Proceedings of the Standing Senate Committee on
Banking, Trade and Commerce
Issue No. 15 - Evidence - March 2, 2017
OTTAWA, Thursday, March 2, 2017
The Standing Senate Committee on Banking, Trade and Commerce met this day at 10:33 a.m. to study and report on the development of a national corridor in Canada as a means of enhancing and facilitating commerce and internal trade.
Senator David Tkachuk (Chair) in the chair.
[English]
The Chair: Good morning and welcome, colleagues and members of the general public who are following today's proceedings of the Standing Senate Committee on Banking, Trade and Commerce either here in the room or listening via the Web.
My name is David Tkachuk and I am chair of this committee. Today is our 12th meeting on the subject of our study on the development of a national corridor in Canada as a means of enhancing and facilitating commerce and internal trade.
During the first part of our meeting today I am pleased to welcome from Natural Resources Canada, Terrence Hubbard, Director General, Petroleum Resources Branch, Energy Sector; John Foran, Director, Pipelines, Gas and LNG Division, Energy Sector; and Stefania Trombetti, Director General, Policy and Economics Branch, Lands and Minerals Sector.
Thank you for being with us today. Please proceed with your opening remarks, after which we will go to a question and answer session.
Terrence Hubbard, Director General, Petroleum Resources Branch, Energy Sector, Natural Resources Canada: Good morning and thank you very much for the invitation to be here this morning. It's a pleasure to participate in your study of this important issue.
I am Terry Hubbard, and I am the Director General, Petroleum Resources Branch, which among other things is responsible for our oil and gas policy and regulatory files including the development of pipelines in Canada. This is very much an issue that is topical to the work that we've been doing within the department.
I have a few remarks in terms of my presentation this morning. I will go about halfway through it and then turn it over to my colleague to speak to the mining sector elements related to the corridor approach we're looking at.
The main purpose of our presentation this morning is to provide some input to the committee on the concept of developing national corridors as a means of enhancing and facilitating trade in the natural resources sector; to provide context on the need for increased pipeline capacity and other energy transportation infrastructure in Canada; to highlight the importance of infrastructure to the mining sector; and to outline some of the Government of Canada's efforts to support sustainable resource development, build public confidence and support trade and infrastructure investment in Canada.
Turning to slide 3, energy is an important driver of the Canadian economy. It represents about 10 per cent of Canada's GDP. Canada has the third largest oil reserves in the world and is among the world's largest oil producers with 3.8 million barrels per day of crude oil production in western Canada. Canada is also the fourth largest natural gas exporter in the world, with 7.3 billion cubic feet exported every day, all of which goes to the United States currently.
Because of our energy riches and our geography we have one of the most extensive energy distribution systems in the world, which is heavily integrated with the United States. There are currently more than 70 cross-border energy pipelines and more than 30 electricity transmission projects.
Canada's crude oil pipeline infrastructure out of western Canada has been operating near capacity for quite some time. Given pipeline constraints about 100,000 barrels per day of crude oil is currently exported by rail. With oil production forecast to continue to grow additional infrastructure will be needed to avoid an increased reliance on rail export capacity going forward.
Turning to slide 4, the energy industry is undergoing a major transformation. It is driven primarily by the shale revolution and the resulting change in energy trade flows. The U.S. is currently Canada's only major export market for oil and gas. In 2015, 99 per cent of Canada's crude oil exports and 100 per cent of our gas exports went to the U.S.
While the U.S. will remain an important market for Canadian energy production going forward, it is becoming increasingly self-sufficient in its own production. New infrastructure will be required in Canada to connect to new markets and to ensure we can obtain full global prices for our energy production going forward.
The International Energy Agency expects global oil demand to continue to grow even under the most optimistic climate change scenarios. Canada has the potential to continue to be a reliable, stable supplier of energy and contributor to global energy security.
Turning to slide 5, as I mentioned, without new pipeline infrastructure our reliance on rail will continue to grow. To keep up with forecast oil production, approximately 700,000 barrels per day of new pipeline capacity would be required by 2020 and 1.7 million barrels per day by 2030.
In the current low oil price environment the difference between sending oil by rail to market versus pipeline is significant in terms of producer netbacks. It can cost as much as $5 per barrel more for rail than pipe when shipping from Alberta to the Canadian West Coast, $6 per barrel more to Canada's East Coast, or up to $10 per barrel more to the Gulf Coast.
Canada's oil production is expected to continue to grow even in the current lower oil price environment. Latest NEB forecasts show oil production to grow from 3.8 million barrels per day in 2015 to 4.5 million barrels per day by 2020 and up to 5.5 million barrels per day by 2030.
As we move forward we'll require infrastructure to move this oil to market. The government is working to ensure that decisions on pipeline projects balance the goal of maximizing economic growth and ensuring environmental protection.
As has been evident in the public debate there are ongoing concerns and remain ongoing concerns about the impacts on the environment from pipeline development, the impacts of increased marine shipping, and the potential environmental impacts associated with oil spills both on marine and on land.
At the same time we're dealing with new global commitments to address climate change. The provinces are also increasingly involved in the development and decision making of infrastructure projects in Canada.
These complexities are magnified by multiple communities involved along energy infrastructure routes, our duty to consult with Canada's indigenous people, and relationships with other jurisdictions including municipal governments on these developments.
Turning to slide 6, it really comes to the heart of the question before us today: Could an energy corridor or a national corridor be the solution to our infrastructure challenges going forward? Our understanding of what is at the heart of a corridor is that it's a preapproved right-of-way for infrastructure development. It would avoid the need for determining whether individual projects are in the public interest so that when individual projects come down the line we can focus on the technical and best ways to develop those projects going forward.
We've looked quite closely at the issue over the years given our work on infrastructure and pipeline development. Our analysis is that there are both pros and cons toward the corridor concept. There are potential advantages. It shows strong federal leadership in the need for infrastructure development. There are opportunities in enhancing environmental protection by looking at amalgamating infrastructure in one right-of-way and opportunities to enhance engagement with Canadians with direct government engagement on the development of this infrastructure.
However, at the same time there are issues around timeliness of infrastructure development. It's an imperative that we develop infrastructure in the near term to satisfy current market needs and the need to do a two-step approach by developing first a corridor and then the future infrastructure within it. It could extend timelines for project development approvals going forward.
There are issues as well around stakeholder and public confidence, particularly if the government were to use its declaratory powers to move forward and declare certain tracts of land in the national interest. We've already seen sentiments from communities that want more engagement in decisions. If we were to cut off that debate we could see increased opposition to the infrastructure development going forward.
Another big issue around energy corridors is costs and who bears those costs. Currently, private sector proponents are responsible for proposing infrastructure development and for assessing the technical and environmental considerations around it.
If we were to develop a national corridor approach, who would bear those costs going forward? Those costs can be significant. I understand for an assessment like the Enbridge Northern Gateway Project they invested as much as $300 million in that environmental assessment and regulatory review.
There are advantages and disadvantages in the near term. For the near term infrastructure needs we are facing in Canada for our energy development we don't see corridors as a silver bullet, but in the longer term there could be opportunities for planning and developing a national corridor approach to facilitate longer term energy needs.
Turning to slide 7, under our current market oriented energy policies, industry as I mentioned proposes the current routes based on environmental, technical, economic and other factors associated with the development.
For example, the technical challenges of moving oil and gas are different, particularly in mountainous regions of Canada. As such, what is an optimal route for one project may not be the optimal route for another project going forward.
Another thing I would note is that new pipelines proposed in Canada typically parallel existing corridors to the extent possible. There is a cost advantage for industry in doing so and facilitating development. For example, the Trans Mountain Expansion Project would parallel 89 per cent of the project along existing rights-of-way.
Line 3, the replacement project, will be fully developed within an existing pipeline corridor. For the proposed Energy East project, a 4,500-kilometre project across Canada, approximately 80 per cent of that project would follow existing rights-of-way, including two-thirds of it leveraging and utilizing existing energy infrastructure.
I will pause there on the energy side of things and I will turn it over to my colleague Stefania to provide a few comments on the mining sector.
Stefania Trombetti, Director General, Policy and Economics Branch, Lands and Minerals Sector, Natural Resources Canada: Good morning, everyone. It's a real privilege to be here to be providing testimony to support the work of this committee in studying trade corridors.
Just shifting gears in terms of the mining sector, I will set some of the context about this segment of Canada's economy and then move along to talk about infrastructure and transportation.
Canada is a leading mining nation. We produce some 60 minerals and metals that are mined at more than 200 producing mines. Mining activity across all regions and notably in the North holds great potential to meet global demand for commodities such as iron ore and precious metals.
The mineral sector accounts for 4 per cent of Canada' gross domestic product and it results in 563,000 direct and indirect jobs. It also employs more than 10,000 indigenous people, making it a major employer of this segment of Canada's population.
Mining is an export-oriented business. It's a very global industry. It accounts for 19 per cent of Canada's exports, with the majority of those exports going to the U.S, followed by Europe and China.
Internal trading of commodities is limited, so barriers to internal trade are not viewed as a significant issue by the industry. It's really about getting commodities to global markets.
Just turning to the next slide on infrastructure, infrastructure is critical for mining development. More than 40 per cent of rail freight volumes come from shipping mined products or by-products. It's key to developing minerals and to getting commodities to market.
Just as a bit more information on that, there are two segments when you look at commodities and exporting them. One segment is high-value/low-volume commodities such as diamonds and even gold which you could transport out of the mine site in an airplane, and the other is high-volume bulk commodities such as coal, potash and iron ore. Those are the ones that typically will be put on to rail transport to a port and then shipped in vessels to international markets. The transportation and shipping costs associated with moving commodities to port can be significant and have an effect on industry cost price competitiveness in a global market.
For example, transportation costs for metallurgical coal are roughly the same as the combined costs of mining, processing, administration and royalty payments. Energy transmission and telecommunications infrastructure support mine construction, operations and the workforce. If you have a lack of infrastructure in remote regions it means projects on the energy side may rely on diesel power.
It's about making choices. If you're relying on diesel power it's more polluting than hydroelectric energy generation, for instance. Mining development has historically proceeded on a project-by-project basis. Mining a remote deposit may only require a single rail line to deliver the product to a port. Voisey's Bay in Newfoundland and Labrador is an example.
In other cases where you have multiple deposits or clusters of deposits a regional approach to planning that mineral development, including infrastructure planning, may make more sense. A good example to illustrate is the Labrador Trough which straddles the Quebec-Newfoundland Labrador border. It's rich in iron ore and it benefits from several mining projects that improve the economies of scale.
To feed our ports and get Canadian products to market, the infrastructure investment that enables and supports mineral development is vital. Nowhere is this more apparent than in the North. Some say it suffers from a northern premium. Basically, the cost to explore and build new mines is estimated at 2.5 times higher than in the South so there is a premium for operating there.
Infrastructure that serves mining projects can also spur economic activity. An example is northern B.C.'s mineral-rich golden triangle area. Port expansions and the Northwest Transmission Line Project go hand in hand with supporting the development of new mines there and bringing jobs to that region. It's really important to have strong major arteries to which mine developments can link.
Regarding economic development potential in remote communities, there's a lot of potential there. We see it when we see mines opening in remote parts of the country. Many communities in remote parts of the country are indigenous communities. Infrastructure and mineral development can connect communities. It can create economic opportunities and jobs. It's not just jobs in the mine; it's jobs that are related to the mine operations. That can be things like trucking, catering, plumbing and infrastructure maintenance. In the broadest sense mineral development has many layers and components to it and it can be leveraged to achieve public-good goals.
The next slide illustrates the gateways that move minerals to global markets. As I mentioned, our mined goods are primarily destined for the U.S. market. They leave Canada via rail, road and ship. Iron, steel, aluminium, gold, copper and potash are some of the commodities we send to our southern neighbour. On the East Coast our ports send precious metals, iron ore, nickel, diamonds and uranium to Europe. On the West Coast our ports deliver commodities such as coal, base metals, iron ore and potash to Asia. In the North base metals as well as diamonds are exported.
To grow international markets a seamless transportation system for our commodities is key from the mine, sometimes stopping at a processing facility, to the port, and ultimately to global markets.
The next slide is about some of the efforts of the government to advance sustainable resource development, which really starts from the premise that a clean environment and a strong economy can go hand in hand. The mandate letters to the ministers of environment and climate change and natural resources signal the government's commitment to developing resources in a sustainable manner that protects Canada's rich natural environment, respects the rights of indigenous people and supports a more resilient natural resources sector.
Without public confidence in the regulatory and environmental processes proposed projects will simply not move forward. That's why there is work under way to modernize the National Energy Board and to review the federal environmental assessment process. There are also commitments related to modernization of Canada's infrastructure and funding to address bottlenecks and to support exporting our goods to global markets.
In conclusion, infrastructure development is important to support the growth of Canada's oil and gas and mining industries and to access new and growing markets for these resources. The development of these resources will create jobs and support economic growth to benefit Canadians. This growth can proceed in an environmentally sustainable manner which will ensure a resilient natural resources sector and bring jobs to communities across Canada, including indigenous communities.
The modernization of the National Energy Board and review of environmental processes are important steps to ensuring that Canadians have the confidence they need that pipelines can be built and operated in a manner that is safe for the environment and the public and that mineral development can occur in a similar manner.
Modernizing Canada's infrastructure will also support the safe and efficient movement and trade of Canadian commodities to international markets.
Senator Ringuette: I want to thank you for your presentations. The purpose of our study is to look at future needs for future development.
I looked for instance at the mineral slide 10 wherein you identify the different minerals. Right now I suspect it is close to the energy resources in our Canadian geography. However, this is current prospecting and exploration. It has nothing to do with the future. This is the purpose of our study: looking at the future.
I believe your department has a major role to play in regard to establishing the potential economic development of our North. The federal government has a responsibility, notwithstanding anything else, in regard to ascertaining our international sovereignty on the territory which will to become a bit contentious down the road.
You know where you stand currently in regard to the exploration and the flow, but do you not find that it is within your responsibility to advance the future requirements for future development in both the energy and the mineral sectors?
Mr. Hubbard: Maybe I can begin and Ms. Trombetti can add in on the mineral and mining side of things.
With respect to Canadian energy the infrastructure we're looking to develop today will support long-term growth of the energy sector in the next two decades. The infrastructure proposals are based on those long-term forecasts and long-term needs. Often the pipelines or transmission lines that we're developing today will be in place for the next 30 to 40 years, and sometimes even longer.
Senator Ringuette: That is within the current explorations. It has nothing to do with future explorations which will move north.
Mr. Hubbard: That's right. The department is working closely, as is Minister Carr with his colleagues at environment and others, and looking to that longer term energy future.
The pan-Canadian framework signed with the provinces in December signalled the intent to move and transition to a cleaner energy future going forward. Discussions are under way looking at what that future will look like.
One of Minister Carr's key mandate commitments is working with the provinces on the development of a Canadian energy strategy. Part of that strategy in the priorities outlined by the provinces is to look at the infrastructure needs going forward. Working groups have been set up with the federal government and the provinces to look at what those future infrastructure needs will be to support those longer term discussions.
Senator Ringuette: Within that consulting process have you met with the diversity groups that are proposing a northern corridor?
Mr. Hubbard: We have had some discussions within NRCan, with the University of Calgary, and with the leads at CIRANO about their northern corridor proposal. We shared some ideas and thoughts and look forward to their continued research in this area.
The ongoing major efforts at NRCan right now relate to the modernization of the National Energy Board. Part of that is to create the conditions for having a regulator in place to address both the current and future needs in terms of infrastructure development. We have a very significant ongoing engagement process across Canada right now, with an expert panel that has been appointed to engage Canadians and with a big focus on indigenous communities, to hear input on what future energy regulators should look like, including the government's role, it's mandate and structure, and how best to achieve some of the objectives of ensuring we develop our infrastructure today and well into the future.
Senator Moncion: My question is about where the pipeline will be going through. In North Bay where I live it will go under Trout Lake, which provides clean water for the whole city. It is not a big city but it is still a city where the pipeline will go through.
What kind of research has been done to work around these problem areas? What kind of assurance can you give people that whatever contaminants will not alter the main water supply or the environment where people live?
Mr. Hubbard: That is the intent of our environmental assessment and regulatory process. It is designed to identify and study those issues, to develop terms and conditions to ensure that the environment can be protected throughout the development and to ensure that infrastructure can be operated and developed safely.
The project you are referencing is TransCanada's proposed Energy East project, which is in its very early days of the environmental assessment and regulatory review. The National Energy Board will be studying those matters.
Over the last number of years we have put in place a number of new safeguards to strengthen our regulatory environment, including a Pipeline Safety Act that came into force in June 2016, which increased the safety and liability provisions of the National Energy Board Act.
We are about creating and enhancing a culture of safety around infrastructure development through National Energy Board modernization, and looking to engage Canadians on how we can further improve that regulatory environment.
Senator Moncion: You are talking about engaging Canadians, but how are you working with the natives? Most of the land in northern Ontario and in other provinces belongs to the natives. Are you working with them on this project in particular?
Mr. Hubbard: Indigenous engagement and consultations is a big part of our regulatory process, both in our efforts to modernize the National Energy Board and with respect to individual projects that are being proposed and developed. The government has been clear on its expectations about developing and enhancing a nation-to-nation relationship.
As we move forward with both the individual project reviews and with the reviews of our legislation there is a commitment to look at how we can further strengthen our engagement with Canada's indigenous communities and integrate those views and perspectives not only in the review of the projects but throughout the whole lifecycle of the energy development from proposal through to the ongoing construction and operations of a project.
Senator Enverga: Thank you for your informative and detailed presentation.
When I look at page 10 of your presentation I see vast lands. The northern part of Canada hasn't been developed. It is basically untapped. More than half of Canada hasn't been tapped.
From your studies where do you think the most promising underdeveloped oil and gas and mining sites are located in the northern parts of Canada? Would the proposed northern corridor that we are studying right now be located close enough to these sites to facilitate their development? Have you seen anything like that?
Ms. Trombetti: You are correct that the North is untapped and there is vast potential there. When you look at mineral deposits you need to spend a fair amount of time exploring and understanding the geology. The government has programs in place to look at the geoscience and understand the subsurface and where we might get specific types of minerals or metals.
There is vast potential in the North but the industry depends on a number of different things to be competitive. Competitiveness is what will drive where projects get implemented, where mineral development projects occur.
Being able to say where a national corridor should be placed specifically at this moment is a difficult question to answer because there are other considerations that go into which projects will have the financing and will get underground and be producing mines.
Transportation is a key aspect of what will drive that development. There is also investment attraction, regulatory regime, taxation, labour supply and the grade of ore being extracted. It is an open system where you have exploration companies out there exploring on the basis of public geoscience put out there by the government as a public good so they can focus on where they are exploring.
Where you have deposits is one thing, but where it is feasible to develop them is another question. It is very difficult to say that most of the development will occur in a particular part of the North over the next few decades, because that depends on the economic feasibility.
Senator Enverga: I understand that. With the recent claim of climate change that we have been hearing all over, are there now more opportunities or are there resources available in the North that we can tap? Have you seen any changes in the availability of these resources, considering that we have climate change?
Ms. Trombetti: Exploration is becoming easier and easier to do. That will potentially unlock more areas for exploration. The more you explore, the more you are likely to find a deposit that you would develop into a producing mine.
Senator Tannas: Thank you for being here. First, let me say that it is heartening for me to run into some folks in the federal government who have actually thought about this. I appreciate your responses to the specific question that we were asking rather than some kind of slide show on your department and all the things you are doing, which is good; I don't want to denigrate that. You have taken great efforts to respond to what we've asked you to respond to, and I appreciate it.
We are coming to a point where we need to make some recommendations. We can say this idea has no merit in further study or we can suggest that it needs significant further study before anybody can really say one way or another. The evidence including yours today has been that there really has been no significant study, no financial models built, nothing around this to say whether or not this is a good idea.
I want to ask you a question and maybe put you in a bit of an uncomfortable position. Frankly today's need for a corridor centred around pipelines certainly brought to mind that we should look at this topic with respect to rail for minerals and grain, and for commodities clearly headed for the ocean that don't need to go through and bottleneck major cities.
If the First Nations had come together and made a proposal for a corridor across the country that they would operate, would we be sitting here today shaking our heads up and down, and saying what a wonderful issue; this solves one of the biggest issues we see in getting anything done?
What we have heard is that the First Nations major project initiative, the First Nations Financial Management Board, would very much like to participate at the beginning stages of a real feasibility study. If we and the government put the right recommendation forward, we might actually see come to fruition an initiated, generated and sanctioned proposal, a plan led by First Nations where they would actually be the proponent and the leader of a major corridor.
I've laid that out for you. In your respected opinions what recommendations should we be making? Do we need more study? Should it involve First Nations who have already stuck their hands up and said they would like significant, serious First Nations leadership to study this further? Or, should we say there has been enough study? We have seen the forecasts. Given that rail and pipeline are the two major components that we see, do you say that we should just drop it? What do you think?
Mr. Hubbard: I will begin and Stefania will have views as well.
In terms of your specific question about whether or not a national corridor could solve our immediate energy infrastructure needs, we don't see that as being an immediate opportunity. Given the time frames that it takes to develop this infrastructure and the time frame in which this infrastructure is needed, a national corridor approach would take too long to do the needed consultations and then bring the individual specific projects forward. In terms of longer term needs, the conversation around where Canada's energy future is going and what those infrastructure needs are, there may be something there.
There are also elements around the corridor approach that could be integrated into the existing system. We are doing a review of the National Energy Board now. Some of the advantages I see of a corridor approach include direct federal engagement and leadership in identifying where infrastructure is needed and in engaging involved stakeholder groups rather than leaving all that engagement to proponents and the private sector to advance.
There is room probably for the federal government to play a more active role earlier on in the development of activities, public engagement and indigenous engagement. We can do a better job and look at ways to integrate that within something closer to our existing system.
It is very difficult to look at the future. We have corridors that have been approved dating back to, if you look at the North, the 1970s for the Alaska Highway pipeline. We took decisions through treaties and legislation to put in place a corridor, but the reality is that the market environment has turned out such that the infrastructure has yet to be built.
We could invest significant amounts of money now to study and develop potential route options. We just don't know enough about what that future will look like to see whether that investment will pay off.
Ms. Trombetti: One of the parts of your question gets to the players and obviously understanding what sorts of impacts, both positive and negative, a corridor could have on the various players, which is an important aspect of considering this question.
As someone who provides advice, it's always good to keep options on the table. For the mineral development sector you could develop on a project-by-project basis; you could go regional in clusters; or you could go corridor. It has merit to look at and further study the pros and cons of the corridor concept. What are its advantages and disadvantages? What sort of impacts will it have on communities? What are the opportunity costs if you take it off the table as an option?
To answer your question, when we look at the mineral commodity market it's similar to what Terry said about oil and gas. It is really difficult to know 50 years from now what will be needed on the market. Many factors affect which commodities are in high demand.
There are always assumptions that we make and assumptions that maybe we don't consider that take a market and turn it in a direction that we hadn't planned for. It is difficult to understand where the market will be. We know that typically in general commodities we try to grow the exports. We try to increase what is going out of the country. Looking at all the options and really understanding the impacts of each of them is something that is important to do.
Senator Wetston: Full disclosure: I used to work for the National Energy Board. I feel modernized.
I want to suggest something to you, if I may, and get your comment on it. I have been around the energy sector for quite a number of years and have participated personally in a number of modernization efforts.
What is different today from the 73,000 kilometres of pipeline that has been built in Canada? I think it is 73,000 kilometres. I really want to focus on this concept of the corridor to understand the thrust of some of your comments about fair process in environmental assessments, and modernizing the National Energy Board to provide sufficient expertise in regional interests.
My own personal experience is that we had a lot of that when we had hearings before on the NEB on virtually every matter to issue a certificate of public convenience and necessity. I am trying to understand your reaction to this process and I am trying to stay away from some of the media content.
I am trying to focus on this corridor and I understand your views about it. When I go back in time to the Mackenzie Valley Pipeline there was no shortage of study and discussion and constant hearings with respect to that. It never got built. You might tell me why in a moment.
I'm getting to the question. That's part of the question. Would a corridor deter investment from the private sector in the natural resource sector in Canada?
Senator Day: Is that assuming the corridor is government built?
Senator Wetston: I don't think it can be, but assuming it is government built. Thank you.
Mr. Hubbard: There are a few questions there. First, in terms of what has changed with the National Energy Board, internationally a lot of people look to Canada and what we do in our regulatory environment. They think we do a pretty good job by international standards. We have a lot of technical capacity and expertise and we do carry out robust hearings.
The fundamental thing that has changed is, first, public expectations and, second, our obligations around indigenous engagement and participation in these projects and activities, which is a new responsibility that is evolving and has been evolving significantly over the last decade. Those two areas will be a big focus of the modernization activities going forward.
Around Mackenzie, you are right. It has been studied significantly, but fundamentally when it came down to making a decision on whether to build or not build that project it was market realities and whether there was a market need for that gas at the time at a price that would pay for that infrastructure going forward. Currently, given the shale evolution that no one saw coming, we are awash with gas in North America. Given it is available in places closer to market there is just no market driver to invest at this point in time.
On whether or not developing a national corridor would defer private sector investment, it may deserve private sector investment in the frontend environmental studies and design of a corridor route, but at the end of the day it would still be the private sector that would have the expertise and ability to develop that infrastructure within the corridor. Whether we as a government could pick the right route that would meet those market needs is the fundamental question we would come down to.
The Chair: How big is your department budget?
Mr. Hubbard: I would have to get back to you with the precise numbers.
The Chair: I don't need a precise number. Give me a general ballpark.
Mr. Hubbard: I would say it is probably in the neighbour of about $2 billion and a big chunk of that would be transfer dollars. For example, we collect royalty payments from offshore oil and gas development and transfer those to the Atlantic provinces.
The Chair: You don't think it is worth $800,000 to check out whether or not a northern corridor would be a good idea?
Mr. Hubbard: There is ongoing activity looking at this issue. We have engaged, as I mentioned, with the folks at the University of Calgary. I know of officials and counterparts in Alberta, the Northwest Territories and Yukon who have also been looking for potential for an energy corridor in a northern route.
There are ongoing examinations and analyses in different areas. We have been looking at this issue from different approaches and perspectives in terms of how we can achieve some of the objectives we are trying to achieve. We have an opportunity to hear from different stakeholders including the University of Calgary and others as part of our NEB modernization about whether this type of an approach would be something we should look at as part of a new regulatory approach.
The Chair: What was missing in the National Energy Board's recommendations on the eastern pipeline? Why are we doing it again?
Mr. Hubbard: Fundamentally, the question comes down to a decision by the three former panel members on the Energy East project to recuse themselves from that process, given some of the allegations in place about some of the meetings that they had. Given that decision by those independent members, there was a need to appoint new members to look at that project going forward and a decision of those new members to start back at the beginning of the review process to ensure they were comfortable with the approach laid out that they will be looking at.
The Chair: I come from Saskatchewan. My next door neighbour is Alberta on the other side. Oil and gas are a big deal for us. We can see what is going on south of the border. We have watched that for quite a few years. They will be our competitor. Not only will they be self-sufficient. I think they will be a competitor and they will be exporting gas.
We are sitting here and there is no sense of urgency anywhere to move that product safely across the country rather than with railroad cars and get oil to the East Coast, which I think we have been talking about for 30 years and nothing has happened. Now we are in a kind of urgent situation where we will no longer be able to move stuff south if they don't need us.
Is there that sense of urgency within the department itself and within the government itself? I don't see it but I could be blind to it.
Mr. Hubbard: First, I am from Saskatchewan as well.
The Chair: Good. You need a little fire in your belly, right?
Mr. Hubbard: I am from a small town south of Regina, so I know these issues are important to everybody in western Canada in terms of the jobs and economic opportunities they provide.
We are aware of the need for new infrastructure development to support the oil and gas industry going forward. It has probably been the number one issue we have been dealing with as a department for much of the last decade. We have advanced a number of initiatives through NRCan to support responsible infrastructure development going forward; the regulatory modernization efforts to enhance our engagement with Canada's indigenous peoples; the efforts to enhance the safety and security systems for transport, both on the marine and the pipeline safety side of things; a lot of activities over the last number of years to address the issues that have been impeding infrastructure development in Canada; and most recently the pan-Canadian framework addressing some of the environmental concerns around upstream oil and gas development.
There has been a concerted effort and focus to address these issues. The issue around market access still remains a top priority for our industry colleagues.
A lot of the focus has been publicly on oil, but you are right that more importantly it has been on natural gas these days with the current situation of the U.S. becoming self-sufficient and Canada needing to have additional markets for our gas production, not only to grow our current production in western Canada but even to maintain the current jobs and levels of investment we have in that industry. LNG would be critical in that regard.
The Chair: As we are into our 150th year it is important for people to review how those two railroads were built, the CN and CP. They are two railroads to nowhere. There was a debate as to whether we should actually do it. We can all get down on our hands and knees that two great prime ministers decided it was a really good idea to build railroads west. We need a bit of vision here as to how we will move our natural resources.
We have to get by this thing. We can study this to death, but we know as we get more population in the south it will be harder and harder to move a pipeline. That is why we are having big trouble with Montreal. If we were moving it through the south and dealing with First Nations, it would be a lot easier than dealing with Montreal, frankly, because they need economic benefit.
I don't have any more questions. I wanted to put that aside and give you some homework to do. I used to be a schoolteacher.
Thank you very much for your presentations today. We have one more presenter. I have to leave at twelve o'clock, unfortunately. They have come quite a ways, so I don't want to cut them short. Larry Campbell, being the senior member here, the oldest guy aside from me, I will let him to chair. Senator Day has to leave as well.
Senator Campbell: I have a meeting. Thank you for your confidence, though.
The Chair: We are continuing our study and report on the development of a national corridor in Canada as a means of enhancing and facilitating commerce and internal trade.
It gives me great pleasure to today to welcome from the Nunavut Resources Corporation, Mr. Scott Northey, Chief Operating Officer. Thank you for being with us today, Mr. Northey. Please begin with your opening remarks and then we will go to a question and answer session.
Scott Northey, Chief Operating Officer, Nunavut Resources Corporation: Thank you, Mr. Chair and members of the committee, for inviting me to speak with you today.
As introduced, my name is Scott Northey, and I am the Chief Operating Officer of the Nunavut Resources Corporation. It's 100 per cent owned by the Kitikmeot Inuit Association, the westernmost of three regional Inuit associations given standing under the Nunavut Land Claims Agreement in 1993.
I prepared some remarks based on some of the conversations I heard prior to my arriving that provide some useful context, but I'm proposing to go off text and talk about why we as Inuit are so involved and so driven to move forward with our Grays Bay Road and Port Project.
The comments I provided to you in advance talk about how and why Inuit concluded that ownership should be a strategic objective. It also talks to a lesser extent about why Inuit were perfectly positioned to take advantage of the opportunity presented by the Grays Bay Road and Port Project. Effectively the ownership opportunity was a vacuum and the Inuit seized the opportunity through their business model.
This is a $485 million project. It's a 235-kilometre long road from the Jericho mine site, which is near the Nunavut-Northwest Territories border, to a port on Grays Bay which is in the Coronation Gulf.
I'd like to talk a lot more about the project. I view it as being a microcosm for the corridor proposal that you are looking at, primarily because of the amount of Aboriginal territory that it goes through and in trying to find a way for Aboriginal groups to participate. We may have a model for you to pursue, and I can cite some other examples for your benefit.
The difference is that our corridor is brand new. It is not supplemental to existing corridors. There is nothing up there right now. If you look at the lines on the map drawn by the University of Calgary study there's no line going into Nunavut at all. Ours is a new line and we think as a result it is a transformational project for the region, the territory and the country.
One of the key features of this project is it's what we view as an historic partnership among Inuit, government and industry. Ironically, it's the business model of Inuit that is the foundation upon which this partnership has been built. We are pretty much the glue that is holding it together at this stage.
I want to explain why Inuit find the prospect of ownership attractive. As I said, the briefing notes I provided explain how we arrived at the need to pursue ownership. I want to talk about why this is specifically attractive and would be applicable to indigenous groups looking at the prospect of participating in the proposed corridor.
First, this road and port opens up exploration of what's called the Slave geological province. It is compared to the Abitibi geological province, which straddles the Ontario-Quebec border and, as most people know, has resulted in more than 100 producing mines since it was first discovered at the turn of the last century.
This Slave geological province has similar prospectivity across gold, precious metals, diamonds, uranium and base metals. The opening up of this geological area is the primary driver behind the economics and recommendation of the study put together by David Emerson looking at the Canada Transportation Act. They viewed this overall corridor going from Yellowknife to the Coronation Gulf, of which our road will be a significant part, as being the best opportunity for a corridor in Nunavut.
For the estimated $2 billion cost it was the view of that study that would result in more than $40 billion of benefit to the country. That's one of the main aspects we are looking at it. Within that province, and again there are some explanations in the briefing note, there are multiple tracts of Inuit-owned lands which were granted to my shareholder under the Nunavut Land Claims Agreement. The background briefing note will explain how that all transpired.
They have a vested interested in seeing these properties developed. They were selected because of their geological potential. They have a vested interest in ensuring that their lands are developed to provide some benefit for them. That's the macro perspective.
From the more micro basis, the Inuit see that there are tremendous multi-tiered opportunities in the usual jobs, contracting and business opportunities. First of all it relates to the construction and operation of the infrastructure. The operation is in perpetuity, so we're not talking about a limited window. There will also be support businesses associated with the infrastructure, things like trucking businesses, heavy equipment maintenance and that kind of thing.
We see tremendous opportunities for new businesses which will be in support of the exploration activities that we see emerging out of the construction of this infrastructure.
Other business opportunities will result from what we see as being lower cost of community resupply. In the wintertime we are contemplating having ice road networks taking food supplies directly to the front door as opposed to flying them in. During the course of the ice-out season, the season will be that much longer because you will be able to truck goods to the port site and then barge them out immediately as opposed to waiting for the shipping season to open in September.
We also see that this offers the opportunity for more effective capacity building. Employment channels will be long term. Right now a lot of the training is trying to take advantage of short-term opportunities. A good example is the drilling program that was put in place three years ago. Some 12 graduates came through that program. By the time they had finished the program all the opportunities had dried up. We don't see that being the case with this infrastructure in place, and that's one of the reasons we want to support it.
More business activity and employment opportunities will provide professional services in the some of the regional hamlets. Right now that is not the case. Everything is serviced out of Yellowknife. One of the reasons we think Inuit are not predisposed to going to the professional ranks is because they don't know what they are and have never seen anyone who is a professional. As a consequence, that is not an aspiration for them, given where they live.
There are multiple other smaller reasons, but the last big reason is that we see this as an opportunity for Inuit to create a pool of wealth capital. This wealth capital will come from the charging of usage fees for the use of the road and the port facilities. Obviously the dollars will be used to cover the operating and maintenance of the infrastructure and to pay back any debt being financed through third parties to be able to build the road. Anything that is left over we view as being accessible by Inuit. It will be put into their trust to be managed by trustees as opposed to being put in the hands of politicians.
The governance is in place to be able to address and accept this. The view is that by building a pool of wealth, Inuit will be in a much better position to determine their own destinies and develop programs for their own benefit.
In the context of emotional wildlife issues, our shareholder has been accused of being pro-development but really they are anti-poverty and anti-dependence. They believe strongly that they can properly balance competing objectives that accompany conservation and development.
To give you some context as well, we applied for up to 75 per cent of the $485 million cost in 2015 to the Building Canada Fund under the previous government. At the point where we expected to get a commitment or announcement, the election was called. We have been in a state of suspended animation since, awaiting the new government's development of their programs. We believe we are extremely well positioned to take advantage of the new programs however they may look in the end. We certainly welcome any and all of your support in terms of endorsing what we are trying to do here.
I go back to my prepared remarks because it is important to talk about some of the key points that can be gleaned from our experience and what we're trying to do.
Beginning with the last full paragraph, to give you a sense of where we are currently, we and the Government of Nunavut have finalized the road configuration and the design of the port site. We have begun the environmental assessment and regulatory review process. We have completed our first round of community engagement in our region and the support for the project has been overwhelmingly positive based on the opportunities the project presents.
I want to put a picture in your head. We're consulting with ourselves. It's not industry consulting with indigenous groups; it's indigenous groups consulting with themselves. Just imagine the change in the dynamic. We saw it firsthand when we were in the communities this past December talking about this project.
Inuit believe that through a careful and considered assessment of science, traditional knowledge and creativity, environmental and wildlife issues can be managed in ways to allow development consistent with Inuit values. That has been the primary driver of this entire initiative.
For your consumption, I made some key points that can be gleaned from our long and sometimes challenging path to get where we are.
First, indigenous ownership in an infrastructure development will provide the unencumbered social licence necessary to allow the development to happen.
Second, the impacts of a development on an indigenous group can be best managed by the indigenous group as a proponent or owner. In effect, they will be consulting with themselves as we showed during our community engagement process in December.
Third, indigenous groups offer access to federal government moneys that private sector proponents currently cannot access. That became a tool through which we were able to develop our partnership with industry and government.
Fourth, the determination of ownership should not solely be based on the amount of cash invested but should factor in in-kind investment, sweat equity and some recognition of the value of the social licence of the project.
Fifth, the pursuit of indigenous ownership will never be a simple and straightforward process. If you read our note, you will see why I say that. It has taken us six years to get to where we are right now.
Sixth, indigenous groups that are properly resourced with commercial and corporate expertise in law, accounting and capital markets are best positioned to be able to consider the merits of ownership or address concerns associated with ownership.
That concludes my formal remarks. Thanks again for giving me the opportunity to speak. I welcome your questions on any aspect of what we're doing here.
Senator Enverga: Thank you for the presentation.
We're talking about developing the northern corridor. I don't think it's going to reach Nunavut. How do you think it will help the development in Nunavut?
Mr. Northey: There are a couple of different angles to the proposed corridor you are looking at. Right now everything is east-west. We know there are two existing corridors that are east-west: TransCanada and Yellowhead. That is great for interprovincial trade. In terms of access to export markets I'm not sure how you're going to get out.
Vancouver has a minimum of 25 to 30 ships in the harbour waiting to find their berth. I've done some work for the port in the past. They are at capacity in terms of what they can do and in terms of expansion. Prince Rupert will have some capacity.
We need to look at other port sites. One advantage of our northern port is it provides a safety valve to be in a position to take advantage of huge increases in traffic that are needed to go to Asian markets.
With the opening of the Northwest Passage as a result of climate change, which is real up there, there will be an extended opportunity to ship goods that would be bound for export markets coming from the south through the port and using the road to get there.
Senator Enverga: I don't know how we can do this, but is it possible to go farther north for the northern corridor so that it will be closer to the resources in Nunavut? Is there a possibility there or maybe another gateway going to the northern corridor? Is that something you're looking into?
Mr. Northey: We're not. We're connected to the TransCanada Highway system indirectly right now through Yellowknife. The all-weather paved part of the TransCanada starts north of Yellowknife and it becomes a winter road up to the diamond mines.
There is a winter road that has continued beyond that to get to the Jericho mine site, the southern terminus of our proposed road. The NWT is looking at turning their ice roads into all-weather roads. That is the opportunity for the all-weather roads in the Mackenzie Valley which are being contemplated or all-weather roads up to our port as well.
The problem with the Mackenzie Valley corridor is that a lot of discussion was premised on oil and gas exploration activity. As the previous presenters mentioned there is no opportunity for exploration now. The economic benefit of the Mackenzie Valley Highway will be limited to community access, which cannot be underestimated, but the economic opportunities are not as great for that now as they used to be.
Senator Patterson: I appreciate the chance to be part of the committee today. I want to tell my Senate colleagues that I'm very enthusiastic about this Grays Bay Road and Port Project. It's the first connection to the North American highway system for Nunavut, which has no roads and no ports yet.
This is only the second link to the North American road system for the territory since Diefenbaker's Road to Resources Program built the Dempster Highway in the 1960s from Dawson City to Inuvik. This is an exciting project for Nunavut.
Canada is being asked to contribute somewhere in the vicinity of $400 million to this $500 million project. The Government of Nunavut has made it a priority. The Inuit will build and profit from this road. What's in it for Canada? Why should Canada invest money? What will be the return for Canadian taxpayers who subsidize Nunavut 90 per cent of their $1.9 billion budget for social programs and the cost of living? What does Canada get back for this investment?
Mr. Northey: There is the multiplier effect. There are tremendous opportunities for Canada such as tax revenues. First, as economic activity picks up in Nunavut there will be corporate business and personal tax opportunities that aren't there right now. Second, a lot of goods and services will be required to supply some of the economic activities up there aren't being made up there so they will have to be manufactured somewhere else, and southern Canada is as good as place as any.
There will be tremendous transportation opportunities. Edmonton stands to benefit massively because they are the gateway to the north. They're the only route north for western Nunavut. I can see Edmonton being a massive hub for the activity likely to transpire.
Senator Patterson: Is there a customer for the road?
Mr. Northey: There is an uncommitted customer for the road. MMG Canada has a major base metals deposit, a zinc deposit called Izok Lake. It's in the middle of nowhere. One of the hopes is that by building this road they will be able to build a spur to it and be the primary user of the road to start with. They are looking at the value of their activity being in excess of $13 billion over the life of their mines as they see them right now.
Senator Patterson: What about the three diamond mines in the Northwest Territories supplied by winter roads right now, melting winter roads?
Mr. Northey: Diamond mines are another angle. Thanks for queuing that up. They are solely supplied by their winter roads. They invest $30 million a year in their winter roads and they melt every spring. They are looking at this as being a terrific chance to lower operating cost by having all-weather access, barging stuff to our port, bringing it down to a staging area at Jericho mine, and then trucking it from there when the winter road is built.
They will have two points of access, whereas right now they have only one. Our winter road season will be one to two months longer than theirs so they will always have that safety valve. When the Government of Northwest Territories builds their all-weather road, which they are contemplating, the opportunities will be even greater to find more diamond and other exploration properties in the region.
Senator Wallin: I agree totally that Inuit ownership is actually the cost of granting social licence. I'm glad you put it so clearly. Don't misinterpret my views here when I go to my question.
In the fourth point you raise it again. How do we calculate the value of that granting of social licence over and above what you have already laid out as a loan ownership and the level of subsidy that exists right now? Are you talking about some kind of value?
Mr. Northey: The short answer is that I can tell you the cost of not having the social licence, and the Energy East pipeline is great example of the cost of not having that social licence.
The Mackenzie Valley Pipeline was talked about earlier. It offered what I thought was the best model for recognizing the social licence that Aboriginal groups had to offer for the success of a project.
In that proposed project, Aboriginal groups were given 10 per cent ownership, end of story. There was no cash and nothing required. There was talk about borrowing money to do it, but in the end they were going to do it as an in-kind investment. It was up to the Aboriginal pipeline groups to figure out how to divvy up the spoils.
From my perspective they had the Aboriginal groups on side. There was one rogue group, but they were ultimately going be on side and not pass up the opportunity to make money. At the heart of it, they bought peace and full support of the Aboriginal groups. What's the value of that?
Senator Wallin: Doable and cheapest price, is that what you are saying?
Mr. Northey: Yes, yes.
Senator Wetston: Can you talk a bit about the challenge over the last number of years with commodity pricing? How has that challenge of the commodity sector affected some of the proposals you're suggesting to the committee?
Mr. Northey: Let me begin by saying I'm not a commodities expert. Most of my knowledge has been gleaned anecdotally, so I can talk anecdotally.
The main project that is supposed to be the anchor tenant is a zinc project. Their assumed price when they started a feasibility study was above what the actual market was when they completed that feasibility study. They took the view of having a longer perspective, but even with assumptions of commodity prices being slightly higher they where they were at the trough, they couldn't make their project work because of the high cost of the infrastructure necessary for them to get their ore out.
That's where we come in. As a result of our ability to get access to third party capital, as well as government capital, we can take that off their balance sheets and then charge them user fees to improve the project economics.
It is the same in gold. Unless you have a gold opportunity at tidewater and you can barge everything in, the prospect of having to build a road to get access to your ore body, especially in the last five years, has been pretty bleak and so no one has done it.
Senator Wetston: Many of the pipelines years ago in Canada were built on the basis of take or pay contracts. They wouldn't have been built otherwise, I believe.
Mr. Northey: Yes.
Senator Wetston: Is that similar to what you're suggesting here or are we talking about a slightly different concept?
Mr. Northey: It is exactly the same concept. One of the challenges we face in north is finding credit-worthy counterparties and enough of them.
Senator Wetston: I have a couple in mind but maybe not the same ones you have in mind, but can you point to any successful indigenous ownership projects that you're aware of today, whether it's full ownership or partial ownership?
Mr. Northey: None come to mind for me, to be fair.
Senator Wetston: For example, Ontario Power Generation entered into some hydroelectric projects. I certainly want the record to be clear on this. I'm not sure if it's an ownership structure or some form of royalty structure. I would think it's partly ownership.
Mr. Northey: It's ownership.
Senator Wetston: That's an example.
Mr. Northey: It's a very good example, yes.
Senator Wetston: We have had some great examples in Canada. I am from Cape Breton originally and I have had the benefit to of doing work at Cape Breton University and at Membertou, a successful economic development run by Chief Terry Paul. It's an example of successful business projects. It is not in the line of what you're discussing, but it is an example of where successes can occur in the right environment. I point to those two as a matter of information.
What are your thoughts about what needs to occur for it to happen?
Mr. Northey: I've worked on two sides of the indigenous opportunities. I have worked on the side in which the Inuit recognize they don't know a lot so they hire experts to help them. I have also worked on another opportunity involving an indigenous group. They knew a similar amount, which is virtually nothing. They went on the cheap in terms of hiring the people they needed to get the advice.
There is a significant role for government to play in ferreting out the people they need to provide the advice for them. The term financial adviser is thrown about easily and freely in the indigenous world. At the heart of it what's really required for most of these opportunities is someone who has knowledge of how capital markets actually work and how to finance the opportunity, not whether the cash flow could possibly work or how the balance sheet will look at the end of the day.
There are examples where the government set up pools of eligible advisers. If they are going to advance funds to pay for advisers, this is the pool to select from. When PPP Canada was first established, a lot of municipalities didn't understand anything about PPPs. They set up a pool of advisers to help municipalities understand how PPPs worked and municipalities were allowed to get government funding to be able to engage from this pool. The government would play a big role in helping to move this type of thing forward.
Senator Patterson: The School of Public Policy at the University of Calgary has proposed what they call a northern corridor concept, which would establish an east-west corridor. The idea was first generated 50 years ago and involved Richard Rohmer, which I actually remember.
The northern piece of this east-west corridor would be a route through the boreal forest in the southern part of the Northwest Territories and down the Mackenzie Valley to tidewater.
My concern about that proposal is that it seems to miss out the rich Slave geological province that contains the Isaac Lake zinc mine and a multitude of base metal, diamond, gold, and precious metal resources. It has been estimated to be significant.
I know the University of Calgary is proposing a three-year academically led peer review process to further flesh out this the proposal. Would you have any comments about that proposal and whether it would be relevant to the priorities of the Inuit in Nunavut?
Mr. Northey: At the heart of it, as I mentioned when Senator Enverga asked his question, there is no contemplation of connecting Nunavut anywhere. Clearly Inuit would not be part of the equation. I also mentioned that as it relates to east-west it is great for interprovincial trade. I think at the end of the day you have to get to a port. I can say there is no capacity to Vancouver and I suspect there is limited capacity in Rupert, so you have to find another port somewhere.
In terms of priorities and nation building I would argue northern corridors should be higher priority than east-west corridors at this stage, especially given the state of port activity. To the extent you were looking at a broader national plan for east-west, there has to be a consideration of doing it in chunks and engaging northern corridors to get your goods out, whether it's Churchill, Tuktoyaktuk or whether it's Grays Bay.
Senator Patterson: Are you the familiar with the Emerson report on the review of the Canadian transportation strategy and what Mr. Emerson's report said about the Grays Bay Road and Port Project?
Mr. Northey: I'm intimately aware of it. It has been one of the main things we have been able to point to as being a major independent verification of what we're trying to do.
They said the Yellowknife to Coronation Gulf corridor is the most prosperous corridor in the North, in Nunavut specifically. For the $2 billion investment, Canada stands to gain as much as $40 billion.
They also said that the federal government should step up and immediately fund the Grays Bay Road and Port Project. I can assure you I never spoke to Mr. Emerson or anyone on part of his panel. I didn't influence the discussion so I felt pretty good about the fact that it was third party verification without my influence.
His panel thought this was the best opportunity for Nunavut, so that is why we continue to push for this aggressively.
Senator Wetston: Exactly where would this road go, this Grays Bay Road? I am not sure when I look at the map.
Mr. Northey: It's not on that map. The port site is halfway between what used to be called Coppermine, but is now called Kugluktuk, and Cambridge Bay. It's on the mainland and the road goes due south to where the Jericho mine site is right now. That's the end of the ice road that goes from the diamond mines up to the edge of Contwoyto Lake.
Senator Wetston: And how long is it?
Mr. Northey: It's 235 kilometres long.
Senator Day: Do you have a sketch you could provide to us?
Mr. Northey: Yes.
The Chair: We have one here to circulate. Thank you, Mr. Northey. We appreciate your testimony today.
Colleagues, we will meet again next Thursday at 10:30 a.m.
(The committee adjourned.)