current and Future State of Oil and Gas Pipelines and Refining Capacity in Canada”. It talked about there being at that time 19 refineries. I'm wondering how many refineries we have built in the last 25 years.
I would like to thank all the witnesses. Unfortunately, we don't have time to look at the question in depth, but I would like to thank you for being available.
I'll start with Mr. Boag.
In the Natural Resources Canada document, I see that the refinery margin is clearly higher to the west of the Ottawa River. We're talking about refineries in Toronto, Calgary and Vancouver, compared to those in the east. The Canadian Renewable Fuels Association's document provides an explanation and says that the situation was caused by excess refining capacity over demand.
Is that the only factor for explaining the clearly higher margin in the west than in the east? Are there any other factors?
:
Thank you all for being here this morning. It has been an interesting discussion.
Mr. McGowan, I want to congratulate you on your points. Oftentimes when we have testimony, we get lost in a lot of the explanation, but you did a magnificent job of expressing your observations and your recommendations. I want to talk about some of those things, because there seems to be a suggestion that we can possibly work this in our favour.
Here's my problem. We don't have any economists, and I'm certainly not an economist either, but I do understand supply and demand. I'm also very nervous when governments.... I think of Ronald Regan and the famous quotation of “I'm here to help”.
What can we agree on? Is there a consensus in the industry that we should move some of the western petroleum, and would the refineries then do the needed updates so that would work? I'm looking for that marriage between supply and demand. Who decides? Suncor doesn't go to the government...at least not at this point, and I hope that day will never come. The market decides these things.
Is there a consensus? Is there something we recognize as industry and we can recognize as government that we can start to work towards? I suppose at this specific point I'm talking about the pipeline to the east.
Somebody mentioned something about the tides too. Are you talking about when the oil tankers come in? They float with the tides, don't they?
:
Thank you, and thank you, Mr. Adler.
There are a couple of minutes left. I have a number of questions, but I don't have time for all of them. I'll try to get one on the table.
I do agree that we should not overact both at the federal and provincial levels.
Mr. Reynish, you said Suncor was scheduled to pay $2.7 billion in taxes to the Canadian government and now it's done to $800 million. That is a sizeable impact. Another concern...Mr. Dunn, you raised the new normal. You've certainly faced a new normal in terms of natural gas prices. People talk about markets going up and down, but the concern here is that we have a fundamentally changed geopolitical situation, and a fundamentally changed crude production market, with the U.S. coming on in such a large way as being one of the top three crude oil producers in the world. You have the reaction by OPEC and by Saudi Arabia, presumably to distort the market and drive the price down, to preserve or increase their market share. That seems to me to be the big elephant in the room that we haven't yet addressed today, and I'm doing it with two minutes left in the panel. Is there someone who wants to take that on?
Canada is a price-taker in this whole thing. The concern is that if OPEC or Saudi Arabia keeps that up as a market strategy, how long can we in this country sustain that?
I'll look to Mr. Reynish. I probably only have time for one or two of you to comment on that.
:
Colleagues, please find your seats for the second panel. We will begin right away. Thank you.
We're resuming our discussion here, continuing with our study of the impact of low oil prices on the Canadian economy. This is our second panel here this morning. We have four witnesses to hear from for this panel.
First of all, from the University of Alberta, we have Professor Andrew Leach from the Alberta School of Business. Welcome, Professor Leach. We have from the Canadian Renewable Fuels Association, the president, Ms. Andrea Kent. Welcome to the committee. From Packers Plus Energy Services, we have Mr. David McLellan, senior economist and business strategist. Finally, from TransAlta Corporation, we have Mr. Rob Schaefer, executive vice-president, trading and marketing.
We will begin with Professor Leach. You each have five minutes for your opening statements and then we'll have questions from members.
:
Good morning. Thank you very much. It's a pleasure to be here with you today.
I'd like to deliver remarks on three aspects of the oil price crash for you today. First, I'll look at how the changes of the market have affected the outlook for oil sands projects. Second, I'll talk briefly about greenhouse gas policies and oil sands projects in light of the oil price crash. Then, if time allows, I'll add something on refining and upgrading as well.
As you know and as we discussed in the first panel, oil prices have declined considerably over the past nine months. Early on we had a little bit of an advantage in Canada, in particular for oil sands, with a weaker Canadian dollar, lower discounts, and cheaper diluent, which led to Canadian oil sands projects probably faring better than projects did on average globally. That's actually reversed now, so things have gotten a lot worse in the last little while for oil sands. It seems every time I write that they're okay, they get worse.
To understand the impacts of these prices on oil sands projects, I will go quickly through three aspects.
When you look at CAPP's oil sands production forecast, we think that's a reasonable benchmark for what industry has planned. You see about two million barrels a day of current production, about another one million barrels a day of production that we're expecting to come online, which is currently in construction, and then another two million barrels per day of forecasted growth projects. These would be projects that don't have significant capital already invested in them.
If you divide the existing operations into those three groups, you're at very little risk of seeing any of those shut down. To take a couple of simple examples, for a project like CNRL's Horizon, you're looking at a cost of production of about $38 per barrel today for a product that sells for about $60 a barrel. So you still have a healthy operating margin.
Suncor, from whom you heard earlier this morning, has pretty similar statistics. Their production costs—and they're in the high end of the oil sands producers, because they have a large integrated project—per barrel are about $35, and that barrel sells for about $60 to $70. If you go down through their existing in situ projects, they're at very little risk of actually shutting any of them down unless the oil prices get a lot worse.
New projects are a little bit of a different story. Like economists, we always have two hands, so I'll talk about two types. On the one hand, we have the projects for which significant capital has already been invested, and on the other hand we have the projects for which it hasn't been.
If you look at the ones with significant capital investment—and we saw a good example of this recently, again from Suncor, with the Fort Hills project—even though that's a relatively expensive project, it was worthwhile for them to continue that because the forward-looking view, even with lower oil prices, is still for a positive rate of return on investment.
This is also an area in which you can plainly see the impact of the Canadian dollar. We used to think of new mines as being projects for which you needed $85 to $100 WTI to make work. With today's Canadian dollar, you can probably make a new mine work somewhere between $65 and $70 WTI, if the Canadian dollar holds where it is right now. For a new in situ project, those numbers get even lower, down into the $50 to $65 a barrel range. If we're looking at the projects that are currently under development in which significant capital has been invested, those numbers get even lower still.
So what does that mean in terms of what you should expect? It means you should basically expect what you heard Mr. McMillan from CAPP talk about this morning—a pullback in future capital investment on new projects leading to a decrease in the rate of increase in oil production, if you can follow that double negative. So there will be less production than what you expected but more production than you have today.
Second, could a GHG policy disrupt this trend? Would it be crazy to introduce new policies on oil sands emissions?
I don't think so. If you look at the types of policies that have been proposed, whether for something like a 30-30 or 40-40 approach in Alberta or at the federal level, or even something like B.C.'s carbon tax, the margin you're talking about is, for a 30-30 approach, maybe 10¢ to 25¢ a barrel. If you take a B.C. carbon tax approach, it's maybe $1 per barrel at most.
I don' t know about you in this room, but I actually find it far less comforting to think of the fact that our oil sands industry is 25¢ a barrel away from disaster than I do to think of the prospects of a greenhouse gas policy. I think we're much better off if we have a credible greenhouse gas policy in the oil sands than we are if we have none at all.
Lastly, on refining—and you heard some thoughts on refining from Mr. McGowan this morning—it is true that refining margins hold up better, because they tend to reflect the cost of refining, and they don't tend to reflect the cost of crude. We're finding that margins have been more stable, but according to recent analysis that I've just pulled together over the last couple of weeks, the total return to shareholders, to governments, and to royalties would be higher by a factor of about 40% for extraction alone versus extraction plus refining per dollar invested.
Thank you very much for your attention. I look forward to your questions.
:
Good morning. Thank you very much.
It's a privilege to be here today on behalf of the Canadian Renewable Fuels Association and our membership.
Just by way of a quick background, our domestic biofuels industry is now generating $3.5 billion yearly in economic activity. We've created over 14,000 quality Canadian jobs to date. We return over $3.7 billion in investments back to the government every year. We've had significant growth since 2006.
Notably, 26 renewable fuel plants are operating across Canada. They make more than just biofuel. We make clean technology. We're making new products, and we're expanding our renewable fuels supply.
CRFA represents the full spectrum of Canada's domestic biofuels industry. Our members are biofuel producers, petroleum distributors, retailers, and farmers. Over our 30-year history, we've seen many challenges and we've risen to them. Declines like this and these low prices that we're seeing in this environment certainly are not uncharted territory. Of course, this is not to minimize the impact that lower oil prices have on our industry or our membership, but it is not uncharted territory. We've been here before.
After all, renewable fuels and petroleum industries are very closely linked and tied. Earlier in this hour, we heard from CAPP and from CFA. I want you to know that those two groups really encompass our customers. They are our members as well—you heard from Suncor. We work together, we play direct roles in one another's successes, and by that token, what affects one impacts the other.
With the committee's questions in mind, I will give you an overview of what we're seeing in our industry as a result of lower prices.
By way of context, we have federal mandates. There is a 5% requirement for ethanol in the gasoline pool and 2% for biodiesel or renewable diesel in the distillate pool. It really is important to note that those mandates and that stable policy is helping us offset a lot of the disturbances that a low price environment can create.
While we are a domestic industry here, a lot of our business actually operates on a north-south trade axis. American ethanol imports have been slashed. Their exports to Canada are significantly lower than last year's projections. With those U.S. exports drying up, the product does back up into the American market. It has caused depreciation in the U.S. market.
It's reducing the amount of overblending in the Canadian market compared with what we have seen in previous years. It's significant because with overblending and over-compliance largely due to the price advantage of ethanol, Canada overblends and exceeds the national mandate requirement by about 130% a year. This is going to dry up now because that price advantage for ethanol is shrinking.
On average, the wholesale price of ethanol has been roughly 20¢ cheaper than gasoline. Falling gasoline prices weaken that price advantage and essentially remove a lot of the financial incentives for higher blends and for overblending that we've seen in the past.
The resulting glut of product in the U.S. also shrinks the market for Canadian biofuels, so it reduces demand and it puts downward pressure on profit margins. At the same time, we see input costs that are a bit higher, purchases that are down, investors who see their portfolios shrinking, and access to capital tightening. In one way or another, we all feel the effects.
Even more concerning than price fluctuations in the short term is policy instability in the medium and long term, and that's true in any market. The long-term need for Canada to diversify its fuel mix really does remain strong. That's kind of the point here for us and our members today and that is in the face of anything, including declining oil prices.
The good news, and there is good news, is that Canada benefits from stable national mandates that have helped build resiliency. However, if we are to continue to grow and progress, government policies need to keep pace by: specifically, renewing and expanding renewable diesel mandates, which is important, moving from 2% to 5%; and supporting innovation and developing broader market access for producers. That's going to echo a lot of the comments that you heard in the first hour.
Thank you very much for the invitation. I look forward to your questions.
:
Thank you and good morning. My name's Rob Schaefer and I'm the executive vice-president of trading and marketing at TransAlta.
Thanks for having me here today. I really appreciate the opportunity to speak here about the impact on the electricity sector of declining oil prices.
Before I get started just let me introduce TransAlta for those of you who aren't familiar with us. We are Canada's largest, publicly traded power generator and marketer. We've been in business, headquartered in Calgary, for over 100 years. We are a well-diversified company. We have operations across Canada, in the United States, and in Western Australia. We have 64 generation facilities and we span pretty much all fuel types, from hydro to wind to coal to gas, with a total fleet capacity of over 8,500 megawatts across all those jurisdictions. We're Canada's largest wind generator and we're among the largest publicly traded renewables companies in Canada.
We're in your communities. We have small hydro facilities in British Columbia. We have efficient coal plants in Alberta. We have wind farms in Quebec. In fact, we have a gas cogeneration plant right here in Ottawa serving the children's health centre just north of here. We've been serving that facility for a number of years and we're very proud to have just worked out a new deal with the Ontario Power Authority to continue the operation of that plant.
We're very involved in the oil and gas sector. Of course, we supply power to the grid in Alberta. We supply all oil and gas producers that way. We also have cogeneration facilities right on site with Suncor, for example. We just heard from Suncor earlier. In fact, we've been in business, in partnership, with Suncor at Fort McMurray for 14 years, with a cogeneration plant there. We serve their refinery in Sarnia, Ontario, as well. Clearly the oil and gas sector is important to our business.
What I would like to do here today is to speak to the impact of oil prices on the power sector, and I'm going to cover both the short-term impacts as well as the long-term impacts.
Thinking about the short term, what we're seeing today are the lowest power prices we've seen in years in Alberta, and actually across North America. There are a couple of things going on here.
Number one, we've had a significant amount of new power supply come in during the last couple of years, brought on by having relatively higher prices that brought on new supply. Now we're seeing the impact of that with quite low prices.
The second thing, though, is that we have very low natural gas prices. I think you heard about that and you've certainly been aware of that. So what's happening is that we're seeing a trend of increased competition between gas and coal in Alberta and in other markets as well. In fact, in 2014 coal ran about 12% less than what it was capable of, and our analysts are linking that to low gas prices. Basically in any jurisdiction where you have a reasonable amount of gas-fired generation you're seeing the impact of that on the markets. Those are the short-term impacts.
The longer term impact is this. As difficult as low oil prices are on the oil sector, it's also difficult on the power sector. If we see a protracted period of low prices, it's going to be difficult to make the investments we require to renew the generation fleet across Canada. Clearly in the short term consumers are better off with low power prices. The challenge is that, longer term, we could see a knock-on impact in the form of higher prices later, and even potentially supply shortfalls. You know that in western Canada, in particular, an oil and gas industry that's not investing in growing means a flat load growth for the power sector.
As we look to the 2020 timeframe to renew our fleet, if we have a protracted period of low prices it's going to be challenging to do that, no matter what fuel technology you want to talk about because all new generation comes with large price tags. There is a long lead time to make those investments, much longer than the oil and gas sectors themselves, so you get into a timing crunch.
That's the bottom line. Just to wrap up, at TransAlta we're certainly up for the challenge. We've adapted to the effectively low mining revenues in Western Australia, the manufacturing sector in Ontario. We've been dealing with the growth we've had in western Canada. We can certainly deal with a softer market. It's not the first time we've seen it; it won't be the last. We're certainly up for the challenge.
Thank you very much, and I welcome your questions.
Packers Plus Energy Services is an excellent case study on innovation and success originating in the Canadian oil patch. I'm honoured to have been afforded the opportunity to participate in today's panel discussion on the impact of the decline of global oil prices on the energy sector and the Canadian economy.
Our company was founded in Calgary at the turn of the millennium by three partners. They developed a system that allowed for the efficient extraction of hydrocarbons from tight formations through hydraulic fracturing. Its introduction was a catalyst for radical change in the industry as it combined with advances in horizontal drilling such that North American hydrocarbon production has grown considerably faster than North American demand. The consequences of this are not unrelated to why we are convening today.
Today Packers Plus has almost 1,000 employees with 32 locations around the world. Our company designs, manufactures, sells, and installs the highest-quality completion systems in the industry. We've now become the fourth largest completion company in the world after behemoths such as Schlumberger, the new Haliburton-Baker Hughes merged company, and Weatherford.
Ours is an example of how Canadian innovation and oil field expertise is sought and exported around the world.
If we discuss impact on prices, first I would like to point out that the members should consider that a barrel of oil is not necessarily homogeneous. There are varying crude qualities coming from different locations to a number of destinations. Canadians will be most impacted by the price of West Texas Intermediate and the Western Canadian Select blends.
Standard pricing is in U.S. dollars and it facilitates easier comparison and international trade. This means there is an inverse correlation between oil prices, particularly WTI, and the U.S. dollar. The current strength in the U.S. dollar is one aspect hampering a recovery in oil prices. Note that many OPEC and other oil-exporting nations have increased demand for U.S. dollars because they need to fund their budget shortfalls with their sovereign wealth funds and foreign currency holdings, and by holding U.S. dollars it protects them against currency losses.
Of course, Canadian producers have benefited by that in that the Canadian exchange rate has dropped from about $1.07 per U.S. dollar to close to $1.21 today.
Brent crude is the international blend and it's what sales are frequently based on. Over the last 25 years West Texas Intermediate has averaged a slight premium of about 2.6% over Brent, but since 2009 and the introduction of new hydraulic fracturing technologies, WTI has traded primarily at a discount. The discount has been relatively volatile but has more recently averaged over 20%. This premium represents lost opportunity for the Canadian economy and should be part of recognizing the motivation to increase our market access to tidewater so that we can sell into that market.
Despite the contention of my colleagues on the previous panel, oil is not necessarily the global commodity it's made out to be. The United States right now has a law banning export, so we have a North American market. Shale oil in the U.S. has increased production by four million barrels a day at a time U.S. demand has fallen from a 2006 peak of 22 million barrels a day to about 19 million barrels a day today.
With respect to the reduction in E and P capital expenditures and reduced oil field activities that was talked about, we are seeing sharp drops in North American rig counts. According to the CAODC website, each rig represents about 20 direct jobs and 135 indirect jobs. The rig count has dropped from over 1,800 in November to about 1,500 now, and it is expected to bottom later this year at perhaps as low as 1,250. A price recovery above $70 U.S. for West Texas would provide the signal to start adding rigs and subsequently increase production.
In the service industry that we are part of we've seen the reduced capex budgets and drilling activity felt across our industry. Competitors such as TriCan have experienced layoffs and have asked their staff to take pay cuts. Operators have been asking for and receiving price cuts but there are limits to how much of the price burden the service industry can or is willing to take.
This new reality will renew focus on efficiencies and provide incentives for companies to adopt more innovative approaches. A $90 West Texas Intermediate environment produced a pattern of drill, complete, put on production, and repeat among many shale operators. They became so busy ramping up their production they really didn't focus on efficiencies. This reduced activity level has now given them an opportunity to pause and review data.
Subsequently, we at Packers Plus expect first to see a lot of high-quality research papers produced, and then to gain some significant market share for us.
I am based in Houston, Texas, after 16 years in Calgary. Half of our business comes from Canada. We are looking to grow significantly in the United States. Open hole completions are the dominant completion method for unconventional ex-oil sands in Canada but in the U.S. it's cemented liner plug-and-perf.
:
Again, we need to keep in mind the following.
[English]
What we need to keep in mind is that, yes, there is an excess of supply in the world markets. That's what's pushing the price down, but that factor is even more prevalent in the North American market, as Mr. McLellan also mentioned. We have a landlocked market in North America, which is leading to prices here being lower than they are on world markets.
So, no, by exporting Alberta bitumen to world markets, you're not going to see us getting a Brent price for Alberta bitumen. But you also would be talking about a relatively small quantity in the global scheme of things, if we're talking about increasing exports off the Canadian shores by, let's say, a million barrels a day.
[English]
I don't have a specific policy that I'm advocating for, for example. My position generally is that what we should have in Canada is a policy where we can look at our policy and say that if everybody else implemented this policy, we'd reach an agreed-upon set of global goals.
So if that's the two degrees Celsius goal, we should be able to go to credible researchers, tell them to take the policies we would implement in Canada and impose them globally on other economies in the same way, and see what would happen globally. If we don't meet global goals, then by my definition, we're not doing our share. I wouldn't get into global pie-dividing by asking what percentage of historical emissions do we get, or they get, or what have you. I'd look more at the policies themselves.
:
That's a great question.
Probably the key difference from the most recent oil price crash, if we look at 2008-09, is that this is not a global economic crisis. This doesn't have the overriding credit constraints that we had in 2008-09, so that changes the dynamic of it. This is more of an oil supply shock, although, as we all know, there are some significant headwinds in the economy globally as well.
From a government and from an industry point of view, one of the key features—and I've written a bit about this crash versus 2008-09 in Maclean's—is that we didn't have a run-up in prices beforehand. We didn't have this buffering, of whether it's government budgets or industry balance sheets, that came from an unexpected price appreciation, as we had in 2007-08. That translated through to a crash and then you ended up averaging out much better than you would have had you just had that drop. This is a bigger drop against, for example, last year's prices. I think that is a key difference.
In terms of the supply side, you may have to look back to the eighties and nineties to get a better sense of what a global crude glut looks like and how long that can last. Whether we're in that or not, it is going to take a while to tell.
:
There are a few things that are important to bear in mind.
This is related for us with fuel prices and the relationship between how gasoline is affected by that compared to the pricing for ethanol. Ethanol historically, on average, is about 20¢ cheaper per litre than gasoline. That results in a natural financial incentive for people to blend more ethanol into the fuel supply. That's not a bad thing because that cost saving is traditionally passed down to consumers. There is also a very strong GHG emissions reduction benefit that is associated with the higher octane in ethanol. On the whole, we see overblending in Canada and we surpassed the federal mandate. That's good news for producers because it's a good demand for their product.
When we see that this price advantage starts to contract there is less demand for ethanol generally because Canada also imports ethanol for this overblending from the U.S. When that demand in the U.S. market, which is much larger, starts to shrink then we see that product back up into the U.S. market. This means that the Canadian market for ethanol shrinks as a result. Ethanol is priced on the Chicago Board of Trade, so it attracts U.S. prices. Looking at the corn-to-ethanol price relationship right now, we have corn at CBOT, I believe, at about $3.50. It's still a profitable relationship, but it's nowhere near where we were this time last year in terms of profitability. When you look at 2014 it was a record-breaking year, so the numbers are going to be exacerbated a bit. It's going to look much worse, but that is because of the record profits that were recorded against North America as well.
One thing that's really helping, and I'll mention it quickly, is diversity. When we look at ethanol it's one output. DDGs, or dried distillers grains, are part of the feed market that comes off ethanol production naturally. The DDG values are good right now. That has buffered a lot of the price constraints and the operating costs that would otherwise be much more volatile in this environment for ethanol producers. I think that's a microexample of why diversity is good. If you look at biorefineries that are able to produce more products, they're going to have more market opportunities. That's going to help build that resiliency in the face of price fluctuations.
Good morning to all my colleagues.
Ladies and gentlemen, welcome to this committee meeting.
My first question is for Mr. Schaefer, who said that he is in a very diversified industry. He also spoke about the short-term impact of the drop in oil prices. He said that, in the long term, we will have difficulty renewing investments in this sector.
Given that his industry is so diversified, could he tell us about the impact of the drop in oil prices on employment in Canada?
A project like the energy east pipeline won't have a stabilizing effect on world oil prices in the sense that it is merely moving product from one area to another. As some of the colleagues have already mentioned, a project like energy east would change crude movements in Canada. It would allow eastern Canadian markets to access western Canadian crude, but they will also be doing that at a cost. They're going to be paying a toll to move that oil across the country.
So what would you see? You might see a slight reduction in crude costs to eastern Canadian refineries. You might see a slight increase in the net revenues to western Canadian producers. But you have a long distance to cover, and that's important.
Why have we always, historically, shipped our oil to the centre of the U.S.? We shipped it to the centre of the U.S. because that was a premium market and because it was cheap to get it there. Even if you were a self-interested Maritimer saying, “I want cheap crude”, your best trade for decades would have been to take crude from Alberta to Chicago and sell it in Chicago, and then go to Saint John and buy oil at the port. That has changed a little bit now but it's not a free lunch, so to speak.
I would like to thank all our witnesses for their testimonies. We have had good discussions with both panels.
[English]
Hopefully I will get to all of you because I so appreciate the discussion we're having, but I would like to start with Mr. Schaefer.
In your testimony—kindred spirits, another CA—you talked about the long-term impacts and the short-term impacts. The part I would like you to expand on a little more is the impact upon making investments in the industry. Obviously, if we don't feed the industry with investments, that's a factor.
Could you expand on that?
:
Okay. That's fair enough.
You've all spoken, as did our previous panel, about market volatility and the impacts of the market price.
Ms. Kent, you talked about that. It wasn't that long ago that we were reading articles about the negative impacts on Mexican farmers and the food supply chain, based on your industry growth. It has impacted upon all of us.
But Mr. McLellan, you're a relatively small player in a world market. We've had some big players come to speak to us on this issue. What are the particular challenges that you as a smaller corporate entity face, and what are the opportunities?
:
Our business is going to thrive and survive with the capital expenditures of the large E and P producers. If they're cutting, then we're just going to have less work.
The opportunity, though, is in market share. As my opening statement said, our completion technology was innovative. In fact, it was one of the key attributes to usher in this era of collapsing natural gas prices and now faltering oil prices, being able to unlock hydrocarbons from what had been previously uneconomic sources—shale oils, tight gas.
Our opportunity, then, is that, first, shale resources exist all around the world. We need to abandon all talk of peak oil, in the sense that we're not going to run out. We're going to move beyond the era of oil long before we ever run out. It is employing technologies such as ours that will enable the extraction of what had previously been stranded. Ours is a low-cost, efficient method developed in Canada.
There's some resistance in the United States. There's an attitude in Texas in particular that “if it wasn't invented here, it might as well not exist”. They can do that. They didn't face the same price pressures as Canadian producers. They are in the world's largest consuming market and are very close to the largest refining market. They didn't have the same regulatory oversight, and they don't pay their people the same. Canadian producers have had their hands tied behind their backs and have managed to thrive despite that by being more innovative.
Now with this new price regime, I'm finding that Texas operators are much more willing to sit down and ignore the fact that this is a Canuck technology. To be clear, I presented this. We're a global company. We are Canadian and proud to be Canadian, but we're now a global entity, and it makes it easier for the Texans if I present it that way.
:
Thanks to the ladies and gentlemen for being here today. It's another very informative discussion. I just want to jump right into the questions.
First of all, for Mr. Leach, I know my chief of staff follows you very well. I appreciate your comments. I'm from Edmonton originally as well, and spent time at U of A. We appreciate your opportunity to provide your experience here for our panel.
You were here earlier for the previous witnesses, who brought up The Economist magazine and how the Saudis and OPEC is indicating 400,000 additional barrels a day for 2015 and beyond. How long this goes on, we're not sure. Then our fine chair did a good summary as far as what the impact is.
I'm just wondering whether you believe the energy sector is in a crisis right now, and maybe elaborate on why you think the Saudis have done this at this particular time.
:
I think unconditionally you could call this a crisis in the sense that the price of your product has decreased by roughly 50%. There's almost no other way you can slice that.
In terms of what the Saudis are doing, I think it's the most talked about non-action that we've seen in global oil markets. They really haven't done very much. You talk about 400,000 barrels a day. That's a rounding error essentially on their production. If you look at most of what we talk about in terms of global oil production increase, it's not coming from the Saudis. It's coming from the small producers in the U.S. It's coming from our producers, etc.
I think what the Saudis would rightly see is that their ability or the OPEC's ability to wield their market power now is reduced by the fact that you have this new technology that Mr. McLellan talked about. You can drill a well, bring a well into production, and produce half the oil it's ever going to produce in about the first 12 to 18 months. It's hard to wield market power in that world because you pull production back now, you let prices go up and all of those rigs come back to activity. All those wells come back online, etc., so it's just a different environment for OPEC to be in. What you see from their actions is that, if anything, they're being less aggressive. They're not really flooding the market with any new production.
Dr. Leach, the first panel of witnesses mentioned earlier that the oil market was highly speculative. There has been a massive change in the past few decades.
We have talked a lot about supply and demand, but there is also oil as an investment vehicle. This explains—and you can confirm this for me—the sudden drop in the barrel price that we have seen in recent months. Basically, the fact that the market is very open accelerated this reasonably sudden drop.
To what extent could this “investment” factor, by which investors can more or less trust the future barrel value, influence things, either by sustaining a low barrel price or slowing the increase of the barrel price?
:
Thank you for the question.
[English]
Certainly there is a broad market in futures and options and all sorts of speculative trading in crude markets. What still anchors that market at one end is the operator producing the barrel. At the other end is the entity burning or using the barrel, transforming it into transportation fuels.
In the short term, absolutely you can see amplifications. In the long term, it has to come back to the same thing as it was in 2008, when there had to be someone willing to pay $147 to burn a barrel of oil. Today there has to be somebody willing to produce and deliver a barrel of oil to market at $50. That's really still the fundamental that underpins the market.
I think what you've seen more aptly, as Mr. McLellan alluded to, is that technology has changed in the market. It now allows more people to bring barrels of oil to market and make money at those lower prices. That's changed the game much more than speculative investing in the market.
:
As I addressed earlier there are about 1.5 million barrels a day of oversupply. Global demand is growing by about one million barrels a day.
Remember there are declines in oil fields all around the world. The oil sands have a unique profile.
In shale oil, as Andrew rightly pointed out, production can be brought on very quickly and taken off-line. Shale producers have become the swing producers in the world. As demand compensates or grows to take over the excess supply, and then continues its growth, shale oil out of North America is going to be able to meet that demand for a number of years.
I deal internationally with a number of other countries that have their own shale oil resources and are looking at how they can develop and how they can recreate the North American shale miracle.
We're not going to be in danger of any shortages, barring a major supply disruption out of the Middle East, Russia, Venezuela, or some of the more unstable areas. There is going to be lots there, but you're right in that it's going to be more expensive.
But then efficiencies.... Remember Moore's law with transistors? We're experiencing that in the oil and gas sector to some degree. The advances we're making in individual well productivity are increasing rapidly. How fast we can drill wells, put them on production, and how productive those wells can be is a magnitude better than it was as recently as 2005, and it's going to continue to increase. Companies like ours spend half our time figuring out what the next step is and how we can stay ahead of our competition.
:
Thank you, Mr. Van Kesteren.
I'm going to take the next round.
Mr. McLellan, you describe very well your company. It's very innovative. I certainly applaud you for that. But your company and others like you have transformed the energy market in the world, right? You have successfully done that. As you said, you ushered in a new era.
If you look at production—I hope these figures are correct—U.S. production of crude was, in 2008, five million barrels a day. In 2014, I think it was 7.4; 2015 is projected to be 8.5; and 2016 is 9.3. I hope those figures are correct, but it shows obviously a trend in terms of supply. As you mentioned, demand is going down, so you have transformed the market.
Mr. Leach indicated that the Saudis are perhaps being less aggressive than they could be, but the sense is that, and many observers are saying this in fact, what they are doing is trying to preserve market share. If you look at it from a very cynical point of view, they are almost trying to either halt your progress or even drive you out of business, such that they preserve their market share where it is today.
Given that—and that may be the reality, I'm not saying it isn't—how will your company and others respond to that situation?
:
First, slowing the growth of the shale oils is one of their imperatives. They have already lost tremendous market share in the United States. They used to be the number one supplier. Canada's now the number one supplier. Saudi's exporting less than a million barrels a day into the United States, so defending market share is a big part of their goal.
Another part of their goal would be to slow the growth of competitive fuels. Lower prices are going to reduce demand there...to hurt some of their strategic enemies if you will, Iran and Russia. There are a lot of things that play into their rationale, but they are taking a very rational approach from an economic perspective. They are the lowest cost producer in the world.
In terms of our business, yes, it's going to slow down our North American business considerably, but we do deal with Saudi Arabia. We have some systems in the ground in Saudi and in all parts of the world. We have offices everywhere. As long as there is shale oil tight gas resources, our company is there. It's a double-edged sword.
The more hydrocarbons we bring on and the faster and cheaper we bring them on, the less likely the price is to recover to say $100 a barrel, but then on the macro picture, the more that benefits consumers. It's about productivity and we are making the industry more productive.
:
It comes back to what I had said earlier, that really what we're seeing from the Saudis is non-action. It is continuing to produce much as you would expect a competitive producer to act.
What they have seen is an erosion of their market power from the factors that Mr. McLellan mentioned. The Saudis used to have the ability to create a low price environment that would shut out high-cost producers, and then to step back their own production, see prices rise, and take advantage of those rents. Now they don't have that second part.
They could cut production now. Prices would bounce up, but who would fill that gap? It would be more light oil production in the U.S., etc. They wouldn't have the ability to then profit from those high prices in the same way.
When you hear people talking about competing on market share, that's kind of the story. They know somebody else is going to flood in on them, be it alternative fuels or other producers. I think you're really seeing a non-active response. I wouldn't quite characterize it as actively as conferring a hat on the U.S. swing producers as Mr. McLellan did. It's just the reality of the new market.
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I didn't see that particular comment. I think we do see that it is going to take a while for the demand side to adjust and take advantage of low prices here, but that's not a uniquely Canadian thing. That's everywhere. It's in the U.S. economy. It's in the global economy.
I think we also need to realize that the effects, like the effects of the boom, are unequally distributed, so whereas Alberta took the lion's share of the benefits in the upswing, it is also going to take the lion's share of the costs—Alberta, Newfoundland and Labrador, and Saskatchewan to some degree.
I think there will be a net positive, as the governor said, but bear in mind that there's a lot of story underneath that regionally, provincially, etc.