Proceedings of the Standing Senate Committee on
Energy, the Environment and Natural Resources
Issue 16 - Evidence - December 9, 2010
OTTAWA, Thursday, December 9, 2010
The Standing Senate Committee on Energy, the Environment and Natural Resources met this day at 8:07 a.m. to study the current state and future of Canada's energy sector (including alternative energy).
Senator W. David Angus (Chair) in the chair.
[English]
The Chair: Good morning, colleagues, witnesses, ladies and gentlemen, our viewers on the CPAC network, on the World Wide Web and on the website dedicated to our energy study. This is a formal meeting of the Standing Senate Committee on Energy, the Environment and Natural Resources. We are continuing our study into the energy sector, generally, with a view to setting some guidelines and finding some strategic direction for the future, given the considerations of exploding population growth, climate change effects on the environment and the exigencies of the economy.
This morning, we are privileged to have gentlemen here representing Encana Corporation. Gentlemen, you should first note that there is a great interest in what you have to say. The committee is here in full complement early this morning. We have already enjoyed a nice breakfast and a preliminary discussion with you.
We introduced ourselves earlier, but there are a few other senators who have come in since: Senator Elaine McCoy, from Alberta; Senator Fred Dickson, from Nova Scotia; Senator Linda Frum, from Toronto; and Senator Rob Peterson, from Saskatchewan.
I am pleased to welcome from Encana Corporation, Dr. W. A. Sam Shaw, Vice-President, Policy Development, Natural Gas Economy; and Eric Marsh, Executive Vice-President of Natural Gas Economy. From their consultant firm, Gladstein, Neandross & Associates, GNA, we have Erik Neandross, Chief Executive Officer.
Thank you very much for coming. I understand you have been following our deliberations. Some of us are neophytes, while others are more experienced, but we are all engaged and interested in the subject matter.
Dr. Shaw is responsible for providing leadership and counsel to Encana's Natural Gas Economy team in Canadian environmental policy and legislation and its impact on our gas demand initiatives in this country.
Mr. Marsh leads the Natural Gas Economy team that is responsible for increasing demand for natural gas in North America through advocacy and technical projects that utilize clean, abundant, affordable natural gas.
Mr. Neandross is the CEO, as I said, of Gladstein, Neandross & Associates, an environmental consulting firm specializing in emissions reduction, energy and transportation policy and market development for alternative fuel vehicles. GNA is North America's leading consulting firm for heavy-duty liquefied natural gas, or LNG, and compressed natural gas, or CNG, vehicles and refuelling station project development.
Colleagues, you will recall that we have had here other representatives from the offshore exploration and development sector portion of Encana. They were very helpful to us when we did our study on the after-effects of the Deepwater Horizon incident in the Gulf of Mexico.
Dr. Shaw, the floor is yours. I believe you will give brief opening remarks, followed by Mr. Marsh and Mr. Neandross. Then we will have a question period.
W.A. Sam Shaw, Vice-President, Policy Development, Natural Gas Economy, Encana Corporation: I will facilitate some of the discussions this morning. Thank you for the opportunity to appear before you today.
It is so timely that we talk about natural gas, given its importance not only to Canada's energy resources but also to lowering Canada's emissions — also the focus of the United Nations meeting on climate change occurring in Cancun, Mexico.
In Canada this year, we presented a bold plan to the House of Commons Standing Committee on Finance to invest in transportation using natural gas, using tax incentives and funding research that would increase government revenues, increase jobs and lower emissions. A copy of our proposal is available to you, and we have provided you with the 1-pager on that.
In fact, natural gas produces 65 per cent less emissions than coal and 25 per cent less emissions than oil. Today you will hear from two highly qualified experts on how Encana is developing the natural resource of natural gas in a responsible manner, what opportunities we have for its use in Canada and what is happening in the United States.
Encana is committed to safety, the environment and the community. Our company has the people, resources, technology and culture to reshape North America's energy portfolio through exploration, development and deployment of natural gas.
As noted, Eric Marsh is the executive vice-president of Encana Corporation. Mr. Marsh graduated from the University of Wyoming with a Bachelor of Science degree in petroleum engineering. He has over 25 years of experience at increasing levels of responsibility and certainly has had direct experience in the upstream side of the business. I think he has overseen over 10,000 wells in his career.
In 2000, Mr. Marsh joined one of Encana's predecessor companies as a lead in the Jonah Field in Wyoming. In 2002, he accepted the role of vice-president of the South Rockies Business Unit, and subsequently has taken on the role of the executive vice president for the Natural Gas Economy. I will turn it over to Mr. Marsh.
Eric Marsh, Executive Vice President, Natural Gas Economy, Encana Corporation: It is my honour to be here today to present some important information on Encana's upstream natural gas operations and an opportunity for natural gas.
It is important that we share this information with you and Canada because Canada is well positioned to take advantage of one of its most abundant resources that is not just in the Western provinces but also in Quebec and in the Maritimes. Natural gas is abundant, affordable and clean, and can be a source of significant revenues for those provinces as well as the federal government.
As Dr. Shaw indicated, Encana recently presented a plan to the House of Commons Standing Committee on Finance to use natural gas for transportation. This will lead to tremendous change in the natural gas industry and, more importantly, to Canada as a country.
As we sit here, technology is raging forward at an unrelenting pace. On a well site in Northeastern British Columbia, a drilling engineer just finished drilling the longest horizontal lateral in the Horn River. After drilling 3,000 metres deep, the drill pipe then turns and runs horizontally for another 3,000 metres — 9,000 feet, or more than 3 kilometres. If that well were drilled from this room, the bit would reach all the way to Rideau Hall.
That drilling engineer sends out an email to 50 other Encana drilling engineers stating how LUBRA-BEADS reduce friction and drag on his drilling pipe. Within weeks, 60 to 70 rigs are drilling longer horizontal wells; they can complete more fracture stages, deliver higher initial natural gas flow rates and increase the reserves on all 60 or 70 wells.
Across the muskeg, another driller tries a new bit design that increases the rate of penetration by 15 per cent. He shares his success with a text message to his colleagues. All of those recipient drilling engineers consider the new bit design and begin to drill wells in less days, savings hundreds of thousands of dollars on every well drilled.
You get the picture: Technology is moving forward at minute pulses, not just in six months, like five years ago. Wells that would produce 1 million cubic feet of natural gas per day five years ago — and we would think that was a pretty good day from a good well — now make 25 million cubic feet of gas per day. That abundant energy flows through pipelines to consumers to light and heat their homes.
On October 27, just six weeks ago, Steve Forbes of Forbes magazine declared that the United States energy crisis is solved via technology related to horizontal drilling. If the energy crisis is solved, and we have this abundant affordable energy in natural gas, then repositioning or rebalancing our energy portfolio is what we, as a society, need to get to work on.
The fundamental question is how will we use this energy to improve what we have been doing. I would suggest to you that we now have choices that we did not have three to five years ago, and those new energy paths are sustainable.
We do not have to do it the way we have always done it; there can be another more effective and efficient way. I believe we are embarking on new opportunities to change the environment and the economy, especially in those things related to the transportation industry. It is time to act and move forward. There will be challenges and obstacles, but that is nothing new. The drilling engineers I mentioned experienced failures before, but they stuck with it and succeeded, and so will we.
I hope that my presentation will give you a feel for the extent of these technological breakthroughs that we have experienced in our industry and how we are able to plan for abundant, affordable natural gas supplies for the future.
Encana is a good proxy for our industry, so you will see some real examples.
The next slide shows future-oriented information that talks about how we use our information and indicates a disclosure protocol.
In addition, we typically talk in imperial units, or feet, so I will try to convert back and forth as often as I can. Also, when we refer to reserve numbers, we refer to those after royalties have been subtracted.
The Chair: Mr. Marsh, you are talking about natural gas today. We have been reading in the papers every day for quite a few months now about shale gas. I understand that natural gas is natural gas and shale gas is just the formation of a different source. Is that correct, or do you need to demystify that for us?
Mr. Marsh: That is correct. As we go through the presentation, we will talk about shale gas specifically. Shale gas is just another type of material that we produce from. For years, we have produced from sandstones, carbonates and siltstones. The technology that I have described — the ability to drill vertically and then horizontally and then fracture that rock — can now be applied to other rock types. People get a little hung up on shale gas. However, the same technology can be applied to sandstones to carbonates, to anything for that matter. That is what has changed. Our industry has been changed by this technology that allows us to drill these long horizontal laterals and laser them horizontally flat. We could not do that in the past. We can now, and, because of that, we can get more gas out of the zones that we choose to produce from.
Encana is a North American company with its headquarters in Calgary, Alberta, and its U.S. headquarters in Denver, Colorado. Furthermore, 100 per cent of our natural gas production reserves are located in North America; 40 per cent of our gas production is produced here in Canada; and 60 per cent of our gas production is produced in the United States.
We are the second largest producer of natural gas in North America with over a 25-year drilling inventory of over 23,000 locations, and that is just our proven reserves. We have twice that in probable and possible reserves. When we consider all the reserve types, we are approaching 50,000 locations to drill — therefore, lots of opportunity to provide natural gas for the future. Our company has a plan to double its natural gas production over the next five years and become a bigger piece of the market.
Our mission in our group is to establish natural gas as the foundation for North America's energy portfolio. We believe that in the past, coal has been that foundation or that backbone. As we move forward, we can use natural gas to create that foundation and have a cleaner environment because of that.
We believe natural gas will be abundant and affordable in the future and will improve emissions in most instances, having been a reliable, domestic solution for years. The abundance of natural gas enables us to rebalance our energy portfolio, using it for power, electricity, and transportation. We have been able to model this rebalancing to show how we can meet our emissions targets here at the least cost to the consumers by using natural gas. Increased use of natural gas in the transportation industry creates industrial jobs and more government revenues through taxation and royalties; increased domestic production means real economic growth. That is what we call and refer to as the natural gas economy.
Slide 6 is an important slide, and I would like to spend some time on it. As I described, what has really changed our business is the technology to be able to drill these deep horizontal laterals or wells and contact more of the reservoir rocks that contain natural gas. About three to four years ago, we were able to drill a 10,000-foot well vertically, and in order to drill horizontally, we might drill 500 to 750 feet. We were then able to hydraulically fracture that lateral three to four times, and we felt that was a good accomplishment. We were pleased with that, and the results might have been a few million cubic feet of natural gas per day on the initial flow rate from that well.
Today, we can drill that same well 10,000 feet vertically, but in addition we can now drill 10,000 feet horizontally, which is the big change that I would like to describe to you. We can hydraulically fracture that lateral maybe 25 or 30 times. The well will now result in producing initial gas rates in multiples of what we had in the past — 8, 10 or 15 times what we would have made previously. The change is that this technology allows us to recover more gas and increase the reserves of every well that we drill. As you have seen the industry change over the last three to four years, we now have this abundant natural gas and this technology that we can apply to all types of reservoirs, whether a shale or a sandstone reservoir. People have focused on shale gas, which has something to do, obviously, with the new reservoirs that we can contact. However, I suggest that it is really the technology that has changed and that has allowed us to get gas out of rocks that we were not able to; we were not able to make economic flow rates.
Over the past three years, we have seen a significant increase in our reserves. The bar charts on the right of the graph show years of supply. The numbers on the top show years of supply at the current production rate. On the far right, our current estimate is over a 100-year supply at our current production rate in North America.
The Chair: These letters at the bottom, PGC, for example, are they acronyms for something?
Mr. Marsh: Those are different studies done, for instance, by the government and by industry; or independent consulting firms that would do them, and we would pay for those. I like to use independent firms so that you can take assurance that we have not done them ourselves and come here to describe them as an Encana perspective. At Encana, we think the reserves and resources are greater than these show.
There is a 100-year supply at our current production rate. It is important to note that the map on the left was done earlier this year. We created that map in either January or February. About five or six different plays have occurred since that time. The new technology being applied to different types of reservoirs has reopened our eyes to everything in North America again.
I had the opportunity to run our debasing program in Alberta for two or three years. We are going back to areas where we had drilled vertically and fractured the rock and are now drilling those horizontally and getting tremendous increases in production. We can now apply that technology.
The map on the left shows where some of the new shale and siltstone plays have started to occur. I believe that in the next four to five years, many more of those will show up. This technology can now be applied to so many different materials that the amount of new opportunities will be mind-boggling. If we were to increase the use of natural gas by 30 per cent, from 70 Bcf — billion cubic feet — per day to 100 Bcf per day, from what we know, we have a 70-year supply. You can be assured that we have a large supply of natural gas for the future.
To your question, Mr. Chair, slide 7 shows that sedimentary rocks are home to the world hydrocarbon system. Shale is the really the source of many of those hydrocarbons through this geologic process. The gas we produce from sandstones or carbonates often came from the shale that existed either below or above them. Therefore, the gas that comes from shale is no different than the gas that came from the sand above it or below it. It is basically the same gas. Occasionally you may have higher inerts, but for the most part it is the identical gas.
Similar to coal, shale can actually store gas in its fabric. It is a process called absorption. The methane molecule can absorb into the material of the shale, which allows for shale to hold more gas in the same volume.
One of the advantages of producing from coal or shale is that the rock itself has absorbed the natural gas as well as the pore space — the little holes — and the fractures. Shale and coal tend to have more gas per unit of volume, if that makes some sense to you.
Shale occupies approximately 70 per cent of the earth's volume. As you look at the surface of the earth to the core, shale is by far the predominant rock, roughly 70 per cent. It changes from place to place, but roughly 70 per cent of that rock is shale. The fact that you can actually get commercial flow rates of natural gas from shale is encouraging for the future of natural gas.
Specific types of shale are more brittle than others. Some will be better than others. Not all types of shale will produce natural gas or oil, but many of them that we have not seen in the past 20 years will begin to produce. That is the real take- away on shale.
The Chair: Mr. Marsh, this question is provoked by the use of your word ``absorption'' and the description of that process. Is there a finite amount of gas in the world, or is there an ongoing process where more gas is coming from somewhere and being absorbed?
Mr. Marsh: In geologic time, there is not a finite solution, but geologic time is a long time.
As far as the opportunities to apply new technology are concerned, we are at the infancy of this. We think that over the next 10 to 15 years, we will produce natural gas from materials that we never dreamed we could have 10 years ago.
I am a former drilling engineer, with 30 years experience. We used to drill through shale. It would puff a little gas at you, and you would say, ``This will never work. This is not enough to be commercial.'' We would mess around with it and never make gas. It was nothing but a nuisance almost.
I can now look back 25 years later and I think to myself that things have really changed.
Senator Banks: I think the chair's question was whether absorption is occurring now — is gas being made now — not whether you can get at it now. Is new gas being made?
Mr. Marsh: Yes, it is. Natural gas is created from organic matter that is put deep in the earth. That organic matter is cooked or baked at high temperatures and pressures, and organic matter continues to make natural gas. However, it is done in geologic time of millions of years, so it is a slow process.
Senator Banks: You said billions of years; I thought you said millions, and I was worried.
Mr. Marsh: Millions of years, for sure.
The Chair: It is clearly a renewable resource though, right?
Mr. Marsh: The process is slow, but it does occur over millions of years.
Production from shale gas is nothing new. There are gas shale fields in the United States that have been developed for nearly 200 years — they have been producing for 190 years. Some of the original gas production in North America comes from the northeastern part of the United States, and some of these fields are now well over 100 years old and continue to produce. I would like to ensure you understand that. The neat thing about producing from shale is that it has a long reserve life, hundreds of years. Once a well has been drilled and completed, we expect that well to produce for 50-plus years, and it could be as long as 100 years in many instances. It is an energy system that gives for a long period of time.
The negative to that is that the wells produce more in the earlier years and less in the later years. However, they eventually reach a point that we call terminal decline or terminal production and basically produce the same year after year.
It does provide society with that energy for a long period of time, so you can plan on it for the future.
Slide 8 gives a bit of a picture of the earth or cube of the earth. As you can see, in the past, we would have produced from conventional reservoirs. Those are reservoirs created by traps, typically sandstone and carbonates, and today we are able to produce from these massive quantities of shale, siltstone and coal.
Production is growing in North America and has been growing. Our plot on the right shows how the unconventional reservoirs, which are siltstone and shale, are becoming more a part of our natural gas supply for the future. We had a little dip in 2008 when the economy had its issues, but overall, we see natural gas production continuing to climb both in Canada and in the United States. That is our forecast on that.
Moving on to prices in our next slide, with the abundance of natural gas, we believe that natural gas will be one of the most competitive fuels you can use. This is a graph of the price of oil, coal and natural gas converted to an energy equivalent or a BTU basis, so it is done on an energy-equivalent perspective.
On the graph, the blue line is coal, the orange line is natural gas and the grey line is oil. Back in about 2003 or 2004, you begin to see the divergence between oil and natural gas on an energy-equivalent basis. For years, natural gas traded at a 6 to 1 ratio with oil, so even though natural gas is more contained to North America because of its necessity to use pipelines to get places, it always traded on an energy equivalence of about 6 to 1. However, we see how oil prices begin to increase in 2004, and natural gas prices begin to increase at a lesser rate. When you look at today on the graph, you see this phenomenal separation between the price of oil and the price of natural gas.
Our perspective is that the price of oil will be set in a world market over the next 10 to 15 years, and the demand for oil will be great. Natural gas will be set more in a North American market for the next 10 to 15 years, and natural gas prices will be relatively low. We believe in the long term, we are looking at between maybe $6 per MMBTU — one thousand thousand British Thermal Units; or per Mcf — one thousand cubic feet of gas; or per gigajoule, depending on your energy unit. When you look at that, it is possible that oil could be at a 15 to 1 ration to a 20 to 1 ratio versus the 6 to 1 ratio that has occurred for many years.
With oil prices increasing and natural gas prices staying flat, we think there is a great advantage to using natural gas for transportation because it will save you money versus paying for gasoline or diesel fuel.
When you compare natural gas and coal, this is the first time in history that the price of natural gas and the price of coal are fairly similar. With coal, for every volume of energy needed for one kilowatt of energy, two units of coal are need. Natural gas is roughly 60 per cent more efficient than coal when used in a power plant. If you took the blue line on the graph, basically you have to double it to be on the same perspective on an energy basis. When you look at that, this is first time that natural gas and coal have actually played on the same playing field.
In many places, the eastern part of our country and the eastern part of the United States, for instance, natural gas is actually cheaper than coal. When you consider that natural gas creates fewer emissions and is cheaper, it is difficult not to make an argument that natural gas should be used for power generation. That is why so many power plants build a natural gas plant rather than retrofit a coal-fired plant. It is economic, and it helps our emissions.
In the next slide, we describe supply costs. These are all the plays in North America, and this indicates that the supply cost to produce the gas, pipeline it and get a suitable return, which is our cost to capital, will be between $3.50 and $6. These are massive plays that have supply costs of less than $6. That proves the fact that we can provide abundant and affordable natural gas for the future.
The next slide reflects the use of natural gas for power generation. It shows that natural gas on a full-cycle basis is the cheapest way to generate electricity. You can see that, in this case, natural gas generates power for about 8 cents a kilowatt hour. You can also see how power from solar, wind, hydro and coal stack up. It is a great opportunity for natural gas. As long as it stays in the price range that it is today, it is very competitive.
We have opportunities to reduce emissions in both Canada and the United States in two sectors. About 70 per cent of the total emissions come from transportation and electric generation, and natural gas might be able to help considerably in reducing our emissions.
In Canada we have a significant amount of hydro power and some nuclear power, which have virtually no emissions, so it will be more difficult to get the change in emissions on the electric sector. Focusing on the transportation sector will provide an opportunity to significantly reduce emissions, particularly in heavy-duty fleets.
On slide 13, we show that in North America, we have huge opportunities. Seventy-four billion cubic feet of natural gas per day could be consumed by the vehicle industry. All of North America produces 74 billion cubic feet per day. The vehicle market is equal to our entire natural gas production. One 18-wheeler truck is the equivalent of about 325 light-duty cars, so converting one 18-wheeler truck to natural gas is the same as to taking 325 cars off the road. If we can convert the medium- and heavy-duty fleets, which make up about 20 per cent, we will make significant inroads on emissions issues.
The world has over 11 million vehicles running on natural gas. Italy has 600,000 natural gas vehicles, and they have increased by 37 per cent growth since 2007 and now represent about 7 per cent of the market share. In this case, natural gas costs roughly 50 per cent to 60 per cent less than gasoline. This has been a success story in Italy, Germany and many other places in the world.
The Chair: That is an extraordinary number because Italy has no natural gas. Where do they get their gas?
Mr. Marsh: They get it via pipelines from other countries, primarily Russia.
We do not have that problem. We have an abundant resource, so it makes a lot of sense for us.
That graph also shows the different countries where natural gas is being used.
Slide 15 shows part of a proposal that we have made. It shows two corridors; the west corridor would run between Edmonton and Vancouver and the east corridor would run between Quebec City and Windsor, Ontario. We believe that these two corridors could be outfitted with natural gas for heavy-duty fleets initially and for other fleets later. Using natural gas in these corridors would affect about 60 per cent of the transportation in Canada. These two areas could be great wins for reducing emissions, and we think we can set those up with the necessary infrastructure quite quickly.
The Chair: Is it your proposal that governments mandate the use of natural gas for heavy-duty vehicles in those corridors?
Mr. Marsh: No. Our proposal is to help the trucking industry with the price difference between natural gas trucks and diesel trucks. Sixty per cent of the cost difference would be incented, perhaps with an accelerated capital recovery mechanism, to help trucking companies recover the cost differential in a reasonably short period of time.
The trucking industry has indicated that a two- or three-year payback on their incremental investment would incent them to do that. We have had some success already. Quebec has done a great job. They have about an 80 per cent differential recovery through an accelerated capital recovery mechanism. Because of that, Robert Transport, a large trucking company that works primarily in Quebec, has spoken for 180 natural gas trucks. That is a great success story initiated by the province.
My suggestion is to do that at the federal level, and get everyone doing it. These two corridors would make a lot of sense in that the infrastructure can be concentrated on them.
Slide 16 describes the program in a little more detail. Our vision is that by 2020, we would have 150,000 vehicles running in those corridors using clean-burning natural gas. There would be spinoff into light-duty vehicles, and here we would see an increase in production of natural gas in Canada of about 1.4 billion cubic feet per day. That would create royalties, property tax and federal income taxes. Rolling the economics of this project all together, the government would be cash- flow neutral in five years, and the project would pay out in seven years. It would create over 70,000 new jobs and would accomplish our goal of reducing emissions.
That is the gist of our project.
We think we have the opportunity to really use natural gas for beneficial uses in society. The new technology and the new abundance of natural gas will change North America's energy portfolio over time.
The question for us is how can we move that forward a little quicker, and how can we begin to allow society to take advantage of the cleaner nature of natural gas. It creates job, revenues and what we call the natural gas economy. There will be challenges around that. However, we also think that as time goes on and we get this adoption, the cost differential between these vehicles will come down. By kick-starting the program with some type of an incentive for the trucking industry, we believe that the manufacturers of these engines and systems will begin to drive down that cost.
Eventually it will reach the point that they are at in Europe, where the price of a natural gas vehicle is not that much more than the price of a gasoline or diesel vehicle. As a society, we benefit with cheaper fuel and fewer emissions.
With that, I thank you for your time. I will turn it over to Mr. Neandross.
Erik Neandross, Chief Executive Officer, Gladstein, Neandross & Associates: Thank you for having me here today, and good morning to the members of the committee. It is an honour to be here before you and to have an opportunity to share with you my company's experience in the heavy-duty natural gas vehicle fuel industry. I hope you find my remarks helpful as part of your phase-2 efforts to examine a sustainable and clean energy future here in Canada.
I am Mr. Neandross, the CEO of Gladstein, Neandross & Associates, GNA. We are a consulting firm based in Santa Monica, California, with offices in New York City. For the last 18 years, we have been actively involved in the development of heavy-duty natural gas vehicle projects throughout the United States.
Beginning in the 1990s, we began to work with heavy-duty truck fleet operators on LNG deployment projects. Since then, we have assisted some of the largest heavy-duty truck fleet operators in the North America to put LNG trucks on the road in some of the world's largest deployment projects in refuse collection, long-haul truck, transit and other applications.
I am proud to say that we have more development experience in this field than any other firm in North America and, arguably, the world. My company has been involved in the development of approximately one half of the LNG fuel station projects in the United States. We have become known for our ability to develop corridors of publicly accessible LNG fuelling infrastructure for heavy-duty trucks hauling freight within and between major metropolitan areas.
In the slide packet, you will see a few maps of some of the corridor projects that we have been working on over the years.
The Chair: Colleagues all have the deck with the slide package and also the text that relates to each slide, so we can follow along.
Mr. Neandross: I have given a bit of background on our company and our experiences. I would like to take a step back and talk about why we first got started using natural gas as a heavy-duty truck fuel. The answer is simple; it has to do with poor air quality. One of the handouts you have been given really exemplifies this issue.
The air quality in California and other places in United States is, frankly, terrible, as many of you are aware; it is unhealthy and dangerous to human health. In California, it is known that the air quality kills 9,000 people per year and causes 2.3 million lost work days. This is an economic impact to the state of $28 billion.
When we look at these air quality problems, we begin to see that these issues are related to the use of diesel fuel. The two maps on the slide I provided give you a clear summary of this. On the map on the left, you will see the increased risk of cancer in Southern California from all sources of air pollution. On the map on the right, you will see the same risk if you eliminate diesel emissions.
It is a powerful example. Due to these air quality problems that we have with diesel emissions, there has been an aggressive effort to replace diesel-powered trucks and buses with cleaner-burning units fuelled with natural gas.
The next slide shows a graph of the emission levels from heavy-duty trucks and buses. Historically, natural gas trucks have been much cleaner than diesel. This has been the reason we have had so many regulations and incentives aimed at increasing the use of natural gas. The incentives are needed because a heavy-duty natural gas truck or bus typically cost $50,000 to $100,000 more than the base vehicle, which can be a 100 per cent up-charge on the cost of the vehicle in some cases. That presents a significant barrier to adoption and then justifies the reason we need these incentives and regulations.
This slide shows the criteria pollutant emissions, NOx and particulate matter. It is also important to point out that natural gas trucks provide a 20 per cent to 30 per cent benefit in reductions of greenhouse gas emissions when compared to even the most modern diesel trucks on the road today.
While regulations and incentives have largely been responsible for the growth of the market so far, the fleets we have worked with that have started to make the transition to natural gas have also started to see significant cost savings simply due to the fact that natural gas is cheaper than diesel. The cost savings are fairly consistent; fleets report a 30 per cent reduction in their fuel bill on the operation of natural gas trucks.
These savings along with the increased focus on greenhouse gas emissions and concerns about energy security have been the primary drivers in how we have seen a shift to natural gas in our market.
In your packet, a number of slides give examples of where natural gas is being used in the heavy-duty fleet sector. It is primarily being used in transit buses, refuse collection trucks and over-the-road delivery trucks. In addition, we have a number of smaller markets such as street sweepers, yard trucks, locomotives and others. Particularly exciting is the use of natural gas in some very heavy applications, such as mining trucks and construction equipment. In other countries, we have started to see a push to use natural gas in marine applications, such as ferryboats and commercial vessels. This is a tremendous opportunity for growth of natural gas in the transport sector.
I even have a slide of an airplane in Russia that runs on natural gas, believe it or not. It was not commercial but rather a demonstration to prove it could be done.
In addition to the use of LNG as a transportation fuel, we also see LNG being used in remote industrial applications where we have no pipelines — factories, remote utilities and other such applications. You will find slides and pictures of these in your handouts.
Production and distribution of LNG is essentially identical to gasoline and diesel: The fuel is produced at a large plant equivalent to a refinery, transported in tanker trucks and delivered to fuelling stations.
The existing market in the United States is served by number of small- and large-scale LNG production facilities, all of which are generally located close to the fuelling station end-user locations. Ideally, we would like to see these plants within 100 to 200 kilometres of the end use, but hopefully not further than 600 kilometres.
Depending on the size of the fleet, fuel stations can range in size from very small to very large. The costs of these fuelling stations range from a few hundred thousand dollars to many millions of dollars. The largest fuelling stations can run $5 million to $10 million. This is substantially more than a typical diesel fuelling station and presents another barrier to the growth of the market, thus the reason we need incentives to get the market moving.
Senator Banks: Are there more expenses in operating, or just in capital?
Mr. Neandross: Just in capital.
Now that I have provided a brief background on the LNG market in the United States, I would like to give some examples of actual projects to highlight some of the success stories and the lessons learned and why we believe natural gas is really one of the only viable fuels for the heavy-duty truck sector, if not the only alternative fuel.
The first case I would like to present is a project called the Interstate Clean Transportation Corridor, ICTC. This is the most successful planned clean fuel corridor in the United States. A large picture of this project has been handed out.
This project is focused on building infrastructure to support over-the-road heavy-duty tractor trailers using natural gas. However, the lesson I want to highlight today is that we have built this project really on the back of return-to-base fleets, such as refuse trucks and transit buses — fleets that do not travel the corridors but come home every night. The strategy we have employed here is one that allows us to build the infrastructure and begin to connect these dots so that it is then available for the long-haul trucks. We found this to be a successful strategy and one that can be replicated in other areas around North America.
Similar to this, the City of Los Angeles provides us with another good example of how strategic infrastructure development can provide for the growth of the market. Los Angeles is a fairly large city, spread out over 1,200 kilometres. The city maintains more than 80 individual fleet yards and operates over 6,000 vehicles in 12 different departments within the city.
The first question faced by the City of Los Angeles in contemplating a transition to alternative fuels or natural gas was where to start. It was almost an unmanageable task.
We worked with the city to help them to focus on their refuse trucks. They have a uniform fleet of refuse trucks, about 750 in total. They are housed in six individual fleet yards, each with 100 to 150 trucks. These yards are located throughout the city. By focusing on these high fuel consuming uniform vehicles that come back every night, we were able to build the base infrastructure to support that operation.
Once these large stations are established, the city is then able to deploy all kinds of vehicles and use that infrastructure. In your packet, there are a number of pictures of these kinds of vehicles. We are talking about dump trucks, transit buses, street sweepers and all kinds of other vehicles.
Once we have the backbone of this infrastructure established, these six major stations strategically located throughout the city, we then start to fill in the gaps with much smaller stations. While this is a model that has been employed by the City of Los Angeles, I believe it is a model that can be applied in any major metropolitan city in North America.
Moving beyond these infrastructure models, I want to highlight a few truck projects that we are working on that show us that LNG for trucks is a viable technology and one that will facilitate the transition away from petroleum as the base of our economy.
My company has been working with SYSCO Foods Services for the last 10 years. It is the largest industrial food distribution company in North America, delivering food to restaurants, bars and large dining facilities such as you would find at hospitals, universities and other types of locations.
SYSCO Foods Services first approached us in 2001 asking about liquefied natural gas for their fleet. We started working with them to convert over to LNG. They have 215 trucks in their Los Angeles operation, about half of which are now running on LNG. What is significant about this transition with SYSCO Foods Services is that their Los Angeles facility is the largest in their entire North American operations. They deliver just under $1 billion of food every year from this one facility to their customers.
The important part that I want to highlight here today is that they are doing this with LNG trucks. They are comfortable with the technology, the fuel supply and the overall operation to run the single largest operation that they have in North America using natural gas. I think this is an important signal that we have to recognize in the development of the market.
Another exceptional example of a large leading fleet making a wholesale transition to natural gas is Waste Management. Waste Management is the largest private refuse collection company in North America. Like SYSCO Foods Services, we began working with Waste Management about 10 years ago to convert their San Diego fleet of about 120 trucks from 100 per cent diesel to 100 per cent natural gas. An LNG fuelling station was built. Since then, the trucks have been operating. After 10 years, we are now starting to see them replace first-generation trucks with new generation trucks. They are committed to the technology.
Since this initial transition in San Diego, Waste Management continues to deploy natural gas trucks throughout their North American operations. They now have over 1,000 units running and over a dozen fuel stations, and they will double that in the short term.
The Chair: In both those instances — SYSCO Foods Services and Waste Management — were there government incentives, in addition to your wise advice, to encourage them to make these transitions?
Mr. Neandross: There were government incentives.
Senator Plett: What were they?
Mr. Neandross: In the case of SYSCO Foods Services, the grants that we have been able to secure for them cover the incremental cost of the trucks, so that is the up-charge on the truck from what they would normally buy, namely, diesel. It is about $15,000 on average. Their fuelling station was about a $2 million investment. I believe we got them a little more than half of that in various grants. The other half was their own investment.
One of Waste Management's most recent fleet conversions took place in Seattle, Washington. In 2010, the company replaced 110 diesel trucks with natural gas overnight. This conversion was the result of a commitment the company made to the City of Seattle as part of a 10-year collection agreement. This agreement is a $1 billion contract, the largest such contract ever signed in the waste industry in North America. Similar to SYSCO Foods Services, this is a telling example of a company putting a $1 billion worth of business, their largest contract ever, on the backs of natural gas technology.
Mr. Chair, you asked about the renewability of natural gas. This next slide is a great example. Waste Management, in addition to being a leader in the use of natural gas, has also been leading the way in the production of natural gas from their landfills. They are capturing this methane gas and turning it into a truck fuel. As the largest landfill operator in North America, the company is turning what is an environmental liability, namely escaping methane gas, into a renewable energy source for their trucks. Waste Management is now operating its first plant in Northern California. It is a small-scale plant in its early stages. We are working with them to build a second plant in Southern California.
With the capture and use of methane gas, Waste Management is effectively running a zero-carbon fleet of trucks. The reductions in GHG emissions from a holistic perspective by capturing this gas and using it as a truck fuel in place of diesel are nearly 100 per cent. Of course, traditional natural gas already enjoys a 20 per cent to 30 per cent greenhouse gas emissions benefit over the most modern diesel trucks, so the renewable gas is simply taking this a step further.
Waste Management's efforts are terrific examples of corporate environmental sustainability. The company has used these successes to market itself to cities and other government agencies looking to improve their environmental profile through the contracting process.
Another example of a large LNG fleet operator that is using the GHG-friendly nature of their LNG truck fleet to drive business is Cal Cartage — California Cartage Company, LLC — the largest port truck operator in North America. We started working with Cal Cartage in 2006 to deploy LNG trucks in their Southern California operation. They have about 1,000 trucks running in Los Angeles and Long Beach ports. They have now converted nearly 400 of them to natural gas.
I should point out that the trucks you see in the slide, which was a picture taken at the ribbon cutting, the dedication of the first 130 units, were manufactured here in Canada.
When Cal Cartage's customers began to see them showing up at their door with these LNG units, they got very excited. In fact, they began to demand that Cal Cartage only show up with these LNG units and no longer bring the diesel. These companies, some of whose logos I have provided here, want to take the ``green credit'' for contracting with a responsible transportation provider, and one that uses LNG trucks, resulting in fewer GHG emissions, which they can report on in their sustainability reports.
Of course, Cal Cartage, seeing this interest, quickly developed some marketing materials to try to drive further sales using these trucks. The challenge they now have is that they do not have enough trucks to meet the demand. We are working on that.
As we have seen with Cal Cartage, we are starting to see the demand for natural gas trucks result from the demands of large retailers, such as Wal-Mart Stores Inc. for example, that are requiring their suppliers to reduce the carbon footprint of the goods that they provide. I believe that Robert Transport, the project Mr. Marsh mentioned and that was recently announced, is also operating using these principles, as they are helping IKEA to meet its sustainability goals via the use of these natural gas trucks.
Simply put, natural gas is really the only technology that can provide meaningful carbon emissions reductions from the truck transport sector. As the greening of the supply chain continues to increase, we see this as a continued driver for natural gas technologies.
Beyond the criteria pollutants and greenhouse gas emissions benefits, we are also starting to see an increased interest in the use of natural gas in the heavy truck sector due to the concerns about the availability, supply and cost of diesel fuel.
We recently started working with Kroger — The Kroger Co. — the largest grocery company in North America. Interestingly, our relationship with them did not start with the fleet department. I received a call from the vice- president of facilities asking me about natural gas trucks. Of course, I had to ask him why he was asking me these questions as the fleet was not his department or responsibility. His answer was that he sees natural gas as a more reliable energy source for them to run their entire operations. His responsibility is the distribution infrastructure and distribution facilities. He recently invested tens of millions of dollars in arguably some of the most sophisticated distribution facilities and IT structure out there. His point was that these investments are basically meaningless if he has a problem supplying diesel for his trucks. When he looks around the world at the geopolitical situation of the day, whether in the Korean peninsula, the Middle East or South America, he sees risk — risk based on their complete dependence on petroleum for his trucks. At the same time, he is hearing theories of peak oil. Whether that is today or in 20 years, it is very short term for a truck fleet operator.
He then looks around and sees developing countries such as China buying up massive oil contracts presenting even more risk to a North American fleet operator. To me this was an eye-opening moment. It showed that large corporations are starting to grasp the impact of their dependence on petroleum. When we have VPs of facilities thinking about risk and risk that would prohibit them from putting food on the shelves in the grocery stores, we need to pay attention. That is a significant wake-up call.
Like Kroger, UPS — United Parcel Service of America Inc. — has understood these energy challenges probably better than anyone in the fleet business. UPS operates a large fleet of airplanes and trucks. Combined, their fleet burns about 1 billion gallons of diesel fuel per year, so you can imagine that even a one-penny price difference in diesel is a significant impact to their bottom line, never mind the one- or two-dollar swings we have seen in recent years.
Because of this, UPS employs a group of energy analysts whose job it is to analyze and predict the future cost of energy and the impact on their business — one of the only fleets to employ people in these positions. These analysts tell you that the outlook on diesel is not positive. When you ask them about natural gas in North America, they are much more confident. This is one of the primary reasons why UPS has been so incredibly aggressive in moving to alternative fuels, and within the alternative fuels menu that they are considering, natural gas plays the dominant role.
It is also important to point out that UPS understands that the conversion of its 80,000 truck fleet will not happen overnight. This is a 20-year conversion process for them to move to something other than diesel.
We are talking about significant capital restrictions, fuelling infrastructure that needs to be built, personnel who need to be trained and many other pieces of the puzzle that need to come into play to make this transition. UPS understands that if diesel were to go to $3 a litre tomorrow, they could do nothing about it. We can do nothing about it. They need to begin the transition now if they want to run their fleet on something other than petroleum in 2030. The optimistic view on peak oil, by the way, is 2030 — the point at which our demand exceeds our supply capabilities.
If we use UPS as a proxy for the North American fleet of trucks, we see it will take 20 years to convert. Being that it is 2010, 2030 is a 20-year transition; we need to begin today. UPS understands that and is working toward that goal. They have been using LNG in their fleet for the last 10 years and have seen positive economic benefits. They have told us their LNG trucks are actually the lowest cost operation in their entire fleet.
Given the dynamics of the world oil market and the shale gas issues, as Mr. Marsh just explained, UPS expects that these economics will remain at least stable, if not considerably more favourable, in the years to come. The significant cost savings UPS has realized in the past and expects to realize going forward has led them to more aggressively pursue this technology. We are working with UPS now to try to put 150 LNG trucks in their operation between Southern California and Salt Lake City. These are some of the highest mileage trucks in their entire fleet, running 265,000 kilometres a year, burning over 100,000 litres of diesel per truck per year. This is about three times the normal average for a heavy-duty truck.
The reason UPS has picked this operation is because that is where they can realize the greatest gain in fuel cost savings. They are saving 30 to 40 cents per litre by using natural gas instead of diesel. However, even with these tremendous fuel cost savings, they still need incentives to buy the trucks. The trucks they are buying are two times the cost of a diesel truck. UPS needs to see a two-year payback for them to go ahead and make the investment, and even with the highest-mileage trucks in their fleet and very nice fuel cost savings, they still cannot get there. One of the things we do is seek out incentives for them to be able to make these investments and begin the transition. Hopefully in time, the cost of the trucks will come down, but we are not there today.
In addition to the large fleet operations and LNG fleet projects that I have reviewed this morning, we are starting to see a significant increase in the number of natural gas demonstration projects and investigations and inquiries from fleet operators in all four corners of North America. We are talking about fleets such as the Coca-Cola Company, PepsiCo Inc., Frito Lay, Wal-Mart Stores and other household company names that do not operate natural gas trucks today but have recently become interested and have started to explore the opportunity.
We have already reviewed most of the reasons. First, these fleets do not forget the sting of $130 per barrel for oil that they felt a few years ago. They have a significant concern about the future supply and cost of diesel in their operations. At the same time, for the last two years, they have been hearing a consistent message about the abundance and low cost of natural gas in North America due to shale gas development and production and this tremendous resource that we have.
For 10 years, they have heard Waste Management, UPS and other fleet operators extolling the virtues and cost savings that natural gas can provide. At the same time, we are seeing a large increase in the amount of available product coming from the truck manufacturers. All of these issues coming together right now are driving fleet operators across North America to look at natural gas, to begin to put their toes in the water and test these trucks, whether that is one, five, ten — small numbers — they are starting to look.
When they do, we see two things happen. First, the driver comes back and says, ``These trucks work pretty well. We can do this. I was able to make my delivery no problem.'' The technology has advanced to the point where it can do the job every day. Second, once the fleet operators begin to get an understanding of and a taste for those fuel cost savings, they become very interested. We have a combination of factors that provide us with the potential for the wide-scale proliferation of the technology in the North American market. However, we do need to find a way to help incentivize these fleets to make that initial investment.
As fleet customers have increased the demand for natural gas trucks and started asking more questions of the manufacturers, the manufacturers have, in turn, started to produce more options. This then allows fleets to make additional investments to meet their operational needs, and we hope this is the beginning of a self-perpetuating cycle.
We now see several truck products available in the market. That has not always been the case. As short as five years ago, if you walked into any truck dealer in America and wanted to buy a natural gas truck, they would have said that they do not sell them. That was just five years ago. Today, we have half a dozen individual products from half of the manufacturers, and each of those products comes in a number of different configurations. In the next 12 to 24 months, we expect new products to hit the market from other large international truck manufacturers, such as Navistar International Corp., Volvo and others.
This is another signal that I see in the market that this is starting to take place. It is important to realize that these large international truck manufacturers do not make these product development decisions lightly. They need a high level of confidence that there will be a market for the product. They need to think about the annual sales of each model they bring to the market, which must be around a thousand units at a minimum to justify the investment and the resources. They are seeing that, and they are making those investments. That is important for us to recognize.
As I hope I have been able to show this morning, the market for heavy-duty natural gas truck technologies is beginning to reach the early stages of maturity. We are beyond the early days of first-generation technology and research and development projects.
The technology is reliable and robust, and can meet the day-to-day needs of heavy-duty fleet operators. It is being used in large commercial applications where trucks are responsible for literally carrying out billions of dollars of economic activity on a daily basis.
If we are able to help overcome the high cost barriers to entry, fleet operators can realize and do realize significant cost savings to their operations. Those savings can then be invested back in their companies.
As domestic natural gas production continues to increase, fleets are becoming increasingly convinced about the long-term price stability of this energy source. Meanwhile, the fleets are being confronted with a challenging outlook when it comes to diesel. These factors are driving fleet operators to see additional reasons and opportunity to convert to domestic natural gas.
The market is well positioned to see a significant increase in the use of the technology. We have ready and willing fleet operators. They want to do this. They want to move toward natural gas.
Considering that the transition will take 20 years, we need to begin immediately. The benefits will be tremendous. We are talking about lower operating costs to the fleets and the creation of jobs to build the infrastructure, the fuelling stations to support these fleets and the trucks and the engines, all of which takes place here in North America. Environmentally, we are seeing the opportunity to reduce our greenhouse gas emissions by 20 per cent to 30 per cent, if not greater. It is a win-win-win.
Accelerating the market will require government policy and incentives. Until we see diesel at $2 to $3 per litre, which we do not hope to see for obvious reasons, to take this risk to move, fleets need help to justify the investment and realize the two-year payback.
The good news is that I think this transition is achievable. As Mr. Marsh pointed out, with the concept of the two corridors here in Canada, we have a tremendous opportunity in Canada to make this transition.
A map was printed for you. If we look at the minimum requirement to transition our heavy truck fleet from diesel to natural gas in the United States, we probably need to build at least 100 fuelling stations, more likely 200 to 300. Here in Canada, with the east and west corridors, you can do it with 20 or so strategically located pieces of infrastructure. You can begin to access a large percentage of the truck market with a relatively modest investment. Between these investments, incentives and policies, we can accelerate the market transition away from imported petroleum to domestic natural gas. It definitely can be done, for a relatively modest investment.
I know there are several analyses that have been done to look at this transition, and you have several proposals that have been presented to you this year. I hope some of the success stories we have been able to realize in the U.S. market provide some insight into how Canada might consider a transition to domestic natural gas for your transportation sector.
I appreciate you having me here today, and I am happy to answer any questions.
The Chair: We have less than 40 minutes left. Even at five minutes a questioner, we will not have time. Everyone will have one question. Try to keep the questions and answers crisp. Mr. Shaw, you can decide who will answer the particular questions.
Senator Mitchell: We appreciate having you here.
This is impressive. It says something that many people have been saying for a long time, that dealing with climate change does not have to be an economic disaster. Quite the contrary; it is the next industrial revolution. There are economic opportunities and powerful investment opportunities that will stimulate the economy if we deal with climate change. This is a positive, constructive, economic, commercial way to do it. You do talk about climate change, but it seems that it is not an overwhelming element in this. Why is that? You could drive this even harder if you dealt with the climate change issue and natural gas as part of the solution to it.
Mr. Shaw: I will ask Mr. Marsh to answer that from Encana's perspective.
Mr. Marsh: From a climate change perspective, the way it will happen is that we will work on the reduction of the criteria pollutants first — sulphur dioxide, nitrous oxide, the smog-creating issues, particulate-creating things. Those can be dealt with with natural gas, where natural gas vehicles eliminate almost all of that matter. When we talk about mortality due to air quality, we are told that a vast majority of that is caused by the criteria pollutants, and natural gas has a huge impact on that. The CO2 reduction is a longer-term effect, but natural gas for transportation is great for being able to help the health issues quickly.
Senator Mitchell: The climate change issue might rally public support and allow the government to do the things you are asking for in the political way. The incentives you are asking for are not unreasonable if you use the oil sands analogy. I am not down on the oil sands. We gave them tax incentives in the late 1990s, without which they would not exist in the way they do today. You are in a sense asking for the same thing, just quicker write-offs.
My technical question involves price. It is cheap now; if everyone converted, it might become more expensive, with more demand. That is what happened with diesel. There was a big differential, and that got crushed. Are the companies that you are dealing with considering the possibility that that differential might begin to crush and what that might do to the longer-term economic advantages of using natural gas as a fuel if demand begins to increase the price?
Mr. Neandross: I will let Mr. Marsh answer the question from a macro perspective. He is more qualified.
From the fleet perspective, the folks we deal with from day to day, in the short term, do not see the increase in demand being sufficient to warrant a correlation between the price of diesel and natural gas. It will take time to make this transition. Over the next 10 to 20 years, we will still have domination by diesel in the market and a much lower percentage of the market using natural gas. Their thinking is that, for the short term, we will not see those kinds of impacts.
On a macro level, and again I will let Mr. Marsh answer, we have more natural gas here than frankly we know what to do with. That will help address that, not to mention that it is ours.
Mr. Marsh: The abundance story is what you should be confident in. We do have this massive resource of natural gas. Our goal at Encana is to continue to push down the supply cost, to get better at producing it. We think long-term prices will be low, so our goal is to get our supply cost down as low as it can be so that we can be profitable and then still provide that low-cost energy into the market.
Senator Mitchell: I cannot ask about pricing carbon, but maybe someone else will.
Senator Lang: You are here asking for a subsidy to make this work. That always makes me take a step back because I wonder why we have to subsidize something that looks as though it makes a lot of economic sense. You have talked about tax incentives or subsidies, but you have not said exactly what you are asking of the government. Have you made a submission to the Government of Canada on to what you would like them to provide to be able to put this into operation? If so, would you table it?
Mr. Marsh: Yes, we have. I believe we have handed out what we call our one-pager, which gives you the details. Our submission is to allow the House of Commons Finance Committee to look at either an accelerated capital recovery mechanism or an incentive. We have proposed to use a higher percentage in the early years to get the market stimulated. We have recommended, for the first three years, having an accelerated capital recovery mechanism in place that would allow companies to get about a two- to three-year payout of that vehicle and pay out 80 per cent of the differential between the vehicle cost. After those first three years, it then declines as time goes on so there is less and less incentive.
We believe that once the trucking firm has the vehicle in operation, like its operation and are confident that that will happen, you will need less incentive because the price of that differential comes down over time.
Right now, as Mr. Neandross mentioned, only two or three manufacturers of these engines are of any material nature. We need to see more opportunities and more companies coming into it.
Senator Massicotte: On that same question, you used the word ``capital recovery program.'' Are you referring to what we call depreciation?
Mr. Marsh: That is correct.
Senator Massicotte: However, cars depreciate 30 per cent; it works out as being four or five years already.
Mr. Marsh: We are talking about trucks.
Senator Massicotte: I think it is 30 per cent.
Mr. Marsh: Thirty per cent.
Senator Massicotte: How does that make a difference?
Mr. Marsh: You take that from 30 per cent to a number such as 80 per cent in the initial years. That is what Quebec has done.
Senator Massicotte: It is not a tax credit but accelerated depreciation, really.
Mr. Marsh: Correct. It gets to that point of being the same thing, but, in this case, you are right, it is really just increasing the depreciation of that vehicle to recover the capital investment faster.
Mr. Neandross: I would like to add to Senator Lang's question about the reason for the incentive. The parallel is in the refuse market in Southern California where it is regulated; you can no longer buy a diesel-powered refuse truck in that market. That has been true for about the last 10 years.
Initially, we saw high incremental costs of the natural gas technology. However, due to increasing volumes, we have seen costs come down to the point where fleets are able to make the investment unsubsidized and achieve a two-year payback. It is a parallel to what we are trying to achieve in the truck market. Right now, unfortunately, we are talking about a couple of hundred trucks being sold in North America every year, and that is just not sufficient to get there.
Senator Seidman: Thank you for a substantive presentation. It has generated many questions, so it is challenging to ask only one.
Being from Montreal, shale exploration and discovery has become a big issue for us. It is probably very exciting and might offer us a great future. However, I would like to ask you a question about the potential negative side-effects resulting in serious environmental concerns.
Could you speak a bit about the effects of shale extraction and production?
Mr. Marsh: To jump right to the heart of the issue, many times people talk about fracturing and hydro fracturing. We have met with a number of environmental firms. What they mean by that is the whole extractive process. Can it be done safely? The actual process of hydraulic fracturing has been used for 60 years in our industry, and I would say that it is one of our safer operations.
When you drill a well, surface casing made of steel is cemented to protect the fresh water. There is then another string of cemented steel casing to protect the intermediate part of the hole, and another string of casing goes out into the production lateral, the horizontal lateral. Three strings of steel casing are all cemented across the freshwater aquifers, which are typically at the very surface, the top 500 feet. The probability of ever impacting the groundwater is virtually zero. I do not believe that is the issue that we need to consider.
However, we need to continue to work on the fact that we have evolved as an industry using water to do our hydraulic fracturing, which uses basically water and sand and a few minor chemicals to reduce friction. Our biggest challenge will be finding a way to that without having to use any water, or using less water in the process. That would be good.
The good news is that, once the well has been hydraulically fractured, which requires the water usage, you will never have to use water again for production. For 50 or 90 years, you will produce natural gas without having to use any additional water. Therefore, it is a one-time water sink. When you compare it to other industries or items, the amount of water we use in this process is not much more than the amount used for a golf course or something similar.
It has to be done safely; our industry has to ensure that we have taken into effect the comments of the residents. In every area that we operate, we have to hold stakeholder meetings to get their opinions and invite them to work with us together to make a joint plan.
As I look at my 30 years in this industry, I see us doing things that we never dreamed we could do 30 years ago.
We, at Encana, have one pad that is four acres in size, and we will have drilled over 50 wells off that one pad. That is a phenomenal amount of energy that comes off one small piece of ground. We have reduced our footprint in society, and we should take credit for that.
I believe it can be done safely and efficiently. All the stakeholders involved have to work as a collective and decide how to get the gas out of the ground.
Mr. Shaw: We have to do a better job of educating the public because there is a lot of fear of the unknown. When you look at the reality, it is far safer than people think.
Senator Banks: I have a couple of comments before my question, which will follow on Senator Seidman's. It is the old question of critical mass and economy of scale.
I do not believe the peak oil argument is a good one. I made a speech in the Senate last week about the dozen or so times that we have been told the sky is falling, that we are running out, and it will not happen. Encana's operation in Weyburn, Saskatchewan, is a quintessential example of the fact that we do not know where the end of that is, and it is not likely to be soon.
I hope you will include Highway 16 in your corridor in the West because truckers prefer it in many cases.
Following on from Senator Seidman's question, you have given us assurances, but I would like you to expand a little on hydraulic fracturing, not in terms of your use of water, but you obliquely mentioned the question of whether it will affect groundwater. Do we know for sure that that will not happen? I know there is no 100 per cent guarantee on anything. However, how confident are you that there will be no effect on groundwater? Were something to go wrong, it would have very serious implications.
Mr. Marsh: You bet. Again, the way I would look at it is that the process has been used for 60 years; we have been fracturing wells for 60 years. If it could create an issue, would we not have possibly seen it in the last 60 years?
Senator Banks: Would you have seen it? I suppose that is part of my question.
Mr. Marsh: Yes, we would have seen it by now. That is how I look at it from a practical perspective. This is nothing new to us.
I personally and my teams have fractured tens of thousands of wells. I have never seen an issue with the groundwater.
Senator Banks: If there was, how would you know?
Mr. Marsh: I will use the Piceance Basin in Colorado. We started that development in a brand new area, which reminds me of Montreal.
Senator Banks: That is where the south end of the Ogallala Aquifer is.
Mr. Marsh: Yes, there are big freshwater aquifers in places. We would go in to an area, and wherever we would drill a well, we would sample the freshwater aquifers of all the farmers and ranchers in the general proximity. We used a radius of half a mile as our distance. We would sample the water in every water well within half a mile of the well we were drilling. Then we would hydraulically fracture our well and get it into production. Then, over a period of time, six months later, we would go back and sample it again.
We know from our experiences and from the processes that are in place that we have not had any issues to date.
The other thing I would add, Senator Banks, is that when you are physically conducting the process of hydraulic fracturing, you are hydraulically fracturing an interval that is deep in the earth. It could be 10,000 or 15,000 feet into the earth. You are treating it at high pressures. If, for some reason, you were to burst all three strings of casings — and I will gave you almost a zero per cent chance of probability that that could occur — then you would immediately see that high-treating pressure go to a low-treating pressure because now you would suddenly be pumping into this shallow aquifer. You would see it in a minute, and you would shut down. I would say that less than a barrel of fluid would be pumped into that.
We set up our treating pressures so that, in the event you have a large change in your treating pressures, the job shuts down. We are protected in that respect. I am not concerned about that aspect. If you pumped one barrel into a massive aquifer such as that, it would have virtually no effect. The fluids we are pumping are basically water and sand anyway. I feel that we have properly mitigated the chances.
The Chair: You got the British Petroleum answer there.
Senator Neufeld: I live in Fort St. John, and I am familiar with the oil and gas industry. I know the water issue is big, and the water that you use for the fracking. As I understand it, some companies are retrieving up to 80 per cent of that water, because that water does not disappear down in those shale formations. It will come back up again with the gas, and you re-consume it. Is that correct?
Mr. Marsh: In many of our areas, where you get to the point where you have a full-cycle development, which is not always on the very first well in the hinterlands, you are able to recycle the water. For instance, back to the Piceance Basin example, probably 95 per cent of the water that we use is recycled. We will continue to reuse it, and that is a fairly standard practice. Certain areas are better at it than other areas.
Senator Neufeld: That answers the question about the use of water for fracking, and I know fracking has been around for a long time.
You spoke in your presentation about communications. I think the industry is doing a great job in communications on the oil sands. It is long overdue. What are you doing to educate the public, the average Fred and Martha who sit at their TV, about fracking 3,000 meters down, or 9,000 or 10,000 feet? It does not affect surface water. No one goes that deep for their drinking water, and, if they do, they will likely get saline water. What is your plan at Encana to get that message out? I am not referring to just the communities because where I come from, people are used to it; not in Quebec. I know you have to go to the community to talk to them. What you are doing generally to let the population know about this?
Mr. Marsh: That is a great question. We worked with three different trade associations here in Canada to create the Canadian Natural Gas Initiative. That initiative was formed last year and now has a budget, and we will begin to do broad-based education across Canada. We have just received the first set of quantitative and qualitative data on people's level of understanding of our industry. We just received it last week.
We will take that information and build a communications strategy that commences with not just conventional media. One of the things we know in the communications world is that the folks we have to really work with are the young people. They communicate with Twitter, Facebook and other things. Our strategy, and you will see it roll out this next year in Canada, will be a very broad-based education about the natural gas industry.
In the past, we have done a poor job of educating all of the population. We have done an okay job in new areas that we get into, but, even then, we can do a better job of educating people on that so that we do not have these issues arise. This is not necessary. If we had done a better job of educating and getting our message out, we would have had a lot less anxiety about the whole issue.
The Chair: We are into twittering on our dedicated website. If you had your ideal Twitter to go out after this hearing, I would like to know what it is, because we have our tweeters here. Give us a couple at the end of the hearing.
Senator Brown: Gentlemen, thank you for coming. I am pleased with this. I think you have two problems: first, the big engines and the transportation group, and, second, the gas stations that will supply these engines.
I wonder why we should not give tax deductions for the engines, first of all. Any big truck, no matter what make, can buy the engine they want when they order the truck. Most of them are Caterpillar, Detroit or International engines. At one time, International was running at 85 per cent of all the trucks.
I think that you said that it takes $10,000 to convert a car but $3,000 to buy it with the engine in it. With trucks, I think you said that it costs $50,000 to renovate a $250,000 truck. What price we can get it down to if we go directly to the engine people and have that engine come out already equipped for LNG? You have one third of the cost on a car if you get it new. Can we get that $50,000 down to $15,000 or $16,000 if we are buying the engine? It seems that the people who need the tax write-off here are the people who will build these engines. Can we do that, and would it be a good idea to try to get the tax rebates to the people that build the engines?
Mr. Neandross: Let me answer that in several ways. The $50,000 incremental cost for a natural gas truck is considering a new truck from the manufacturer, so a Cummins engine in a Freightliner truck. Most of that cost is actually associated with the fuel tank and the fuel system versus the engine. The engine still has an incremental cost to diesel. However, it is important to note that Cummins has said in public that, in like volumes, a natural gas engine will be cheaper to build than a diesel engine.
That has to do with the fact that natural gas is a much cleaner fuel going in. Natural gas is essentially methane — one carbon and four hydrogen atoms. If you look at the chemical chain for diesel, it is much more complicated. You must do a lot more to diesel these days to get it clean at the exhaust pipe.
The problem is that we do not have the like volumes, hence the need for incentives. Could you give the incentive to the engine manufacturers to effectively buy down the cost of that technology before the truck manufacturer puts it into the truck and sells it customer? Sure; that could be an effective way to deal with it. I think that would help. Engine manufacturers do have access to grant funds. We help them get these funds. Much of that is for R & D, demonstration and development.
Senator Brown: The last part of that question is what do we do to get the LNG stations? We need to know the difference between diesel and LNG. They carry 250-gallon saddle tanks on each side of the truck, so that is 500 gallons of diesel fuel. How far can LNG go with the same fill up? What distance apart will they have to be on the highway or on your corridors?
Mr. Shaw: I know we are short on time, but 700 kilometres will get you there. That is why we are looking at an LNG station in Edmonton to service Fort McMurray and one in Calgary. The distance is not a problem. In fact, they can go up to a 1,000 kilometres.
In terms of research, I would like to add that we have some great institutions in Canada. If we could do applied research on the storage tanks, we could get that cost down. One of the elements in our proposal to the House of Commons Standing Committee on Finance was looking at incenting some of the applied research to get those costs down.
Senator Frum: As a senator from Ontario, it is depressing to read that 70 per cent of sedimentary rocks have gas and none seem to be in Ontario. Do we have 30 per cent of the other kind, or have you not done any exploration in Ontario?
Mr. Marsh: Part of it is that. It is also good to know that 70 per cent has become really shallow by the time you get to Ontario. If you go right across the Great Lakes, Michigan has a significant play happening.
I am not an expert on Ontario geology, but there is production in the southern part of Ontario. I am sure at some point people will begin to look at it to see if we can make a go of it.
Senator Peterson: On your chart on page 11, you show natural gas at 8 cents a kilowatt hour and nuclear at 11 cents a kilowatt hour. This committee recently visited the nuclear power stations at Darlington and Bruce, and Bruce Power said that it was 5.6 cents. Why is there a difference?
Mr. Marsh: This is a chart created by the International Energy Agency, EIA, for North America. It is today's costs with plants entering service in 2016. If you decided today to build a plant, and it would take you five years, give or take, to get a permit for it and get it online, these are the costs. They have gone in and equalized all of this. It is a full- cycle view. I like to use it because it gives you a good look, full cycle, at both the fuel and the capital costs.
For instance, we own two natural gas plants in Alberta, and we provide power for 4.5 cents a kilowatt hour today. That is what our costs are at today based on cheaper gas.
These are projections for a new plant; if you were to make a decision today to build today, this is the way the economics would work out.
Senator Peterson: They are refurbishing now and can go out 25 years. I do not think it is quite a fair comparison. The cost can be lower than 5.6 cents a kilowatt hour.
The Chair: The point has been made, and the answer was given.
Senator Massicotte: Senator Neufeld told me last week that it probably does not include distribution costs.
At this time of the year, the budget is coming up. I am sure every industry is saying to the minister that they need more money and showing how many jobs they can create, et cetera.
To be cynical, you are talking a one- or two-year payback for the fleet companies on their incremental cover costs after taxes. If it is that good when the industry average is closer to 10 per cent or 15 per cent, not 100 per cent, why the need for a subsidy?
Mr. Marsh: On the trucking industry side, our focus on the incentive is more of a two- to three-year payback for them based on the accelerated recovery of it.
We need the incentives for them to take that risk. They perceive a new technology, and it is a risk; it is not established in their minds. For them to take that risk and put in infrastructure around it, they feel that they need that level of a payout to make it work.
Could it work at a three- or four-year payout? It probably can.
Senator Massicotte: There is nothing wrong with asking, right?
Mr. Marsh: There is that. However, instead of incenting at an 80 per cent recovery for the differential, that is a 50 per cent recovery. That is another way to do it.
Mr. Shaw: That adoption curve is important, but it is also important for a company such as Encana to make the millions of dollars of investment. Therefore, one goes hand in hand with the other.
The Chair: In terms of what you have asked for, which is set out through Budget 2011, have you had access to Minister Flaherty or the Parliamentary Secretary doing extensive budgetary consultations right now?
Mr. Shaw: We have made the formal presentation submission in August. Mr. Marsh and I made the presentation to the House of Commons Finance Committee, and Mr. Marsh attended the first round table with Minister Flaherty.
The Chair: Was that the one in Edmonton?
Mr. Shaw: That was the one in Toronto. It was the first one that occurred.
The Chair: Your message is being presented directly, then.
Mr. Shaw: We are trying. We are meeting with MPs and getting a good response in terms of understanding natural gas in this country. As I said earlier, we need to educate more.
Senator Dickson: Thank you for the excellent presentation. On behalf of all Nova Scotians, thank you for going forward with Deep Panuke.
On the benefits agreement for Deep Panuke, there is a supply vessel being built at the Halifax shipyard. Will that be powered by LNG and, if not, why not?
Mr. Marsh: That is a great question. To my knowledge it is not being powered with LNG. It is certainly something we can look into. LNG is available at the refinery at Irving Canaport, so it is available. Not only do we want to look at that vessel but also many other maritime vessels on the coast.
The Chair: Colleagues, I want to congratulate you all. We had 10 questioners, in addition to my intervention, within the allotted time. The witnesses were here early this morning and have been wonderfully communicative with us. I think they can see their message is being heard.
Mr. Neandross, you have told us about a potential win-win-win situation in the area that we are most interested in and concerned with.
Thank you very much for coming, gentlemen. Colleagues, I think the witnesses are available to have a chat with after, if you so desire.
(The committee adjourned.)