Proceedings of the Standing Senate Committee on
Transport and Communications
Issue No. 3 - Evidence, May 10, 2016
OTTAWA, Tuesday, May 10, 2016
The Standing Senate Committee on Transport and Communications met this day at 9:30 a.m. to study the development of a strategy to facilitate the transport of crude oil to eastern Canadian refineries and to ports on the East and West coasts of Canada.
Senator Dennis Dawson (Chair) in the chair.
[English]
The Chair: Honourable senators, today the committee is continuing a review for the development of a strategy to facilitate the transport of crude oil to Eastern Canadian refineries and to ports on the east and west coasts of Canada. I would like to welcome our witness for today, Mr. Alex Ferguson, Vice President, Policy and Performance, of the Canadian Association of Petroleum Producers. We will start with a presentation from Mr. Ferguson, and then senators will have the opportunity to ask questions.
Alex Ferguson, Vice President, Policy and Performance, Canadian Association of Petroleum Producers: Thank you very much. Thanks for the opportunity to be here today on behalf of the upstream association of petroleum producers, CAPP. It's an important topic, so we are excited to be here and hopefully add some value to your deliberations.
I want to start off with a bit of recognition for some of the devastation in Fort McMurray in the province of Alberta. It has been really first and foremost in many of our minds for the last little while, and it will continue to be as we see families try to recover from the horrific incidents related to the Fort McMurray fire. It is weighing heavily on our minds, and I'm sure it is across Canada, as we see the outpouring of support from many parts of Canada for those Canadians who are displaced right now.
I don't have a formal presentation, if that's okay. I thought I would start with a bit of current context, as we see it. I noticed in the materials that I was asked four reasonably concrete questions, so I thought I would focus some initial comments on those. Then I will entertain any questions, concerns or issues that you want to raise and give you a response from the perspective of the upstream sector in Canada.
The first point I want to make is to note the volatility of the commodity price for our products, oil and natural gas — all kinds of oil. We saw that reflected, if you look at the last few days regarding the production declines or shutdowns as a result of the Fort McMurray fire. There was a quick move up in the commodity price, but then, once the fires were noted as not growing at the rate that they had projected, the price immediately came back down.
That is a good indication of the kind of volatility and the commodity price markets that we're facing. We're going to see that continue for quite a while, as the markets do a very efficient job, we believe, going forward adjusting to the decline in price and the supply situation we have globally.
I did want to also highlight that we have just recently released our sector forecast for capital investment and drilling for this year. There are some notable comments in there that are related to your study, I believe. There was a decline of 62 per cent over the last two years in capital investment in this industry. This is a big percentage drop; it is the largest drop over a time that's been either a one- or a two-year period that's been recorded since we started recording or monitoring the investment numbers in Canada, which I believe was sometime in the 1940s. That translates into quite a significant decline in production.
Also, when you look at the loss in capital investment — which really is what keeps our industry going — the amount of money that we drive into Canada and drive through Canada to continue our operations — the decline is greater than the total capital investment that we see in the second-largest sector in Canada. We highlight that more to illustrate that the impacts in the Canadian economy are significant here. You can't take your number one, number two or number three sectors out of the economy without having a pretty significant impact for everybody in Canada.
I will also highlight a point probably more specifically related to your study. I noticed on April 26 that the National Energy Board indicated that so far they have approximately 2,500 applicants to participate in the hearings for the Energy East pipeline project; that's 2,500 people for a specific infrastructure project in Canada who have put their name forward so far to indicate that they want to be involved in the hearing processes.
I would also highlight that over the last two years, approximately 20 per cent of the Canadians who are employed directly and indirectly in our sector have become unemployed, to the tune of about 110,000 Canadians. That's another number I just wanted to highlight for context.
I will talk a little bit about the four questions that I saw in my materials, offer a few comments and then quickly get into questions. The first question that I saw on the paper was, how does the federal government facilitate social licence for crude oil transport projects, that is, pipelines? I will point out that the private investments that are coming into Canada and that want to come into Canada for these pipeline projects are Trans Mountain, $6.8 billion private capital investment; Northern Gateway, $7.9 billion private capital investment on that project; and proposed Energy East, $15.7 billion private capital proposed to come into Canada for that project.
In Ottawa, there is an LRT project proposed or under way. I think stage two for the Ottawa LRT is $3 billion of P3 money. So, in that context, these are significant private capital investment opportunities for Canadians.
One of the ways that we see the federal government having a strong role, and we're encouraged to see this role forward, is around the ability to collaborate and work with the provinces, and try to get the provinces to be reasonably aligned on the need for this kind of infrastructure across the country. We have the situation where, over the last little while, within a matter of days sometimes, we would have one province articulating that a pipeline project is very important for their province and the country, and then the province right beside them comes out and articulates that, "Not so much. We're not interested in that pipeline project.'' So having a role for the federal government to bring those provinces together, to see the need for these kinds of large-scale infrastructure projects for Canada, we believe is a really good role for our federal government.
When you get down into the more of the detailed information and ways the federal government has roles and mandates to play out — safety standards, rules around pipeline construction, maintenance, operation — and not just pipelines. I will articulate that the rail piece is also an important part of the transportation infrastructure for our sector. So we see some good work.
Our sector has participated in much of the engagement work with the federal government as well as the provinces. Even though we are not the rail industry or the pipeline industry, we see it's very important to us, because that is our product on that transportation system.
Broadly speaking, we look at the opportunities the federal government has to continue to raise public awareness of the importance, first, of the development of Canada's natural resources for today's and tomorrow's economy, but also continually raising public awareness of the importance and value of getting our products to the right markets at the right time, all the time, and that it's not just a short-term, one-project proposition; it's a broader piece in making sure Canadians understand that our natural resources need to get to the right markets, to get the best value for all Canadians.
The second question I had really quickly was around my thoughts on how to improve public confidence in the pipeline review process. Here, I stalled a little bit. I want to throw back a question: Is there a lack of public confidence in the pipeline review process? When we have looked at it, we're not clear just how big of a problem that is and where it's a problem. If we can't define that clearly, we would be concerned about what kind of fixes we're applying to a process for which we don't really know what the problem is.
From our view, we want to be very careful and controlled because we have a lot of projects that have been built under the existing process. We don't want those projects now to be seen as being less than carefully thought out and processed as we look to new projects. We're quite fine in terms of the public confidence, making sure that as our society grows and our expectations change over time we address that in our regulatory processes. We certainly don't want to create or instill some lack of confidence in projects that have recently been approved as we move forward. So there has to be a good understanding. Let's make sure we fix the problem, not a few symptoms. We think that's a good starting process for any kind of review of the NEB modernization initiative that this government has announced.
As a former regulator for this industry, I will tell you, the issue is whether the review process is the problem or the outcome of that review process is the problem. That's something that we're stuck on when we look at our interactions with our communities that we work in. It's not clear to us whether fixing the review process, which could eventually lead to an approval of some project, will satisfy everybody. I think the realization of that happening is pretty slim.
There are three states that any kind of activities in our societies can proceed with. There are certainly activities that are completely prohibited and that you can't get a permit for. We don't think oil and gas development or natural resource development fits that. It's not a prohibited activity.
There are activities that you can do without any oversight or any permit required, and those things you don't see in any regulation or law, certainly in Canada. Other countries have specific laws that outline things that citizens of their countries can do without regulation to make it very clear that those don't need to be regulated, and they are not prohibited.
There is a vast number of activities that you can do but under some conditions or regulations.
We believe our business and the transportation to our markets is a well-regulated industry. We always see opportunities for improvements on that. I think the federal government has a role to ensure there is not confusion between activities that are regulated to the point where they become de facto prohibited. I think that's the balance point we want to see clarity on as we see progress on improving or changing our regulatory systems in Canada. We don't want to confuse ourselves or confuse the investment community. We certainly don't want to confuse the public to think that regulated activities can be prohibited.
A good example of that, just for clarity, is the difference between a moratorium on an activity and an outright ban on an activity. The clarity around what those two phrases are becomes really important for the public as well as for the investment community.
The third question was how to facilitate the involvement of indigenous peoples in decisions related to crude oil transport. First, consider that it is not just a problem for crude oil transport. How do we broadly include indigenous peoples in decisions related to all activities in our society, our economy, and our culture? I think that's a broader question, if we could figure that out. We believe the key role for the federal government through that is through engagement on the reconciliation efforts that need to be undertaken and proceeded with across Canada with our indigenous peoples. We see some positive movement in that, so we're very encouraged. To make you aware, our industry has in the last couple of weeks issued a policy statement on behalf of 100 per cent of our members that we fully support the implementation of the United Nations Declaration on the Rights of Indigenous Peoples within the context of Canadian law and the Constitution. So from our perspective, that is the starting point for an ongoing dialogue that needs to happen in Canada to get on with the reconciliation piece, make indigenous peoples a key part of our economy, society and culture in Canada and continue to grow that. We believe that is one of the key aspects in our pathway to ensure we have access to our products to the right markets at all times.
I will say that the federal government has a very strong role in this area. Our sector is highly encouraged by, if I can articulate it with one number, $8.4 billion in this year's federal budget to support indigenous peoples across Canada. We believe that is a great position to start from, and we're looking to see good leverage for that in making sure we make progress for indigenous peoples in Canada.
The last question concerns key elements of a national strategy. As I just mentioned, indigenous peoples' reconciliation and involvement is important from our point of view. Interprovincial collaboration and having a role for the federal government there is important. These pipelines need to cross all those provincial boundaries. If they don't see an alignment on value and effort on that, then we're really fighting uphill.
We did talk briefly about the public confidence. That's generally a very important area, whether it's on environmental matters or whether it's on communication, awareness and engagement in the process; we believe that's important. The only thing I will leave you with on that, though, is that from our view, a national strategy is not just getting a few pipelines approved. This is a longer-term, longer-range vision that is required, a road map. What institutions do we need, for example, to ensure that we have the ability to get our natural resources to the right markets at the right time for the best value for Canada?
I'll stop there and entertain any questions that you may have.
The Chair: That is a strong overview. Thank you very much.
Senator Doyle: Thank you, Mr. Ferguson. It was a very interesting presentation.
You referenced in the beginning of your remarks the upstream petroleum industry. What, in your opinion, would be the impact of not building any new pipelines on the upstream petroleum industry?
Mr. Ferguson: Today, if you look at the production declines we have seen as a result of the commodity price drop, we have seen a significant drop in the non-oil sands or conventional part of our business, so today there is not a pipeline constraint process on that. But on the oil sands, we have seen and will see for some time now a continuing increase in production. Right now, we are constrained on total volume because we're still moving a lot of product by rail, which is okay to do, but it's certainly not the optimal economic opportunity.
I think the more important thing in the short term is what markets are we accessing for our products and what pipelines. In the short to mid-term that's a much more critical problem for us. We have an oversupply situation in the North American market. With respect to the spread between North American prices, international prices and Brent verses WTI, that differential has shrunk quite a bit, but so has the base value of the product. So that differential, even though it has shrunk significantly, is much more important today than it was when we were at $90 oil, a much more significant opportunity for us.
Then, if you look at the longer-term perspective on global demand for oil, no surprise that the markets globally for this product are very efficient, much more efficient than OPEC meeting and talking about price or supply constraints. Lower oil prices, if you look at the booming sales and increased use of fuel in North America, as prices come down, that is a significant uplift in the longer term for commodity price but also internationally. I think just last week or two weeks ago, India announced a significant breakthrough in demand projections for oil into India. Those are market opportunities for Canada that we don't currently have. For us, in the mid- to longer term, being able to access that is critically important.
However, today, as soon as price bounces back again, I think the opportunity for growth in the sector in our economy is critical for pipelines.
Senator Doyle: Going over the notes, you refer to Enbridge Line 9B reversal and Line 9 expansion and the fact that crude oil is now flowing through the projects between Ontario and Montreal. The Mayor of Montreal is not very impressed with the Energy East project. What about the Enbridge project? Did it enjoy social licence? Was the City of Montreal against it? Was it a project that served Montreal, for instance?
Mr. Ferguson: Not to the same extent as the concern expressed on Energy East. It's probably boiled down to a number of factors. I don't have the specifics of that project, but from what we can see, generally I think some of it is framed, for example, around political influences around the large Energy East project versus smaller Enbridge projects. It's also probably related to a number of other issues that are project-specific that I wouldn't be able to comment on.
Senator Unger: Thank you very much, Mr. Ferguson. That was very interesting. Your commentary is very well explained, received and good to have on the record.
I find myself wondering what your thoughts might be regarding, in the aftermath of that horrendous fire in Fort McMurray, what the results might be regarding the many activists and people who oppose the oil industry at large and pipelines in particular.
Mr. Ferguson: Certainly. That's a very interesting question. I think we haven't really turned our minds to that. I think we're still really reeling from the displaced families and how do we get people back to work and settled and bring the town back to life, in some sense.
Some of the commentary we hear out there, there are some less-than-informed public comments around climate change and this fire, for example. Some of that is corrected periodically, but there is still an element that actually mistakenly believes that a particular forest fire is a result of climate change, as opposed to broader underlying conditions. Yes, the patterns are changing over time, broadly speaking, and the risks of that increase, but certainly you can't draw apples to apples on that.
I don't think a lot of linkage has been created yet between the activists and the opponents for pipeline projects or any oil and gas projects or any resource development projects and this forest fire. We don't see any reason to link them, in our view. We are just so focused right now on getting families back into some level of safety and comfort more than anything else at this point.
Senator Unger: Thank you for that. To what extent have your member companies been successful in forming partnerships with indigenous people? I know that in B.C. there have been some successes, but I would like your opinion.
Mr. Ferguson: I have worked in other sectors in Canada as well. I came originally from the forest sector. In my view, the performance of Canada's oil and gas sector in forming business and community partnerships with indigenous communities across Canada where we work is stellar. I have worked internationally and have not seen the depth and the commitment that I have seen in this sector building those relationships, whether they are business or community.
I think the challenge for us really is that most of those relationships and excellent relationships are built where we operate, but of course, as we now seek to build this infrastructure outside of where we are operating, we're dealing with communities, and whether it's indigenous or non-indigenous communities, they don't know us. It's not us; it's a pipeline project. Pipeline guys are doing, I believe, a great job building what they can, the relationships they have in the communities where they are planning their projects through, but again it's our product that is in that, that's being transported, and they don't know us because we don't operate there, whether it's in northern Ontario or of course some other parts of the country.
Northern B.C., not northeast, northwest B.C., they don't know us. So they are asking questions that frankly we don't have the long history of building those relationships that we have in the communities we operate in and have operated in. That's just taking time and some confidence and trust that we're there. We will always be here. We will be there for Canada. And certainly a good role for government is to help us bridge that and make sure that those communities outside understand the importance of this infrastructure and how it benefits them indirectly as well as directly, where possible.
Senator Unger: I'm very proud of Alberta's record. I know that a lot of First Nations people work at the oil sands. There are large numbers, and you could probably comment more on that than I can.
Mr. Ferguson: I've been asked questions recently, for example, how many indigenous engineers does your industry employ? My answer is simple: all of them, all of them. We'll continue to do that, and we're looking for more. We're happy to support the development of more indigenous peoples in all aspects of our business. I think you'll see that in every one of our operators, whether it's Alberta, British Columbia, Saskatchewan or Atlantic Canada. Everywhere that we operate is a very strong commitment; we always will be there.
Senator Unger: Thank you Mr. Ferguson.
[Translation]
Senator Boisvenu: Thank you very much for being here this morning. You appeared before the Standing Senate Committee on Energy, the Environment and Natural Resources last February and March. In your presentation, you stated that the Quebec refineries depend largely on imported petroleum and that they have to pay an import premium. I have not heard that before. What is the premium and how big is it in terms of the net cost of a litre of gasoline?
[English]
Mr. Ferguson: Thank you for the question. From our perspective, there are two ways to look at it. It is not necessarily a premium on the oil that they are paying. It will be in some cases a different blend of oil, but I think we need to understand that the refineries would need to look at opportunities for how to use the heavier crudes as well as some of the lighter crudes that we have in Western Canada.
Certainly I'm not familiar with the specifics of the refinery operations in Quebec or Atlantic Canada. It's more about there is a value that is used to purchase a product from outside of Canada compared to a product that is produced and adds value into Canada that can be bought here.
The premium comment, I think, was more about we do have — and we know this from our transportation records — there are crude oil products from Alberta that are shipped down through the pipeline infrastructure to the southern United States. Some of those molecules actually get on a boat and come back up along the ocean into Canada. Canada is not benefiting from the cost of that transportation; someone else is.
We look at this as an opportunity. You have to balance that against what kind of investments may be required in the refineries to make them more suitable or able to take the kind of product line that comes from Western Canada. All of that has to be worked out. Investment is required on that, certainly. Probably more importantly, broadly speaking, you have a Canadian product that benefits Canadians being produced. It's not being used as it could be.
[Translation]
Senator Boisvenu: So basically, you are talking more about economic benefits.
I would like us to turn to another subject. Earlier, we heard about Quebec's reluctance to have this pipeline cross the province. The last organization to oppose it, but not the least, was the Union des producteurs agricoles du Québec, which is a very militant and powerful union.
It is estimated that 75 per cent of the pipeline will go across agricultural land. In Quebec, there is more and more talk about a possible levy for transporting the material. Farmers currently have been getting a bonus from the construction of the pipeline; they will be receiving a payment that will vary according to the length of the pipeline across their land. However, the Government of Quebec claims that there are no economic benefits from oil that goes across our territory en route to other provinces. Hence the talk of a levy on the quantity of oil transported.
Is that something you talk about in your association, or with petroleum producers, or even with the promoters of the Energy East pipeline project?
[English]
Mr. Ferguson: Great question. Thank you very much. Certainly it's important for us. I want to distinguish that we have a relationship with the pipeline operators, no different than the rail systems or anything, but we're quite distinct from them because they charge us to use their infrastructure. Under competition law in Canada, it's very important that that remains distinct from us.
We certainly advocate getting our products to market. We have to be somewhat careful, because if we advocate for those projects being so costly that we can't afford to move our product through them, it becomes a real challenge for us. So we're looking for efficiency, appropriateness of cost structures for those pipelines, because that's the basis of the charges we pay for using that infrastructure to move our products.
I've heard a little bit about the levy. I'm sorry; I'm not aware of what the pipeline proponents' specific position is on that. We look at it, broadly speaking, that if there's an economic efficiency that we can get our products moved at a reasonable cost, then how that money is distributed is really a task of governments and the specific project proponents.
I'll be frank with you: We are concerned about the cost of these projects because we end up paying that as an add-on to our product to move it. Anything that decreases the economics of our business is a concern to us, so we would watch that carefully. But as to the appropriateness of landowners getting benefit or value from pipelines crossing their property — or, let's be honest, slightly under their property — that would be a negotiation among governments, the landowners and the project proponents that we would just look to see broad efficiencies in economics.
[Translation]
Senator Boisvenu: At the moment, petroleum moves either by land, sea, rail or pipeline. Municipalities are very reluctant; we saw it in Montreal, and in relation to what happened in Lac-Mégantic. The municipalities are those incurring the risk when they see a huge amount of material going through their territory, but they get very little benefit as such from transporting the material.
Could you not see your way to establishing a royalty strategy in order to calm things down and get municipalities more favourable to the idea of pipeline construction, especially if it meant a reduction in the use of railways and trucks carrying that kind of freight?
[English]
Mr. Ferguson: Yes, I agree completely. I think the role of governments is to look at the opportunities created by these kinds of projects and how we grow our economy, broadly speaking, but also project-specific, for the benefit of all Canadians.
There are many ways to do that. For example, I will offer that Canadian oil sands right now, which is the bulk of the products that are going to be moved, obviously, there are 191 companies in Quebec today that are providing goods and services to support oil sands businesses. There are 191 individual companies that are benefiting from oil sands production in Quebec. The ones I like to highlight are three in Prince Edward Island that are benefiting from Canada's oil sands.
If you look at it broadly speaking, this is a Canadian industry, even though the development or the resource that's being developed is generally in one specific area. I think having an understanding of that is important. How does that fit into the mix of everybody benefiting from getting our resources to the right markets?
I agree; maybe one of the elements on a project-specific basis could be looking at how landowners benefit and mitigate the risk and the impact on their farming operations, which is a very important piece.
[Translation]
Senator Boisvenu: Certainly for the municipalities because, currently, they are the key to the pipeline construction strategy in Quebec and in other provinces. So if the municipalities were on board with the project, I think it would calm things down a lot.
We know the financial problems municipalities are having. Clearly, if there were some financial benefit to getting the pipeline built, the situation in Canada would be much more harmonious than it is at the moment.
[English]
Senator Black: Thank you very much, Mr. Ferguson, for your very helpful presentation this morning. Before I get to a couple of questions on your presentation, I wanted to pick up on the comments that you made initially about the terrible fire in Fort McMurray. I wanted to communicate, on behalf of my colleagues, to you, to your members, how impressed Canadians are with how your members, the major oil and gas companies of this country, have got the job done. They have protected their assets, but more importantly, they've protected their people. I think it's very important that they know from you that Canadians share that view.
I'd also, if I may, say we all know now that there are 30,000 families who have been relocated in Edmonton, 5,000 in Calgary and 3,000 in Lac La Biche. This committee should know, Mr. Chairman, that our witness voluntarily took in a family from Fort McMurray — unknown to him — and this is the kind of example we've seen all across Alberta over the last number of days, people opening their doors to families in a very difficult position.
So thank you; thank Albertans and Canadians; thank the energy companies. Please communicate that message.
Mr. Ferguson: Will do. Thanks very much.
Senator Black: In respect of your presentation this morning, I'm looking for a tight response. Let's pretend I run into you on the street in Vancouver. I'm a busy person, so I've got to get on the go. I say to you, "What are the consequences for Canada of not building pipelines?''
Mr. Ferguson: Not growing our economy.
Senator Black: Thank you very much.
In terms of my next question, we often hear about the regulatory framework, whether it's appropriate or not; the safety framework, whether it's appropriate or not in Canada, vis-à-vis pipelines and the energy industry, generally.
Are you able to share with us — and if you can't, you can't — any comparative data as to how Canada does internationally on matters of regulatory prudence and safety concerns? How does Canada do?
Mr. Ferguson: I'll try to give you a short answer. About a year and a half ago, we commissioned a study comparing the Alberta regulatory system, specifically around oil sands — it was an oil-sands-related project for us — compared to all other international jurisdictions in terms of fairness, transparency, efficiency — a number of factors. I can certainly provide a copy of this to the committee.
On any of those aspects, but when you pull them all together — and the study was done by an international, independent consulting company that has operations around the world, so this was not a lightweight study — Canada is typically first, second or third in every aspect that they reviewed in terms of our regulatory system.
Before you take too much confidence in that, our question is, if we're first, second or third, just how much do we need to improve? Maybe others need to improve. I can tell you from my experience working in many other countries, some considered much more advanced in terms of environmental protections than ours, the standards that I see in Canada are first-class, above anybody. And I say that even from my previous job as a regulator. Our standards, expectations and performance are far beyond almost any other jurisdiction that I can name.
Senator Eggleton: I want to pick up on the conversation about Fort McMurray. I think we were all relieved to hear yesterday that 90 per cent of the structures in the city are still sound. It will probably take some time — and the disruption of life, and your business as well in the area because of the employees affected. But at least a lot of it has been saved.
Let me ask you about the cost of production as it relates to the oil sands. The oil sands are now more than half — 58 per cent is a figure I've seen — of the oil produced in Canada, overall. Yesterday, the price of oil was about $44 per barrel, down to $43 at the moment. I've always been given the understanding that more than double that would be required in the long run to make the oil sands pay — to make it a viable, long-term proposition.
Can you comment on that?
Mr. Ferguson: I think "double that'' would be pretty high. It's very specific to project. There's quite a differential among oil sands projects and types of production. A lot of effort and millions and billions of dollars have been spent on how to optimize and be more efficient, which benefits the environment in terms of efficiency on energy use, which is a big cost driver for any sector, but this one in particular.
We have some projects that are, I'm sure, quite viable in the range of $45 to $50. We have some projects that will require significantly more. Also, it depends on where they're at in their project life cycle. It's dependent on scale and reservoir quality. There are so many factors involved. You'd have to look at each project alone.
Senator Eggleton: More of the new areas are more expensive?
Mr. Ferguson: Yes, some of the new steam-assisted gravity drainage, or SAGD. But we're learning, and some of those efficiencies are coming out.
What you saw was that there has been a cancellation of projects in the mid-term. The production growth is coming from the projects already in play; these are long-term investment horizons. So production growth will continue for a while as these projects complete and come into production.
The more troublesome thing is what that mid- to longer-term picture looks like without a price recovery or the efficiencies that we're hoping to get through technology and innovation to get these projects economic.
Senator Eggleton: But on average, $44 is not a very good price for oil sands extraction.
Mr. Ferguson: Not for the long term.
Senator Eggleton: No, not for the long term.
Second, let me ask you about the pipelines. We keep hearing that pipelines are needed to get the product to tidewater — "tidewater'' suggesting overseas markets or consumption. Yet, right now 97 per cent, I'm told, of our exports go to the United States.
Mr. Ferguson: Yes.
Senator Eggleton: So what analysis has been done with respect to overseas markets to determine the viability of them? Where are they?
Back in the days when I was Minister of International Trade, we were talking a lot about liquid natural gas, and that was an uphill battle, even dealing with the subject matter, never mind actually achieving it. So what makes you think there's this opportunity at tidewater?
Mr. Ferguson: Just in the last week or two, some of the expectations of global growth in oil demand are heading toward 100 million barrels a day. It's at about 96 million barrels a day today. The lower prices have steamed ahead a lot of jurisdictions; India, for example, just in the last week or two announced a record for their demand growth for oil.
Senator Eggleton: Is that conventional oil?
Mr. Ferguson: Heavy oil, too. Depending on what the supply is, the refineries will take on an economic basis what they can.
Global oil demand is continuing to increase and will continue to increase for quite some time. We have a supply imbalance today caused primarily not by OPEC, the Middle East, China or those jurisdictions, but by the United States, Canada and maybe one or two countries in South America. Our problem, with 97 per cent of our demand captured in North America, is that we're not getting the advantage. We're sitting in a very constrained market — an island, if you will. Being able to get off that island becomes really important.
The U.S. will always be an important trading partner. They're also a very important competitor for us now for investment, as we see a lot of money going south. But we need to decrease from 97-odd per cent, as you say, to anything below that, which is of significant value.
Senator Eggleton: It's always been a problem, trade-wise, overall with the United States. That's where most of our markets are for just about everything.
Finally, let me ask you about indigenous peoples. You embrace the UN declaration, which the government announced yesterday it would be getting on side with. I get the impression, though, that it will give indigenous peoples a stronger hand, which will mean all the more need to build relationships with them. I realize what you said about your relationships of your association, but it doesn't always fit for the pipeline companies. I know there's a separation of mandates here — you talked about that — but it's your product that's going through the pipelines, and it's in your interests to be part of it.
You say they don't know you. Isn't it time they got to know you? Isn't it time you became more involved? If they're going to have an even stronger hand in terms of dealing with these matters, perhaps it's not just a matter of dealing with the people who do the pipe but the people who put the product in the pipe.
Mr. Ferguson: Absolutely. I think our positioning on support for the implementation of UNDRIP is a good marker to start some of those broader conversations. We have been having them as well, to be honest. We've worked with the pipeline companies on all these projects, supporting them, making sure we talk to these communities outside as part of their project consultations they do along these pipeline corridors. So we have provided support advice.
We're encouraged. We believe there's a window of opportunity right now with the federal government fairly focused on this right now as well and the provinces focused on it. We think there's an opportunity space here now to gain advantage out of those relationships and the efforts that we've been putting in and will put in.
Senator Runciman: Thank you, Mr. Ferguson. I appreciate your being here. My question ties in somewhat with what Senator Eggleton was talking about, the efforts by your association. You talk about working with provincial governments. In the past, you've talked about value-added projects. You mentioned earlier 191 companies in Quebec, for example. I noticed in one of your earlier submissions you said two LNG plants would result in half the production in Algoma Steel in Sault Ste. Marie in Ontario — and, again, the provincial government is struggling with the possibility of another bailout of the company or the loss of it and the economic damage it would do to that community.
I wonder how well those messages are getting out. I'm not sure whether Premier Wynne has modified her position, but initially when we talked about the pipeline, there was criticism. We know what's happening in Quebec with respect to at least a significant number of municipalities. I guess I'm tying this into getting your message out. From your association's perspective, how much do you budget for communications or public relations?
Mr. Ferguson: It's not my strength or my area in our association, but we have quite a good team involved there. The way we work as an association is we draw in, collaborate and coordinate a lot of the company-specific operations. But over the last two or three years since I've been at CAPP, I've seen in the order of millions of dollars that the members have committed to raising awareness across Canada for our sector. There are lots of different avenues for it.
For example, one of my favourite things to talk about is Canada's Oil Sands Innovation Alliance, COSIA, which is a collaboration of many of the oil sands producers to leverage and gain more opportunities for collaborating and sharing on innovation technology development. COSIA is going through a process right now called the XPRIZE. It has gone through different names over the years. The first XPRIZE— at that time not called "XPRIZE'' but something else — that we know of funded the Lindbergh flight across the Atlantic.
Senator Runciman: I've read some of your previous testimony and am aware of those initiatives. There is a message I've been trying to deliver with various witnesses throughout this process. You've talked about regulating and managing carbon development in this country being better than any in other jurisdiction in the world.
Mr. Ferguson: Absolutely.
Senator Runciman: We have millions of foreign monies coming into this country. We have organizations, Aboriginal groups and others, some of whom will never nod yes; we know that. But how effectively is your message getting out? Reading your notes about Algoma Steel, for example, I know that's a real and significant concern in northern Ontario.
I've talked about the industry and all the elements of the industry getting together. I've cited the free trade battle many years ago, and having a coordinated effort and recognition of social media, all of the elements available to you today, getting out into the universities and colleges with young people, talking about not only the economic benefits but also the realities of environmental impacts; it's on those kinds of issues where I think the industry itself could and should be doing a much better job.
We talk about social licence. Well, how do you achieve that social licence? I think you have to have more and more Canadians understand the environmental and economic impacts and what it means to their future and to that of their kids and grandkids. I would hope, as I send these messages out with each witness almost, that you start sitting down and talking about a coordinated and much broader effort than working on one element, doing it on an industry-wide scale.
Mr. Ferguson: Thank you for that comment. I will say that we put a lot of effort into that area. My comments around Algoma Steel came from a recent effort in communications with the steel association in Canada. We have a regular collaboration sit-down with them. Before I made that comment, it was that day they gave me that fact. I thought it was a stunning opportunity to get that kind of message out.
I think it's not a short-term exercise. It is a long road ahead of us to get Canadians truly understanding the benefits of having this sector as well as other natural resource sectors.
Senator Runciman: Getting down to the basics with messages like that, they have to be better understood and better communicated, not just to a Senate or parliamentary committee. They have to know how to do the job.
Mr. Ferguson: I hear you.
Senator MacDonald: Mr. Ferguson, good seeing you again. This is a question that, I suppose, I've been thinking about for a while but haven't asked. Since you're here I'm going to ask it. One of the major physical components of the Energy East pipeline is the TransCanada pipeline, which we're converting from natural gas to petroleum to heavy oil. I know that the market is changing for natural gas, and I know that the volumes of natural gas in that pipeline have been going down over the last number of years. How are we going to get the stranded Alberta gas to market? What's going to happen to this gas without any access? I realize it's going to get more uncompetitive coming eastward, but Alberta is still a large producer of natural gas. I know a program will be put in place to convert some of the coal fire to natural gas, but it's going to take decades to do that.
In the interim, if this pipeline is approved — I hope it will be — what's going to happen to this gas? How will it get to market?
Mr. Ferguson: We have that debate internally quite a bit, to be quite honest. We look at the issue of getting our western natural gas to Eastern Canada not being driven by pipeline capacity first and foremost between Western Canada and Eastern Canada. We have a pretty significant resource that's looking for a home just south of us here, Marcellus, so regardless of pipeline access and constraints, which there will be, we believe, or at least maybe some lost opportunities. But what do we do about the competitive forces from a very significant and large supply of natural gas looking for a home just south of us? What's the opportunity for our natural gas? Certainly, we'd like to see as many opportunities. Now, we'd have to compete for that and that would be difficult into Eastern Canada, but we want to make sure it's still a viable option for us. We're having those debates internally.
On the other hand, we see the bigger opportunities are through LNG on the West Coast. Certainly, it's somewhat disappointing that we're a little slow getting those things built and in play, but it's probably the near to longer-term opportunity for us. We're a little more optimistic on the natural gas conversions in Alberta. We think we can accelerate some of those. We're hoping that government continues accelerating some of those conversions and giving us an opportunity for a market for our product closer to home where we could get a good price for it.
We're concerned about all those things. I never want to suggest that our natural gas operators don't have as many or more market access constraints than oil does, but those producers are very concerned about access to Eastern Canada. So we're monitoring that situation pretty carefully on their behalf.
[Translation]
Senator Boisvenu: I have a follow-up question. Mr. Ferguson, you said that there would be difficulties for Eastern Canada in shipping natural gas. Is that a result of converting the pipeline to crude oil? I do not understand why there would be any difficulties.
[English]
Mr. Ferguson: I should be clearer. It's more just pipeline capacity getting natural gas from Western Canada to Eastern Canada. If we're talking about converting natural gas pipelines to oil, then it becomes a question of where are our access routes for that. There are many routes, but we're concerned enough that we're monitoring that situation. It's nothing to do with the end use of the natural gas. It's more primarily just getting pipeline capacity.
[Translation]
Senator Boisvenu: Will the conversion of the current pipeline have an impact on the ability to ship natural gas to places like Quebec?
[English]
Mr. Ferguson: We don't see evidence of that yet, but we are monitoring it. In the hearing process for Energy East, I think Enbridge has just recently indicated that they are monitoring that as well. So Enbridge is monitoring from a pipeline market concern, from the rest of their operations; we are more just from a broad market opportunity and access.
We don't see a significant problem now, but it's something that as we see growing interest in finding markets for Marcellus gas coming up from the south, we want to be live to that and be prepared for it and look at opportunities to protect Canadian production as much as possible.
Senator Eggleton: That is a very important issue. As I mentioned to you, I think we need the natural gas people in here as well because we need to see how it will affect that market as well in terms of the pipeline access.
I want to ask you about the controversies going on over fracking. I don't know whether any of your industries are involved in fracking, but we keep hearing, at least from the American side, earthquakes coming as a result of all of this. Do you have any thoughts on the fracking situation?
Mr. Ferguson: I will give you a confession: I am a fracker. I have worked in many jurisdictions in the business, and I think there are some legitimate concerns. It's an industrial process that has risks inherent in it, no different than any other industrial process. It is highly regulated in Canada and in other jurisdictions. There is very sound technical engineering, but at the end of the day, there is still risk associated with that.
There are some linkages that have been backed up by evidence in some jurisdictions with seismic activity, earthquakes. For the most part, they are very mild slippages anywhere along existing fault lines. One of the more significant areas of concern is not on hydraulic fracturing for production stimulation but, in many places, for deep well injection of waste fluids after recycling is not viable anymore. If they are not properly planned and assessed in terms of relationship to existing hydrogeological features — slips, cracks, faults — then you could introduce some risk for activity.
On a production basis, there is some opportunity for some risk of pressuring up a well for a hydraulic fracture stimulation project on other wells nearby that may be connected through some natural faulting and that aren't properly abandoned and plugged. There are always those kinds of risks.
Alberta is well ahead of many jurisdictions in terms of planning and managing for that. We have seen some evidence. I think British Columbia has also done some really good work in this place on the regulatory front, introduced some increased seismic monitoring around frack activities. So it's a risk, but I think if you had concern in that area, enough expertise could come here and convince you pretty quickly that it's well managed.
Senator Eggleton: I take it then a lot of it has to do with the method of the disposal of the water. For example, this system they are using in Oklahoma which has apparently resulted in several earthquakes in the last few years, it is because of the injection of the water at a certain level in the system. Is that it? Is that not used here? That's not used here, that kind of system?
Mr. Ferguson: No, it's used here as well. The difference is in some of the planning and history in the area. Oklahoma has a long, long history of wells that may or may not have regulations in place for properly abandoning or even monitoring where some of those things are.
So as you pressure up a formation with a frack job, you are introducing a pressure hydrologically that has to find an avenue somewhere. If there is an easy avenue to another fault, it will go there naturally. That's the law of nature.
The opportunities in Canada, we have in my view a much more robust regulatory system and a longer history of monitoring and understanding and tracking where all these activities have been in the past, better planning that takes place around location, and the permitting process for depth and pressuring, and a lot more oversight I think.
The Chair: Mr. Ferguson, we'd like to thank you for sharing your thoughts. As you can see, the members participated very actively.
I would like to thank Kevin for having been our clerk today. But I would like to tell the steering committee members — Senator Unger, Senator MacDonald — that we will meet with Dan to talk about future meetings.
Tomorrow evening we will be hearing from Bruce Campbell, Visiting Fellow of the Faculty of Law, University of Ottawa; and Theresa McClenaghan, Executive Director and Counsel for the Canadian Environmental Law Association. And the honourable deputy chair will be chairing the meeting tomorrow. Thank you very much.
(The committee adjourned.)