Proceedings of the Standing Senate Committee on
Energy, the Environment and Natural Resources
Issue 17 - Evidence of June 10, 2003
OTTAWA, Tuesday, June 10, 2003
The Standing Senate Committee on Energy, the Environment and Natural Resources met this day at 5:49 p.m. to examine and report on emerging issues related to its mandate (implementation of Kyoto).
Senator Tommy Banks (Chairman) in the Chair.
[English]
The Chairman: This is a meeting of the Standing Senate Committee on Energy, the Environment and Natural Resources, which is called to continue our report on emerging issues related to our mandate, which includes the implementation of the Kyoto agreement, and other matters having to do with emissions.
Today we will hear from Mr. Michael Cleland, who is the president of the Canadian Gas Association and has a distinguished, long background in both government and the energy sector at large, and from Mr. Brendan Hawley, a communications and marketing expert, who is here also with the Canadian Gas Association.
I presume, gentlemen, you have some things you would like to say to us before we begin our questions. Please proceed.
Mr. Michael Cleland, President, Canadian Gas Association: I have a presentation to make and I have provided you with copies. I will move through this quickly to leave as much time as possible for questions.
First, I would like to provide a brief overview to put our industry in perspective. I am sure you are familiar with some of it, but there may be some aspects that are new. Then I will talk briefly about natural gas in the context of dealing with climate change. Finally, would like to focus on what we are doing to develop an industry-government partnership to address, in particular, the emissions from consumers. That links to the government's one-ton challenge.
Page three outlines the natural gas industry at a glance. We serve about five million customers, on way or the other. This is a sector that includes the long distance transmission system, then the distribution system and finally the end-use utilization. This industry provides a little less than one-third of Canada's total energy demand. There is one more item that dropped off that slide, which explains why those numbers do not add up. There is an industrial and power generation component of 1.1 million cubic feet. I apologize for that.
Slide four depicts the transmission system and shows where the gas that is produced in Canada goes. About 56 per cent is exported to the United States; the remainder goes to most regions in Canada — not to the North, obviously. I notice that Nova Scotia has just recently awarded a franchise to a distribution company, which means we are covering most of the provinces now, except for Prince Edward Island. Most of the production, as you are well aware, comes from the West. Some comes from the East Coast. We would like to see more yet, but that remains to be seen.
The fifth slide shows who are the main members of the Canadian Gas Association. There are the big distribution companies from one side of the country to the other, and a number of smaller ones that have smaller, local service areas in particular provinces.
A general breakdown of the natural gas market is: 56 per cent of gas goes to export and the rest is distributed in a variety of parts of the Canadian economy, from industrial and power generation through institutional, commercial and residential. Power generation is still a relatively small part of it in Canada, compared with the United States, but it is a growing part and perhaps the most important factor looking forward, in terms of how demand overall might grow.
In some important ways, natural gas is part of the solution — that is to say, converting to natural gas from other fuels. At the same time, the industry itself is doing its bit to reduce its own emissions. I will talk about that. Finally, in respect of the question of consumption, there is much we can do to deal with consumer end-use efficiency.
Off all the fossil fuels, natural gas is the least carbon intensive. It also produces fewer air emissions than other fuels. In the near and the long run, there are several applications for natural gas such as power generation, industrial use and transportation. Such applications will mean that natural gas can make important contributions both to the improvement of air quality and to the reduction of greenhouse gas emissions. I would like to stress that you have to look at this in the context of an overall solution involving many fuels and technologies, including renewable technologies, but also including other more traditional fuels.
It will be a long time, indeed, before Canada gets away from fossil fuels or even some of the more traditional fuels. Keeping the balance is the key here. In order to keep the balance we will need to ensure adequate supplies. There are some hearings going on in Washington, dealing with the growing supply demand imbalance in North America. That is becoming a real concern. We are seeing that in prices today.
We do not have a crisis. That is an important distinction to make. We have an issue that we need to deal with to ensure that we do have adequate supplies, both in the near term and in the future.
The natural gas industry — that is to say, the local distribution component of it — is a relatively small part of Canada's overall emissions picture. Most of that consists of fugitive emissions such as emissions resulting from leaks from old systems. It is difficult to measure, but for the past several years, the gas industry has stepped up as one of the leaders in voluntary reductions across the board in the full spectrum of our operations. We are working with the federal government to cost-effective means to further reduce emissions.
As I suggested earlier, we think that consumption is key. Nearly one-third of our total annual primary energy consumption comes from gas, and more than two-thirds of gas emissions occur at the burner chip. Our argument is that that is the big opportunity area in which to look for reductions. Consumers do need to play a role, but in order for them to do so we need to provide them support, as does government.
We have a lot of experience doing that. The natural gas industry has a lot of experience in demand side management, DSM, programs. There are opportunities to get leverage on that experience, as well as on the extensive experience that the federal government has with these programs. We are the interface with more than the five million customers.
The next slide is an illustration of the results of Enbridge's DSM programs. We can come back to this if you wish. This shows that for a reasonable effort, although by no means a small effort, Enbridge has managed to save 2.5 million tons in total of CO2 equivalent. Compare that with the fact that the total emissions from our own sector are only about 1 million tons. The potential savings from the consumption end are considerable by comparison, although not cheap. Real expenditure of effort is required in order to get at that, but there are some very substantial possibilities.
With that in mind, we have been working with Natural Resources Canada to develop an industry-government partnership. We think that if government and industry can work together we can achieve synergies — leverage, if you will — from our respective efforts and take the reductions beyond what current programs do. We can work together to address regulatory barriers and ultimately to assist consumers to make smart and efficient decisions in their natural gas use.
The discussions with Natural Resources Canada have been ongoing for some time. They are very collegial and we are optimistic that we will be able to put a framework in place. We are looking to work together to better coordinate, share best practices and develop better communications — which is a major aspect with consumers. We want to ensure that we have defined clear objectives and targets and that we have clear auditing of what we do so that both government and we are sure that we are getting results for the investment made.
We are seeking to secure federal funding to complement the funding our industry puts forward. We want to ensure that regulators recognize what we are doing and that the appropriate incentives are in place to make it work. Beyond energy efficiency and demand side management, we think there are opportunities through that kind of partnership to extend some of the niche markets, such as natural gas vehicles, and to get a more effective partnership in innovation and technology development. Again, both are areas in which we find the government open to considering such approaches.
The potential benefits of this are pretty clear. We can help the government increase the reach of its programs by getting directly to the customers. We can improve the effectiveness of them through our experience. Finally, the government can demonstrate leadership by creating programs that assist Canadians to meet the One-Tonne Challenge.
The industry obviously feels a need to be active and to be seen to be active in meeting environmental objectives. This is clearly an area in which we think we can do that. We can enhance our efforts by shared funding and, in the process, improve customer service. The more we work with our customers on improving the efficiency of their energy and use, the better service we provide to them.
In summary, we think it is important that government take a comprehensive approach in dealing with industries to reduce greenhouse gas emissions. In other words, not just looking at what you can do with your own emissions but also what any industry can do, working either with other industries, with suppliers or, in our case, with customers. If we are going to be successful in this, we will probably have to do it that way. Natural gas is part of a clean future, both in the short and the long term, provided we can keep the supply-demand balance right. Finally, the biggest gains can be made by working with consumers.
Senator Christensen: I have a question with regard to supply and demand, which is, of course, a big question with regard to the future. I am from the Yukon and very interested in both the Mackenzie Valley pipeline and the Alaska Highway pipeline. When the Alaska Highway pipeline was first proposed in 1975 or so, it was supposed to be in operation in the early 1980s, as you probably remember well. There was a pre-build done from Alberta down into the States. The concept was that the gas from Alberta would be sent to the United States and gas that came down the pipeline would replace it. Of course, we never got the pipeline.
How will that affect our inventory and long-term supply in the future? It seems to me that it could be a very big political problem.
Mr. Cleland: Is your question with regard to the pre-build itself?
Senator Christensen: The pre-build was in Alberta. The deal was that gas from Alberta would be sent to the United States. When gas came down from Alaska, Alberta would use it.
Mr. Cleland: That was obviously filled up and additional pipeline capacity has gone into place with the Alliance pipeline. There is spare capacity to take gas out of Western Canada. The gas from the Mackenzie Delta first, and then from Alaska, will readily meet Alberta's needs, but clearly much of it will continue through to the U.S. market.
Senator Christensen: Who will have first demand on that gas coming from Alaska over the long term?
Mr. Cleland: The glib answer would be that it is a marketplace and whoever steps up and pays the price will have it. That has worked for the last 15 years. There is no reason to believe that Canadians would face anything like a shortage of gas.
Senator Christensen: Could that not be the case? Those Alberta fields have been bled down over the years with the pre-build, and the gas from Alaska will not be replacing that.
Mr. Cleland: In effect, the gas coming from the North will simply come into the Alberta pool. Think of it that way. I am not using the word "pool" in the technical sense, but it comes into the Alberta space. Some of it will be taken off on the TransCanada PipeLine system.
Senator Christensen: That would be the Mackenzie gas, but I am thinking of the Alaska gas.
Mr. Cleland: The likelihood is that it will come down into northern Alberta or possibly northern B.C. The likelihood is highest that it will come in and be part of the overall supply coming into Alberta.
Senator Christensen: Do you have any updated knowledge or experience on LNG tankers and the technology? How is that progressing? Is that becoming a more feasible way of transporting gas as opposed to pipelines with the new technology?
Mr. Cleland: It is unlikely that LNG would be more economic where you have a readily available overland route. The energy penalty in liquefying natural gas is so high. On the other hand, at prices such as we have had in the last couple of years, LNG technology is economic. The big issues are building terminals, the time lags and the risk involved in that, and perceptions of risk and, if you will, the "not in my back yard" problems that you are likely to encounter.
Senator Christensen: With Alaska gas, as the cost comes down for LNGs it may in fact get to the point where it would be cheaper to bring it down into Valdez. We could have a terminal there and just bring it down the West Coast as opposed to building that long pipeline.
Mr. Cleland: I believe that the proponents have examined that option, but as I understand it — and I am not an expert — currently, the overland route through Canada is still the more economic choice.
The Chairman: Any overland route — whichever is chosen — will as a matter of practicality link up with the head of the supply line at the top of B.C. and go through Alberta. There is no other way to get the gas anyway.
Mr. Cleland: You can come down through the Duke system in B.C. or through the Nova System in Alberta, but that is it.
The Chairman: One way or another, that is the way it has to go.
Senator Milne: I have a couple of points for clarification. In your brief on page 9, you say that the majority of emissions — .89 megatons — are fugitive, unintentional leaks. On the following page, you say that over two-thirds of the emissions associated with natural gas use are at the burner tip.
Mr. Cleland: Some of the numbers are missing from the presentation. That would be of the total emissions associated with natural gas going right upstream to the production.
Senator Milne: Which is correct?
Mr. Cleland: The .89 is a very small part of the overall.
Senator Milne: You said it was a majority, did you not?
Mr. Cleland: No. The majority of the emissions from the system overall, including transmission and production — that is, if you add all of those up.
Senator Milne: From point A to point B, with point B being the burner tip?
Mr. Cleland: That is correct.
Senator Milne: It is in between.
Mr. Cleland: The emissions from the downstream part of the industry, which is what my association represents, is only that one megaton of emissions, which is a very small fraction of the total.
Senator Milne: The rest is at the burner tip. Incomplete combustion.
Mr. Cleland: Yes, or even complete combustion. CO2 is an inevitable consequence.
Senator Milne: I am curious about the map that you have on page 4. Some of the arrows going down into the United States seem to be dotted; others are clear. The TransCanada Pipeline, TCPL, system starts at the Saskatchewan border. I know there is a major pipeline going straight south from there, from about Cabri, Saskatchewan, but to the east in Saskatchewan is there one proposed, or an actual one or a different system?
Mr. Cleland: I apologize for being a little vague on this, but it is a schematic map. It is really indicative. You have the Alliance Pipeline, so you have more than one pipeline going into the U.S.
Senator Milne: In relation to that 1024 billion cubic feet in Eastern Ontario, there seems to be a line there going down through the Niagara area and another line going down to the United States, the Iroquois line in Eastern Ontario. How much is going down through the Iroquois line right now?
Mr. Cleland: I do not have the number handy, but I can get it for you.
Senator Milne: I am a little curious because my husband was in charge of its construction.
Mr. Cleland: I will definitely follow up and let you know.
The Chairman: When you follow up with the senator's curiosity, would you let the clerk know the answer to the question as well?
Senator Milne: You have indicated that 56 per cent of our gas now being exported, by the time they finish the Sable Island gas line down through New Brunswick there will be much more. How much more is it?
Senator Buchanan: Which one are you talking about?
Senator Milne: The Sable Island.
Senator Buchanan: It is already into Massachusetts.
Senator Milne: There is another line going through New Brunswick too.
Senator Buchanan: Not yet.
Senator Milne: Is that the one that is proposed?
Senator Buchanan: Yes, that is proposed, if the second phase of Sable goes through, which it will.
Senator Milne: You are guaranteeing it, are you? Certain people will be very interested.
Do we export too much natural gas right now? With the diminution of the fields in Alberta, do you see that we will start relying on Sable Island gas? Will we rely on gas from other sources? What should Canada be doing to take a long- distance view of how much we are exporting, how much we will need ourselves in the future, and how we can increase our own usage of natural gas — a cleaner burning fuel — particularly in cars and in large industrial set-ups?
Mr. Cleland: There are several parts to the question. First, are we exporting too much gas? I would say no. Another way of looking at it is how much more do we now produce in Canada compared to 15 years ago before deregulation and before free trade? We now produce well over 6 trillion cubic feet, which is somewhere between double and triple what we produced previously.
I would argue that that deregulation framework and that free trade framework has been extremely effective at drawing investment into the industry and ensuring that we are developing the resources we have. In the future, I suspect we will need sources for the North. We will need Mackenzie Valley and Alaska. We will need coal bed methane. We will need East Coast offshore. Eventually, quite possibly, LNG will come into Canada and certainly LNG will come into the United States.
To go back on what was achieved in 1985 through to 1990, I think, would be extremely difficult at this point. It has served us well and I think it will continue to do so.
Senator Milne: The free trade agreement guarantees the amount of gas that we must provide to the United States, I understand.
Mr. Cleland: Not as such. It provides that in the event that the Government of Canada chose to restrict gas production for resource conservation reasons, we would have to ensure the availability of the same proportion to the United States.
Senator Milne: It is the same proportion and not the same amount then.
Mr. Cleland: It is definitely not the same amount. That is an important distinction.
Senator Milne: Will that affect our ability to use natural gas to achieve our Kyoto goals?
Mr. Cleland: To the extent there is tightness in gas markets — which we are seeing right now — and consequent effects on price, it certainly will affect consumer choices, whether that is industrial consumers or residential consumers, or builders of power generation. To that extent it will have some impact.
Our view is that the appropriate choice is for governments to do everything possible to increase the availability of supply — supply in a North American context. Again, using the term "pool," it is really a one-market pool. The price will be set in that context. One way or another, Canadians will be looking at prices that are determined in a North American context.
The Chairman: Those rates are in every case regulated as to the percentage of profit that your members can obtain from the operation. Is that correct?
Mr. Cleland: Our business is transportation. We are regulated slightly differently, depending on the province, as to the rates we can charge.
Senator Cochrane: I read an online article by Roma Luciw in The Globe and Mail about a meeting that occurred in Washington today. I quote:
Demand for natural gas in North America will exceed existing supplies, the head of TransCanada Corp told a U.S. government committee in Washington today.
"We believe natural gas from Canada's North and from Alaska, as well as liquefied natural gas, are all required in the next decade if North America is to have competitive gas prices," ...
"We estimate natural gas demand growth of more than 15 billion cubic feet per day by 2012, but supply growth from traditional North American sources is not expected to be more than 5 billion cubic feet per day."
Would you like to comment on that?
Mr. Cleland: I am aware of the report, and I do not think I could comment on the precise accuracy of those numbers. I am not certain what numbers Mr. Hal Kvisle is working with there. However, the orders of magnitude seem right.
One important distinction is that he talks about supplies available from "traditional" North American sources — that may not include coal-bed methane and it may not include the North. Therefore, there are some sources that have not been accounted for.
The demand growth sounds approximately right. The message you should probably take from that is that we will need our traditional sources and we will need a number of non-traditional sources so that we can keep up to the demand.
Senator Cochrane: I am from the East and not among the 5 million consumers of natural gas — not by choice but because my region is Newfoundland. I wonder how the cost of natural gas compares to other energy sources for the average consumer in Canada?
Mr. Cleland: Generally speaking, for space heating in most regions it is the most economic alternative. It is a little tougher in Quebec where it competes against very low-cost electricity.
For other applications such as hot water heating, the fuel cost is competitive, although the water heaters are more expensive. That is a tougher market for our industry to penetrate. Generally speaking, for space heating — which is the big part of the market — natural gas is the economic choice. On the other hand, the prices that we have today make it a bit tougher.
Senator Cochrane: For the local consumer it is on par.
Mr. Cleland: It is better than on par because it is a cleaner option than fuel oil and definitely a preferable option to electricity, in most regions.
Senator Cochrane: What are your projections in terms of expansion?
Mr. Cleland: I am not sure that I can comment on that because my industry represents the local distribution segment of the industry and not long-distance transmission. I am not sure what the current economics are in terms of extension of the transmission system farther east in Quebec or North in New Brunswick or Prince Edward Island. The economics have not proven favourable. With some questions around supplies from Sable Island — although I hope Senator Buchanan is right that it will be resolved soon — it is hard to know just what the prospects are. Newfoundland, of course, is extremely difficult because there is a great deal of gas but it is a long way offshore and hard to access.
Senator Merchant: In respect of natural gas climate change, which is our concern, you put the emphasis on consumption and the consumer. There are industrial consumers and residential consumers. I would like to know about the latter because of the targets that have been set for the individual saving.
You said that consumers need to play a key role and that government and the natural gas industry need to provide support. Could you elaborate on the kind of support that you would provide to individual consumers?
Mr. Cleland: Yes. Several of our members already have DSM programs of one kind or another — although some are more extensive than others depending on how the regulators treat it and the wide variety of programs. If you wish, I could provide you with testimony that Enbridge Gas Distribution Inc. provided to the Ontario Energy Board in December 2002. It provides quite a bit of detail on exactly what the programs are. That may be of interest and is in the public domain.
However, the support ranges across the board. There are small incentive programs to reduce the cost of converting to high-efficiency furnaces. Information programs with a variety of partners — energy service companies and others — ensure that consumers have the information they need to deal with the proper installation and use of equipment — for example, installation and setting of programmable thermostats at appropriate levels. There is a wide range of programs involving many partners.
Senator Merchant: To get consumers to comply, the transition has to be almost seamless. If it requires too much effort, I wonder whether consumers will do it. We could have great plans in place but the consumers may not comply.
Mr. Cleland: It is a difficult challenge. If you look at the numbers that we showed you, you could convert those to dollars per ton of CO2 for the Enbridge program overall. Those numbers are, by any standard, very good for demand- side management programs but they are more than double the government's ceiling price for CO2 credits.
The difference is that they are real, they are in Canada, they are changing the actual capital stock in Canada and they have more enduring effects, therefore it is probably worth it. The best numbers are at the industrial level where the customers are bigger, transaction costs are lower, and there are opportunities to get the effects. It is more expensive at the commercial level and it is very expensive at the consumer level. You are absolutely right: Consumers do not pay much for their energy and they do not pay attention to it as a consequence.
The Chairman: They are beginning to pay attention now.
Mr. Cleland: They pay attention in spurts and that is the problem. The effort does not seem to last because of price spikes — which they notice — and then the price drops.
The Chairman: In the global sense, natural gas used to be, at least in Alberta, absurdly cheap — it was not a significant part of anyone's monthly expense. It is now a significant part of many monthly expenses. The cost has gone up for the consumer.
Senator Finnerty: Recently, some committee members travelled to California to hear some of their ideas about energy efficiency. We met with Pacific Gas and Electric to discuss the success of their efforts to promote energy efficiency to residential customers. Do you agree with their contention that because they have regular contact with the consumers, utilities are the best entity to take the lead in promoting energy efficiency?
California energy programs are funded by a surcharge on all utility bills. That provides considerable financial support that is sustained from year to year. What do you think about that approach in Canada?
Mr. Cleland: In response to the first part of your question, I would say that it is true — potentially, for electric utilities as well. We are at the customer's door every month with our bills or through service calls and so on. We are familiar with the customers and their energy-use patterns. We are familiar with the kind of equipment they have. There are all sorts of reasons why we are very well placed to, if not take the lead, certainly take a large part of that effort.
That is why we are working with Natural Resources Canada. Already, several of my members are working with Natural Resources Canada to do these partnership arrangements for exactly that reason. Between industry and government, we have a lot of information and a lot of ability to come up with the most cost-effective ways of doing it.
As to whether or not we would advocate a surcharge, I am not sure I can comment on this specific mechanism. However, regulators — such as the Ontario Energy Board, which accounts for DSM programs in the rate base — need to set up appropriate incentive arrangements for the industry to take some of these actions. After all, what we are doing by virtue of these actions is reducing our throughput. To make that a reasonable proposition from the investors' perspective, there must be some incentive to do it.
The Chairman: Is not part of the incentive the reduction of your under-supply problem?
Mr. Cleland: If you could get those kinds of effects in the near-term, that is correct. There is probably a lag problem there; the under-supply problem is really the next year or two years at its worst. The opportunity to get big effects with consumers in that short a time frame is limited. However, it is part of it. It is one of the things from a public policy perspective that we need to be thinking about.
The Chairman: To pursue that point, if I may, for a moment, you are no doubt familiar — because you were involved previously with the electricity industry — with the success that B.C. Hydro had with a concerted consumer- oriented program. I have a speech that I often give on this that refers to my cousin who is in the gas business. He spent three years trying to convince the customers of his company to please use less gas and explained how to do it and still do fine. B.C. Hydro did the same thing.
They were faced with an oncoming, onrushing supplier problem. They had an under-supply and over-demand. There were three ways in the gas business that they could solve that. One would be to drill new wells, which is pretty iffy; another was to build new pipelines, but the security of supply is a question and it is very expensive. The third way to meet that difference between how much gas they had and how much they needed to sell to their customers was to reduce the customer need.
They invested quite a bit of money, and in a very short time — B.C. Hydro did exactly the same thing with electricity — found that they met the shortfall between their under-supply and over-demand by reducing the demand. They won big by deferring — if not eliminating — huge capital investment. They improved their profits very substantially and their customers were happy because gas and electricity bills were a lot less. That happened in B.C. Hydro's case in about two years, if I remember correctly. You would know better than I.
Mr. Cleland: My sense is that it did not come on that fast. I would not want to dispute that because I do not have exact facts. However, I think that, in respect of B.C. Hydro's numbers, the curve from demand-side management programs probably is not that different from the one I showed you from Enbridge — in other words, a build-up period over a few years.
It is possible that they may have come on faster from the B.C. Hydro program. The only case with which I am familiar that speaks to that instantaneous effect, was in California, where there was an impending crisis — or a real crisis — and consumers were acting to conserve energy.
If you are going to get a sustained effect, it is through capital stock purchase decisions such as when you buy a new furnace. You can get an immediate effect, but it would not be sustained, by getting someone to turn down the thermostat. As soon as the crisis is over, the thermostat goes back up and the sweater comes off.
The Chairman: There are more efficient furnaces now.
Mr. Cleland: Yes. It is an interesting question because there may be cases where the curve comes on faster; but, typically, it would be more like the Enbridge curve.
The Chairman: We will be hearing from B.C. Hydro next week, so we can direct questions there.
Senator Buchanan: I want to welcome our two witnesses and tell the committee that both of them have great experience with Nova Scotia.
Michael Cleland, if you want to go back — in Nova Scotia we signed the first offshore federal-provincial agreements — three years before Newfoundland, by the way.
Senator Cochrane: Who was the premier at that time?
Senator Buchanan: I was the premier and I signed the documents. In 1986, we signed the second document; the first was with Prime Minister Trudeau, the second with Prime Minister Mulroney. Both of those great documents had been negotiated through the expertise of our people in the Nova Scotia Department of Energy and the Nova Scotia Department of Development. Through all of those years, Michael Cleland was with the Nova Scotia Department of Development. That is why these two witnesses are so expert to have before us today.
Heritage Gas has finally signed a contract to distribute gas in Nova Scotia, but it will only be distributing through central Nova Scotia, through the Strait of Canso and those areas. The municipalities in the Strait of Canso area also have a contract to do distribution. As of this date, there will be no distribution to Cape Breton, but I think that will be solved in a few years — not only if we have more gas coming to shore but also if they can overcome some of the problems of the pipeline to industrial Cape Breton.
It is interesting to note that we do not, unfortunately, mine coal in Cape Breton any longer. However, we still generate about 1,000 megawatts of electricity using coal. It is profoundly irritating to Cape Bretoners to go through the Strait of Canso and see those huge mounds of coal that are now imported from Colombia and from Hampton Roads in the United States, and then shipped by truck and train down to Cape Breton to the generating plants. Our hope, as you know, is that within not too many years, we can start to convert those coal plants in Cape Breton to natural gas as more natural gas comes on.
It is interesting also to note that, in answer to Senator Milne's question about the pipeline, we have had for four years now a major pipeline from Nova Scotia through New Brunswick and to Dracut, Massachusetts. We are delivering anywhere between 400 and 500 million cubic feet per day to the northeastern United States.
Do you know the sad thing about it? I delivered a paper to the Canada-U.S. Parliamentary Association three weeks ago. A number of Americans in the House of Representatives and the Senate who were there from the northeast had no idea that, in the city of Boston and those areas, they were heating their homes with gas coming from Nova Scotia. They did not know that. In the same way, most of them do not know about all the energy that we send from Canada into the U.S. They just do not know.
It is so important that we make sure that they know that they are quite dependent on Canada for a lot of these supplies, including little old Nova Scotia. I am not leaving Newfoundland out.
I attended a conference in Boston many years ago when El Paso had put together a plan to pipeline natural gas from Newfoundland and Nova Scotia under water into the northeastern United States. It never happened — and it may never happen — but it is a good possibility that we could help you out in Newfoundland.
Senator Cochrane: There is some gas there.
Senator Buchanan: There is a lot of gas there.
Senator Milne: Perhaps we should call Senator Buchanan as a witness before the committee and let him carry on.
Senator Buchanan: I have a question. I found the comments about assistance from the government for people to convert interesting. One of the problems in New Brunswick is that they have not had that much opportunity to convert. I believe that there were only 4,000 homes that they hoped to convert. In Nova Scotia, there is a $12- to $14- million fund that will be used to help people convert to natural gas from oil — which has the oil dealers in Nova Scotia really upset, by the way. However, it is not government money. It is money that is was set aside by the companies drilling offshore Nova Scotia developing and producing natural gas. They have set aside something in the area of $12 million to help with conversion. That will be a big help in getting people to convert to natural gas in Nova Scotia. It will be a hard sell, but it will happen.
I was talking to the people from Maritime and Northeast Pipeline few weeks ago. The ENCan people were in Halifax. Unfortunately, they have partially closed their offices in Halifax. They are coming back for the Sable II project, which will be another half billion cubic feet of natural gas to the U.S. per day. That will help us in Nova Scotia and New Brunswick.
What is your opinion? What do you hear about Sable II and the chances of it happening in the next few years?
The Chairman: He just heard from you.
Mr. Cleland: I am not sure that my opinion would be of much help to you in the sense that I cannot claim expertise in that area. I have an opinion derived primarily from reading the financial press.
As you well know, the offshore Nova Scotia area has, from the beginning, has proven difficult because it is fractured. It is deep and over-pressured. It is expensive to develop, but they managed to get the first round out. There is more gas there. Probably, at this point, the approvals processes are proving difficult.
I do not know beyond that. I would not want to venture an opinion as to when the next face might come along.
The Chairman: Approval processes by whom?
Mr. Cleland: The various regulatory authorities. It involves a complex regulatory process. It is getting more complex as time goes on.
Senator Buchanan: I have spoken with people within the Department of Energy, the petroleum director of Nova Scotia, the Department of Development and the Nova Scotia-Canada offshore board. They are trying desperately to reduce the regulatory control because, as you know, many of these companies are not backing off completely but are deferring what they will do for a while because of the regulations of the board, the environment, the federal government, and the provincial government. It is such a complex situation for them. It will be corrected, we hope, very soon, and we can get this underway again.
As you know, another pipeline was proposed and it is still there. El Paso were going to put a pipeline from the Sable Islands fields to on land Shelburne, have the gas plant there and ship it underwater all the way to Massachusetts. That is also on hold.
Senator Christensen: In your brief, you indicate that one of the objectives is to address some of the regulatory barriers. Could you elaborate on what some of those barriers are? How should we be looking at it in our study?
Mr. Cleland: Those are regulatory barriers at the level of the provincial energy regulators. There is a wide variety of treatment.
Senator Christensen: It is these premiers that are causing the problem?
Senator Buchanan: I will not comment.
Mr. Cleland: It is a matter of working with the regulators to design systems that provide the appropriate incentive. The difficulty, of course, is that to the extent that you do that, it shows up on the rates. Not all of the people paying those rates are fully supportive of making that change. It is a question of balancing the near-term interests of certain consumers with what are arguably longer-term interests of both consumers and society.
Most regulators are moving in the right direction. It is a matter of moving them farther and faster.
Senator Christensen: Those regulations would act as disincentives to expand the market.
Mr. Cleland: They do. Our companies are in business. To the extent that these costs fall entirely to the shareholder, there is only so much appetite for it.
Senator Milne: I understand that there are several projects underway out west where they are using old gas wells as carbon sinks. By pumping carbon dioxide down into the well, they are getting another flow of gas from the area. Is this a minor part of the market, or do you see a future for that?
Mr. Cleland: I will confess that I am not familiar with the use of CO2 to enhance gas production. It is being used for oil production.
The big opportunity there would be sequestering carbon dioxide in coal seams and extracting the methane, which is in the nature of coal. Do not ask me about the chemistry but carbon dioxide sticks to it. You get a win-win out of that.
However, I cannot say that I am familiar with injection into gas wells.
Senator Milne: Perhaps we should follow through on that thought and see if there is something to learn on that.
What do you see as the future of natural gas-powered private vehicles? Most of them now are conversion jobs — and they are not terribly efficient. Some of the newer gas-powered cars are more efficient than the converted vehicles.
Do you see any future in that? I know that it is dependent on people being able to get natural gas to fuel, them but do you see much of a future in that?
Mr. Cleland: We would like to see more of a future than we do for private vehicles. There are many opportunities for fleets using natural gas vehicles. It is cost-effective and environmentally desirable.
It is more difficult for private vehicles. You put your finger on the primary reason. It is really the refuelling infrastructure. I do not think we will see a great deal of that in the near or long-term future.
The Chairman: I will follow up on the question of natural-gas vehicles. I will put aside the new vehicles that are extraordinarily efficient at burning gasoline and hybrid cars.
The traditional engines that are in most cars now, run better, last longer, and are more efficient in burning natural gas, we understand. They are even more efficient, with respect to emissions than, for example, ethanol. At least representations have been made to that effect.
I gather you are saying that your association is not pushing for — or pumping for — greater use by the public of natural gas in their vehicles, as opposed to fleets.
Mr. Cleland: I might ask my colleague to comment. He knows more about fuel use for transportation than I do. If the opportunity arose to expand market share in individual vehicles, we would undoubtedly push for it. However, it is a question of how prospective that market looks.
The Chairman: Do you not have to create the market?
Mr. Cleland: You do, but it is a question of how much investment you are prepared to put in.
The Chairman: That is my question.
Mr. Cleland: The most prospective market is still is in fleets. Presumably, if you get more penetration into vehicle fleets, if by extension that turns into an improvement in the fuelling infrastructure, then the opportunity might be better. However, there is only so much you can invest in, and that does not look sufficiently prospective to make a big effort.
Mr. Brendan Hawley, Communications and Marketing Management, Canadian Gas Association: I think the question becomes one of mandates or subsidies. Some industry groups have been fairly vocal about their opposition in principal to the use of subsidies — particularly as related to the use of ethanol.
There are two issues. One is the economic issue. In an open marketplace, will you consciously use taxpayers' dollars to force the entry into a competitive market of a particular type of fuel product? There are some environmental challenges from the point of view that the addition of ethanol into conventional gasoline increases its volatility, or rate of evaporation, and thus contributes to greenhouse gas emissions. Those arguments have been made.
With respect to some of the alternative fuels, when this was debated in the house two or three years ago, there were issues around performance of gasoline-fuelled vehicles relative to those fuelled with perhaps natural gas. Certainly, it was a point of perhaps low humour in one of the debates when the RCMP, I believe, indicated that they had some concerns of converting pursuit vehicles to alternate fuels. The glib comment was that if they changed their logo to, "We always used to get our man," it would be appropriate.
The Chairman: I do not quite get the gag.
Mr. Hawley: The point being that the performance with alternative fuels is not as efficient as with conventional gasoline.
The Chairman: The car does not go as fast?
Mr. Hawley: It does not go quite as fast or as far.
Examples of other issues include limitations with propane — you cannot park the car in an underground garage. Such issues like that that do provide some restrictions on fuel choices and fuel availability.
The experience, as Mr. Cleland suggested, is that natural gas seems to be the best fit for travelling in known routes in urban areas and for vehicle fleets.
The Chairman: What efforts has your organization made to convince people to put new and more efficient furnaces in their houses?
Mr. Cleland: The core of our demand side management programs is finding ways to introduce consumers to the more efficient models and to get them to use high-efficiency furnaces. There are other things we do with respect to thermostats and water-heaters and so on, but the biggest opportunity is in increasing the uptake of the best that is in the market place.
The Chairman: Senator Buchanan referred to the resistance — as you did — of consumers in a given area to convert from whatever they had been using before to natural gas to heat their houses and to run their stoves. I come from Alberta, and my dad worked for the gas company all his life. There was not anyone in Alberta who did not have natural gas from about 1912 or 1913 on. Therefore, I am unfamiliar with that problem. What is the mindset of folks who have access to natural gas and do not do not want it in their house?
Mr. Cleland: Senator Buchanan may want to comment as well, but in the first instance, it is an infrastructure issue. It is a matter of laying the pipes, getting the gas into the street and then getting it hooked up to the home.
The Chairman: People do not want to have their front street dug up?
Mr. Cleland: Or they do not want to pay for it. It is in the nature of the beast that if you are serving one big industrial customer, it is cheap to get it there, or a power generation customer. When you are serving multiple consumers distributed in single-family houses, it is expensive. If you are burying pipe in Halifax-Ironstone, it is particularly expensive. There are issues of that sort. However, once you have the gas, it is a very good option.
The Chairman: Those infrastructure issues apply to one degree or another everywhere in the country. To my knowledge, it has always been the case, to my knowledge natural gas companies invested in that infrastructure to order to gain access to their customers. Nobody ever paid for the main line going down the street to deliver natural gas. I think one might have paid for the line going into the house, but not for the main distribution lines. Do you know whether I am right or wrong on that?
Mr. Cleland: I am not particularly familiar with it. I am familiar with the Vancouver Island pipeline, which was extended to Vancouver Island. Part of the package that made that work was assistance to build the distribution system.
The Chairman: Publicly funded assistance?
Mr. Cleland: I cannot recall exactly what the structure of the package was. I was with the Department of Finance at the time and I had some involvement. Arrangements were put in place to provide some public support, but I cannot remember the details. As to earlier experience, I cannot say that I am familiar with it.
Senator Buchanan: Heritage Gas — and Sempra before it — would be and will be putting the lines in the various subdivision streets. It is hoped that they will start in the big subdivisions where it is easier to service the subdivisions than in the central part of Halifax or areas like that.
Heritage will pay for the main lines coming out of the Maritime Northeast Pipeline system, the lines into the distribution systems. However, it is like a sewer line from the street into the house — one has to pay for it oneself. One also pays for the conversion of one's furnace to natural gas. For that reason, it is a hard sell in New Brunswick. In Nova Scotia, it would not be as hard a sell, because we have access in Nova Scotia to this $12 or $14 million fund that has been set aside over the last four years by the Mobil Oils, et cetera, the other groups, to encourage people to convert to natural gas in their homes.
The other reason is that it is difficult for people to grab onto anything new. Once it gets underway, I think it will go along very smoothly. The people Heritage Gas think it will be a hard sell for a while, but will move smoothly and quickly once people see that it is starting.
The Chairman: All we have to do is send them to Medicine Hat. Medicine Hat sits on, in Rudyard Kipling's words, "all hell for a basement." It sits on a gigantic natural gas deposit. The City of Medicine Hat kept its own natural gas supply and does not export it anywhere. It supplies it only to its own citizens. It is handy.
Senator Buchanan: I want to make one comment about something that happened last week. We had the most interesting time last week with the General Motors tech tour. For the first time, I found out that hydrogen can be produced in huge quantities from natural gas. As you know, the engineer in charge was from Nova Scotia. He told me that Nova Scotia has the greatest opportunity to extract hydrogen from natural gas at the plants in Point Tupper. Now, there is no use for it. However, as hydrogen vehicles start to come on stream, there will be a big market for hydrogen, which is now just wafted out into the atmosphere. The natural gas comes ashore. It goes through the gas plant, then it goes through the processing plant, and one of the extracts can be hydrogen, which could have a big use in the future. That is another use of natural gas.
Senator Merchant: When we were in California, we drove some of those fuel cell cars. They asked how we liked them. We replied that they were great and that they manoeuvred very well. The fellow said he was happy we enjoyed it because the car costs $15 million. I am waiting for the day when they are inexpensive enough.
Senator Buchanan: The development costs were a little over $6 million.
Senator Merchant: When are these cars going to come on the market?
Senator Buchanan: I will be dead and gone.
The Chairman: As soon as they build the second one, they only cost $3 million a piece, less the metal, economies of scale.
Gentlemen, do you have anything further to say before we close?
Mr. Cleland: The senator's point about hydrogen is potentially an important one. There are two basic sources of hydrogen: either natural gas steam reforming, which is established technology, or electrolysis, which is a higher energy penalty and the less economically advantageous technology.
In the future, if we do get into a hydrogen fleet, we will have to use one of those two sources. We think natural gas may prove — at least for some period — as a good source.
Senator Christensen: Since the passing of the Kyoto and the One-Tonne Challenge, have you noticed a shift towards natural gas through consumers? Is there any blip or anything or is it just business as usual?
Mr. Cleland: To be honest, the effect of the One-Tonne Challenge and the plan on consumers is zero. Consumers do not notice things like that. What we have seen in our markets in the last several years is pretty much flatline, not much growth. As I say, with current prices, we are starting to see some resistance.
The Chairman: We must solve that one.
Mr. Cleland: We believe that thinking very hard about supply should be a priority for Canadian public policy over the next little while. We share that view with many of our colleagues in the energy industry.
The Chairman: We are finding out that they are concerned about the supply of everything.
Mr. Cleland: It is turning out to be everything. I am you have heard from others in the electricity industry or the oil and gas industry. We do not have a crisis; we do have an issue and one that we should be turning our minds to with a long-term perspective.
The Chairman: Thank you very much, gentlemen, your presentation has been most informative. I am sure that much of what you have said will show up in our report that we are working on now.
The committee adjourned.