Proceedings of the Standing Senate Committee on
Energy, the Environment and Natural Resources
Issue 4 - Evidence - October 20, 2011
OTTAWA, Thursday, October 20, 2011
The Standing Senate Committee on Energy, the Environment and Natural Resources met this day at 8:34 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: I call this meeting of the Standing Senate Committee on Energy, the Environment and Natural Resources to order.
Our guests this morning have been in Ottawa for a couple of days, weaving in and out of the corridors of power and holding exhibitions on the Sparks Street Mall. I hope it has been successful and that you are now ready for the most important part of your visit here — at least in our minds it is the most important part because we are very anxious to hear what you all have to say since we were first introduced to your subject matter back in Montreal. That was when the people from Robert Transport gave us a pretty good outline of the project and the pros and the cons and the difficulties of having refuelling stations, as well as the difficult overlapping jurisdictions and all of the great Canadian issues that face business in this country.
Before we go further, I want to say this is continuing our study into the energy sector in Canada, with a view to developing a national strategic framework for making our energy system more efficient and more sustainable and cleaner. We have been at this for over two years. We are focusing down now towards the conclusion and it is our hope that we will have something in the way of a report toward the beginning of June of 2012.
The only other thing that remains, apart from continuing to hear witnesses from the various energy sources and groups, is to complete our national consultations in Alberta, Saskatchewan, Manitoba and British Columbia, and possibly the North, which we plan to do if I have good success on Monday night.
There are five of you, but I can see that the pivotal player on your team is Alicia Milner, President of the Canadian Natural Gas Vehicle Alliance. Under her enlightened and strong leadership the association has restructured and expanded its membership base, increased support for Canadian companies that are active in export markets and partnered with the broader gas value chain to promote greater understanding of the benefits of natural gas as an abundant Canadian resource.
Ms. Milner also serves as Vice-President of the Global Natural Gas Vehicle Association, NGV Global. She has recently been appointed to serve on Canada's National Advisory Council on Energy Efficiency, which of course is right down our street in terms of this study.
From the Vedder Transportation Group, Ms. Milner is joined by Fred Zweep, President; from Encana Corporation, Sam Shaw, Vice President, Policy Development, Natural Gas Economy, who is well known to our committee. Thank you for coming back, Mr. Shaw.
From Peterbilt Canada, we have with us Mr. Dan Kaye, Manager. Welcome.
From Westport Innovations we have Jonathan Burke. We did hear a lot about Mr. Burke's company. I believe it is based in British Columbia and manufactures these special trucks.
It seems you have all the bases covered in your group this morning.
I am David Angus from Quebec, the chair of this committee. Senator Grant Mitchell, of Alberta, is the deputy chair. From the parliamentary library we have Mr. Mark LeBlanc and Ms. Sam Banks. From Saskatchewan is Senator Rob Peterson; from Alberta, Senator Tommy Banks; from Nova Scotia, Senator Fred Dickson; from the Northwest Territories, Senator Nick Sibbeston. Our clerk is now known to all of you and all Canadians who watch us on the webcast. Whenever I look, I am never in the picture and I think that is just fine.
From British Columbia we have Senator Richard Neufeld; from Quebec, Senator Judith Seidman; from Manitoba, Senator Janis Johnson; from New Brunswick, Senator John Wallace; and the only elected senator as of now, Senator Bert Brown from Alberta.
We have started a little beyond our normal time because we usually have two panels, but I can see we have plenty of business here to keep us going until Senator Wallace's committee moves up to the table.
I believe Ms. Milner will make an opening statement.
Alicia Milner, President, Canadian Natural Gas Vehicle Alliance: Thank you, Senator Angus, for your kind comments and your welcome here this morning.
As noted, yes, we did have Canada's first SmartWay certified LNG tractor-trailer on the Sparks Street Mall yesterday. That display had been off and then on again with the weather. As it turned out it did go forward and we had a lot of interest, not just from parliamentarians but also from average Canadians going by on the mall over the day. Thank you for noting that. We are pleased to be able to bring that vehicle to Sparks Street. While it was not one of the Zweep trucks it was the Robert fleet, but you will certainly hear more about the Vedder project this morning from Mr. Zweep.
We are here to talk about smart truck corridors and the industry's vision of how the investment opportunity we have here can be leveraged significantly given the advantages Canada has on the energy and innovative technology side.
As you mentioned, the committee's draft report in June looking at sustainable energy certainly is very relevant when it comes to this subject and the use of natural gas in transportation. Those large issues of competitiveness, security and lower carbon economy all tie in with the subject that we will be discussing here today. Certainly the common thing in this industry is that transitioning to a lower carbon economy can absolutely generate economic, environmental and energy security benefits for Canada.
In terms of what natural gas for transportation offers, number one, fuel choice in a sector of our economy where there is no choice right now. While we are a net exporter of oil, we certainly have some regional vulnerability where refineries in Quebec and the Maritimes rely on imported oil.
Number two, reduced carbon emissions. Heavy vehicles, where we are going to focus our comments here today, are one of Canada's fastest growing sources of carbon, and there are very few options to reduce the emissions from this source.
Third, a new market for an abundant Canadian resource. Of course, Canada is the third largest producer in the world for natural gas. Opening up a market like the transportation market that uses 30 per cent of secondary energy use could be very significant for us on the resource side, and I know Mr. Shaw will speak further to that.
Finally, increased private sector investment, whether it is on the production for fuel, whether it is on manufacturing for components and stations, whether it is for vehicle assembly, and Mr. Kaye will speak to that from Peterbilt's perspective. A whole number of benefits can be derived by focusing more attention on this.
We certainly laud the committee for looking at this important issue of energy use, and we would encourage you to ensure that transportation is very much under your microscope. Typically, too, in the transportation space, it is the passenger vehicle that gets a lot of attention, and that is rightly so, as they are 96 per cent of the vehicles on the road, but we will focus today on the heavy vehicles. They are only 4 per cent, but a third of the on-road carbon emissions, so a very big element. We think we have a very powerful Canadian solution to address that.
The Chair: When you say "heavy vehicles," you use it as a generic term. Could you perhaps put it in its perspective?
Ms. Milner: More accurately, it is medium and heavy, although in Canada's national inventory it is basically tracked as light duty vehicles, which is automobiles, pickup trucks and SUVs, and then everything else goes into the heavy vehicle bucket. Whether it is an urban courier, a garbage truck, a tractor-trailer, these all fall into that medium and heavy vehicle, but for simplicity sake, we just abbreviate to heavy vehicles just like the national inventory does.
The Chair: All trucks.
Ms. Milner: Any truck and bus on the road would fall into this category.
As noted, we do have a number of industry members here today who will share their perspectives on this opportunity from the different angles that we are coming at here. First, on the fleet investment we have Mr. Fred Zweep, President of Vedder Transport. Vedder launched, in the last three weeks, the first LNG truck project in Western Canada in Abbotsford, British Columbia, and he will share more of those details.
Second, we have Mr. Dan Kaye from Peterbilt Canada. Peterbilt, as you may know, is one of only two truck manufacturing facilities left in Canada and absolutely our leader when it comes to alternative fuels, including natural gas.
Third, on the engine manufacturing side, we have Mr. Jonathan Burke from Westport Innovations. As many of the committee members know, Westport and their joint venture company, Cummins Westport, are the market leader when it comes to heavy natural gas engines in North America. They currently supply to more than 20 different truck and bus manufacturers. Right now, as Canadians, we own this market, essentially, with this very innovative technology.
Finally, we have Mr. Sam Shaw from Encana on the natural gas side of things as well as the related investments. Encana has taken a strong leadership position when it comes to the transportation market, and I know he will be sharing with you some of their initiatives to help move this ahead as a major energy sector player.
Before we get into the industry side of it, I did want to highlight for the committee members that the industry spent a good chunk of last year working on this report, and many of you may have seen it: Natural Gas Use in the Canadian Transportation Sector Deployment Roadmap. It was released by Natural Resources Canada in January of this year. It was really the result of a very broad stakeholder-driven process. Everyone understood the supply outlook for natural gas has changed dramatically in Canada. Then the question was, in transportation, where do we focus? What is the right first market to start getting at? The high-level conclusion was the medium and heavy vehicles that come back to the yard at night or operate in regional corridors. I am sure many of you are familiar with, on the natural gas side, always the challenge, like many alternatives, is infrastructure and the chicken and egg question. By focusing on these return-to-base fleets and the regional corridors, we can minimize that infrastructure investment and maximize the benefits and the transition to natural gas.
Besides the report being issued, I should also mention to the committee that in Budget 2011 there was a $1.4 million ecoENERGY for Alternative Fuel program included within the NRCan Office of Energy Efficiency suite of programs. That was a very helpful measure for the industry. That is two years, focused on codes and standards and capacity building related to education and outreach. The industry is currently partnering with the department to work on these activities, and the timing could not be better. Now that we have an LNG truck project in the west, we also have our first garbage truck project in Western Canada, and the LNG truck project out of the Robert fleet in Quebec, there is a lot of learning coming forward and a lot of need to understand how to systematize everything that is going on. We very much need our pioneers and trailblazers, like Fred Zweep, but we do not want the challenges. We want to lower the barrier and make it easier for fleets to get into this in a cost-effective and expedient way.
Before turning to our industry partners, I would like to highlight some of the investments that have been made in Canada in 2011 related to natural gas for heavy vehicles. They have been significant. First, in Ontario and Quebec is the Robert project. This is approximately a $60 million dollar, incremental investment compared to what they would have spent on a comparable diesel project, 180 LNG trucks. The first station was inaugurated on Monday of this week in Boucherville in the Robert yard. A second station will open in Mississauga within about a month, and then a third station is proposed in Quebec City with this project. Robert is one of Canada's largest for higher truckers. They will basically allocate a portion of their fleet, about 15 per cent. They know exactly where those trucks go, and they know that, with a thousand kilometre range and two stations and an eventual third, no problem, they can meet the demands of their customers and their freight movement. It is a great project, and what we see too is sort of a starting point for this smart truck corridor to the Windsor to Quebec City.
Second now, in Western Canada, investments there have been more varied and between both British Columbia and Alberta to date. I mentioned Canada's first refuse truck project. That was Waste Management in Coquitlam, British Columbia. There are 20 trucks there now. The trucks all come back to the yard at night and they plug in to refuel overnight. This model is well used in the U.S., and it is the start here in Canada and we expect to see much more. In that regard, the city of Surrey, British Columbia, was recently the first municipality to mandate the use of natural gas as a lower emission alternative as a condition of bid process. We see that as progressive and a lever that we will continue to encourage.
I will let Mr. Zweep go into detail on the Vedder project and the stations associated with these projects.
Finally, we have also seen investments to bring fuel into the market. Encana has invested in mobile liquefaction units to start to familiarize the market with LNG as a fuel for heavy trucks to help lower that barrier so fleets can get a little exposure before they have to make that much bigger commitment.
Finally, we have the Shell announcement that many of you may have seen in late September. Shell is building a liquefaction facility in Alberta. This is very noteworthy because this is part of a global strategy for Shell, but they chose Canada for their first investment. We had their general manager at a dinner event here last night with parliamentarians. He mentioned that investment. I am showing it as more than $50 million, but he disclosed it was $250 million will be invested in that facility. That is a fantastic win for Canada, and it will help bring fuel into the western market. Right now, the only LNG in the west is in British Columbia, lower mainland and Vancouver Island, so that is a real assist.
Finally, in conclusion, I would like to highlight, as I have indicated, there are opportunities in the supply chain for fuel for Canadian companies, vehicle components, vehicle manufacturing and stations. To give you a high-level idea of the benefit, though, as natural gas starts to penetrate the market, how big could this be and what could the benefit be? We are talking about new vehicles. These are all factory-built vehicles. If 5 per cent of the new trucks and buses sold in the next 10 years were natural gas, that would be about 18,000 vehicles, just to give you a sense, which is fairly modest. We estimate about 1,200 jobs and about a megaton of carbon dioxide equivalent reduction from one of the highest growth areas, so it is fairly significant for a fairly modest penetration level, and we think it is achievable. I am glad to have my industry colleagues here today to share with you how we can make that happen.
The Chair: Thank you. It was a clear and articulate presentation. We hear numbers bandied about by groups who come before us. You hear, to give you an example, that 55 per cent of the electricity in Ontario is generated by these nuclear plants. We hear that of all these greenhouse gas emissions in Canada, X per cent comes from heavy vehicles. Do you know what X is, and the potential for how much X would be reduced if your plans went nationwide?
Ms. Milner: I would like to give you the complete statement on that. What I can tell you is that since 1990, in the vehicle area, the heavy vehicles have accounted for half of the growth in emissions. I believe that is close to 20 megatonnes, but do not quote me on that. It is a very significant part and it is significant in the national.
I think, too, what is important to understand is while it is very important to encourage the lower emissions, the green technologies on the passenger vehicle side, since 1990 carbon from passenger vehicles has actually decreased; not the light duty pickup trucks and the SUVs, but for passenger vehicles it is declining. Therefore it is great that we have this path of technology moving forward to reduce emissions from the tailpipe on light duty vehicles, but let us also focus where we legitimately have a problem, and, squarely, the heavy vehicle is one where a lot of the natural gas elements are now in place to help address the rising emissions issue.
The Chair: You may have mentioned this, but in terms of liquefying the gas that is used in these vehicles, where does that take place?
Ms. Milner: Right now in Canada there are four utility peak shavers. Utilities will buy gas off peak in the summertime when it is the cheapest, cool it, put it into what is essentially a large thermos vessel and store it until the winter when they need it on the coldest days of the year. Those four are in Montreal, northern Ontario near Sudbury, Lower Mainland, Delta, B.C., and on Vancouver Island. That is it for all of Canada. The only other source of LNG at present is the Irving facility, the Canaport facility in Saint John, New Brunswick.
For many years Westport had the demonstration project in Ontario, in 2005 and 2006. With transport funding, SDTC — Sustainable Development Technology Canada — and other partners, there was a lot of excitement coming off that demonstration because it was very successful and the emissions benefit was proven out. The challenge was that we had no LNG supply. We could not pick up the thread at that point in Canada. Now we can. We now have a couple of utilities. As you know, there is Gaz Métro. FortisBC in the West has now moved into this space and said they have this fuel, are not using it and will invest to also expand peak shaving facilities to bring more of the fuel into the market. We are also now seeing private sector players, like Shell and others, who are looking at this opportunity and doing a direct investment. This is outside the utilities base, which I think will be extremely helpful.
The Chair: Thank you for that. You were going to pass the baton to one of your colleagues.
Ms. Milner: I will pass it to Mr. Fred Zweep, President of Vedder Transport.
Fred Zweep, President, Vedder Transportation Group: Vedder Transport is an adopter of the technology. To give you a brief history: Vedder Transport was founded in 1956. We are an international transportation organization. We have two core trucking companies. We have Can-Am West Carriers, which is a general freight hauler, and then we have Vedder Transport, which is a liquid bulk dry state or food grade transportation provider in Western Canada.
To give you an example, our business today is the largest milk transporter in all of Canada. We pick up 1.6 million litres of raw milk, direct off the farms in the Lower Mainland of British Columbia, and transport that into the processing plants for consumption. Today we employ approximately 650 people. We are a privately held enterprise, family owned and operated, and our head office is in Abbotsford, B.C.
The core decision for us to become involved in liquefied natural gas and take a look at the natural gas engine technology was really driven from two facets. We, as a user of traditional diesel fuel, needed and are continually pressed to look for alternative ways of reducing our expenses and delivering our services to our clientele. Up until now, transporters in the class 8 vehicle range, which we operate in, have had no other alternatives to utilize alternative fuels in our business model. That was one significant reason. We were looking for an opportunity to be able to deliver a lower cost, more competitive opportunity, into the realm of business in which we operate.
The second is to lessen the environmental impact. Today, with the greenhouse gas emission opportunities, by the utilization of natural gas, we will reduce our greenhouse gas emissions between 27 per cent and 30 per cent and that is a significant impact into the environment.
From a capital perspective, when you look at natural gas and the opportunity of utilizing the technology founded by Westport Innovations, there is a significant upswing in the cost of adopting natural gas engine technology into the fleet. Vedder Transport, in conjunction with our partner Peterbilt, has done a purchase of 50 natural gas vehicles. That is to the tune of $11.3 million of capital investment. The traditional expenditure, if we were to adopt traditional diesel engines, would have been $7 million. The additional capital required is $4.3 million on the uptick. That is quite substantial, and in an industry that has margins that are quite thin.
We started looking at our project 24 months ago and at our initial rate of return on that additional $4.3 million. A year ago, when we were defining what the initial rate of return would be, looking at a barrel of oil and the volatility of what happens on the daily market, we were looking at a 40-cent spread in terms of the return for every equivalent diesel litre we would consume. With the investment of the 50 vehicles into our fleet we are going to displace 500,000 litres of diesel fuel per month and replace that with a natural gas equivalent.
Twelve months ago, that initial rate of return would have been about 22 months. Because of the continued variability and the volatility of a barrel of oil, today the spread is 61 cents. It has grown from 40. It has now reduced our initial return of investment from 14 months to 16 months. That is what the return has been.
The other component is when people ask us if you are going into the new technology we feel like pioneers; Robert Transport in Eastern Canada and Vedder in Western Canada. It is a technology that has been around for many years. My colleague, Jonathan Burke from Westport, will explain that to you. We still are pioneers in this because our industry thinks so traditionally. Venturing off into a new engine technology is quite daunting but it is also extremely exciting.
When we looked at the life cycle and through our engineering groups compared the life cycle of a traditional diesel tractor versus a natural gas-powered engine vehicle, in our application — and they will vary depending on the application and the heavy-duty environment — the 50 vehicles we have traditionally acquired would show a 7- to 9-year life cycle. When looking at that 14- to even 22-month payback period, there are certainly opportunities on the upside from a business perspective.
With the natural gas burning engines, the difference is a cleaner burning fuel, which then will reduce the amount of residual that is left in the firing chambers from a very simplistic perspective. We see at minimum the same life cycle. We are actually in an 8- to 10-year cycle on the natural gas investments.
One of the challenges we have been faced with — and Ms. Milner has certainly exemplified them — is the distribution network or the limitedness of that network in Canada. For our project we are partnered with our B.C. utility company, FortisBC, and we have constructed a temporary fuelling station on our property. In late fall of 2011 we will begin the construction of a permanent fuelling station. Initially that permanent fuelling station will be for our own investment of our own equipment, but we certainly recognize that Vedder Transport will only be a small fragment of this industry in terms of adopters in years to come.
In closing, I am a slave to two groups: my staff and my clients. From a driver perspective, they are the ones who will use this technology day in and day out. On the first day of September, when we brought in the equipment and began to do our test trials in Abbotsford, we recruited a 50-year driving veteran from our fleet. Walter Martins is the gentleman's name. He will retire at the end of this year after 50 years working for our business. Walter was bestowed the honour of having the opportunity to drive the vehicle. When Walter was done he walked away and I said, "Walter, what did you think?" He turned around and he looked at me and he said, "Fred, it's just a truck," and it really is. That is really the simplicity of it at the end of the day.
The real keenness to that is that Walter is a gentleman who would have grown up through gas engines, through mechanical diesel engines and then the electronic engine of the diesel, and now he is operating a natural gas vehicle and he sees the same parallels in operating that equipment. That is one of the greatest rewards that we can have.
The other opportunity with the natural gas engines is the level of health and wellness to the staff operating the equipment. The decibel levels of a traditional diesel engine, although they have become greater and more efficient over the last 10 to 20 years, still offer a significant impact on the level of hearing. Our comments from our driving fleet are about the level of quietness of the vehicle. One of the things they have recognized instantaneously out of the gate is the level of quietness of the vehicle.
What are the comments from our clients? Our customers have driven us to go and find more opportunities. Our clientele that we service are the agricultural industries worldwide and particularly in Canada. They are very proud of the fact that we have taken the step forward to make the investment and to find alternative ways of continuing to drive efficiencies into their business, while at the same time recognizing that we also have to contribute back to the health and well-being of the environmental impact that we impose every day by operating our equipment.
The Chair: Thank you very much. I thought when you were talking about Walter and you asked him what he thought, that he signed up for another 70 years.
Mr. Zweep: I was hoping so.
Dan Kaye, Manager, Peterbilt Canada: It is just a truck, but it is a Peterbilt truck.
Good morning, senators, and thank you for taking the time to hear Peterbilt's story about our initiatives and commitment to alternative fuels, specifically LNG technology.
Peterbilt is a division of PACCAR, a multi-national technology company that sells vehicle around the world under the Peterbilt, Kenworth and DAF name plates. We manufacture our trucks in Denton, Texas; Mexicali, Mexico and our state-of-the-art facility in Sainte-Thérèse, Quebec. We are proud to be the only true remaining heavy truck manufacturer in Canada.
Protecting and preserving the environment is a core value of Peterbilt. As one of Canada's leading companies, Peterbilt recognizes its responsibility for reducing environmental impact of our products, and we continuously strive to be a corporate leader in environmental responsibility and responsiveness. We have introduced to the heavy and medium duty truck industry a wide range of natural gas and hybrid powered trucks, tractors and LCF refuse vehicles. Peterbilt also offers one of the widest range of smart waste certified products running on diesel, and over 80 per cent all content and components in a new Peterbilt are recyclable.
As diesel prices continue to rise, customers are looking for alternative fuel options without impacting performance or service. Peterbilt's commitment to LNG is solid. Peterbilt's design focus is to provide a wide profile of high performing, fuel-efficient products for our customers, and we now offer the most complete line-up of natural gas powered vehicles covering on-highway, regional haul and vocational trucks.
We offer a choice of two engines with LNG technology, the Cummins Westport ISL and the Westport HD heavy duty. This technology uses a domestically available, low-cost, cleaner burning fuel than diesel with no compromise on engine torque, power, fuel economy or driveability, in addition to reducing greenhouse gas emissions between 25 and 27 per cent.
Natural gas powered systems complement our other products, such as lightweight, aerodynamic, conventional, medium duty hybrid electrics and idle reduction systems, all of which exceed customer expectations and requirements.
There have been just over 600 LNG units sold in North America. We are proud to announce that Peterbilt has sold 232 of those units in Canada to two courageous companies, Robert Transportation in Quebec and Vedder Transportation in British Columbia. On behalf of Peterbilt, we thank you for not only your belief and commitment to this world-class technology, but also your courage to be the first movers in this ultra-conservative, competitive industry. We thank you for taking that leadership role.
The Chair: You said Peterbilt is part of the PACCAR of Canada group. Is PACCAR of Canada part of an international PACCAR group?
Mr. Kaye: PACCAR is based in Seattle, Washington, and we are a division of PACCAR, which is Peterbilt. Peterbilt Canada is a division of PACCAR
The Chair: PACCAR is a public company in Washington?
Mr. Kaye: Yes, it is.
Jonathan Burke, Vice President, Westport Innovations: Thank you for having us here this morning. I first want to thank my colleague from Peterbilt for doing all the marketing pitch on our wonderful product, so I do not need to get into that.
This morning, I would like to share with you the story of Westport. We are a relatively young company by comparison to Vedder and to Peterbilt and PACCAR. We were spun out of the University of British Columbia in 1995 with technology originally developed by a very forward-thinking professor of mechanical engineering at the University of British Columbia who, during the first oil embargo, came upon the idea that diesel engines needed an alternative fuel. He loved diesel engines, being a mechanical engineer, knowing they had tremendous characteristics of horsepower, torque, fuel economy, et cetera, and they were driving the freight transportation industry, the shipping industry, the rail industry. Leading up to 1995, he had gathered Ph.D. and masters students together at the university and had generated the technology that Mr. Kaye spoke about that is currently available in Peterbilt tractors. I do have to say that I am proud to recognize that Dr. Hill received the Manning Innovation Award just last Friday in Edmonton, in recognition for his years of innovation, and Dr. Hill continues to come into Westport three days a week and act as a professor emeritus at the University of British Columbia.
Our company, as many start-ups do, meandered through the woods for some time before we found business models that would work to try to deploy what was a relatively innovative yet highly disruptive technology into the trucking sector, and that is natural gas fuel. As my colleagues have indicated, there are some tremendous challenges to introducing natural gas in the trucking industry. There is need for the infrastructure, the technology, and, most importantly, the need for the customers to want to adopt it and adopt it well, and adopt it into their fleets such that it is commercially viable.
We settled on partnerships to do that — partnerships with companies like PACCAR and Peterbilt. Our first joint venture was with Cummins Engine Company out of Columbus, Indiana, in 2001. Our first revenues were in 2003. I am proud to say that just this past fiscal year, we had over $140 million in revenue and we expended almost $40 million in research and development right here in Canada.
Here in Canada, in British Columbia, in Alberta, in Ontario, and in Quebec, we employ over 300 Canadians doing research and development into this technology. Around the world, in operations that are spanning multiple countries, in Beijing, in India, in Columbus, Indiana, in Lyons, France, and other locations in the United States, we employ almost 700 people. As was mentioned, we are recognized as a world leader in heavy duty, natural gas transportation technologies, but we continue to push the envelope in light duty vehicles. We have partnerships with General Motors and with Ford Motor Company. We sell technology to Fiat, to Volvo and a number of others around the world to deploy natural gas vehicles worldwide.
We have not been terribly successful in selling product in Canada, until recently, with Vedder Transportation Group, with Waste Management, as Ms. Milner mentioned, and with Robert Transport in Quebec. To date, over 99 per cent of our revenues have come from around the world, with over 33,000 engines in service in cities like Beijing, for the 2008 Olympics, in Delhi, India, to help clear their air quality issues, Los Angeles, California, Washington, D.C., Boston, and the list goes on and on. It makes us very proud as an organization, and I can tell you the pride of our employees is tremendous, knowing that, right in our own backyard, in Abbotsford, British Columbia, the technology will be running and moving the milk that we drink and the sweeteners that go into our food products.
There was a tremendous sense of pride in Quebec on Monday morning when the station was opened in Boucherville. We were part of a Sustainable Development Technology Canada demonstration project in 2005-06, with Challenger Motor Freight out of Cambridge, Ontario. It was an incredibly successful project, but, as Ms. Milner mentioned, the fuelling infrastructure was a challenge. At the end of it, despite every intention on the part of Challenger and others to possibly pursue additional vehicles in service, we had a tremendous barrier of not being able to build out the infrastructure.
It is a great day for Canada that we are starting to see these trucks hit the road. They are using our domestic natural gas produced here right in country. We are cleaning the environment, we are reducing greenhouse gas emissions and, importantly, we are adding a tremendous economic benefit to an industry that can use every economic benefit they can get, the trucking industry, which moves every good we eat and every piece of furniture we sit on. Pretty much everything is moved by truck at some point in this country. Thank you.
The Chair: The 700 employees you mentioned worldwide, does that include the 300 in R & D?
Mr. Burke: Yes, it does. It includes almost 200 people in Europe, and then approximately 20 people in Detroit, Michigan, and other locations in the United States. We have our service teams in the United States. We have customers such as Wal-Mart, Coca-Cola, UPS and others in the United States that we support there.
The Chair: Thank you very much.
We will now hear from Mr. Shaw.
Sam Shaw, Vice President, Policy Development, Natural Gas Economy, Encana Corporation: Yes, sir. Good morning, senators, and, first of all, let me commend you on the leadership on the report that you did, Attention Canada! It is a fascinating report, and I am looking forward to the next one where you will talk about the claims of transportation using natural gas.
For these trucks, and for the innovation, they need natural gas. Encana is one of the largest producers of natural gas in North America. Clearly, Encana had seen a need in that if we have a lot of a secure natural resource, we need to do something with it. The natural gas economy was founded to look at promoting the demand of natural gas in a couple of key sectors, transportation and power generation. Since the last time I addressed this committee, I can tell you, there is more natural gas being found today than there was yesterday. In fact, there is a new record being hit in the U.S. for production of natural gas, and it has reached 66 bcf per day, which is a new record for the U.S.
The Chair: With this increment, are we talking about shale gas?
Mr. Shaw: Yes, some of the gas being found, particularly in Canada and the U.S., is shale gas. It has come about because of the technology. There is technology in the upstream and downstream operations of natural gas. Canada has been a leader in terms of looking at that.
One of the interesting aspects to natural gas is that it is abundant, and, because of that abundance over the last four or five years, it has lessened the price, and that is what made it competitive for the trucking.
We are also showing leadership with some of the partners we have in the industry on the upside. We signed a contract this year with Heckmann, and that is 200 trucks. Again, this movement is growing significantly. There is an embracing of looking at using natural gas for transportation, but I would also say that it is not only on-road but also off-road, and it is in our operations. We are using drilling rigs that are now running on natural gas, and they are quiet, efficient and cost effective.
We also found that one of the clear gaps in the utilization of natural gas, which has been alluded to before, is the infrastructure. How will you fill up? We are working on a number of initiatives. At Encana — this is a first in North America — we have built two mobile refuelling trucks to service the trucking industry. This has been deployed and they are operational now.
We are deploying CNG stations. We are now into our sixth station, and, for the senators in Alberta, we opened up the most recent one in Strathmore, Alberta, in September. Millions of dollars are being invested by companies in terms of infrastructure and production.
The other element regarding the deployment of natural gas is that we believe it is important that we show by example. By 2012 next year, we will have 200 of our own fleet operating on natural gas. Again, I think it is a testament to our belief in natural gas, and the partners we work with will also be deploying their vehicles into natural gas.
Suffice to say that natural gas is abundant, clean and reliable, and it is a domestic resource.
The Chair: We think of your firm as a natural gas firm, and we read the papers like everyone else in terms of the price of gas and the outlook for the gas sector at the moment. I know we are here to concentrate on the LNG truck, but I am giving you an opportunity here in front of the CPAC network: What are we to believe in our energy study in terms of the outlook?
Mr. Shaw: Let me preface it by saying that anything I say that is future oriented you have to take with caution, if you are a present or future investor in Encana.
It is important to realize, and it was alluded to earlier, that the uncoupling of the price of oil and natural gas has come about because of the massive supplies. This is not just in North America; this is global. There is natural gas in Poland, Germany, offshore Israel, Australia and China. In fact, Australia wants to become the number one exporter of LNG in the world, again, supplanting Qatar.
What we see, obviously, is that the prices will remain low, even when you start looking at diversification of the marketplace, looking at LNG for Asian markets and so forth. Again, I think it is predicated on the fact that there are massive supplies, and if you start increasing the demand, I expect that you would find more reserves of natural gas, but it takes the demand side to increase the exploration side.
The Chair: Thank you very much. I hope you will forgive me for that question.
Mr. Shaw: I will. Thank you so much.
The Chair: You did not ask me for that in the elevator. It came directly from my inquisitive mind.
Is that it, Ms. Milner, in terms of your team?
Ms. Milner: That is it, thank you.
The Chair: We will move to our deputy chair, Senator Mitchell.
Senator Mitchell: Thank you very much. This is one of those presentations that is very inspirational. So often when we are discussing what to do about climate change, there is always a downside, for example, it is not commercial or it is dangerous, but there does not seem to me that there is any particular downside. Maybe I am missing something here.
My first question is about the estimate of maybe 5 per cent of heavy vehicles by 2020. Why 5 per cent? Why not 50 or 75 per cent?
Ms. Milner: I guess that goes back to Senator Angus's earlier question. I think the reality is we are not quite starting from zero, but we are pretty darn close. Right now, natural gas use in transportation is less than a tenth of a per cent of total domestic demand for natural gas. Could it be much higher than 5 per cent penetration? Absolutely.
Of the 36,000 buses and trucks sold every year in this country, how many are returned to base? How many operate in regional corridors and could be a fit? Yes, it could be quite a bit more than that 5 per cent, but we are also cognizant of understanding the need for many things to move in parallel. Now that we have our early leaders here on the fleet side, we have the manufacturers engaged, but they also have a network of dealers and having to ensure that everybody is on the same page so that whether you go to your dealer in Moose Jaw or Halifax, you can get the right information about the alternative fuel, for instance. There is a lot of bringing everything to the same level to support that market development. That is a big focus of the work with Natural Resources Canada.
Could it be higher? Absolutely. I think we also see the need to put some of the fundamental building blocks in place and ensure there are no barriers or minimize those barriers for execution, like the Vedder Transportation Groups of the world.
Senator Mitchell: Mr. Zweep, your numbers were, I think, a marginal extra investment of $4.3 million for your project. Now your estimate is that you would recoup that, I think, within 14 to 16 months. Just to make that clear, you will pick up an extra $4.3 million by doing this with 50 trucks in 14 to 16 months.
Mr. Zweep: That is correct.
Senator Mitchell: That is like found money.
Mr. Zweep: That is correct.
Senator Mitchell: Why is everybody not doing this? Is it the psychology of the industry? You mentioned the word "conservative" a couple of times. There is resistance to change everywhere. It seems when the potential is so significant, obvious and quick, what are the risks when you make this decision? Is it that natural gas prices will go up much more quickly so that the cost savings might not be there?
Mr. Zweep: In regard to being a provider and being involved in the transportation service of heavy-duty vehicles, our industry is extremely traditional and, in terms of adopting new technology, very conservative. It is traditionally "who will put their toe in the pond first," and then everybody sits on the sidelines and watches.
We know that we do have fleets around North America, and particularly in Canada, that are observing the Robert rollout, as well as the Vedder rollout in British Columbia, and every business day for probably the last four months not a day goes by when I do not field a call of inquiry from a traditional transportation provider in Canada. At the end of the conversation they say they will wait to see how the rollout goes, which goes back to the traditional nature and the conservativeness of our industry.
Ms. Milner: To add to that, the other real challenge with natural gas as a transportation fuel is scale. If you need a station to refuel your vehicles, and assuming that is a private station, you cannot start with two or three vehicles. You cannot make those numbers work. You have to start with 15, 20, 30, then you are in the zone where that all-in costs on that dispensed fuel, including the capital for the station, is below diesel.
I would remind senators that what is important here is not so much the absolute price of the natural gas, but that differential with crude oil, which has for the most part always been in place and now has widened significantly. It is a very big step up, and I believe Mr. Kaye said in these first fleets it is "courageous" for the steps they have taken. That is the right word. They have had to take a huge step up where others have not have even touched it, so great credit to them.
Senator Mitchell: Congratulations and thank you for doing this because from my point of view we need this kind of leadership in this important issue of climate change.
As you were speaking about the scale and the need for this huge step up, I think about the oil sands. You talk about a huge step up. The oil sands never would have begun when it did and perhaps much later, if at all, had it not been for a collaboration of government and the private sector. The government of the day had a 12 per cent stake in Syncrude. They started it. Then in the late 1990s the government of the day changed the tax structure so that the oil sands just took off and are a huge engine of economic development in Canada.
This is a rhetorical question: We do it for that industry, but here is yours, here is tremendous possibility, we make these things in Canada, and it strikes me that some of the technology is Canadian, there are jobs everywhere and we could be leaders in the world. If you were the prime minister, what would you do to make this happen way faster?
Ms. Milner: I would absolutely introduce a time-limited tax credit that targets 50 per cent of the incremental cost of the vehicle. Share the risk with the fleet but lower that barrier to adoption. We want everybody who is a partner in the thing to have some skin in the game and that is how you would get at it, by a shared tax credit on the incremental cost. While we did not bring forward that particular ask or recommendation to government in this budget cycle, because the government is obviously in a focused belt-tightening phase, we do feel that this sort of measure over multiple years is the right approach. We need to send a signal of certainty. While programs are wonderful for front-end demonstration, et cetera, they do not achieve that certainty in the market. If the fleet looks like one week it is there, six months later it is gone, that actually has been counterproductive.
This year we had the opportunity to appear before the federal Finance Committee and we are recommending, besides implementing the recommendations of the road map, to also work with the alternative fuel industries to determine what is the right measure. We know these technologies are there, not only in natural gas and increasingly commercial, but they are not moving into the market. I am sure many of you have heard that statistic on hybrid passenger vehicles: 3 per cent of the market after a decade. How do we encourage some of these low-emission technologies to get in the market and send that right signal? I very much agree though that a time-limited use of the tax system is probably an appropriate signal. That is where we have put the focus in those discussions.
Mr. Zweep: Definitely we would concur.
Senator Mitchell: When you say a tax credit, are you saying a quicker tax write-off so there is not a net loss in revenues to government?
Ms. Milner: No, it is a deferral. That is correct.
Senator Mitchell: Excellent idea. I wonder if we did not build prisons, maybe we would have the money. Sorry, only kidding.
The Chair: Senator Mitchell of course, as Leader of the Opposition in Alberta, supported the development of the oil sands. I want to thank you, senator, for raising what government incentives could be afforded to assist you. I would like to complement that by asking where there are any, and what barriers in terms of regulatory barriers are in your way, if any, which the government could remove in order to alleviate the situation?
Mr. Shaw: Maybe I will comment on that to give a specific example and then extrapolate that to some of the recommendations we have had to the Finance Committee. The first is we had a part made for a fuelling pump that was to be implemented in Strathmore. Although it was made in Manitoba and passed the Manitoban certification, it did not pass the certification process in Alberta until another three months.
We talk about a competitive edge. I think the interprovincial standards need to be more aligned. Also, the standards in the United States, both in CNG and LNG, need to be aligned. I would strongly recommend that the regulatory coordination council focus on this. Some of the barriers are indeed the standards themselves, therefore we need to pay due attention to that.
The other barrier is we forget about the partnership. Senator Mitchell was key in pointing out that the oil sands came about because of a partnership. That is where we need the leadership of government and industry to work together to create the natural gas economy in Canada. It is absolutely critical that we take the leadership position in working together on how we can incent an industry for all our goods, for all our prosperity, for all the programs that need to be funded, from looking at the revenues that will come from a natural gas economy.
The final thing I would say is that when we talk about barriers let us remind ourselves about adoption curves. It took seven years for SUVs to really enter the 12 per cent marketplace in the automotive industry. It does take time. In that time, however, we need leadership and we need to be working together, whether it is looking at the applied research that has occurred and operationally to commercialization, to the deployment and to the production we need to be working together.
Senator Banks: Senator John Buchanan, who was for many years the premier of Nova Scotia and was for a long time a member of this committee, never failed to make a direct connection with a witness. He would ask if they were from a particular place and then make an assumption.
Ms. Milner, are you the Edmonton Milners?
Ms. Milner: No, I am not.
Senator Banks: John was better at it than I. You are an equally good presenter, Ms. Milner.
Ms. Milner: Thank you very much.
Senator Banks: We appreciate your being here.
I hate to get technical but I will get that technical thing out of the way in the first place. If you were after the kind of incentive that Mr. Shaw has referred to, would you want it to be — and I would ask this question of Mr. Zweep — a straight business write-off, a tax deduction, or would you want it to be accelerated capital cost allowance or what? What would be your preference?
Mr. Zweep: The preference would be an accelerated capital allowance.
Senator Banks: If you are to recoup $4.3 million, which is the additional capital cost, in 14 months, does that mean that in the next 14 months there is another $4.3 million that will fall directly to your bottom line? I assume this comes mainly from fuel savings.
Mr. Zweep: Definitely the assumption can be drawn that there will be a $4.3 million enhancement to the bottom line of the operations of the business but in fact that is not true. In fact, that $4.3 million will go back to share with our customers in assisting them in delivering a lower cost component of their cost of doing business.
Today diesel fuel represents the largest cost component in the cost of doing or completing a transportation transaction. We are being challenged on an ongoing basis to find alternative ways of reducing that cost on behalf of our clientele. Our clientele, and ultimately the consumers of goods, will be the beneficiaries of that lower cost delivery.
Senator Banks: In short, you will be more competitive.
Mr. Zweep: That is correct.
Senator Banks: Mr. Shaw, you mentioned LNG and CNG. ATCO, among other people, have had fleets operating on CNG, as many taxi companies did for a long time. What are the advantages of one over the other, if any?
Mr. Shaw: Clearly CNG is usually used for the passenger vehicles in terms of looking at the tank size and so forth, and LNG for the larger vehicles. Again, it is storage and distance. Mr. Burke can comment on the technical side of that. It is important to recognize that, as we start to look at the OEM design, which is so critical, you can build in the design for whatever fuel, whether it is CNG or LNG. That is one of the things we are starting to see with the OEMs in the U.S. Ford, Dodge and GM have announced pickup trucks that will be operating on CNG. Those pickup trucks can incorporate tanks that would allow them to operate on that. That is one of the elements to that.
Senator Banks: We have a standing rule that the use of an acronym without spelling it out costs a buck into the pot. What is OEM, please?
Mr. Shaw: Original Equipment Manufacturing, and I apologize, Senator Banks.
Mr. Burke: Peterbilt is an example of an OEM. There were two other acronyms. Liquefied natural gas, LNG, is natural gas just like we use in our homes but it is super cooled to approximately minus 190 degrees Celsius, and it turns into a liquid. It allows us to store natural gas like for our barbecue or cook top in a much smaller space. It compresses it down into a 600 times smaller space than if you were to have it just coming through a line at ambient pressure. Compressed natural gas in Canada is 3,000 psi, in the United States, 3,600 psi, to give you an idea of the irregularities or dissimilarities we have in codes and standards. That is basically taking natural gas and compressing, using a large compressor, and then putting it into something that looks like a scuba bottle and putting it in the trunk of a vehicle or between the frame rails. Regional haul trucks can use CNG, but the moment you get to a truck where you might want to be pushing the boundaries of 600 to 1,000 kilometres of range, you really need LNG to be able to fit enough fuel into a small enough space so you are not starting to constrain the ability of the truck to do the work it was intended to do.
In addition to LNG and CNG, there is also renewable natural gas. Companies across Canada are exploring this, and we have companies that are members of the Canadian Natural Gas Vehicle Alliance who are leaders of this around the world. Renewable natural gas is natural gas that is obtained from sources such as waste material, sewage treatment plants and landfills. Even forest products as they rot on the ground generate methane that can be captured and used for natural gas production.
Senator Banks: Ms. Milner, Mr. Shaw referred to the exponential new findings of natural gas everywhere in places where 20 years ago no one thought there was any. It is a factor, but we have to be concerned, do we not, with establishing a domestic market for our natural gas, because it is entirely conceivable, in fact if not a certainty, that the U.S. market for our natural gas is going to very substantially diminish in the very foreseeable future?
Ms. Milner: That is true. I believe the figure is that our exports are down about 20 per cent in four years to the U.S. market. We expect that trend to continue. Just even to look at that very modest 5 per cent penetration for natural gas on the heavy vehicle side, and we included this in our federal pre-budget submission, that would offset about 8 per cent of that decline we have seen in the last four years. That is a fairly small, targeted measure but actually material in the broader context for Canada. This is absolutely a challenge, and we will see it play out regionally where you have the Ontario and Quebec market sitting above the Marcellus shale. This poses a particular challenge for Alberta gas coming across the trans-Canada transmission systems. There are lots of challenges ahead for this resource, unfortunately, in many respects, because of the emissions benefit of it and the affordability, but things are shifting quickly in North America here.
Senator Brown: I thank you both for your presentation this morning and the one I got last night. I notice there is not a bottomless glass of wine with what you are presenting this morning as there was last night.
I do want to focus just on Peterbilt trucks. I wanted to know what the cost of a Peterbilt tractor will come out at the door, at what cost, if you could tell me that. I would like to know something about whether you have — I know you have Westport Innovations, or I think you called it motors?
Mr. Kaye: Westport is a partner in this technology.
Senator Brown: What other motors are you willing to go with, like GM, Caterpillar, Cummins, John Deere? Are you able to put those in a Peterbilt truck, or do you have only certain ones?
Mr. Kaye: For the first question, without LNG technology, our trucks come out anywhere between 80 to $120,000, approximately. With LNG technology, you are talking about anywhere from a 70 to $75,000 increase on top of that. The cost of entry is quite steep, and that is one of the barriers going into this for companies like Vedder and Robert.
As for the other engines that we do, Peterbilt and PACCAR are associated with Cummins, and we have our own engine. It is a PACCAR engine. The technology that we developed with Westport, who is our partner, is with the Cummins.
Senator Brown: I guess the most important thing for you people will be the service stations that we talked about last night, like from Edmonton to Calgary and Red Deer. Those corridors will be the most important ones right across Canada in order to make the trucks worthwhile in terms of the extra cost. Are there plans now for points in Ontario? They are using it in Quebec already, so there must be corridors there.
Mr. Kaye: In terms of serviceability of these trucks, for North America, when we talk about the truck industry, you just cannot talk about Canada alone, because these trucks go north and south. The PACCAR dealer body has over 250 service locations across North America. We are set up currently right now to service LNG trucks. There is a significant cost to bringing these service stations up to a standard to repair these units. Not only is there another cost barrier going into this but, for our dealers, there is a cost to upgrade the facilities to make LNG a serviceable shop.
Senator Brown: Right now, with the excise tax the way it is, it is a pretty good support level for you over diesel right now.
Mr. Kaye: Absolutely. We have to realize, too, for this technology, for Peterbilt being a first mover, this is a great and tremendous opportunity for us too, so we are seeing a lot of value-added to bringing in Westport and selling it to great companies like Vedder and Robert.
Mr. Shaw: Senator Brown, just as a follow-up to that, one of the interesting components that Senator Banks brought up was crucial. When we start looking at the competitive edge, I would put it into the context that Canada needs to compete. Certainly, as you see the deployment of natural gas in the U.S., trucking folks in Canada need to compete with the U.S., and they are further along in embracing natural gas than we are in Canada. I am sure my colleagues would agree. However, there are also, I think, some aspects in the U.S. that are very clearly incenting the rollout of infrastructure. There are state incentives for infrastructure being built, and the nat. gas bill in front of Congress also has a component in it that is looking at the infrastructure.
As we are looking at the competition, I think you are starting to see how the U.S. incents the industry to look at natural gas for transportation. I remind you that 70 per cent of the foreign oil coming into the U.S. is for transportation. Again, it is a very important component to that.
Senator Neufeld: Thank you for being here.
They were very comprehensive reports that all of you gave. It is refreshing, as Senator Mitchell said, to tell us something that I have always dreamed about, and that is using natural gas for transportation. I do not want the chair to chastise me, but I want to go back to incentives and then talk about LNG.
About six or eight years ago, we were going to import LNG from other parts of the world to supply Canada's needs. Encana will know very well, Mr. Shaw, that the Province of British Columbia actually created all kinds of incentives — not the federal government, the province — to encourage shale gas development, which had been developed in Texas. That has changed now. Encana and their partners have received an export permit from the National Energy Board to export LNG from Kitimat. That is a huge change in six to eight years. All of these things are pretty new on the scene, but governments have been involved, and the Province of British Columbia is one that has stepped out with fracking, looked at all those kinds of things through our environmental assessments and worked with Westport, a very good British Columbia company. I know that because I was there and involved with it directly. We started something in Canada, and I think now we have to continue with those incentives or the help for the trucking industry, fuelling stations and so forth across Canada because I think it is the fuel of the future. It is the cleanest burning fossil fuel we know, and we will have it for us for decades to come, regardless of what some people say. All of your work on this is much appreciated. We need to continue to work with you.
Mr. Zweep, on a mileage for a truck burning diesel fuel, as compared to what it would cost for just purchasing the natural gas to replace the diesel fuel you would use, would you have that number?
Mr. Zweep: Depending on the fleet application, today, the cost of a diesel litre in British Columbia for what we purchase will be approximately $1.15 per litre. In our heavy use application where we will be utilizing the natural gas equipment, we achieve about a 4.5-mile per gallon, so in actual cost, it will cost us approximately one dollar for every mile that we travel in utilization on a diesel equivalent today.
In terms of the natural gas component, the cost for a diesel equivalent litre of natural gas in our application will be in the high 50 to low 60 cents per diesel equivalent litre, based on today's ratios. We have seen that spread grow by 21 cents over a year ago. Twelve months from a year ago, the spread for a diesel equivalent was approximately 40 cents.
One way to do the mathematics is if you take a barrel of oil at 45 gallons, on the U.S. diesel equivalent, it would be 170 litres. If you take today's trade of a barrel of oil at approximately $88, that cost per deliverable litre per diesel would be approximately 61 or 62 cents. Today, with natural gas trading at about $3.61, your diesel equivalent litre of natural gas is around 13 or 14 cents.
Then over and above that, you then have your taxations and you have your infrastructure, and that is how we build our models, based on the costs, when we are doing the comparison between diesel and natural gas.
We have a comprehensive study within our business for over 15 years. We track the price of diesel fuel, as it is our largest cost component of doing business. Year over year, taking out the highs and the lows, diesel fuel climbs an average of 8 cents per litre per calendar year.
Senator Neufeld: That is significant. I thank you for those numbers.
I would also be remiss if I did not put a plug in for B.C. gas, not just Alberta gas, the two largest basins in Canada and North America that we know of today, both the Horn and the Montney, which in Canada is a huge producer of natural gas. That is where a lot of companies are investing $5 billion a year just to develop that in northeastern B.C. There are some huge things happening out there.
With respect to fuelling stations, you are building one on site. That would be owned by you?
Mr. Zweep: That is correct.
Senator Neufeld: What kind of costs are you looking at, if you do not mind telling us? If you do not want to, you do not have to, either. That would be for a station that would fuel the 50 trucks that you are bringing in.
Mr. Zweep: On our property, when you take in the infrastructure cost of the mechanical operations and the associated property, you are in the range of between $4 and $4.5 million.
Senator Neufeld: I wonder what the installation costs would be for a service station that dispenses diesel and gasoline in today's world. I would bet it is probably not far from that. Did you experience any problems getting permits?
Mr. Zweep: No. Our approach was very collaborative, and when we began the foray into looking at adopting the natural gas, we brought all the stakeholders involved. We went to our municipal, civic and provincial governments, and they have been extremely supportive of the dynamics of what we are looking to accomplish, and we have had great success with it.
Senator Neufeld: When we had Mr. Robert testify, he said one of his biggest problems was trying to get stations or a station in place to fuel their vehicles.
Who do you think should be building these stations to service LNG vehicles across Canada? Where would we suggest in a report that we have that says who should be doing that, putting aside whatever tax concessions governments give? Who should be doing that?
Mr. Shaw: Let me speak on behalf of Encana. Our position is clearly that private industry should be doing that. We are doing that across North America, and it is self-interest that we are building them in conjunction with our rollout of our own fleets, but we are then starting to look at making that more available to our partners and then eventually to the public.
I think that is a key component in terms of industry making the investment for doing that. There are some more fundamental aspects to looking at the whole distribution network. You have referenced stations. In Canada, although I cannot quote you the numbers, the number of service stations has been on the decline. Part of that is based in terms of the competitiveness, but if you start thinking about changing the distribution, and I will reference back to a comment I said earlier about our mobile refuellers: go to where the demand is. Therefore, we go to a trucking company and can refuel, or, better yet, looking at the passenger side, we are looking at home refuelling with our partners in the U.S. If you have a gas barbecue, why not fill up your Honda Civic that runs on natural gas? I think the distribution channels are changing, and that may involve the utilities, as opposed to looking at just companies like Encana or others like Shell and so forth. Again, the future is very bright for rethinking that distribution.
Ms. Milner: As Mr. Shaw started to allude at the end of his comment there, the role of the regulated utility is something we do see at the front end of market development. One of the things that characterizes both the Vedder project and the Robert project is that they had a very strong utility partner. Of course, local distribution companies for natural gas have strong expertise on safe handling of fuels, relationship with the local authority and the whole system to use this fuel in the market.
Absolutely we see a more enhanced role for the utilities at the front end. The challenge now is that since deregulation, about 9 or 10 years ago, the utilities are very constrained in the activities they can undertake and secure their guaranteed rate of return on. We are in the process of preparing a submission for the Government of British Columbia related to a section 18 undertaking in the Clean Energy Act. This whole focus will be on helping to define where it is helpful to have that utility assistance at the front end while not creating any conditions that in any way prevent private sector players from entering as the market builds. Our challenge is at the front end. While there are private sector players out there, they will not necessarily take the time with the Vedder Transportation Group to help them work through the process. It is essential that we have that; whereas the utilities are resourced to do that with their knowledge and expertise. I would add that the other benefit of greater utility engagement at the front end is that we avoid this whole risk of predatory pricing whereby one strong private sector player will move into an area geographically, which we have seen in the U.S. That player will essentially take two thirds of the benefit in fuel pricing for themselves, which Mr. Zweep talked about, and leave just a bit for the fleet at the end of the day. That action is counterproductive to market development. That is where there is a goal for government leadership to ensure at the front end of market development, we do not have predatory pricing that essentially will keep out our very important private sector players. We want to encourage those conditions, not put up barriers.
Senator Neufeld: That is a great point. Looking back, we have not thought about LNG in terms of transportation fuels for very long; it is relatively new in that area. I am sure that you will find some willing partner in the British Columbia government to work with you on that.
Ms. Milner: They are very receptive.
The Chair: It says here that Dr. Sam is one of Alberta's 50 most influential people, but I want you to know that our Senator Neufeld is one of the three most influential people in British Columbia.
Senator Banks: Going a little further on Senator Neufeld's question, the answer he received would apply very well to a fleet that is coming home every night. You have to go one day to Winnipeg so someone has to build a service station for LNG in Yorkton or some place. Who will do that? Will you do that? You were talking about building service stations to service your fleet and you said that you maybe it would be available to others. You were talking about your fleet that comes home every night. The guy who is driving a truck 900 miles from Calgary to Winnipeg needs a place to refuel. He has a heavy load and his initial fill up will not take him quite that far. Should that also be private business?
Mr. Shaw: I come back to my earlier comment that it requires cooperation within the industry, the producers, the distributors and government. Certainly, there are other pieces to this puzzle that we have been talking about, not just heavy-duty trucks, such as municipal transit authorities and so forth. By working in concert, you will create the demand that is necessary for the infrastructure. Again, there has to be a leap of faith — Catch-22. We need to go in there and do the market analysis to make sure that the truckers are being serviced at a time when they need the fuel.
It is a case of working in cooperation. As you roll out your plan — certainly Encana and others have plans — with regard to the infrastructure, part of it is looking at the demand side and another part is taking that leap.
Encana's history over the last couple of years shows that we have made that leap in terms of building infrastructure, where the demand did not exist, and we are starting to build out. Again, it is a chicken or egg thing. It is coming. We are working with others to get that sense of synergy to create the demand to create the infrastructure to service the industry.
Senator Peterson: Thank you for your very informative presentation.
You talked about a number of challenges such as operational risks and cost in technology. Are there any safety risks unique to your initiatives?
Mr. Burke: With regard to safety, LNG and CNG trucks have been around for a very long time. They have been operating in countries around the world, including Canada, as someone mentioned CNG taxis from some time ago. They undergo rigorous testing just as gas and diesel vehicles undergo testing. There is an importantly point with LNG from a safety perspective, and natural gas in general. If a truck were involved in a very bad accident where the LNG tank were penetrated or compromised and the LNG were to spill, LNG turns to vapour when released and rises straight up because it is lighter than air. It is very safe.
Conversely, a diesel vehicle in such a situation spills its fuel on the road, where it goes into the drainage at the side of the road and makes quite a mess. The flammability of natural gas is lower than that of gasoline and diesel. We typically associate it with some sense of caution and danger because we are pumping it directly into our homes, into our furnace rooms and other confined spaces. I do not know how many people have a diesel cook top in their kitchen or a barbecue with gasoline. LNG is a very safe fuel.
Senator Peterson: You indicated that you spent $40 million on R & D last year. Was that all internally generated capital?
Mr. Burke: We spent close to $40 million on R & D, and we are on track to do better this year. Our R & D investment since inception has been almost $280 million. All capital that we have raised has been in the public equity markets. We have been a publicly traded company since inception. In 1995 we listed on the Alberta Stock Exchange. We are now on the Toronto Stock Exchange and the NASDAQ. All of our capital has been raised through investors in Europe, Canada and the United States. More recently, we have investors in Asia and other parts of the world.
Senator Peterson: That is very commendable; kudos to your CFO.
The Chair: To the investors too.
Senator Seidman: I agree with my colleague that it was extremely inspirational to listen to your presentation this morning. Being from Montreal, we are very proud of Robert and what they have managed to achieve. You said that they rolled out Monday, so I presume that they dealt with their regulatory barriers, which, as they discussed with us, had to do with Transport Canada and getting permits.
Ms. Milner: Yes.
Senator Seidman: Forgive me if you have already mentioned this in your presentations. Clearly, Transport Canada is a very important piece of the puzzle and your ability to move forward with this. I would like to know how closely you work with Transport Canada and whether there are issues that we might hear about.
Ms. Milner: I would not characterize it as issues so much as complexity. To give you an example with the Robert transport project, I know one of the things that they did very early stage. Claude Robert, President, is a very entrepreneurial fellow, as you may know. He decided he wanted to move forward with the project because he saw so many benefits to it. He went to the City of Mississauga to have his people ask for a permit for an LNG station. The staff person looked it up in the binder, but it was not in the binder, and said, "I am sorry, Mr. Robert, you cannot do that here." That was the end.
The whole issue around educating the market about the existing channels is a big piece. I had mentioned the program with Natural Resources Canada, and that is a big part of that. Before they start on their 169 questions, we want to make it easier for them to stay in the right channels and access that information in the easiest possible way. In that case, he went back to GazMétro who knew exactly where to go to get the answers to those questions. Go back to that partnership, it is just critical. With Transport Canada, Robert hit their head on the ceiling of not understanding their requirements. When you move LNG, there are requirements under the Transportation of Dangerous Goods Act, 1992. They found out about that when they were already in motion.
It is a matter of getting the information out. From the industry standpoint, you have an alternative coming into a space, particularly trucking, that is new. To their credit, Westport and other companies in the industry certainly have become much more involved in understanding that world. Do all the players in the industry understand it? Not necessarily. Do we know which doors we need to be knocking on at transport? We are getting there. However, it is big and complex, and as the safety regulator essentially in Canada for new vehicles, yes, there is more work to be done there but I can say we have started all of those conversations and that our partners at Natural Resources Canada are also having those discussions with transport.
I should add too that those discussions are cross modes, not just road, but rail, marine and off-road and, again, for Transport Canada that also makes it significantly more interesting since they are the primary lead in many of those other modes.
Senator Seidman: That sounds hopeful, so I am pleased to hear that. You talked about education and communication as an important piece here, so how much progress do you feel you are making in that area?
Ms. Milner: That is a tough question. There is a lot to be done. I think the good thing is there is a lot of good information out there. Our challenge right now is that it is in about 300 different pockets in the industry, and some of it is in English, some in French, not consistently, and it spans the spectrum; everything from what is the volumetric difference from LNG and diesel to where do I get my questions answered on my truck and who can look at my site and who can help me modify my garage.
There are many items there and I know working with NRCan we have tried to even just clump together what are our big baskets we need to fill and ensure that we are communicating properly about. We are getting there.
With that program with NRCan, there are two aspects: One is to have a national website, in both official languages, which is essentially a portal. It is not to duplicate the commercial but to provide objective third party information to help the market in terms of confidence level. Second, they intend to have two regional hubs that are on-the-ground resources that go out and do workshops that act as a first line of responding to questions and, again, in both official languages and having a regional focus with one in the East and one in the West. We think that will be extremely helpful as well.
Senator Seidman: Clearly it appears that there are certain natural predispositions in certain provinces where you have managed to make greater inroads, such as in Quebec, B.C., Ontario, Alberta perhaps, if I remember from what I have been reading. What might you say about that? What has facilitated development in those provinces more readily than elsewhere?
Ms. Milner: That is interesting. I would not necessarily put Ontario on the list yet. We have had some early stage conversations with them, but there has also been a lot of political change there. Ontario has benefited from the Robert spillover essentially, but there are different drivers. Certainly among the producer provinces, particularly British Columbia, Alberta and more recently Nova Scotia, there is interest in looking at this as an opportunity to use a provincial resource and to reduce emissions at the same time.
In Quebec, on the other hand, the bigger driver has been environmental. The funding that Robert received was because of the emissions reduction. For that province, because they are a major hydro player, transportation is their largest source of carbon emissions. I believe it is upwards of 45 per cent. They have done many things in terms of speed limiters for trucks and other regulations, but they have kind of maxed out on what they can do in those directions and are looking for other options. That has really been the driver for Quebec.
The other side of it, to be fair, is we do have provinces like Saskatchewan where there is a resource, obviously, but at this stage the gas distribution community is not engaged. Often the utilities have been the history and often too they are the foundational player. If nothing else, they take those incoming inquiries they hear in the market and they pan them out, whether it is to a Peterbilt, a Westport or whoever.
I have to say Saskatchewan, Manitoba and in the Maritimes we do not have that level of engagement from the local distribution community when it comes to natural gas and I think that has been part of the lag in those areas.
Mr. Shaw: I will respond to a couple of your questions, one on the education side. What is really important now is that we need to get into the marketplace, particularly on the trades training in automotive of getting training programs to service vehicles that are running on natural gas. As a former president and CEO of the Northern Alberta Institute of Technology, we did a lot of work with the automotive sector. That needs to be done. The curriculum needs to be written in concert with the manufacturers of the engines and so forth. That is one piece.
The other piece, having sat on Canada's Science, Technology and Innovation Council, is that I would say applied research is absolutely key. If we want to compete in a global economy, we need to ensure that we are choosing the areas that we should focus on. Clearly you can see that we have a winner with Westport. That came out of UBC, it came out of looking at applied research and we were looking at a researcher who had a great idea. Then we should be hailing the fact that it is commercialized. We need to do more in regard to natural gas. Just some of the things we could be doing is lessening the cost on tanks and we could do some research on that.
In speaking about the provinces, I am doing some work with the new West partnership: Saskatchewan, Alberta and B.C. With the departments of energy they are embarking upon looking at the downstream opportunities of natural gas, so creating that policy framework.
I come back to my earlier comment, senator, that it is really an important engagement where industry and government are working together to look at deployment of a resource that we are so blessed with in this country.
Senator Wallace: Just about everything you had to say this morning was extremely interesting and informative, particularly Mr. Zweep's comment about the differential in cost between diesel fuel and natural gas. It would certainly seem to give natural gas a considerable advantage at the marketing level.
When I think of that, and I realize you speak about partnerships with the federal government at a lot of different levels, financial and otherwise, at the regulatory level, at the R & D and the explorative stages, but much of what you are talking about today is the commercialization, it is taking your product to market, it is connecting with your customers and the costs related to creating that infrastructure.
What strikes me is that where there seems to be such definite advantages that natural gas would have over conventional fuel in price, operating efficiency for equipment and environmental benefits; those are all the marketing tools that any marketing company wants to go to your customer and expand your market. As you expand your market, there is greater ability to then expand the infrastructure.
Having said all of that, why should government be involved in funding that aspect of your business — the commercialization, the retail network of your structure?
I compare it to the gasoline and diesel fuel distribution system, which is infrastructure that I do not believe government is involved in funding. It is in oil and gas, in heavy oil exploration and R & D, but at that retail level I do not believe the federal government is involved. Why should it be involved at the retail level, if I can call it that, of natural gas development?
Ms. Milner: That is a very good question. We have certainly had that question in other meetings we attended in Ottawa, around whether there is a role for government and why should there be a role in government beyond, for instance, a little bit of help on codes and standards barriers, education and outreach, that sort of thing.
I have a bit of a two-part answer. For one, on the infrastructure side, other than helping to lower some of these barriers, we do not see a direct role in terms of fiscal contribution for infrastructure. More, to go back to Mr. Shaw's comment about bringing the partners together, is ensuring there is a coordination of movement forward. Where we do see a need though is at the fleet level for the customers.
While there is a significant fuel savings right now, I know certainly any of the theoretical work done on demand for new technologies suggests that customers will look at that and dramatically discount those future cash flows because of all the perceived risks. Let us say four years from now Vedder wants to get rid of those trucks. Will there be a market in this country for those trucks? How much of a financial impact is that? Will the projected maintenance costs be what they expect, et cetera, et cetera?
The roadmap very much bore this out. For the right scale and type of fleet, there is a very good business case, so why is this not happening in Canada? That was the fundamental issue that then flows to the recommendations.
To go back to cost structure, the issue natural gas has is the cost structure at the vehicle level. Mr. Kaye alluded to that earlier. This is a very young industry. Westport has not sold 1,000 of their engine systems. With their joint venture, Cummins-Westport, yes, they are into the tens of thousands. What is notable with Cummins Westport is for the first time, about two years ago, they started to sell more engines to refuse truck, vocational truck, non-incentivized markets. Prior to that, a lot of their business demand was going into California, Texas, New York, where there were incentives, but again, it is a scale issue. How do we bring that cost structure down? That issue too is highlighted in terms of the roadmap. The whole point being, if government is going to have a role here, it must be only a temporary role. We have to ensure that actions are happening to reduce that cost structure, to get at the cost of components and ensure that when government does pull out, it has in fact created all the right conditions for a new industry to really thrive. I think it is really more that sort of infant industry, the need on that side and how long will it take to get to that volume point.
To give you one other minor example, on the garbage truck side, natural gas garbage trucks have probably been around for about a decade. All of that has been in the U.S., except for 24 units now in Canada in the last two years. The incremental cost on a natural gas garbage truck has been almost cut in half in that time frame. The reason? You used to take a chassis built by a company like Peterbilt, send it somewhere to put the body on, and send it somewhere else to put the fuel system on. Now, as the bigger players start to see this and realize, wow, there actually is some potential demand out here, a company like McNeilus in the U.S., one of the largest body manufacturers in North America, now does the natural gas fuel system in house. It is that integration of the supply chain, but the vendors have to see the demand in the market, make those investments and bring it in house and really start to bring that cost structure down for the customer. I do not know if that entirely answers your question.
Senator Wallace: Somewhat.
As a quick follow-up on the types of financial incentives that you would be seeking from federal government to assist in this infrastructure development at this commercialization stage, you say that it should only be there for a limited period.
Ms. Milner: Yes.
Senator Wallace: What type of period are we talking about?
Ms. Milner: We had proposed a five-year period, and just a measure for fleets, not for the infrastructure side.
Senator Johnson: What is happening in Manitoba? I have not heard much mention of it. Can you tell me how they could be brought up to speed more? I also want to talk a bit about the trucking, because I was a member of a committee that did a two-year study on trucking. I think you were there. I do not know if you appeared. Could you start with what is happening in Manitoba and what we could be improving there?
Ms. Milner: Manitoba is interesting. It is a bit of an enigma. Here we have two companies that already assemble natural gas vehicles, and that is New Flyer Industries, very successful, and now Motor Coach Industries that makes inner city coach buses. They just started manufacturing natural gas this year. They got their first order from Los Angeles Transit. We also have within our membership a company called Kraus Global. They make dispensers for natural gas refuelling stations, also located in Winnipeg, a very successful global company. All their sales are outside of Canada for Kraus Global. What we do not have unfortunately in Manitoba is the engagement of Manitoba Hydro, which is the local gas distribution utility.
Senator Johnson: We know that.
Ms. Milner: To be fair, for this industry being relatively small, we have to focus where the prospects are the best. If we do not have some glimmer of a partner on the horizon that will meet us halfway, we have to shift to other jurisdictions in Canada.
Senator Johnson: We have to shift Manitoba Hydro into this.
Ms. Milner: That would be great.
Senator Johnson: I want to compliment you on the alliance. I think it is fantastic and the only way to go in the future, especially with the smart trucks and the heavy duty trucks. You have come a long way since our study a few years ago when there was no one moving into this, so it is very young. In terms of our study, what would you say we could do, not just what Senator Wallace was referring to in terms of the federal government, but also in terms of framing a national, sustainable energy strategy? How would you view that being moved forward? The whole thing of sustainable development falls in your realm as well.
Ms. Milner: That is a big question. For one, in terms of looking at the broader sustainability questions, it is important to start with the resources we have on the table and a clear-eyed understanding of what their emissions benefits are, and then I guess trying to understand where they fit into the various niches in Canada. We talk about Canada in one sort of big clump, but the reality is there are so many jurisdictional differences and different opportunities. To give you a specific example, in the hydro provinces like British Columbia, Manitoba, Quebec, there is very huge opportunity for electric vehicles because of the low emission power. We cannot make that statement across the board in Canada, though, because there are many jurisdictional differences. That is a very difficult question to answer.
Senator Johnson: That will evolve too, as your alliance evolves. In Manitoba, one thing I can say is that we are used to plugging in cars. We would be very adept at the strategy. Thank you very much for coming.
The Chair: Ms. Milner and gentlemen, thank you for an enlightening presentation. We wish we could have spent more time with you yesterday, but with other things happening, Senator Wallace is well aware of his former company Irving, they had a pretty smiling night, but new judges from the Supreme Court, you picked a busy day to come. We are here. I think we have a good relationship with your organization, and I am hoping you will stay in touch with us as we try to narrow down our findings in our report. All of you have been just terrific today. We will deal through you, Ms. Milner, if we have further questions, or if you feel we need to be clarified or further edified on some of these issues, you will be in touch.
Ms. Milner: Thank you.
The Chair: Senators, if there is nothing else, I will terminate the meeting.
(The committee adjourned.)