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Proceedings of the Standing Senate Committee on
Energy, the Environment and Natural Resources

Issue 3 - Evidence, April 24, 2001 (morning)

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CALGARY, Tuesday, April 24, 2001

The Standing Senate Committee on Energy, the Environment and Natural Resources met this day at 9:00 a.m. to examine such issues as may arise from time to time relating to energy, the environment and natural resources.

Senator Nicholas W. Taylor (Chairman) in the Chair.

[English]

The Chairman: Honourable senators, we are meeting today in Calgary to consider two issues. This afternoon we will deal with Bill S-15, the Tobacco Youth Protection Act, and this morning we will continue our study of energy-related issues.

I will take a few moments to explain the process the committee will follow. Each witness will be asked to make a short presentation. We will hear from each group for an hour, but we would like you to all finish your opening remarks within a half an hour so that we have a opportunity to ask questions.

Our meeting today continues our examination of energy-related issues. Yesterday we heard from witnesses in Vancouver. In the next few days we will hear from Canadians in Edmonton, Toronto and Montreal. Witnesses will also be heard in Ottawa. The goal of these hearings is to allow us to get a sense of the views that Canadians have of the rapid and significant changes in the Canadian energy scene in recent years.

Once the committee decides it has received all the necessary information on Bill S-15, we will proceed to clause-by-clause examination.

I would note that earphones are available. Translation from English to French or French to English is available. We will also take a break at noon, and senators and members of the public can visit an exhibition on smoking in Glen Room, 208.

Our first witness this morning is Mr. Ken Vollman. Thank you for joining us today. We look forward to your presentation. We would like to thank the NEB for meeting with us today as part of our study of the changing Canadian energy sector.

Later today we will hear from CAPP, the Canadian Association of Petroleum Producers, as well as from the wind people, specifically, Cowley Ridge Wind Power Inc.

Mr. Kenneth Vollman, Chairman and Chief Executive Officer, National Energy Board: Mr. Chairman, we have distributed copies of slides to which I will refer. It would be a good idea to have those in front of you. They have various lines and objects in colour which will make it easier to identify items to which I will refer this morning. Other than some minor formatting changes, these are the same as the slides you received last week, so any notes you made on the other slides will still be relevant to this page numbering.

Our purpose today is to provide the views of the National Energy Board on matters set out in your April 6 letter of invitation. I will be delivering the entire formal presentation this morning, and I hope to do that in under 20 minutes. I will be assisted in the question-and-answer session by some of the board's advisors. Mr. Terry Rochefort is responsible for our commodities business unit, and Mr. Bill Bingham works in Terry's unit and has specific responsibilities for natural gas matters. With me also is Mr. Glen Booth who is the board's chief economist. Finally, Ms Judith Hanebury is the board's general counsel and she will be handling the legal dimensions of any questions.

Slide 2 sets out the topics I will be covering in my opening statement. My introduction to the NEB will be very brief, as I believe the committee is familiar with our roles and responsibilities as a result of our previous appearances before you, the most recent of which was just over a year ago in Ottawa.

The second and third topics in the outline are designed to cover the issues set out in your letter.

Under the fourth topic I will cover a number of initiatives the NEB is taking to respond to a growing interest from the public in energy matters. I will then try to tie it all together in my concluding remarks.

Slide 3 is a high-level description of the NEB, that is, who we are. Let me emphasize that our business is regulation. Although we provide information and advice to the Canadian public and to the government on matters related to energy, the responsibility for energy policy clearly lies with Natural Resources Canada. This distinction will be relevant to a number of points I will make today.

The Chairman: DIAND operates a great deal of the Canadian oil and gas in the High Arctic. Do you interface somehow with the Department of Indian Affairs and Northern Development?

Mr. Vollman: We do interface with DIAND, particularly in respect of oil and gas exploration north of 60. DIAND is responsible for leasing in the North.

The Chairman: Do they come to you for advice? Are you available equally to Natural Resources Canada and to DIAND? Does DIAND use you almost exclusively?

Mr. Vollman: We do have relations with DIAND from time to time, not as frequently as with Natural Resources Canada because, of course, energy policy rests with Natural Resources Canada.

Our discussions with DIAND have been more frequent perhaps in the last eight to nine months than at any time in the past, and that is because of the interest in Ottawa in northern pipelines. DIAND certainly has a role to play as part of their responsibility for the interests of aboriginal peoples.

Senator Spivak: I do not quite understand the nature of that relationship. Will this board have some role in the environmental assessment of these pipelines? Exactly what is the relationship? That is a burning question at the moment in Canada and the United States.

Mr. Vollman: Your question goes right to the heart of why we have been talking more to DIAND in the last eight or nine months than at any time in the past. They, like ourselves, have an interest in what the regulatory process and the environmental assessment process might look like in the North. Further on in my material I have some background information on some of the issues we will have to deal with in terms of a northern regulatory process.

Senator Spivak: Could you give us a brief refresher of the extent of that regulation? At one time exports had to go through your environmental assessment. I am not sure they still do.

The Chairman: I also have some questions for Mr. Vollman, but perhaps we should make some notes and allow him finish the presentation.

Senator Spivak: Yes, of course.

Mr. Vollman: With your permission, it will be easier to answer your question after I show some of the maps and various jurisdictions in the North. We can pick up again on the question if the presentation does not respond to your question.

I mentioned the distinction between regulation and policy development, and I talked about pipelines in the North as being a good example of this. It is absolutely crucial that this board protect its independence and its neutrality in order to judge any proposals that are filed. Consequently, we have been involved in some discussions with Ottawa but those discussions are related simply to regulatory process matters and not to policy-related matters.

Slide 4 introduces our present complement of eight board members. They are full-time members appointed by the Governor-in-Council for terms of seven years. We are assisted in our work by a staff of some 280 professional and administrative support personnel.

Slide 5 provides some information about the importance of energy in the Canadian economy. As you know, Canada does have abundant energy resources which allow us to be a major producer and exporter of energy. As a result, the energy sector plays a very important role in our economy.

Energy exports accounted for about 8 per cent of all merchandise exports in 1999, but with the energy price increases last year, this grew to 12 per cent in the year 2000.

Slide 6 shows the contribution by energy form to total energy exports. It also shows the growth over the past five years. Natural gas, the yellow portion of those bars, is Canada's largest energy export, both in terms of volume and revenues earned. However, crude oil exports, shown as green in the bars, has increased rapidly since 1996 as production has increased from conventional heavy oil, oil sands and Hibernia.

Slide 7 is the same comparison, only this time shown in dollar value rather than energy units. Large increases in the price of oil, electricity and, in particular, natural gas resulted in a boom in export revenues in the year 2000, reaching nearly $50 billion. Since Canada also imported $16 billion of crude oil, net energy exports were $34 billion.

We do not import any significant quantities of natural gas. Is that correct, Bill?

Mr. William Bingham, Team Leader, Gas Commodities Business Unit, National Energy Board: That is correct, Mr. Chairman.

Mr. Vollman: Let me turn now to the natural gas supply and demand picture which is the first matter you asked us to discuss.

Slide 9 shows the relative importance of each supply basin in Canada and in the United States. The Western Canada Sedimentary Basin is a significant source of gas supply, accounting for nearly one-quarter of North American production. Most experts believe that future gas prices will be affected by production levels from the U.S. Gulf Coast, which is North America's largest source of supply.

Production from Sable Island reached a half of a Bcf a day in 2000, most of which was consumed in New England.

Slide 10 is a very busy one which we have included simply to help make the point that Canada is part of an integrated North American natural gas market as evidenced by the extensive pipeline grid. In terms of pricing, though, the market does become fragmented from time to time depending on local supply and demand, a recent example being the western portion of the continent. Buyers can purchase gas from a number of supply sources and have that gas delivered through numerous pipeline interconnects.

Slide 11 illustrates the increasing reliance of the United States on Canadian natural gas imports. The top of the yellow area represents total United States natural gas demand, and the top of the blue area is U.S. domestic production. Nearly all of the difference is satisfied by imports from Canada.

Following deregulation in 1985, gas exports to the United States have quadrupled and now account for more than 15 per cent of U.S. consumption. Growth in U.S. gas consumption has historically outpaced growth in supply. Accordingly, the United States has had to increasingly rely on imports from Canada. Gas production in the United States actually peaked in the 1970s, and despite high levels of drilling, production has not yet returned to those levels.

Slide 12 is our introduction to the subject of gas pricing, which is the second question you asked. The dashed red line on the chart represents historical oil prices, and the solid black line represents natural gas prices. Throughout most of the past decade, prices of crude oil and natural gas have had a close but not precise relationship.

In the early 1990s, a gas bubble existed that resulted in gas-on-gas competition which, in turn, depressed gas prices. Gas was sold at a discount to crude oil which was often viewed as a ceiling for gas prices. More recently, gas-to-oil competition has become a factor as supplies for both commodities have tightened.

The current demand by electric generators for natural gas has added additional pressure to gas prices. As a result, the upper limit for gas prices is now determined by what electric generators are willing to pay for natural gas.

Slide 13 shows gas prices in actual or nominal dollars over the past two decades. That is the red line. It also shows the same data expressed in constant 1980 dollars, which is the yellow line.

Prior to 2000, prices for natural gas were lower than they had been before deregulation. In 2000, however, the average price for gas at the Alberta plant gate was double that of previous years. However, taking inflation into account, gas prices have just recently returned to levels experienced before deregulation.

Slide 14 provides some perspective on the future pattern of gas price movements. While it is impossible to predict prices, the futures market is currently indicating that gas prices will increase to about U.S. $6 per million Btus by this coming winter before settling down to just over U.S. $4.

The blue area labelled as an industry range is representative of what we are hearing industry experts reporting at various conferences and meetings that we attend.

Slide 15 summarizes the study we prepared last fall on the industry response we might expect to see in light of the current market situation. We projected at that time that 8,000 to 10,000 gas wells would be drilled in each of the next three years. The producing sector has in fact responded to recent price signals with record levels of drilling. We now estimate that the industry actually drilled about 8,800 successful gas wells in the year 2000. We had forecast just over 8,000.

It is expected the drilling will continue to increase because a significant portion of future deliverability depends on production from new wells.

Slide 16 shows the result increased drilling is expected to have on deliverability. The increase in deliverability will likely be far more modest than the increase in drilling would suggest. Newer wells have lower initial productivity than wells drilled five years ago, and decline rates for these wells are higher than for older wells.

If no new production were brought on, in other words, if we stopped drilling today, deliverability decline would be 3 Bcf per day each year. For illustrative purposes, that is the annual gas demand for British Columbia, Alberta, and Saskatchewan combined. Simply put, we must drill more and more wells just to maintain our current production level and even more to increase it.

Slide 17 turns us to the demand side of the natural gas market. It shows an outlook for U.S. gas demand as projected by the Energy Information Administration in its 2001 energy outlook. The U.S. gas market is expected to continue to grow strongly, led by the electric generating sector.

I would draw your attention in particular to the red line. Over the next two decades, the U.S. Energy Information Administration projects that the amount of natural gas used to generate electricity in the United States will triple. Gas required by other sectors grows more modestly. Similar trends can be expected in Canada, but with less dramatic growth for electric generators.

Slide 18 sets out some solutions to the high price situation, which touches on the third question you asked us. With respect to conventional supply, Canadian producers have responded to price signals by drilling record numbers of wells and shifting to more prolific and expensive areas of the Western Canada Sedimentary Basin, such as the southern Northwest Territories, northern B.C., and northern and western Alberta.

In the United States, producers are also drilling large numbers of wells. Further, several companies are examining the feasibility of expanding the capability of importing liquefied natural gas from abroad. Canadian and U.S. producers are also developing projects to expand production from the frontier areas such as the offshore East Coast and the Arctic.

Consumers have also reacted to the recent price signals by reducing demand, either in the form of conservation measures or switching to other fuels such as coal or oil.

Your fourth area of interest concerned northern development. Slide 19 introduces one of the issues we must address as the industry turns to northern gas resources. Land claim settlements north of 60, which are certainly seen as positive by all players, have also produced a complex array of assessment and regulatory bodies. They are listed in blue down the left side of that graph, and you can see how many constitutionally protected assessment agencies exist in the North. Each has important work to do, but to a proponent seeking approval, for example, to construct a pipeline down the valley, the review process must look daunting.

The chairs of the involved agencies, including ourselves, have been meeting periodically since last fall to understand how the various pieces of legislation work and identify where opportunities exist to work together to streamline review processes. Our next meeting will take place the third week of May.

This is a good point in the presentation to expand on my previous answer. You can see that DIAND is a player in many of these areas and, therefore, has been involved in the discussions we have been having since last fall.

The Chairman: This is more a question for our information. You have an unsettled claim area. Where is that on that slide?

Mr. Vollman: The unsettled claim area would be the lightest gray area at the bottom which shows North Slave, Deh Cho, and South Slave written on the area.

The Chairman: Gwich'in, Sahtu and Deh Cho are all in gray. Does that mean all three are unsettled claim areas?

Mr. Vollman: No, the Inuvialuit, the Gwich'in and the Sahtu all have settled land claims. Starting at the north, the Inuvialuit settled their land claims in about 1983. Gwich'in and Sahtu both settled in the 1990s.

The Chairman: Deh Cho is the only one unsettled.

Mr. Vollman: That is correct.

Slide 20 summarizes the progress we have made to date. I would have to admit that these accomplishments listed on the slide are modest compared to where we have to be in terms of being ready to process a pipeline application. At the same time, they are important milestones which indicate the willingness of all agencies to work together in identifying and seizing opportunities to streamline the process within the limits of existing legislation.

Slide 21 shows the two most likely routes for moving northern gas to markets. I will not expand on those. They have been in all the trade journals and newspapers many times in recent months. Let me say that, as a regulator, our focus is on ensuring that the regulatory process is ready to process applications for either route in an efficient and timely way.

Slide 22 lists a number of other initiatives the board is taking to respond to a growing interest from the public in energy matters. We have put increased emphasis on providing easily understandable information to the pubic. An example is placing a question and answer feature on gas and electricity prices on our Web site. Coupled with the information and education component, we are placing more emphasis on the monitoring of energy markets. With an increased emphasis on market solutions rather than regulatory solutions, it becomes more important for a board like the NEB to constantly monitor the energy markets to ensure that they are working and the public interest is served.

Part of our information program involves the publishing of energy market assessments. In the past year, we have published two on gas and one on oil, and we will shortly, in fact within the next couple of weeks, be releasing one on electricity. We will continue to publish these EMAs as the need for information grows. We have brought a couple of those EMAs with us this morning and we will leave those with you.

We are currently working on a long-term supply/demand report for all energy commodities. We do this periodically as part of our information monitoring role and also as a key component of our processing of natural gas export applications. The last supply/demand report was published in June of 1999. The next one will be published in early 2003.

Slide 23 shows some additional initiatives. Public engagement is one of the key NEB corporate goals. It is important for the NEB to hear and understand the public's views and concerns, and equally important for members of the public to be able to easily submit views and access NEB information.

Board members recently took the board's business to Montreal for a week, meeting with many interested groups there, just as you are meeting here today. We have plans to do the same in Atlantic Canada in May. We will be out there for 10 days, in Newfoundland, Nova Scotia and New Brunswick, meeting with the interested public.

Board members and staff are also active in canput, which is an association of public utility tribunals, and also interface regularly with other regulators in the United States and Washington and in Mexico.

The board is very conscious of the impact that its decisions have on industry and on the public. Besides making our processes more user friendly, we are working on streamlining our application process. We regularly measure cycle times and have reduced them in the past two years, especially cycle times for routine applications.

To the extent that applications before the board will bring more natural gas to the market, the board streamlining of regulatory processes will help bring gas on more quickly, assuming the approvals are in the public interest. The board is also readying itself for the regulatory work associated with expanded development off the East Coast.

Slide 24 begins my concluding remarks. More than ever before, Canadian natural gas supply and demand is an integral part of the North American market. This is evidenced by the fact that the price of gas across North America has converged. Canadian supply is important to the U.S. market, supplying about 15 per cent of U.S. needs, and the gas industry is vital to the Canadian economy, both in terms of domestic jobs and investment, and also in terms of exports.

At this time there is a tight supply in the North American natural gas market. With tight supply and increasing demand, much of it fuelled by electricity generation, we have seen prices rise considerably. Prices have gone down from their winter levels but not to their levels of two years ago, and it is unlikely that they will decline to those levels in the foreseeable future. It is also likely that there will be additional price spikes in the short term as the markets find the price levels which balance supply and demand at a given time.

With the increasing importance of natural gas as the fuel of choice for electricity generation, demand for gas by electric generators has led to electricity prices being a determiner of gas prices. This is because as electricity prices rise, electricity-generating companies can afford to pay high prices for gas and are therefore willing to bid the market price up.

Slide 25 completes my concluding remarks. The NEB believes that, where markets are working, the market is the best regulator; and the evidence is that, notwithstanding high prices, the market is working.

Low oil and gas prices a few years ago limited the cash flow of producers and inhibited them from spending on exploration and production. In a working market, prices send signals to both producers and consumers, and this is happening in the gas market. Producers are working harder than ever to increase exploration and production, and new supplies are becoming economically feasible.

At the same time, consumers will practice better conservation where feasible. Industrial and commercial consumers are more readily able to move to alternative sources of fuel, and this is happening. As an example, even electricity generators who previously considered natural gas to be the fuel of choice are now looking at alternatives such as coal and nuclear.

More supplies will be brought on through the increased exploration and production efforts of the industry, but the new supplies cannot be brought on instantaneously. There will be a lag. As new supplies are brought on, prices should continue to moderate.

Thank you for your attention. We would now be pleased to take any additional questions that you may have.

Senator Spivak: My first question relates to the cost of natural gas versus other sources. I comparing the price, do you consider the whole life of the energy source? For example, with nuclear energy and coal, do you consider storage costs. Do you factor in the environmental consequences? It is interesting to see how these comparisons are made, although they are usually not an accurate reflection of the whole picture. You prepare energy market assessments that are considered to be authoritative. What goes into those assessments? What are your premises?

Mr. Vollman: In the determination of market shares and in doing our future projections, we have to recognize that the pricing of energy forms and the interprovincial trade and consumer choices are not determined by regulation. They are determined by the operation of the free market. Therefore, many of the factors you are talking about, because they are not built into what a supplier would charge to the customer, are not considered.

However, in considering a new energy project and trying to determine whether commencing that project is in the public interest, we are concerned with costs and benefits, so we will try to look at as many of the cost factors as we can identify.

Senator Spivak: Am I correct in saying that, in considering the construction of, say, a pipeline, you will factor in all of the environmental costs in a way that was not done before? I am referring to the impacts, for example, on rivers, the water supply. I recently looked at what Dr. David Chindler said about the Prairies, and I am sure his remarks also apply to the North.

Do you contract out the work to be done for these assessments.

The Chairman: I think the concern relates to hydrocarbon energies, gas and oil, and whether they pay their fair share of the costs of pollution. We know that with wind energy there is no pollution and that with atomic energy there is very little pollution. There is a general feeling, right or wrong, that oil and gas are, perhaps, the spoiled darlings of the energy industry and that they may not be carrying their fair share of the environmental cleanup load.

Senator Spivak: My question relates to the fact that the National Energy Board plays a very authoritative role in the energy field, and when the board puts out figures, people accept them without question. What are your premises? How do you arrive at those figures?

Mr. Vollman: In the first instance these matters are addressed directly through regulation. Governments and boards establish permissible environmental impact limits. For example, gas producers are told how much sulphur must be removed from the natural gas, that is, how much can be emitted. Regulations govern how their infrastructure can cross streams as well as how the restoration of agricultural land is to be achieved.

In a market-based environment, there is no master hand that is assessing the total costs to society of an energy form and saying that this has to be reflected in the market price. It is only reflected in the market price to the extent that we have guidelines and regulations with which the industry must comply.

My panel members may wish to add to that.

Mr. Glenn Booth, Chief Economist, National Energy Board: I would add that, we will conduct extensive public consultations before we start our supply and demand report. Any input we get will feed into the way we do our analyses. I understand perfectly the intent of your question. We have heard it said to us many times that, when we speak, we speak with the voice of authority.

When we consider the scenarios that will develop in the future, we are having preliminary thoughts about considering a different energy strategy for Canada, one that is not just business as usual. However, there will probably be a continuation of the world as it is now, with projections of increased demand for electricity and gas and so on. We do want to look at alternatives to traditional forms of energy, and we will take into account some of those external costs to which you referred.

We are just starting our project now. It is in the very early stages, and we will be doing extensive consultation.

Senator Spivak: The point is, though, that everybody has to be in on the act. You cannot just say that you only regulate and that you do not set policy. Your input will be a major factor when people decide to invest in, say, wind power or whatever. Cost is the most important factor for most people, although they would like to not harm the environment which is, I think, a crucial issue, particularly in view of the climate change.

Senator Adams: The project in the Mackenzie Delta has been ongoing since 1970. How many kilometres of pipeline runs from Norman Wells down to Alberta? Is it about 500 miles?

Mr. Vollman: It is runs two-thirds of the distance up the valley.

Senator Adams: Is it a 12-inch pipe?

Mr. Vollman: Yes.

Senator Adams: I understand it produces about 25,000 barrels a day; is that correct?

Mr. Vollman: That sounds like a good ballpark figure.

Senator Adams: I remember the studies and testing that had to be done in the 1970s by the companies that wanted to build that pipeline.

As you know, any expansion or future development will require consultations with the Department of Indian Affairs and Northern Development because Aboriginal land claims in that area still have to be settled. According to what you have told us, it is proposed that the Mackenzie pipeline will go through North Slave and South Slave, so future property and land claims will have to be considered. DIAND has told us that any pipeline to be built in the future, in areas where there are unsettled land claims, will cause a problem. Do you consult with DIAND? I think that any land claims will have to be settled before the National Energy Board can approve the expansion of the pipeline

Mr. Vollman: You are absolutely right. The fact that a portion of the land claims have not been settled poses a difficulty for a pipeline project. However, I am optimistic about the work Nellie Cournoyea is doing with Aboriginal peoples in the North. You probably know that she and Harry Denaron formed the Mackenzie Valley Aboriginal Pipeline Working Group, and they are trying to define the conditions under which a pipeline down the valley would be acceptable to Aboriginal peoples. If that effort is successful, I think that would, in part, mitigate the unsettled land claims situation.

Senator Adams: Since the 1970s, environmental considerations have influenced corporate policy. The Canadian Environmental Protection Act makes it tougher to develop or expand pipelines than it was in the 1970s, the 1980s and the 1990s.

Mr. Vollman: It is fair to say that the standards are far more rigorous now than they were in the late 1970s.

Senator Adams: Does the National Energy Board consult with the federal government before final approval is given to any pipeline project? I am talking about after any environmental adjustment plan is approved. Before work begins, do you consult with Ottawa?

Mr. Vollman: In our discussions in the North are looking at all the federal, provincial and territorial legislation, and trying to determine how they will fit together. We have identified four options which are currently under examination. One is to have different sequencing, and another is to hold, perhaps, one large review. These matters are still under discussion.

Senator Adams: Now that there is talk about shipping natural gas down to the States, has any consideration been given to developing the natural gas reserves in the High Arctic? I know that Pan-Arctic and Petro-Canada have expressed considerable interest in the North.

Mr. Vollman: In a free market, as we currently have, one should expect the industry to develop gas reserves incrementally, based on increasing costs. I can say that the gas in the Arctic islands will be more expensive than the gas from the Mackenzie Valley, onshore. There is certainly a great deal of potential in the Arctic, but it probably will be developed after we access the reserves of the onshore delta.

The Chairman: I have a supplementary question on High Arctic gas. It seems to me that High Arctic gas would be more than likely to come on stream quicker if the pipeline went down the Mackenzie Valley, than it would be if the pipeline went down the Alaska highway. The delta is much closer to the high Arctic. I do not know where the southern terminals would be, but they would be a long way away.

Mr. Vollman: Based on distance, one would come to that conclusion.

The Chairman: In your calculations, do you not consider that perhaps approval of the cheapest pipeline or getting energy to consumers by the cheapest method may not be the best long-term solution for Canada? It may be that a pipeline that is farther over would connect to, say, Arctic gas.

A similar situation was considered when we worked on the trans-Canada pipeline. Originally, the cheapest way was to go down through Chicago and back up. A fellow by the name of Howe warned us against doing that when he said, "Nothing doing. It would be coming across northern Ontario." As time has moved on he has been proved right. How do you factor in the political long-term good of a nation versus the short-term market?

Mr. Vollman: That could very well be a factor that would be introduced in a hearing on northern pipelines. Right now the debate seems to be simply between the existing reserves, the Alaska reserves, the delta reserves, and which pipeline goes first.

We were all around when industry was seriously looking at Arctic reserves. I just want to remind you of the surprises that technology can throw at us. The proposal that actually went the farthest in terms of Arctic gas reserves at that time was bringing them out as LNG. I do not know what the economics of that would look like today, but there have been tremendous advancements in LNG economics since the 1980s.

Senator Adams: Does Pan-Arctic still exist, or was it completely taken over from Petro-Canada?

The Chairman: Petro-Canada owns Pan-Arctic.

On your slide 5, energy is 12 per cent of all exports. Does that include only raw gas and oil, or does it include fertilizer, plastics or anything that is made out of hydrocarbon in Canada?

Mr. Vollman: My understanding is that it is probably those energy forms that are listed on slide 7, but Glenn or Bill will probably be able to give a better answer.

Mr. Bingham: I believe your understanding is correct, Mr. Vollman.

The Chairman: It is strictly raw gas and oil.

Mr. Bingham: It would be the categories that are shown on slide 7.

Mr. Vollman: It would not include any derivatives such as fertilizers.

The Chairman: That leads to another question, a philosophical one. When somebody wants to build a pipeline, do you consider the advantages of processing in Canada and the jobs that will create, or do you solely consider the price of gas?

Mr. Vollman: Those related issues are usually raised in our hearings.

The Chairman: It is factored in.

Mr. Vollman: I am thinking in particular of the Sable Island project where all of these matters were discussed in the public hearing.

The Chairman: On slide 6 yellow represents natural gas. Do you have any idea of the split in usage, that is, whether it is used for manufacturing, space heating, or electrical energy? Do you split the three major uses?

Mr. Vollman: It would probably be roughly the same as the split shown on slide 17, but slide 17 illustrates the entire U.S. natural gas market, and our gas tends to go into regional markets selectively, so it would be a bit different. Perhaps Bill, who is our wizard on that subject, will add to that.

Mr. Bingham: Historically, most of the Canadian gas exports have gone into the residential and commercial markets, but over the last 10 years, since deregulation, as the marketers have come to the fore, that gas has been moved more towards the power generation markets. We expect that trend will continue in the future.

The Chairman: We talked to some representatives of power generating plants yesterday in B.C. who told us that there may be a ceiling at which electrical energy will be cheaper than solar, wind or biomass. The curves on your chart indicate it approaching infinity. Have you done any studies to determine the limit of natural gas use before everyone switches? For example, Denmark is moving over to wind energy. At what price do these major alternatives to hydrocarbons enter the scene?

Mr. Terry Rochefort, Business Leader, Commodities Business Unit, National Energy Board: Mr. Chairman, slide 17 was taken from the U.S. energy information provider, the Energy Information Administration. This is not an NEB-derived slide. This was put out by the EIA in the U.S.

The best answer to that question I can think of is that we do not know what the breakpoint is. As gas goes up in price, there will probably be some point at which electricity generators will switch to something else.

We know that a year ago people in the United States were saying that there would be a 30 Tcf market within the next 10 years for gas, and what we have heard recently in speaking to people in the industry and at conferences we have gone to is that that is now being questioned by industry observers who are asking exactly what you are asking: Can the demand for gas for electricity generation continue to go up almost exponentially without regard to price? The answer we are hearing to that question is no, but we do not have the breakpoint at which people will stop demanding gas for electricity generation.

The Chairman: Jim Gray of Calgary who is considered a guru of the gas market, gave a speech recently in which he said that atomic energy would come in at around $4 to $5 U.S. mcf. In another speech by a representative of a financial house in New York it was said that atomic energy so substantially undercuts gas once it gets to $4 or $5 that it is almost a must. The North American public will have to think about it. Nevertheless, the fact is that, if it is not atomic power, there is also wind power and biomass. You have not put a pencil to it. This investment house said that 4.4 cents or 5 cents a kilowatt hour would be the top in electrical energy. You could factor that back. That means gas cannot get much over $4 U.S.

Mr. Rochefort: We have not put, as you say, a pencil to it, but to pick up on the point that Glenn made a few minutes ago with respect to supply and demand, we put out a major report every few years called a supply/demand report which is a multi-year view. The last one was 25 years. This time we have not come to a decision about how far we should project. We try to look at what the forces are with respect to supply and demand for all energy forms. As part of the process of doing that study, we hold extensive consultations with all interested parties. Last time, we held consultations in the cities across the country, almost like town hall-type fora.

This time, more than ever before, we will have to do it in a North American supply and demand context. We will still consider Canadian supply and demand but in the context of North America, that is, where the supply will come from and where will the demand come from.

I suspect that some light will be shed on what the market expects in terms of just how far prices can go up and what the breakpoints will be before people start switching to other forms of energy, but that study is just getting underway now.

The Chairman: I would refer to slide 7. You say that $16 billion of oil and gas is imported. Where does that crude oil come in? Is that to the Chicago and Montreal markets?

Mr. Bingham: The crude oil is imported primarily to the Port of Montreal area, and that would be from offshore sources such as the North Sea and, I believe, the Middle East.

The Chairman: Are there trades of natural gas across the border?

Mr. Bingham: Yes, but as Mr. Vollman pointed out earlier, the volumes that are imported from the U.S. into Canada are actually quite diminimus.

Senator Spivak: What do you estimate is the lifetime of oil and gas from the North? The reason I ask that is because we heard from Ballard yesterday who are projecting that by 2010 the fuel cells will be in operation. How will that impact on this? Once we have fuel cells that does not mean the end of fossil fuels. It means they will be used differently. What do you estimate is the lifespan of fossil fuels from the North and from Canada generally in long-term projections?

Mr. Vollman: One has to think of them in terms of an increasing amount of supply at an increasing cost. Geologists currently estimate that we have something in the order of 500 to 600 trillion cubic feet of reserves in Canada. That includes all of our frontier basins. We produce about 5 trillion cubic feet a year. That means it will last about a hundred years.

Senator Spivak: Some people put it at 50 years.

Mr. Vollman: That is one very general way of coming at it.

Mr. Rochefort: It is very important to look at the impact of technology and the impact of price. If you look at what geologists thought the ultimate potential was - and the ultimate potential is everything that geologists, through studies, think is there, whether it is actually being drilled into or not - that has been going upward over the years. Twenty years ago, the amount of resources that geologists thought was there was less than what we know is there now, and it is quite conceivable that, as technology goes along and there are different ways of finding gas and oil and better ways of recovering it, the economics and the technology may start to intersect and that may tend to increase the amount of resources that we think we have. For example, we know now there are vast marketable resources in the oil sands.

Senator Spivak: Of course that is not factoring in any catastrophic climate change.

In terms of your powers of regulation, what if the Continental Energy Policy results in most Canadian oil and gas companies being bought out by the United States and, if they were not, would you run into Chapter 11 problems? Would it not be cheaper for them to just buy their source of supply?

Mr. Booth: You will hear from CAPP shortly, but the upstream exploration and production industry has opportunities all around the world. In the last decade the pools of gas in Canada have become smaller. It has actually been Canadian companies who have the local expertise and have invested a lot of time and effort in understanding the geology, who are actually increasing productions for companies like Talisman in northeast B.C., AEC, and PanCanadian. Many American companies are interested in the large places offshore. Increasingly, the world petroleum industry is going to where they have the expertise - they develop that expertise - and where they feel they can make some money by economically producing the resource and applying their special technology and know-how.

Canadian companies have demonstrated that they have learned a lot about producing in Western Canada and Northern Canada and that, even if it is totally open, as it is today, they will continue to play a major role in Canada, as well as an important role off-shore. Canadian companies are also investing around the world.

Senator Adams: My question relates to the Alaska highway route from Prudhoe Bay. As I understand it, the proposal is to build through part of the Yukon and down to B.C. and connect the link down to California. Is there any process underway right now? About a month ago I was in Whitehorse where I met some of the native people from Alaska, and they were quite interested in this.

Does that National Energy Board have responsibility for all pipelines that come through Canada? Are the native organizations from the Yukon or those in the Mackenzie Delta being consulted? The rumour in Ottawa is that the pipeline will be built in any event. Does the National Energy Board have a responsibility in this area?

Mr. Vollman: It is a very straightforward question, but it does not have a very simple answer. Two things can happen. If the Alaska producers decide to use the certificate that was issued by Parliament in the late 1970s, the act that issued that certificate also created an agency called the Northern Pipeline Agency, which is now a virtual organization, but legally it exists, and it was created for the express purpose of supervising the construction of the Alaska highway pipeline. If the producers decide to use that certificate, and there are a lot of reasons why they would or would not, the construction of that line will be regulated by the Northern Pipeline Agency. It is doubtful the National Energy Board would have any involvement in the process.

However, we have also heard that the producers may choose not to use that certificate, that they may apply for new pipeline, for a variety of reasons, including commercial reasons and the fact that they do not believe that the old design is the design they want to use today. In that case, they would most likely have to come to the National Energy Board to have the new application processed.

The Chairman: Do new specifications have to go through you?

Mr. Vollman: Yes, under that second scenario. In our focus of trying to figure out the regulatory process, if I can put it that way, we have been focusing on the valley because there are so many questions to be addressed there. However, we are beginning to have discussions in the Yukon as well because of that second scenario. If it were a new application, we would probably be involved, and we would have to define our process there as well.

Senator Adams: Has there been any discussion with the Yukon government and Aboriginal organizations about the Porcupine caribou migration across the North Slope in the Yukon, and how that would be affected if a pipeline were built?

In Inuvialuit, the Sahtu and the Gwich'in had an interest interest in the natural gas reserves around the of the Beaufort Sea and the Mackenzie Delta.

I know the people in Alaska want to ship their natural gas, and those in the Mackenzie Valley want to build a natural gas pipeline to export the product to California.

Is anything happening now in Innuvialuit involving the Gwich'in and the Sahtu exporting natural gas?

Mr. Vollman: We understand the industry is still seriously looking at two routes for Prudhoe Bay gas. One is a route along the highway under one of the two scenarios I described. Their other main interest would be in what is called an over-the-top route, and that is indicated on the map here, but that route would not be on the North Slope. It would be in the shallow offshore. I have heard it said that it would be three miles off shore, perhaps, where the water is not too deep.

Given the prospect that there could be an application, I do not know how likely it is that it would be for a line offshore in the north.

As well, in the discussions we are having with the northern regulators, we are trying to assess how we would have to adapt the options we are putting together to handle an over-the-top proposal. Again our interest is only in the regulatory process, not on whether it is a good idea or a bad idea, or whether it is Canadian policy or not. We just look at the regulatory process itself.

Senator Spivak: Is there a gas pipeline anywhere under water?

Mr. Vollman: There are many of those in the Gulf of Mexico and in the North Sea, as well as other places around the world.

Senator Spivak: Have they worked well?

The Chairman: As a matter of fact, it is a good spot to build a pipeline. You have no surface owners with whom you must negotiate.

Mr. Vollman: Bringing it closer to home, of course, all of the production on the Scotian Shelf comes to a landfall in Nova Scotia near Goldboro.

The Chairman: On slide 21 you show the Yukon but you make no reference to any land claims. I believe there are unsettled land claims on the Alaska highway. I think everyone assumes those have all been settled. Have you looked into this? Who is in charge of looking into land claims? Is there an aboriginal land claim along the Alaska highway?

When I was Chairman of the Boreal Forest Committee, I recognized and accepted that native land claims are very important. One of the areas of the land claims was just along the border between Whitehorse and Watson Lake.

Mr. Vollman: You are right, senator. It is not shown on the map, and I do not have the data with me, but there are something like six or seven claim areas along the south of the Yukon, and the proposed pipeline path traverses about five of those six or seven claim areas.

The Chairman: It is not all smooth sailing there.

Mr. Vollman: It would appear that it would not be smooth sailing.

The Chairman: Honourable senators, our next witness is Mr. Greg Stringham, Vice-President of Markets and Fiscal Policy, Canadian Association of Petroleum Producers.

Mr. Greg Stringham, Vice-President, Markets and Fiscal Policy, Canadian Association of Petroleum Producers: I will explain the package that I brought with me before I quickly go through the slides.

Mr. Pierre Alvarez, our president, would have liked to have been here as well, but he is in the Maritimes today visiting with officials in Newfoundland and Nova Scotia.

In the package you will find a few items for background information. The first document describes CAPP. We represent 150 companies that produce about 95 per cent of the oil and gas in Canada. Those companies vary in size from very large to very small. I do not plan on going through document in detail today.

The other document that I included in the package is the submission we recently made to the U.S. government on their continental energy strategy. The document is called Oil and Gas Strategies for North American Energy Markets. I will touch on that at the end of my presentation. I have included the whole submission for your future use. It has some graphics and other information that might be useful. We plan to use this document in discussions with the Canadian government, including this committee. However, it was primarily targeted to deal with the strategy being developed in the U.S. now.

The third piece of information included in the package is a four-page public brochure that we have been publishing for about six or eight months now on natural gas prices and how the public can understand natural gas prices in Canada, what has caused the recent changes, what is going on in the industry, what prices have been, and where they might go in the future. We provided that to all the utilities, to the public, to the media across the country, and to governments.

The last document is a summary of what we have that you may wish to ask some questions on, Mr. Chairman, that is, our commitment to responsible development, and the stewardship program that we have initiated in order to be responsible both socially and environmentally in the development of our resources.

With that, I will walk you through the material that I have brought. Please feel free to ask questions as we go along.

The first slide is a perspective of the oil and gas industry in Canada relative to the world. Since we are definitely in a global economy, I thought it would be important to highlight that we are the third largest producer of natural gas in the world. Sometimes that is not fully recognized by the public. There is also the possibility that it will grow.

We are the thirteenth largest crude oil producer in the world. We rank lower in that regard, but we still produce a substantial amount of crude oil.

The Chairman: As you know, the Carseland plant brings in 100,000 to 120,000 barrels a day. With each well that comes on, how does that move us up in ranking?

Mr. Stringham: We now rank thirteenth. The next closest producer would probably be about 100,000 to 150,000 barrels above us.

The Chairman: If we had 12 plants, then we might be number two.

Mr. Stringham: We have a long way to go before we hit the production of Saudi Arabia. However, Canada exports to the United States about the same amount, or slightly under, as does Saudi Arabia. We jostle back and forth between one and two with Saudi Arabia for their imports into the U.S.

Senator Spivak: Apparently we have more reserves than they do.

Mr. Stringham: When it comes to the oil sands, and I will touch on that, that is correct.

The oil and gas trade surplus is a major factor. The oil and gas trade surplus accounts for close to 50 per cent of Canada's trade balance. That figure does change, of course, with commodity prices on oil and gas.

About half a million people across Canada are employed in this industry. What is probably most important, is that we are very capital intensive. Our industry, as you well understand but many do not, does not produce the same amount year after year. In the first year we may produce 100 units; in the second year we may be down to 75 units; and it may continue to decline. We have to invest money just to stand still on production, and we have to invest even more money to grow. This year we expect to invest close to $25 billion in Canada and internationally. That makes us the single largest private capital investors anywhere in Canada.

I will not go through the second slide since it is just a status report indicating how the Canadian industry performed in the year 2000. It gives you some statistics that the National Energy Board already has on our production of crude oil and gas, as well as our export numbers.

The other key element there is that the payments to government last year, in 2000, was close to $15 billion. In 2001, with commodity prices being higher, we expect that to go up significantly. That is payments to the federal and provincial governments.

The Chairman: A lot of steel is used in the construction of your infrastructure. How much of that steel do we produce in Canada and how much is imported?

Mr. Stringham: Much of the steel is made in Canada, but some of it does come from offshore. A lot of the manufacturing of pipelines is done here in Canada. There is a large pipeline manufacturing industry here in Canada, and that is because we have such a broad geographic base where we can install it.

The northern pipeline will involve a large requirement for steel pipeline as we move forward. The same will apply to the planned oil sands developments. The development of the oil sands plants will have a significant impact on areas such as Ontario because we rely on the manufacturing and steel industry to provide the vessels for those plants.

Senator Spivak: From an employment perspective, are you telling us that it does not matter which pipeline route is chosen? Will the work on the Alaska highway pipeline create as many jobs in Canada as the other?

Mr. Stringham: They will likely choose to purchase the steel wherever they can get it at the least cost. However, the manufacturing facilities that are closest to that, whichever route is chosen, are here in Canada.

Senator Spivak: Is proximity to the pipeline a major price factor?

Mr. Stringham: Proximity is a factor. It is not the only price factor, but it is one, yes.

The third slide is graphs showing crude oil and natural gas prices since 1995. The graph on the left-hand side, in yellow, shows crude oil prices. Again I want to emphasize that our industry is cyclical. Commodity prices on oil in particular are governed by global markets. OPEC has a big influence on that. Oil prices do go up and they do go down. In fact, we have gone through a drastic cycle in the last two years.

The situation with regard to natural gas is somewhat different. We remained below $2 mcf in Canadian dollars for an extended period of time because we had a lot of natural gas without the ability to move it to markets. When we got new markets in place that price jumped up, as you can see. Now it is also very cyclical. The price has come back down, but it will continue to fluctuate.

The Chairman: Those graphs lead me to ask a question. Your crude oil prices fluctuated so much because OPEC decided to sell the crude for a certain price. However, in terms of natural gas, the only foreign competition is in LNG. Is there a breakpoint figure where LNG will be imported? There is certainly a lot of gas being flared around the world, and if it can be captured, liquefied and transported, then there would be a price attached to that product.

Mr. Stringham: As far as oil is concerned, you are right, we are in a global market. Natural gas is continental. You can bring in LNG for anywhere in the range of U.S. $4 to U.S. $5.

The Chairman: Will we bump our head against the price of imported natural gas?

Mr. Stringham: You require significant expenditures in facilities to create the facilities to do that.

The Chairman: You also have to find someone who will allow you to unload it in a port.

Mr. Stringham: That is another big issue.

Senator Spivak: The natural gas market is mostly a continental market.

Mr. Stringham: Yes.

The Chairman: The only foreign competition from natural gas is if it is liquefied somewhere and put in a tanker and brought to our shores.

Senator Spivak: Then it is a hazardous substance.

Mr. Stringham: It has a cost associated with it. There are some ports where it is difficult to do that.

Senator Spivak: John Buchanan is always talking about liquefying coal.

Mr. Stringham: A project of coal gasification has been going on in North Dakota for several years. However it would still be considered to be a pilot project if it were tried, but it is a possibility.

Senator Spivak: Would that have the same utility as liquefied natural gas?

Mr. Stringham: Yes. Essentially the product is about the same. You must remember, though, that natural gas is in competition with coal, with oil, with electricity, with nuclear power and with hydro.

Senator Spivak: It is used to generate electricity.

Mr. Stringham: Yes it is, but it competes with other fuels. The market is always back and forth. It is not just a matter of one or the other. We always are competing with those fuels. We also compete with biomass, wind and solar.

To answer your question, coal gasification is a possibility. Coal bed methane, which is the gas that resides in the coal itself, is exactly the same as natural gas, and that is attracting a lot of interest right now. However, there is a cost associated with that. When we reach a certain level of prices, people do start considering those alternatives.

The next slide shows the number of wells that we have drilled in Canada. When prices go up, the industry does reinvest those dollars back into the ground, and we have hit fairly close to a record number of wells in the last two years. The difference between now and 1997, which is when we drilled a record number of wells, is that there are far more natural gas wells today and we are starting to drill deeper. Of course, it takes longer to drill a deeper well, so we have a slightly fewer number of wells, even though we are going at a record pace.

Senator Spivak: What is "Dry/Service"?

Mr. Stringham: Dry and service are two different kinds of wells. Dry is when we drill a well and we hope to get natural gas and/or oil, and we hit nothing. We do not like to have many of those.

Senator Spivak: It looks like you have a lot.

Mr. Stringham: A fair amount, yes. This is a very risky business. We do not know exactly where all this oil and gas is located.

The service wells are those that are drilled to service the wells already in place, to provide additional well servicing to them to help them to continue to produce.

Senator Adams: Are you more interested in exploration in one area as opposed to another? I know that there has been quite a bit of drilling in the Arctic offshore. I believe Gulf and Esso are in partnership with the Inuvialuit. Do you know if any other companies are interested in exploration in the Arctic? I also note that there is never very much exploration around area the of Hudson Bay where I live. Perhaps they figure that there is no oil up there, so there is no interest.

Mr. Stringham: The areas of interest right now are natural gas in the northern parts and the southern parts of the Yukon and the Northwest Territories. Another area of interest is the southwestern part of the Northwest Territories and the southeastern part of the Yukon. That is where the reserves lie, and a lot of exploration is now going on there. There has been a very increased interest there.

The next slide demonstrates this. You can see where the geographic basin in the darker brown colour at the top of the map goes. It extends down from the Northwest Territories through the provinces of Alberta, B.C., Saskatchewan, and over into Manitoba. It goes right across the southern half of Manitoba. Oil is produced in Manitoba now. We currently have production from eleven of the provinces and territories. There is a small amount of production coming from almost every province and territory.

"Tcf" means trillion cubic feet. This number comes from the National Energy Board. This is a geographic representation showing where the natural gas reserves are throughout Canada.

There are, of course, reserves up in the Arctic islands.

Senator Adams: How does the number of wells in the Northwest Territories, north of 60, compare to the number in Alberta? I see Alberta production is 270 Tcf, and north of 60 it is 175 Tcf.

Mr. Stringham: There are probably about 100,000 or more operating wells in Western Canada, and north of 60 right now it is probably less than 1,000. I think that would be a safe guess. That area is definitely less explored and less developed. That is why there is so much interest right now. There is interest from around the world. They consider that basin to be an area for development.

Senator Spivak: Where is the Arctic northern reserve? Where is it within this basin? Is it right in the middle of it?

Mr. Stringham: Are you referring to the Arctic, as far as the Beaufort Sea?

Senator Spivak: The ANWAR.

Mr. Stringham: I have not mapped the reserve into Alaska. The Alaskan border is the faint yellow line on left-hand side. The Prudhoe Bay gas would be just north of there, on the ocean, where the dark blue and the light blue come together.

I will try to give you a picture of what is happening in North America. I come back to this because gas is such a continental energy source. You can import a small amount but it is very continental. Comparing U.S. and Canadian demand into the future, as the National Energy Board explained, over the next five to six years we project that there will be a very strong demand for natural gas, most of that being driven by the need for electricity. Economies have grown so strong in Canada and the U.S. over the last few years that the trend is to require more growth in the economy, and to fuel that, we need some form of power, mostly electricity, and natural gas is the preferred fuel for generating electricity, not just because of its environmental benefits but because you can put it in very quickly and it has a very high efficiency level. You can locate it where it is needed. You can build a natural gas generation plant in a downtown area, in the middle of a fairly congested, populated area. You can do that because it has low emissions. That is why there is a very strong demand for natural gas.

The Chairman: We had a hearing in Vancouver yesterday where the fuel cell people, Ballard, told us that they think they are only a short stage away from putting one in the basement of a house.

Mr. Stringham: Exactly.

The Chairman: The natural gas would generate the electricity for the house. There would be a natural gas feed into the fuel cell. You talk about moving it out, and that is one more stage. You could do away with electrical wires in residential areas because they would all have a little fuel cell.

Senator Spivak: Would it give you heat and light?

Mr. Stringham: Yes. It is called "distributed generation." That is what they are working on with the fuel cell.

Another interesting thing that is happening on the oil and gas production side is that they are suing microgenerators, microturbines. This is a tiny microgenerator that can be put on a well and it will generate electricity and pass it on to an electric grid.

Senator Spivak: Is that what they mean by Amicrohydro?

Mr. Stringham: Microhydro is the same kind of thing, but it uses small irrigation canals and small streams and rivers.

Senator Spivak: Then why do we need these huge power developments? Would this not be more economical?

Mr. Stringham: It is not necessarily more economical now. It depends on the location. The good thing about large powers plants is that they do have economies of scale. Once you have a large plant, you can generate a lot of electricity at a single site. There are trade-offs.

The Chairman: But you still have power lines.

Mr. Stringham: You still have power generation lines.

Senator Spivak: Which, by the way, lose efficiency. If you are up in, say, Churchill and you are transporting it down to the southern United States, is there a cost attached to that?

Mr. Stringham: There is for both gas and electricity. However, with gas you have very small pipeline losses.

Senator Spivak: With electricity it can be as high as 50 per cent.

Mr. Stringham: It can be a big number, although I do not know the exact number.

Senator Spivak: There is no reason to build big hydro developments.

The Chairman: They transport electricity in the U.S. using DC generators and then they convert it back to alternating current. They cannot send AC very far without losing it in the wires. The DC actually warms up the wires to the extent that they stretch and sag and short out in the tree tops.

Senator Spivak: It seems to me there must be better ways.

Mr. Stringham: You have made a very important point that I will touch on later. Technology is the key to this. Technology is changing so fast that it is difficult to predict what will happen in the long term.

You have heard mention of the demand across North America. In 1998 we provided about 14 per cent of the U.S. consumption of natural gas. We see that growing to perhaps 16 per cent. However, if the growth trend continues, we will need production from all basins across North America to meet this demand. It will not just be a matter of Canada feeding the U.S. Our market share will remain the same and we will provide the necessary natural gas to Canadians as well, but we will need gas to be developed across North America.

The Chairman: That seems to be a very cautious forecast.

Mr. Stringham: On a percentage basis it is small, 14 per cent to 16 per cent. However, on an absolute magnitude basis that is in the range of an increase in our exports of about a trillion cubic feet a day of natural gas, moving it from about three to four.

The Chairman: In other words, we will be hard-pressed just to keep up.

Mr. Stringham: We will be going full blast to try to make sure we can do this as well. That is correct.

The Chairman: You say our limit in the future is not based on the market but, rather, on how much we can produce.

Mr. Stringham: The market is demanding it now far more than we can come forward with it. That leads to future areas of development perhaps on the East Coast, in the North, and other areas in the western basin.

Senator Spivak: As we were told yesterday we will have to practice conservation and eco-efficiency measures to prevent brownouts and blackouts. These are happening not just in California but also in Oregon and Washington, although they do not have the problems that California imposed on itself.

Mr. Stringham: It is important to talk about this issue now. The Prime Minister and others are talking about this it because we want to make sure our country does not get into that situation. There is an opportunity to come up with some conservation strategies right now.

Senator Spivak: Is our country facing at blackouts and brownouts?

Mr. Stringham: No, but we want to avoid getting to the point where we are.

Senator Adams: I would have thought that the increase in natural gas required by the United States in the future would be more than 2 per cent. Does the U.S. have lots of natural gas reserves? Is that why you say our market share will only go up by 2 per cent?

Mr. Stringham: This will increase the absolute amount we export by significant amounts. The demand in the U.S. is growing so fast that we will need the reserves which we will be able to export from here. There will also be the development of the U.S. reserves. They still have significant reserves in the Gulf Coast, in areas of the Rocky Mountains, and in areas around Florida.

The next slide demonstrates what has happened to natural gas prices over the last few years.

The next slide shows natural gas prices in both U.S. and Canada and how they have compared over the last several years. Yes, we have seen the peak in pricing, but we have also seen it start to come back down. I would just remind everyone that, only two years ago, we were still sitting at about $2 an mcf. We do not have a forecast as to exactly where prices will stabilize; but they will peak up and down.

It is important to recognize that natural gas does not just peak in the wintertime when it is cold. It also peaks in the summertime when there is a very strong electricity demand for air conditioners and other appliances because natural gas is being used for electric generation. We go through seasonal peaks.

The next slide shows that the higher natural gas price has resulted in significant new natural gas drilling in Canada. This year we will probably hit a record number - close to 10,000 natural gas wells. That is almost a tenfold increase if you compare that to 1992 when we drilled 900 wells in Canada. That increase is purely market driven. When the price went up, all of these wells were drilled and we started to increase the amount of exploration that was going on. You can see that the price signal to consumers on conservation as well as to consumers on production does work.

The next slide shows where we are drilling those wells. I want to highlight an important trend. The map that shows gas drilling only in western Canada. We are not ignoring the North or the east. We are just focusing on what is happening here. A substantial number of wells is still being drilled in the southern parts of the provinces. These are more shallow wells, but the relatively big increases have been in the northern parts of the province, pushing up into the territories, where the wells are much deeper and much more expensive to drill. There is also a higher risk drilling there because there is uncertainty as to where much of that resource is located. There has been a trend to move into those areas.

The next slide shows where the top 10 natural gas wells were found in the year 2000. They were all down the eastern slopes of the Rocky Mountains. We are pushing into what we call the Foothills Front or the Foothills area for the development of more natural gas.

In the box at the top right-hand side you can see that, for 2001, so far this year we have found some very big wells, including the Murphy/Apache well of 100 million cubic feet a day from a single well.

Senator Spivak: Is that Alberta Energy?

Mr. Stringham: That is Murphy and Apache. Alberta Energy is right below that. Those three wells are right in the northeastern part of B.C., in the Foothills area. That is where the trend for new exploration for the large wells is going.

There comes with this exploration, of course, some difficulties with respect to for land access. There are also environmental restrictions as they relate to the drilling season. You can only access these areas when the ground is completely frozen, so the window for getting in may be as short as two or three months. There are also restrictions relating to the caribou. There are other difficulties associated with this exploration which lead to an increasing cost for developing that natural gas. It is deeper, it is more remote, it is harder to find, and it has restrictions associated with it. Therefore, the cost of natural gas is increasing.

It is important, and even vital, to understand that, wells in the deeper part of the basin can take between one and two years to connect to the pipeline system. Since you can only access that well between December and the end of February, if you finish drilling by the end of February, you have to wait until next December before you can go in and put the pipeline in place. Therefore, there is a lag in bringing that on.

Senator Spivak: Why are they only accessible in the winter months?

Mr. Stringham: You have to wait until the ground is frozen to avoid environmental damage on the muskeg. That it means the supplies that are being found now may be a year to two years away from being available. You don't just turn on the tap and the supply starts coming on. There is a lag factor associated with this.

The Chairman: Now you can have an unlimited market, how fast will these wells be drawn down? Will the big wells last 20 or 30 years?

Mr. Stringham: Depending on the reserves, the big wells can last 20 or 30 years.

The next slide deals with northern gas. There is a substantial amount of gas in the North to be developed, and there are a variety of pipeline routes associated with that.

Senator Spivak: You are only talking about gas. Is there oil in the North?

Mr. Stringham: There is some oil in the North. I will get to that section in a minute. Presently, the attention is on the development of the natural gas there. The oil pipeline starts at Norman Wells. There is an existing oil pipeline from there down into the provinces and then to the refineries in Canada and the U.S. from there. This relates to your earlier question to the National Energy Board. The pipeline already goes about halfway up the territory. From Norman Wells north, however, there is no pipeline.

Senator Spivak: Am I correct in saying that Shell has a lot of capped gas in the Mackenzie Delta?

The Chairman: That would be Petro-Canada, Esso.

Mr. Stringham: Several companies are in a consortium up there, and that consortium would include Imperial, Shell, Gulf and Petro-Canada.

Senator Spivak: They have found a lot of gas.

Mr. Stringham: They have found some gas that is ready for development.

Senator Spivak: I believe it is capped gas. It is in the location where they drilled for oil. They capped it and reinjected it.

Mr. Stringham: There are two ways to define capped gas. When there is oil underneath in the reservoir, the gas resides on top, and that is called a gas cap. Alternatively, there is gas that has been started to be developed but they, because of economics or other reasons, have turned it off and capped it.

The Chairman: They cap any potential producer. That is called a capped well. They can, some day, come back and get the gas, but there may be a problem if there is no pipeline.

Senator Spivak: That gas will become available, but they say that in most of Alberta it was not economical to cap the gas. I do not know why.

Mr. Stringham: Because they could get it to market and they could sell it, that is why. Some of that gas from those reserves is now flowing into Inuvik for power generation. It goes to a small power generation plant that started up last year.

Senator Adams: Along the coast of the Beaufort Sea there is an offshore pipeline. I know the ice is not as thick in that area as it is in the High Arctic. There is no thick ice to damage a pipeline. Have there been any studies done on that subject?

Mr. Stringham: I understand there are producer groups looking at the over-the-top route which would go subsea. From what I have heard at various conferences, they are looking at some subsea locations that are not too far offshore, and I understand that there are ways to bury the pipeline to avoid the scouring from icebergs. There is a cost associated with that as well, and that is what the evaluation that is going on now is trying to determine.

I want to highlight the developments that are going on in Eastern Canada. Natural gas is a major commodity in eastern part of Canada including Nova Scotia. There was a recent announcement by PanCanadian related to their Deep Panuke project which could be on stream as early as 2005. That is another large scale natural gas project coming ashore into Canada and then it would go to the markets from there.

There are also significant oil developments the East Coast with Hibernia now up and running. Terra Nova is being considered, as well as several others including Hebron and White Rose that are in that area. Those could come on soon.

Senator Spivak: Where are the very environmentally sensitive mountains and valleys?

Mr. Stringham: That is the Georges Bank, which is close to the southern part of the Nova Scotia. Some areas in there have been protected. Most of the ones I mentioned are off in the deeper part, on the edge of what they call "The Shelf." That is what they are investigating now.

The last two slides demonstrate that there are significant opportunities in natural gas supplies, including, as I mentioned, coal bed methane. Technology is opening this up significantly. On the next slide you can see that there are also several challenges associated with the development of natural gas, one of which is rising costs.

The key one that you will understand when we come back to our continental energy strategy is trying to get access to that resource in a timely fashion. We want to meet all the standards, we want to meet all the regulations, but we would like to do them just once or through one window so that it does not take a long time to do that.

Senator Spivak: Is sour gas a problem that is restricted to Alberta, or does it occur everywhere?

Mr. Stringham: It is not restricted to Alberta. Some of the discoveries in the East Coast offshore included a sulphur content which makes it sour.

Senator Spivak: How are they capturing it?

Mr. Stringham: There are very good technological solutions to capturing that, but when you capture more of it, you have to process more to make sure you extract all the sulphur.

Senator Spivak: Are they doing that everywhere in Alberta? What is the problem in Alberta?

Mr. Stringham: The problem in Alberta is that there is a lot of gas, and a lot of the future gas production will contain sulphur. Therefore, there has to be a lot of additional consultation.

Senator Spivak: I am sure you know about all of the controversy with the ranchers. Is all of the sour gas being captured now, or is it still floating around?

Mr. Stringham: They always were capturing the sour gas. The question was: If there were a plant upset, what would be the safety reaction scenario? How do you manage that if anything happened? That is the concern about developing the natural gas. The technology is there to capture the sulphur.

Senator Spivak: Why are the ranchers saying their cows are dying and that there are all sorts of problems?

Mr. Stringham: The studies of the health effects indicate that, in locations where there is a small content of sulphur, some of the sulphur is being vented or flared through a flare at the natural gas site. The industry has committed to reduce the amount of flaring over time. Flaring is the issue there.

In locations where it is too small a quantity to try to capture it, then the next best alternative is to flare it.

The Chairman: That leads to the last question before we wind up. A great deal of the public think that hydrocarbons are not paying their fair share of the costs of cleaning up pollution. We have a carbon tax at every fuel pump, but most people do not realize that two-thirds of the price that they are paying at the pump is a tax, but the federal and provincial governments put it in their pocket rather than use it for pollution cleanup. People are talking about putting wind and biomass and solar energy on the market in competition to natural gas. For a long time this was just sort of a hazy concept, but when we get up to $4 to $6 an mcf for natural gas, they may be able to make it on a straight dollar basis. They are encouraging the competition to steal markets from natural gas. In that regard, they have two hand holds. One relates to the fact that you are treated, taxation-wise, better than they are; in other words, you get immediate write-offs for most of your drilling.

Mr. Stringham: For the exploration.

The Chairman: That is right. They do not. The second thing is that they argue they are not polluting the air so they should get a bonus. Have you thought about whether the energy that is delivered without any CO2 or pollution costs whatsoever should get a bonus over natural gas production?

Mr. Stringham: The market has certainly tried to value that recently. I know you can buy something called "green power" which comes from those types of areas and pay a premium for that, and some people have chosen to do that.

The Chairman: That is a labour of love. I want you to encourage your market in that direction.

Mr. Stringham: When it comes to evaluating the two of those together the market has to value not only the emissions side of it, but it has to look at the siting issues associated with wind power or hydro, and it has to bring those intangibles together. That is what the National Energy Board and other regulators look at in their environmental impact assessments.

Senator Spivak: Well, they do not really, but that is what they say.

Mr. Stringham: They do look at that, but it is very difficult to quantify in purely dollar terms.

Senator Spivak: There is a lot of work going on in that regard at the United Nations.

Mr. Stringham: Yes, there is.

The Chairman: Our next presenter will talk about Canadian hydro. You may want to stay around to hear what he says.

Senator Spivak: Mr. Chair, we did not get CAPP's input into the continental energy policy. Could we take a little time off our lunch in order to hear what they have to say?

The Chairman: Yes, we could.

Can you stay around? The next witness says he has to leave around 11:30, and I have to leave at 12:00. Perhaps you could give us your view on that between 11:30 and noon.

Mr. Stringham: That would be fine.

The Chairman: I would welcome, Mr. John Keating who is concerned with low-impact hydro in Canada. First, we would like to know what low-impact hydro in Canada is, and second, perhaps you could you tell us a little bit about yourself.

Mr. John Keating, Chief Executive Officer, Canadian Hydro Developers: I would be happy to do that. Thank you for inviting me here today. I appreciate this opportunity to come speak to the committee.

Canadian Hydro Developers has been around for about 10 years, building hydroelectric power and wind power plants throughout Canada. We are a public company. We are on the Toronto Stock Exchange. We have been building, on average, one plant a year for several years. This past year we built three plants, and we have several more to build in the next three years because of the increasing demand for electricity and the shortages we are encountering. We are busier than ever, and the demand for our services is ever increasing.

There are two different types of hydroelectric power: low-impact hydro and not-so-low-impact hydro. Unlike wind power, which people think is green and friendly, hydroelectric power does not have that same ring to it. People think that hydroelectric power is a bad thing for the environment, mostly because of what has been witnessed throughout the past century with respect to large hydroelectric developments in various provinces throughout Canada, large dams, lots of land being flooded, and the negative consequences associated with it, not only to the environment, but also to society in terms of the impact that it has in the areas that it exists.

Low-impact hydro essentially uses the weight of water, flowing water, and the height that it falls on a run-of-the-river. In other words, take it as nature delivers it and do not impound it. Do not create a dam; do not cut down trees and so on. It generates power that way.

The Chairman: What fall is necessary?

Mr. Keating: It can be as little as two or three metres, and as high as 600 metres or more.

Senator Spivak: Is this not an old technology? Is it not what they used to do?

Mr. Keating: Yes. Basically we are going back 100 or 150 years. It is low-impact. It is like putting a wind plant or windmill, turbine, in a flowing river.

The Chairman: I believe the first issue you want to deal with is income tax.

Mr. Keating: There is an anomaly in the Income Tax Act that is the topic of our presentation. I was to appear here as a member of another group to which I belong, that is, the Low-Impact Renewable Energy Coalition which represents about nine industry associations. I am the vice-chairman of the Independent Power Society of Alberta. For four or five years we have travelled to Ottawa as a coalition representing several industry associations from across the country, not just the hydroelectric industry, but most notably the wind energy and solar energy industries.

I did not want to give you a very broad perspective on certain issues because I wanted to focus one issue that is holding back the industry here in Canada. It basically died in the 1990s.

The presentation consists of a three-page executive summary, which I will skip over, along with my and my biography. I will quickly go through the first four or five slides, which is an introduction to who we are as Canadian Hydro. We are probably Canada's pre-eminent zero emission energy developer of power plants. We utilize several technologies: wind; water; biomass, that is wood waste; and natural gas. The slide has zero emission side and a thermal side. The thermal side is low-impact.

I would like to focus on hydroelectric today. Our operations reside in the provinces of British Columbia, Alberta, and Ontario. They are principally hydroelectric, as you can see from the geographic and operational diversification charts, principally in Alberta and principally hydroelectric. We do own the Cowley Ridge wind plant which is Western Canada's largest wind plant and that skews the graphs a bit. From a hydroelectric perspective, a water power perspective, we are equal in British Columbia, Alberta and Ontario in terms of capacity.

The next slide is simply a listing of the various facilities that we own. There are two different technologies depicted in three different pictures.

The next slide is illustrates what has happened over the past year to power prices. Since wind and hydro and biomass have a very small, if any, fuel component as compared to a CCGT, a combined cycle gas turbine, the price of electricity generated from our renewable sources today in today's natural gas pricing environment is less than the combined cycle gas turbine technology which we are predominantly seeing as new installations today.

Therefore, we have an economic advantage. Now is our time, and we are pursuing, on an aggressive-build basis, new plants with these renewal technologies. This situation may return to the condition that existed a year ago and throughout the 1990s whereby combined cycle gas was cheaper to use for generation. Given today's environment, we hope to make an impact in the market.

Hydro power is a proven technology. It has been around for a long time. Canada is recognized worldwide for its expertise in the field. I can say that 62 per cent of Canada's electricity comes from hydroelectric power and a good part of that from run-of-the-river technology. Niagara Falls, the Sir Adam Beck plant, Ontario Power Generation's largest single plant, is a run-of-the-river plant. This does not mean that small hydro and low-impact hydro are one and the same. It is incorrect to assume that low-impact hydro means small hydro. It can have a large impact to society, as well as a very beneficial impact on society.

Senator Spivak: It uses what is there instead of converting it.

Mr. Keating: Instead of creating a resource by putting a large dam in and creating the head - the head meaning the drop of the water - it comes naturally, as in the case of Niagara Falls which is the best example of large-scale run-of-the-river technology that exists today. We have very small plants. They are around one megawatt. We also have under construction a new plant in British Columbia that is 30 megawatts. It, again, will be run-of-the-river. This is very long-lived technology. These plants will last 100 years, and there is no fuel price risk.

An anomaly in the Income Tax Act is discriminatory in nature as it relates to size. Class 43.1 is an incentive class. Our wind development and our some of our hydroelectric plants are classified as class 43.1. It is a 30 per cent declining balance class, the same tax treatment that manufacturing and processing equipment receives in the country. There is an artificial size limitation on only one technology in that class, and that is hydroelectric power. Anything less than 15 average megawatts qualifies for class 43.1. Anything over 15 average megawatts does not. This is the anomaly on which I would like to focus. This is not high tech. This is not difficult to understand. It is simple. It was the result of an arbitrary decision that was made in the mid 1980s when class 43.1 was first brought in.

Canada has opportunities because our flowing water resources. We all recognize that. It goes from a coast to coast and it is not restricted to Alberta. There are hydroelectric plants in every region of the country. The jobs in low-impact hydro we have demonstrated to be significantly higher than those in fossil fuel construction activities for power development. During the construction phase, it creates in the order of five-to-one to ten-to-one times the jobs because hydroelectric power is very civil oriented. We do not merely import a large gas turbine from GE in the United States. Most of what we use to manufacture a hydroelectric plant in Canada is made here in Canada.

Senator Spivak: That is only for generation. That is not related to the exploration which creates the jobs in fossil fuel production.

Mr. Keating: That is correct. When I talk about fossil fuel, I do not mean the exploration and development of oil and gas. I am talking about fossil fuel power generation, natural-gas-fired power generation, or coal-fired power generation typically.

Significant export potential exists to U.S. markets for our product. There is a growing consumer demand, particularly for green energy.

The problem is that low-impact water power construction was limited in the 1990s. In Canada, it dropped to almost zero by the mid 1990s. The industry has been significantly restricted, and part of this restriction is due to the size limitation in class 43.1, which is the incentive class. Thousands of megawatts of development potential are being overlooked, and in the event that we do not correct this anomaly, that development will be in the form of fossil fuel alternatives, such as coal and natural gas.

Class 43.1 in the Income Tax Act contains an arbitrary size limit for hydroelectric projects, regardless of whether they are run-of-the-river projects or not.

The EcoLogo certification is a designation that Environment Canada can ascribe under its guidelines to low-impact commodities, products, and they certify hundreds of different products that are on store shelves, one of which is low-impact renewable electricity. LIREC, the Low-Impact Renewable Energy Coalition, is suggesting that hydroelectric projects that qualify as low-impact, run-of-the-river renewable projects which are EcoLogo certified by Environment Canada should also qualify for class 43.1 regardless of their size. Keeping in mind the Niagara Falls example, we should not be precluded from building another Niagara Falls project should that opportunity arise.

Presently, deregulation in Alberta and Ontario, and perhaps other provinces down the road, increases the importance of providing access to incentive classes such as class 43.1. No longer will we see utilities offering special deals for pilot projects to demonstrate the value of renewable energy. Renewable energy is competitive on its own today but, in a competitive marketplace, you will see no goodwill expressed by the utilities and, as a result, degradation of the environment just might occur, as we have seen in various jurisdictions in the United States.

Canada's wealth of hydroelectric resources coast to coast should be revitalized as a material contributor to Canada's international greenhouse gas commitment.

Some of the provinces are in fact getting on board. In the year 2000, Ontario and British Columbia enacted new regulations specifically designed to revitalized the hydroelectric industry in their respective provinces. In Ontario now, municipal taxes and water rentals will qualify for a 10-year holiday, that is with respect to water rentals for a newly constructed project. That is like waiving the oil and gas royalty on new natural gas projects for the first 10 years of production and then it will kick in in year 11. That is a terrific step, and it was designed specifically to revitalize an industry that was literally dead in Ontario. British Columbia similarly has introduced regulations effective January 1, 2003. They have reduced their royalty rate by 57 per cent on projects that generate 160 million kilowatt hours per year or less, which is roughly a 30 megawatt project.

A simple amendment to class 43.1 would solve the problem. One simple significant federal step is what we are asking for, and I have raised this many times in the last five years in my trips to Ottawa. I thought that it was important enough to make it the specific subject of this presentation today, We have received a lot of goodwill in Ottawa, but we have not been heard.

We would like to see the removal of or an amendment to the size limitation in class 43.1 to level the playing field for water power projects vis-a-vis other renewable energy projects. There is not a size limit. No one is saying you cannot build more than 15 megawatts of wind power and qualify for that class, or a solar energy project. We would like to see the arbitrary size limit either raised from 15 to 100 or some other megawatt size limit, or leave the provisions exactly as they are but with an added provision that would allow such larger projects to qualify as low-impact renewable by Environment Canada, consistent with their guidelines which have recently been developed.

The result is that significant new low-impact water power projects will create jobs immediately, adding tax base to the jurisdictions in which they are built, and provide much needed generating capacity for Canadians. It is not a trivial issue, as we have seen in recent months along the West Coast with the power shortages. We are experiencing power shortages in this province. On the East Coast, the state of New York is experiencing power shortages, and Ontario should help alleviate that. That is the presentation.

The Chairman: As a tax measure, can you not issue flow-through shares on the high-impact hydro projects?

Mr. Keating: No. I would not call it high-impact hydro. I would say it is not-so-low impact. I think all hydroelectric power, being a renewable energy source, is desirable. Projects greater than 15 megawatts simply does not qualify for class 43.1.

The Chairman: They do not qualify for flow-through.

Mr. Keating: That is right. To have exploratory expenditures considered to be a Canadian conservation expense and eligible for flow-through, you need to be in class 43.1.

The Chairman: As I understand it, wind and biomass qualify for flow-through.

Mr. Keating: Yes, because regardless of their size, they are already in class 43.1.

The Chairman: Have you compared wind to oil and gas flow-through?

Mr. Keating: Yes.

The Chairman: I understood that oil and gas had better flow-throughs than wind.

Mr. Keating: They do.

The Chairman: You do not want the same as oil and gas?

Mr. Keating: Correct.

The Chairman: That is even better.

Mr. Keating: I was part of the four-person group that did catch Ottawa's ear in 1996 which resulted in the CRCE provisions in the Income Tax Act which allow for flow-through shares. In oil and gas we have the Canadian Exploration Expense and the Canadian Development Expense. One is a write-off of 100 per cent, and one is 30 per cent. Both are eligible for flow-through share treatment so that the junior oil and gas sector can access capital for start-up companies and smaller companies.

In the renewable energy field, we have CRCE, which is the CEE equivalent, and we can issue flow-through shares if we are in class 43.1. We do not have a CDE equivalent, but most of the expenditures in the renewable field are a Canadian Development Expense. You have a minimum amount of exploratory expenditures in measuring the wind or measuring the water, for example, putting in temporary access roads, and items that are analogous to the expenses which qualify for the CEE. Those are perhaps 5 per cent to 15 per cent of a project's capital cost, and those are eligible for flow-through.

The Chairman: It is not a discriminatory tax treatment. It is just that the CDE applies more to wind than to drilling a gas well. They are treated the same except that the gas well has a higher exploration component.

Mr. Keating: They are not treated the same because in oil and gas you can spend your flow-through share proceeds on development, on CDE, and flow that CDE out to investors. You cannot do that for renewables.

The Chairman: We have three items here: low-impact hydro, wind, and oil and gas. I was hoping you would tell me the difference in the flow-through. I understand you get no flow-through at all for low-impact hydro.

Mr. Keating: That applies to anything in class 43.1, which includes low-impact hydro under 15 megawatts.

The Chairman: There is no flow-through.

Mr. Keating: There is flow-through.

The Chairman: Under 15. Anything over that there is no flow-through.

Mr. Keating: That is correct.

The Chairman: Is oil and gas treated differently than the other flow-throughs? I believe you said that because the wind energy has a higher development cost, when the project is finished, perhaps 90 per cent of the wind project is CDE, development costs, whereas when a gas well is finished, maybe only 40 or 50 per cent is development.

Mr. Keating: That could be. I do not know.

The Chairman: It is somewhere in that range. That is the discrimination.

Mr. Keating: That is not the point of my presentation, though. The point of my presentation is the size limit.

The Chairman: We will have wind energy people making presentations to us and they will be arguing, much as you have, that they should get a better write-off.

Mr. Keating: We have been saying for years that we should be on par with access to flow-through financing for exploration and development expenditures, but that is not the point of my presentation. We own Western Canada's largest wind plant, so we are also interested in that issue. Our bigger issue is the size limitation in class 43.1.

Senator Spivak: Why have you not been able to achieve that?

The Chairman: Historically, I suppose the reason was that they did not want to give flow-through shares to hydro producers.

Mr. Keating: No, the flow-through shares aspect only was introduced into the Income Tax Act in 1996. Class 43.1 was introduced into the Income Tax Act with this limitation in the mid 1980s, and it was an arbitrary choice of size, probably because the Department of Finance feared abuse. Class 43.1 is an incentive class. It has a 30 per cent declining balance.

Senator Adams: Yesterday, B.C. hydro told us that the main disadvantage with wind power is that, if the wind dies down, there is no energy source.

Mr. Keating: Right.

Senator Adams: Currently, you have quite a few windmills at Pincher Creek. What percentage of power is generated by wind in Alberta? Is it a good way to do it?

Mr. Keating: We think it is a good way to do it because wind energy in Alberta is almost self-load-following. The windiest period of day on a daily basis is late in the afternoon, and it coincides with the peak electricity usage. It is self-load-following, just by nature. As well, wind energy peaks in December, which is coincident with peak electricity usage. There is an argument that it does, to some extent, follow load.

However, no one would ever suggest that it is a dispatchable source of electricity. At this point in time the technology does not exist to store electricity. We are looking at those types of ideas, but any ideas we have come up with are very expensive to implement. You can use wind generated electricity to create hydrogen and then deliver the hydrogen back into the grid in the form of electricity at peak load times. As an industry, we are looking into that. I think that will come. There are some very large utility-scale projects in operation and under study in England and in the United States, and they are looking at storage systems. However, as it stands today, wind is not dispatchable, aside from the natural delivery.

The Chairman: An issue that is raised from time to time is the so-called dirty energy versus clean energy. How do you think our government should compensate in this regard? Should you get a bonus for the energy you produce because it has no pollution, over the polluting energy? Should there be a disincentive to those who are using polluting energy, and should they bear a certain percentage of the pollution costs?

Mr. Keating: I would never sit here and argue the case for a carbon tax, which is the opposite of an incentive. I think a production tax credit or consumer tax credit, a green consumer tax credit, would be one of the key platforms.

The Chairman: It would use the tax system?

Mr. Keating: Yes, it would use the federal income tax system which would deliver a credit. If I elected to buy my electricity at home from a green energy source, it is very easy for my utility to issue to me, because it is all on computer, a T5 equivalent slip that says I bought so many kilowatt hours in a year. Then I would get a credit on my tax return equal to 50 per cent of the premium that I have agreed to pay for that power. I would be committing my own dollars as would all Canadians through the tax system.

Senator Spivak: Is that not what the CARE coalition suggested?

Mr. Keating: Yes, it is.

Senator Spivak: You also mentioned a consumer tax credit.

Mr. Keating: As well as a producer tax credit.

Senator Spivak: That would be much better than a carbon tax.

Mr. Keating: That would be a lot more palatable.

Senator Spivak: Carrots are much better than sticks.

Mr. Keating: Absolutely. That would definitely be very beneficial.

Senator Spivak: I think we would support that.

Mr. Keating: The CARE coalition is a recently formed group of very high-powered companies and environmental groups.

The Chairman: Mr. Stringham, what do you think about consumer and producer tax credits?

Mr. Stringham: The difficulty in doing is trying to assess the value. I do not disagree with the concept. It provides the carrot, and I think carrots work much better that sticks. However, you have to be careful of the direction you push it.

The Chairman: It is good philosophically, but when you start putting numbers to it, it becomes more difficult to assess.

Mr. Stringham: Especially when you hear it is competitive with other fuels already.

Senator Spivak: Could you define "distributed generation" for me?

Mr. Stringham: In its basic concept, distributed generation is where you generate the electricity closer to where it is needed rather than in the centre, and then move it. That could be in the basement of your home through fuel cells.

I do not want to take up too much more of your time. I appreciate this opportunity to talk about the continental energy strategy, which is dealt with in the last three slides of the presentation.

The middle section, which we did not have a chance to cover, deals with oil sands. I should make just one comment on oil sands. The size of that resource is very large, 300 billion barrels of crude oil; and we know where it is. No exploration is required. It is just a matter of using technology to get it out of the ground.

Senator Banks: There may be more.

Mr. Stringham: Yes. Out of 2.5 trillion barrels, we know that 300 billion barrels is recoverable.

Senator Spivak: From what I understand, the emissions related to that are about 30 times higher than anything else.

Mr. Stringham: Yes, that is because it is so carbon intensive.

Senator Spivak: How will you deal with that?

Mr. Stringham: We need to deal with that by offering an incentive, a "carrot", as was mentioned earlier, so that the producers will become efficient in capturing the carbon dioxide coming out of that. It does generate a lot of carbon dioxide.

Senator Banks: You said that 300 billion barrels of oil is easily obtainable, but that there is 2.5 trillion barrels. For what reason can all of that not be recovered?

Mr. Stringham: When we recover any oil out of the ground, we recover only about 25 per cent of it and leave the other 75 per cent there. That is because of the nature of the oil inside the reservoir. It sticks to the rocks and other material under the ground, and it is not capable with today's technology to get that out. Technology has definitely increased that number over the last 20 years that oil sands have been around.

Senator Banks: People are going back to old wells which were not thought to be economically productive because, with the new technology, they are now economically productive.

Mr. Stringham: Exactly. The same situation applies to the oil sands. Using today's technology, 300 billion barrels is deemed to be recoverable.

Senator Spivak: What amount is spent on research?

Mr. Stringham: Huge amounts of money are spent on that. I used to work for Syncrude Research. Syncrude spends probably $25 million. A substantial amount is being spent because the cheaper you can make it, the more economic the reserve.

The Chairman: On the subject of research, I know that way back the federal and provincial governments gave grants or loans to some of the big operators for research. Do you know if that was paid back or whether that was forgiven? At one time about $100 million went into research, $40 million of which, I believe. was put in by governments.

Mr. Stringham: There are a lot of partnerships on the basic research because there is a need by governments and the industry to get it back. Governments are paid back if the money is provided by way of a loan. Today it is mostly done through partnerships with provincial and federal governments. In the historical situation you referred to, the money would probably have been paid back through the taxation system or a direct payment. I am not familiar with it.

The Chairman: The federal government has a role to play in trying to minimize environmental impacts, SAGD, which is a general term that is applied to taking oil out of the tar sands. The government may have a role to play to try to minimize surface impact. Do you think you just let the market go, or do you think that governments should be a little more sensitive to SAGD in order to make sure that the environmental costs are minimized?

Senator Spivak: What is SAGD?

Mr. Stringham: I would refer you to the picture on the page with the heading, "Oil Sands - In Situ." It depicts two wells.

Senator Spivak: To what does SAGD refer?

Mr. Stringham: At the bottom of the chart, at the second-to-the-last bullet, it says, "Steam Assisted Gravity Drainage."

Senator Spivak: What is wrong with that in terms of environment?

The Chairman: There is nothing wrong with it. It is good for the environment. It does not disturb it.

The other method is open pit.

Mr. Stringham: There is no mining associated with that development.

Senator Spivak: You would not have that moonscape that we saw before.

Mr. Stringham: There is no open mining of the oil sands in situ. I do not want to spend too much time on oil sands because I want to get to your question on strategy. However, 80 per cent of that 300 billion barrels is only recoverable through in-situ methods. Only 20 per cent is mineable.

Senator Spivak: Does this reduce the carbon dioxide emissions?

Mr. Stringham: The carbon dioxide emissions come from upgrading the heavy oil into lighter oil. Regardless of whether you get it out of ground in this technique or a mining technique, you still have to take the heavy, thick molasses-like oil and turn it into lighter oil.

Senator Spivak: I visited Syncrude. Does that picture depict history, that picture of those vast moonscapes?

Mr. Stringham: Those will be used for the mineable resource, again, 20 per cent.

Senator Spivak: In future this is what they will use for most of it?

Mr. Stringham:Yes, for most of it. I would say that 80 per cent has to be used this way.

The Chairman: To go back to strategy as it relates to the North American energy policy, do you think the public of Canada would like to see some negotiation in the North American energy policy? It is clear that we have the energy and the Americans are the consumers. Should we use it as a lever in dealing with everything from softwood lumber to wheat subsidies?

Mr. Stringham: No.

The Chairman: Should it not be in the overall trade basket?

Mr. Stringham: Tying one commodity to another is very dangerous because you may miss an opportunity in one area, simply because you have linked one commodity to another. Our position is a desire to pursue this North American energy policy or strategy. Canada is growing and, as I said at the outset, economic growth requires some form of fuel. We have a great opportunity right now in terms of energy because there is this demand that I explained.

The Chairman: Why do we need a continental energy policy? If the market rules, why do we have to sign on to any sort of policy? If the market rules, they will get energy. What is the advantage of a policy?

Mr. Stringham: I would refer you to the second-last slide. This holds the answer to your question, Senator Taylor. Using the number loosely, currently 80 per cent of our trade in oil and gas with the United States is working very well. It is open. It is free. It moves back and forth. We benefit, and they benefit. In certain areas, there could be some incremental improvements. The continental energy discussion gives us an opportunity to make those small improvements. Certainly, the first step is to build on the successes that we have already had. We should not do anything to try to stop that. If there is something that they want to alter that will change that free trade relationship, we should make sure that we are careful in resisting any kind of change.

The Chairman: You like things the way they are. You are not recommending a continental energy policy, then.

Mr. Stringham: We already have a strategy in place that has worked for many years. It predates the Free Trade Agreement and the NAFTA. It has evolved through those, and it can continue to evolve.

One of the areas that we highlight here is that we make sure we retain market-based policies. In terms of research and development, we have an opportunity now to capitalize on the whole continent's interest in oil and gas, to provide some research and development that addresses environmental questions, conservation questions, technological advance questions and efficiency questions. All of that could be something that we get out of this.

Senator Spivak: I see a red flag here. You say it would "streamline process for responsible development of new supplies." Does streamlining mean that you do not deal with the environmental aspects of it?

Senator Banks: What needs to be streamlined?

Mr. Stringham: The industry has just completed what we call regulatory road maps, documents that are almost 300 pages long, and they contain the environmental considerations and the regulations that we have to go through from the beginning to the end of a production. That is what we would like to see streamlined.

Senator Spivak: We should, perhaps, go to outcomes analyses.

Mr. Stringham: We want to meet the stringent standards that are in place, the current high level of standards, whether they be environmental or regulatory standards, but we would like to do it in streamlined fashion so that we can do it through one window. We would like one application which could be used for several purposes, rather than having to go to 13 or 14 different agencies to seek approval of that application.

The Chairman: Some of which will rule against you.

Mr. Stringham: Exactly, and some of them have conflicting or at least overlapping jurisdictions.

The Chairman: You are not trying to dodge any agency. You are saying you want them all in the same room at the same time.

Mr. Stringham: It does not have to be just in the same room at the same time, but we would like to use one application for multiple purposes.

Senator Spivak: Here is the other thing that bothers me here. Washington has a narrow focus on what constitutes energy. Does that mean we would highlight fossil fuels as opposed to other kinds of energy?

Mr. Stringham: We have had discussions directly with the White House on what they will come up with. We expect their strategy will come out in the next three weeks. In that they are focusing on renewables, conservation, coal, oil and gas, international, hydro, nuclear, the list that we started off at the beginning - and I do not want to miss biomass this time - all of those will be part of that strategy.

Senator Spivak: About five or six of those guys sitting around in the administration with the President, including the President, are oil and gas guys, so what do you think they will be interested in?

Mr. Stringham: I think they are interested in the economy growing and however they can do it, so they will be interested in everything.

The Chairman: There is another problem which you have not touched on. This happened in the past in the U.S. In trying to be more self-sufficient, the U.S. would quite often put out foreign import restrictions with the idea that, if you cut back, you bring up your domestic price. Canadians would tell the Americans that, if they imposed an import quota, we should be able to take advantage of that. We would say, "If we are to supply energy to you from Canada on a long-term basis, we should have the same rules that the Americans have." This is where a North American energy strategy would come in.

Mr. Stringham: That is exactly what is in this submission.

Senator Spivak: They have trade restrictive policies.

Mr. Stringham: Yes. On the energy side, there are fairly few restrictions, but the Department of Commerce frequently reviews their imports of oil and gas to deal with oil coming from other parts of the world.

Senator Spivak: Yes, I understand that, but overriding that the United States has trade restrictive policies, which they have refused to give up. They can arbitrarily use those laws to block anything.

Mr. Stringham: It is important to remember that the oil and gas industry, like other industries, must be competitive on a tax basis. We have been working with Minister Martin and his federal finance officials on this. You will recall that last year they announced reductions of corporate income tax rates for all other industries except the oil and gas industry. We are still working towards being included in that. All the other industries benefit from those.

The Chairman: What is your answer to those who make the argument that already in the oil and gas you have got flow-through shares, you have got depletion, so on and so forth? These are other benefits that your industry gets that are not available to others. You just heard a man in here saying he could not get flow-through to put in low-impact hydro.

Mr. Stringham: Yes, I did.

The Chairman: I guess your argument would be that two wrongs do not make a right.

Mr. Stringham: That is one element, depending on what they classify as development costs, and I do not understand that side of it. With the Department of Finance, we are looking at what they call flow-through share issues as potential impacts, or incentives they called them, that the oil and gas industry receive. We are finding that they are minimal.

The Chairman: That is because there is a boom right now, but I can recall when that was the only money you had in town.

Mr. Stringham: That is right. As you know, presently, the industry is becoming very taxable, which is fine, but we want to be taxed at the same tax rate as everyone else.

When it comes to a continental energy strategy, we want to continue to develop the resources we need to be competitive, otherwise the investment will go elsewhere.

The Chairman: At least we must be aware of the U.S. taxation system.

Mr. Stringham: As well as the tax systems around the world. If the U.S. does anything to reduce taxes further, and this industry is not given any tax reductions in Canada, we will see the impact.

Senator Spivak: What are the oil and gas reserves like in Mexico and other countries that could cut into our market? I imagine the United States is not just considering Canada. They are primarily looking at Mexico.

Mr. Stringham: They are. Mexico has very large oil reserves, and they are exporting them on the world market now. Their natural gas reserves are fairly undeveloped. They also have a very large need to be met for their own consumption. They need to start generating electricity out of natural gas for themselves.

Senator Kenny: Mexico plays by a different set of rules, and they have a much tougher attitude about investment. We have folks here in Calgary who would like to do deals in Mexico, and they are finding it is a very tough game to play.

Mr. Stringham: It is also still a state-owned oil and gas industry. It is a state-controlled company. They are looking at opening it up to foreign investment, and that would create a good opportunity for investment.

Senator Kenny: They will only let you do a gas play down there if it is not associated with oil. It is not exactly wide open. It is a pretty complicated exercise to do business there.

Senator Banks: I wanted to ask about the harmonization and streamlining. Has that mainly to do with the fact you have to deal with the federal government and then you have to play a different game in dealing with the provinces? Is it that, within the federal government itself, there are too many places, too many doors to knock on, too many hoops to jump through?

Mr. Stringham: I do not want to single out the federal government. Within governments themselves, be they federal, provincial or territorial, there are many interested parties. For example, they may have a regulator who looks at the project, an environment department that looks at the project, an economic development department that looks at it, and First Nations or Aboriginals groups are interested in it.

Senator Banks: Do you think there is a way of actually putting all of those interests under one roof?

Mr. Stringham: I am not necessarily suggesting that they come under one roof, but it should proceed through one or two processes rather than 13. Perhaps we could have a similar process for every application.

Senator Banks: You would be happier with one 1,000-page application rather than 10 100-page applications?

Mr. Stringham: They all tend to be about 1,000 pages. However, using that analogy, that would be a better way of ensuring the sequential treatment of that project with a time lime that has a determined end associated with it.

Senator Banks: The boiler plate material would be the same in every form, and then you would deal with individual matters of concern.

Mr. Stringham: Correct.

Senator Banks: Is that the point?

Mr. Stringham: We still have to deal with all the concerns. I am not trying to eliminate the issues.

Senator Banks: For example, if I had an interest in Aboriginal issues, on every form I would recognize what part of the form my concerns would be dealt with; is that right?

Mr. Stringham: You would know what process piece you would fit into. You would know where on the form you would have an opportunity to ask questions.

Senator Banks: It would be a 10,000-page application; 980 pages because 20 pages will be taken off because we already know your address.

Mr. Stringham: Presently, each group wants to see the whole application.

The Chairman: Thank you very much.

The committee adjourned.

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