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Proceedings of the Standing Senate Committee on
Energy, the Environment and Natural Resources

Issue No. 22 - Evidence - February 28, 2017


OTTAWA, Tuesday, February 28, 2017

The Standing Senate Committee on Energy, the Environment and Natural Resources met this day at 6:21 p.m. to study the effects of transitioning to a low carbon economy.

Senator Richard Neufeld (Chair) in the chair.

[English]

The Chair: Good evening, colleagues, and welcome to this meeting of the Standing Senate Committee on Energy, the Environment and Natural Resources.

My name is Richard Neufeld, and I am honoured to serve as chair of this committee. I am a senator from British Columbia.

I wish to welcome all of those who are with us in the room and viewers across the country who may be watching on television or online. As a reminder to those watching, these committee hearings are open to the public and also available online on the new Senate website at sencanada.ca. All other committee-related business can also be found online, including past reports, bills studied and a list of witnesses.

I would now ask senators around the table to introduce themselves.

Senator Griffin: Diane Griffin, Prince Edward Island.

Senator Meredith: Senator Don Meredith, Ontario.

Senator Fraser: Joan Fraser, Quebec.

Senator Wetston: Howard Wetston, Ontario.

Senator Seidman: Judith Seidman, Montreal, Quebec.

The Chair: I would like to introduce our staff, beginning on my left with the clerk, Maxime Fortin, and our Library of Parliament analyst Sam Banks, on my right.

Colleagues, in March 2016, the Senate mandated our committee to embark on an in-depth study on the effects, challenges and costs of transitioning to a lower carbon economy. The Government of Canada has pledged to reduce our greenhouse gas emissions 30 per cent below 2005 levels by 2030. This is a big undertaking.

Our committee has taken a sector-by-sector approach to this study. We will study five sectors of the Canadian economy, which are responsible for over 80 per cent of all GHG emissions. They are electricity; transportation; oil and gas; emission-intensive, trade-exposed industries; and buildings.

Today, for the thirty-fourth meeting of our current study, I am pleased to welcome, by video conference, from the Petroleum Services Association of Canada, Mark Salkeld, President and Chief Executive Officer.

Thank you for joining us. I apologize for being late. When a few politicians start talking maybe a little bit too long sometimes, the time goes on. I have to apologize also that there are some senators who have made other arrangements to leave, so we'll do our best, sir. Please proceed with your statement. The floor is yours.

Mark A. Salkeld, President and Chief Executive Officer, Petroleum Services Association of Canada: Thank you very much. I appreciate the opportunity to be here today, no matter what.

Thank you for the opportunity to present. Please allow me to begin by stating that the Canadian government's actions for transitioning to a low carbon economy and setting targets for greenhouse gas emissions are viewed as creating business opportunities for the Canadian oil field service, supply and manufacturing sector.

PSAC would like to address section (b) in the extract from the Journals of the Senate of Canada dated Thursday, March 10, 2016, as it relates to identifying the most viable ways the oil and gas services sector can contribute to a low carbon economy in meeting Canada' emission targets.

I will begin with a little overview of what PSAC is, what our sector is currently doing to reduce emissions, what we can do going forward and then a few recommendations at the end.

The Petroleum Services Association of Canada is a national trade association that represents services, supply and manufacturing to the upstream oil and gas industry with member companies that employ over 35,000 people. PSAC members represent the best of the best in the Canadian oil field services when it comes to developing oil and gas resources for our customers, the explorers and producers.

PSAC member companies are the front-line workers and innovators that ensure their customers' corporate responsibilities are met when it comes to environmental protection and safety for Canada and the communities in areas of oil and gas production and development.

Canadian oil field services are key players when it comes to innovation, efficiency and protecting the environment, all while safely developing oil and gas wells for their customers. Recognizing the increasing role of renewables into the energy resources mix, PSAC has introduced a new membership category for renewable energy sources to encourage new collaborations while remaining true to our core member base of oil and gas service providers. Canada requires a mix of energy sources to meet its energy needs for years to come. Wind, solar, geothermal and others can all work in tandem with traditional petroleum energy sources to meet the emissions reduction needs well into the future.

Oilfield services are present throughout the oil and gas development cycle due to the broad diversification of service and supply that has and is still evolving in oil and gas operations around the world. From an oil field services perspective, we touch on every aspect of this development cycle simply because E&P companies, from majors to juniors, have become far less vertically integrated and are outsourcing the services required to develop their resources.

As mentioned previously, Canadian oil field services have been evolving since oil was first discovered in Canada and will continue to evolve as we transition to a low carbon economy. The requirement to lower greenhouse gas emissions is already being acted upon by those PSAC member companies recognizing the significant business opportunities already present and which will continue until targets are met and being maintained.

The success of the Canadian oil field service, supply and manufacturing sector is due not only to Canada having a robust regulatory regime, but also because of collaborative and competitive relationships between the services sector and their customers, the oil and gas producers and between service companies respectively.

The Canadian oil field services sector has relied on innovation and research and development to meet or exceed the expectations of their customers, as well as maintaining competitive advantage over their peers in industry to succeed in a high-cost basin. The quest to maintain market share has ultimately led to this sector being a world leader in the multiple service aspects of this sector.

Through the implementation of new technology applied to long-established processes such as directional drilling and hydraulic fracturing by the oil field services sector, the surface footprint for exploring and developing oil and gas wells has decreased dramatically, and with that, the intensity of greenhouse gas emissions related to thousands of wells drilled on thousands of individual sites. By applying real-time, down-hole data gathering and analysis using microseismicity technology, the ability to steer the drill bit in real time and multi-stage hydraulic fracturing with precise, fuel consumption, land disturbance and reclamation activities have been reduced to a minimum.

In my presentation, I have identified a couple of slides here. They are meant to provide you with another glimpse into the entrepreneurial strategies emerging through the application of new clean technology with old.

In remote locations, a typical light tower used for 24-hour operations across several industries, not just oil and gas, such as road repair, construction sites and oil field service and completion operations has evolved. Where a diesel engine would run at least during nighttime hours to keep work sites well-lit and safe, it now uses solar and lithium ion battery storage technology, so the diesel engine may only run an hour a week versus 84 hours over a week of nighttime operations, for instance.

Another innovative application from the smelter and smokestack scrubbing technology first required to help Canada move beyond the acid rain era was adapted and applied to the evaporation of waste water from oil and gas well completion processes, which can also capture and scrub exhaust gases from diesel engines and facility emissions. By evaporating waste and produced water on location, the need for trucking water to various disposal wells has eliminated fuel consumption, truck traffic and pumping fluids down disposal wells.

These are just two examples of business opportunities evolved from the need to transition to a low carbon economy and reduce greenhouse gas emissions.

Noticing that Canada will be transitioning away from burning fossil fuels for the foreseeable future, what needs to be achieved is the improvement of the oil and gas development process, as well as the reduction of consumption of fossil fuels. PSAC-member companies, through their ongoing innovative processes, have made significant progress in not only minimizing the surface footprint during the development and extraction process; they are also implementing clean technologies in their service offerings throughout the life cycle of the oil and gas well development, production and decommissioning process.

Examples include technology and service offerings which include renewable and alternative energy resources, as I had mentioned, solar power, lithium ion battery storage technologies, but also system drive transitions technology. Where diesel engines used to run, they're converted to natural gas or we've converted right over to AC drives on the equipment.

I feel the need to provide an example of positive community relations in the area of oil and gas development, because through discussions with concerned citizens, landowners, ranchers, farmers and First Nations, PSAC developed a hydraulic fracturing code of conduct that had a direct input from these local groups. The importance of this, I feel, is that it shows the alignment of industry not just with the local citizenry but an overall alignment with Canada's need to transition to a cleaner future. Citizens' input and concerns also support the desire to transition to a low carbon economy while realizing the need for an oil and gas economy that supports the transition, as well as business opportunities.

In closing, I would like to call attention to a few recommendations now that I have provided input on our sector. I hope you have come to realize the important role oil field services can play for the transition and will consider PSAC when developing policy based on your findings from this study. I also hope that in this short presentation I have provided a glimpse of the excitement felt by this sector for the opportunities that have been and will be forthcoming to lower Canada's GHG emissions; and finally, that policy will encourage further growth in this innovative and entrepreneurial sector for the betterment of the industry and Canada.

Thank you very much for the opportunity to present. I am more than happy to answer any questions you may have and to follow up on any requests you may have of me today that could require further action. Thank you.

The Chair: Thank you very much.

Senator Griffin: Thank you for your presentation and thank you for waiting for us. It was a long afternoon.

If you were to identify a couple of things that the Government of Canada could do to best help you make further progress regarding your industry, what would those one or two things be?

Mr. Salkeld: We would appreciate the understanding that in terms of the producer companies who are our customers, for us to be successful, we need them to be successful. When they go to their investors or lenders or head offices to justify new business development, all they look at is the lump sum cost of lifting a barrel of oil or a gigajoule of gas out of the ground. But from your perspective and our perspective, that lump sum entails such things as a potential border tax that we've been hearing about, carbon tax, GST and PST. All these individual pieces add up to that lump sum. Head offices for producers don't look at the individual items.

Our request is that, when you're looking at the industry, consider that all of these individual pieces add up to that overall cost. It goes beyond carbon tax; it's also the labour and the remoteness of the commodities or the product to market. We would request that you consider that it's more than just the lump sum; it's the makeup of the individual pieces.

To support the industry is something we've been asking for a number of years. What won't be new to you is access to tidewater. I appreciate the fact that we are making progress on that front, so a broader customer base and knowing the makeup of the cost of lifting a barrel of oil out of the ground. Does that answer?

Senator Griffin: I think so, yes. You gave me a couple of things. That's what I wanted.

Senator Galvez: Thank you very much for your presentation. It's very positive that you are looking into all these new innovative and green technologies. My understanding is that your members work on the upstream oil and petroleum industry, so you are in the drilling, exploration, equipment and environment. Because this is relatively new, how are your workers getting the specific training they require to be up to date with changes in the technology? That's the first part of my question.

Mr. Salkeld: With the member companies that we have, it's internal training for the most part, to answer your question. It's comes in-house from our member companies. Having said that, PSAC does work closely with the local polytechnics like SAIT or NAIT, and even the University of Calgary for that matter, to identify educational needs in this area. As you mentioned, that's relatively new for us, so we're only just exploring those requirements with these educational institutes.

The company that I identified with the light towers is designing and manufacturing their own LED lights internally. They're gathering the knowledge they need from local subject matter experts and teaching themselves, and then teaching their employees as they go through the learning process. So it's internal and just starting down the path of external training from accredited educational institutes, as required.

Senator Galvez: In your speech and in the documents that were provided, you talk about oil and gas as general terms. However, we know that if we talk about gas, now we talk about unconventional gas, tight gas, medium tight. We talk about Bakken, Eagle Ford, Permian Basin. These are very deep, very different mixtures of gases. One thing is to keep doing the infrastructure — the pipelines and excavation — but the other thing is the handling of these different products, and the same thing when we talk about petroleum. We have conventional petroleum and unconventional petroleum, and the ones that come from the tar sands are very different.

In terms of training in environmental handling and in getting new technologies for handling spills — because pipelines will continue to be used and there will eventually be spills, over the lifetime of pipelines — do you also have training for emergencies and the handling of these different products that are now available on the market?

Mr. Salkeld: Yes, they do. I appreciate the question.

First of all, you're right in the difference between the oil or the bitumen we get from oil sands versus the unconventional. Having said that, the unconventional is all oil, whether it comes from a tight formation or the various different formations, and the same with natural gas. At the end of the day, natural gas is natural gas, whether we get it as liquids from the petroleum development or tight shales or conventional fields. At the end of the day, when it comes to surface and we have to manage it, it's the same commodity.

So the training required once it gets to surface, that is pretty much the same. To answer your question, yes, we do have training. The individual oil companies, whether they're the small, medium-sized or majors, all have to have emergency response plans. Then, depending on their types of operations and where they're operating and with respect to the different kinds of transportation, whether it's gathering lines in the field or the sales lines to the main transmission pipelines, there is specialized training required for those three different circumstances.

From a PSAC perspective, we work through our safety association, Enform, which is an industry safety association made up by the six industry associations: The Petroleum Services of Canada, the Canadian Association of Oilwell Drilling, the Geological Association of Canada, and then the small producers, EPAC; the large producers, CAPP; and then CEPA, the pipeline association. These six associations came together to form Enform.

With Enform, we look to develop first responder services. For instance, from the learning we had with regard to Lac-Mégantic, we realized as an industry that a lot of first responders in remote communities didn't have the knowledge or training to deal with a severe emergency such as that. We tasked our safety association to develop that training, go out and find out if there's existing training and use it. Why reinvent the wheel? And if there are gaps, identify them.

So the long-winded answer to your question is that the producers train internally with their own training programs with respect to spill responses, whether during the drilling and production process or the pipeline circumstance, and then as an industry association we task our safety association to fill in any gaps with required training. That training is either internal by the producer companies or by the service companies, and the emergency response companies through their respective training processes that we have through the association.

Senator Fraser: I have a couple of questions, Mr. Salkeld. The first one everybody else around the table may already know the answer to, but I don't. What is microseismicity?

Mr. Salkeld: Microseismicity is a technology. It's seismic technology, so the technology we use to gather seismic data, like the pickup phones on the ground. When we're gathering seismic data, we drill holes and we set off charges or pound the ground with special equipment, and these phones pick up those vibrations through the earth. From that, we can analyze the formations.

We've taken that technology one step further. So microseismicity is a whole array of sound-gathering devices. We might drill little boreholes around the drilling activity where we're going to drill and hydraulically fracture, and then it's also measuring downhole when we're fracturing.

It is a very intense or complex gathering of the seismic data, while we're drilling and while we're hydraulic fracturing. Through the use of the microseismicity process and the data-gathering technology, we can actually steer the drill bit in real time. So we can drill down a kilometre and then out horizontally and watch what's going on with that microseismic activity in real time, on surface, so we can steer the drill bit.

Once the well is drilled and we begin the hydraulic fracturing process, that same microseismic process is employed to allow us to watch the fracking process. As we pump pressure and break the rock, we can watch it in real time. Microseismicity is that technology that allows us to measure the vibrations of the earth in real time, below the surface, so we can manage our operations.

Senator Fraser: Thank you. I'm reassured to know that there's at least one other senator who didn't know what it was.

My second question has to do with the concerns you expressed at the end of your presentation about the cumulative burden about this tax and that levy and this regulation all adding up. Have you done any work to assess the impact of carbon taxes, if any, on your members, in particular on the competitive position of the Canadian industry as it sells its final product outside Canada?

Mr. Salkeld: To answer the second part of your question first, no.

On the first part where we're just now beginning to reach out to our members, we've had calls from our members concerned about the carbon tax raising the cost of doing business. As an association, we have to represent our members as a whole, as I'm sure you know, so right now we've initiated a survey to ask our member companies to gather that information. To answer your question, we've just begun down that path.

The few examples that I've had is a member company that moves fuel. He has to buy the fuel and pay the carbon tax up front, deliver it to a customer that's tax-exempt and has to wait to collect his carbon tax rebate through a longer process. So he could be out-of-pocket for a month or two. It's a part of doing business. These things are just starting to come to light. I'm more than happy to report back in a month or two, once we've gathered that together.

Senator Fraser: That would be great. Thank you very much.

Senator Wetston: Thank you for your comments today and your presentation. I have a couple of questions around your approach. I think I have a good understanding of PSAC and what you do.

As I read your presentation, I'm sort of looking at your upstream petroleum industry, exploration, production, seismic, drilling and all of these services that are necessary for oil and gas extraction.

Most individuals today talk about innovation. Everybody is an innovator today it seems. I'm looking for the results of your innovation. I'm trying to understand how you measure it and how you come to the conclusion that indeed, I'm sure, many of your members are innovative and have achieved a great deal. Could you elaborate a bit more on that?

And I have another question, if I may, in that context. I can understand your approach to environmental protection, which I don't think is the same thing as trying to achieve a low-carbon economy. They may be related but they're certainly not the same thing. It's kind of a double-barrelled question, if I may. Could you help me with that?

Mr. Salkeld: It would be my pleasure.

I'll give you a couple of examples off the top of my head. Take the drilling rig, for instance. The traditional drilling rig used to run with five or six diesel engines. As soon as AC, or alternating current, technology became small enough to apply, we took the diesel engines off the drilling rig and applied AC drive engines, so now there's maybe one generator or power source — it doesn't necessarily have to be diesel power; it could be natural gas — and it drives the generator which in turn drives all of these AC electric motors that used to be diesel.

Canada has a fleet of 800 rigs and they're not all converted, but they will eventually be. That alone — taking five engines off one rig — has taken numerous diesel engines and all the exhaust emissions from that circumstance out of the picture. That's definitely a measurable with respect to reducing greenhouse gas emissions from that one piece of equipment.

Another example, as one of my slides shows, is that back in 2004-05 we drilled around 24,000 wells in Western Canada in one year. Each one of those wells was a vertical well that required its own location and its own road to the location. The technology that I was talking about a little earlier with respect to directional drilling and microseismicity has allowed us to now drill 30 wells from one location so that we require only one road and one location.

Again, all of the greenhouse gas emissions related to the heavy equipment, road building, individual wells and the drilling has been eliminated down to just one location and one road. The drilling operation today, for instance, is now essentially a hole-making factory with all of the economies of scale with respect to equipment movement that has been eliminated.

Again, in my example with respect to evaporating wastewater on location, all of the trucking that was required to move that wastewater — hundreds of thousands of cubic metres of water being trucked off-location to disposal wells — is now being eliminated by this CleanSteam process. We're not moving truckloads of water off-location; we're evaporating, cleaning and scrubbing it on location to the point where our member companies are now in a position to offer carbon credits to their customers. They even go so far as to help them fill out their paperwork to qualify for carbon credits for reducing their greenhouse gas emissions. Those are two examples.

Senator Wetston: This is a bit of a loaded question and probably not easy to answer: Do you think that through the work of your association and your members, you will be able, in years to come, to achieve zero carbon in exploration, drilling, service and manufacturing? Obviously, we expect you're going to, at some point, continue to transport oil and gas, but are you able to achieve that in a zero-carbon economy?

Mr. Salkeld: That is a very interesting question. We're already talking about fully robotic rigs and having a fully robotic AC-driven rig operated by a remote control.

You know what? I don't think so. I'm even backing up to the actual lease construction. You're still going to need heavy equipment to build the roads and lease, and unless those are all electric — we're a ways from the battery storage technology to make a grader, bulldozer or any piece of heavy equipment all electric. The short answer to your question is that it's maybe not impossible, but not doable in the foreseeable future.

Senator Wetston: Thank you very much.

The Chair: Senator Galvez, did you want to ask a question on behalf of Senator Meredith?

Senator Galvez: Yes. He wanted to know how your members are adjusting to this change in technology. I think it's similar to what I asked. Are they happy being implicated in, hosting and engaging in these new technologies, or are you finding some resistance?

Mr. Salkeld: I won't say we have resistance, but we definitely have the old-school service companies who are just out there to drill and complete wells, and they're focused on their daily business.

I've been in the industry for 36 years, the last six years of those with PSAC, and what I've seen with the membership I'm engaged with is that there is a very positive outlook about the opportunities. I've already participated in a number of seminars on how to take advantage of these opportunities with respect to reducing greenhouse gas emissions.

There is a good percentage of our membership that is very keen to identify these opportunities, to be first movers in methane emissions reductions software for tracking it so that we can track it, to answer the previous senator's question with respect to being able to measure it. That's the kind of technology we're getting into because it's taking the federal government's 45 per cent reduction over 2014 emissions down 45 per cent. We have member companies excited about developing the software that can measure that, not just on that broad scope but to be able to report back right at the field level, right at the well site, how we have come up with ideas to measure the greenhouse gases or measure the methane emissions and then reduce them and measure that. So there's definitely interest in identifying the opportunities, and I would say that it's growing more so than any resistance to change.

Senator Galvez: If your members are doing this willingly, I'm sure it's not just because they care about the environment but because there are some economic benefits, profits. Can you elaborate on these economic aspects of changing to this technology?

Mr. Salkeld: Well, two points there. You're absolutely right. If there is an opportunity to make money, then, absolutely, that is a motivating factor. But I will tell you what I believe one of the more motivating factors is for our customers. The E&P companies, the major producers in Canada, they have their corporate social responsibility and their commitments to the environment, and, as I mentioned in my opening comments, they're looking more and more to the services companies to help them to deliver it, so there is a motivation in the sense that, if you want the next job, then you have to come up with these technologies to help our customers, the producers, to meet their requirements. Yes, the next job means money and generating revenue. So, absolutely, there's an economic driver, but it's also meeting their customers' expectations. As I can tell you from a services company association perspective, we're getting more and more requests from our customers, the producers, to help them to deliver on their commitments to protect the environment and lower their carbon footprint.

Senator Patterson: Just carrying on with that theme of motivating innovation, you mentioned carbon pricing. Does carbon pricing play a role in driving the innovations you've described in your industry?

Mr. Salkeld: That's an interesting question. It's early days of being faced with the Alberta carbon tax, for instance, that we're dealing with now. Senator, I can't give you an example of a situation where the carbon tax is incenting innovation. I am drawing a blank on that front. I apologize.

Senator Patterson: That's okay. I have a big concern about carbon pricing myself, coming from a jurisdiction that doesn't have any real alternative energy sources, so I'm not wanting you to sell me on carbon pricing. If it isn't helping to drive innovations, then that's useful information.

I'd guess I'd like to ask you a little further along that line. You mentioned carbon pricing, I think, and other taxes as a burden to your members. I would imagine that many of your members operate both in the U.S. and in Canada. I know companies like Precision Drilling have big footprints in both countries. I know of that one company. I am wondering if your members have considered the implications of some of the pro-business policies being proposed by the new U.S. administration and perhaps a de-emphasis on carbon pricing in the new U.S. administration. Do you think that is that going to have some impacts on Canada in your industry?

Mr. Salkeld: It's definitely on our radar, so to speak, in that I know that a number of our member companies have already been approached by the state of Texas, encouraging them to relocate to Texas to set up their business operations there. One of their encouraging motivators is, "We don't have a carbon tax. If business gets difficult in your own backyard, then look to Texas, and we'll welcome you.'' We're already seeing those kinds of impacts or outreach.

And you're absolutely right; Precision Drilling is a member of PSAC. I think 72 per cent of our membership has some form of U.S. operations. Again, that's part of the concern. This is a very high-cost basin with, as you are all aware, labour and everything else that's involved and the distance to market, the differential in getting our product to market. Anything that sort of threatens the margin, so to speak, we're concerned about, and, when you look to the U.S. and the implications coming out of there with respect to opportunity to do business, our members are definitely aware of that. Again, they're business people looking at their margins and their cost to do business, and that's just Economics 101 from a business perspective. They're aware of it.

Senator Mockler: Thank you very much for your presentation plus answering the questions. I think you've enlightened certainly me, in a sense. The question to follow from Senator Patterson's is: Are we going too fast and too far in your experience, especially with what I just heard that Texans are linking with Canadian operations to say, "Come to the U.S.?''

Mr. Salkeld: Again, very good question. I don't think we're moving too fast. These are things that we have to do, and, to kind of add on to an answer from a previous question, PSAC members are front-line workers. Our members are in the communities across Western Canada, on the front-lines of delivering these services, and they care as much about the drinking water and the environment and the carbon footprint as anybody else out in those areas.

The one thing that I can say is that we know we need robust regulation. We know we need incentive to move to a cleaner future. There is no denying that. Our members are not dinosaurs. They know we have to move that way.

As to introducing a carbon tax and the basic economics to incent an industry to shift, I don't see those as coming too fast. On behalf of our membership, they're aware of it. They're working towards it. They know it's coming. They know we need it. It's that balance, I think, that you're asking about, to not detrimentally impact business. We don't want to drive businesses out. We want to allow them the opportunity to transition, those businesses that are open to transition.

At this point in time, there's concern, but I don't see it being too fast. Businesses aren't closing their doors today because of carbon tax at this point in time.

Senator Mockler: There's no doubt in my mind that you're monitoring your membership if you have Texans saying, "Here's an opportunity because you're in business to make money and to create wealth.'' That said, are you monitoring your membership as to whether they are being catered to go to the U.S.? You've mentioned one.

Mr. Salkeld: Yes, we do, senator. We actually have a business issue survey that we issue to our membership every year, and two or three of those questions talk about international operations such as "where would you like to operate,'' et cetera, specifically to the questions that you are asking. We do monitor their operations.

At our board meetings, we have a diverse membership and board of directors to represent our membership. We start our board meetings with a state-of-the-industry round table. That inevitably comes up in conversation with around 16 or 17 companies represents about opportunities in the U.S., South America and other parts of the world.

I can say with the current environment with respect to coming out of this downturn that a lot of our members are looking internationally for opportunities. These detriments to doing business add to the motivation to look elsewhere. Having said that, they're Canadian-based companies and they look to operate here first and foremost.

Senator Mockler: I'm sure that you're aware the federal government is committed to reducing their emissions by 30 per cent below 2005 levels by 2030. According to Environment and Climate Change Canada, the emission gap needed to reach this goal is 219 megatonnes of carbon dioxide equivalent. With your 35 years of experience in the industry, do you believe that this target is achievable?

Following that, do you believe that the public has a sense of the scope of the challenge involved? Society is divided and, to move forward, we need social licence.

Mr. Salkeld: I don't believe the average Canadian citizen realizes the scope involved to reach that target. I do believe that the oilfield services supply and manufacturing sector will absolutely play a significant role in helping to reduce that overall requirement. As your study has identified, you're looking at five areas, and the oil and gas area, as I mentioned, is the producers and the services companies.

So, yes, as I mentioned earlier, we're looking for those opportunities to identify the smallest leak on a wellhead on location and figuring out ways to eliminate that leak or capture and reuse that gas. We're there, and we will play a significant role in that overall reduction requirement.

Will it all come off the backs of the services sector? No, but we will definitely be able to measure our role in helping to reduce that overall target.

The Chair: I have maybe a couple of questions, and then we will go to our next witnesses.

Is Canada the only place in the world where the oil and gas industry works that is imposing these kinds of measures? Personally, I don't think that is true. I think the measures might be different in different places, but with the Shells, the Exxons and all those big companies, are there parts in the world where they say, "You go ahead and do whatever you want to do'' with their drilling? I don't quite think so. I think there is something within the companies themselves. When you talk about going from diesel engines on drilling rigs to electric, that isn't just because of a carbon tax. That's because there's a value to doing that. There is a value environmentally for the company, because they want to sell their product at the end of the day, but there's also a value because it's likely cheaper once you sort it all out. Tell me, are we the only country that is saying some of these things you have to do around the world where the oil and gas industry works?

Mr. Salkeld: We're one of the very few that's expecting that. That's based on the fact that I have worked offshore in Europe. I've worked onshore and offshore in East and West Australia. I've worked in Western Siberia and a few other places in between in Canada and the U.S. I can honestly say that Canada is a leader in these types of initiatives and has been for many years.

You're right that the motivating factor is how to be safer. Taking these rigs from diesel to AC is a huge safety factor. Taking the hydraulic fracture pumping units from having a person on each unit having to stand in that danger zone to run that equipment and replacing it with an AC motor is a safety factor. From that, we win by eliminating that diesel engine and that GHG initiative.

The oil and gas sector and industry in Canada, because of a very robust regulatory regime provincially and federally and because of a strong relationship between the producers and the services sector, just naturally goes to that better option. There are economic and environmental reasons, absolutely. Other parts of the world don't demand that as much as Canada does. The companies do it because it is the right thing to do, not because they're being told to by other governments. But Canada is by far a leader in this area.

The Chair: Thank you. And I agree with you. I don't think the public actually realizes what the cost of doing what the government has decided to do is going to be on the end users. That's who I call Fred and Martha, because they're the people who will pay the bill at the end of the day. No one else will. It won't be some big conglomerate company that will pay the bill. They will pass the costs down.

Part of why we're doing this study is to try to figure out what it will really cost to do these kinds of things. I'm always an optimist, but if we're going to meet the 2030 target and reduce by 219 megatonnes, even if we took out all the transportation in Canada, you wouldn't meet that target — taking out the whole oil and gas industry. It's not just that; it's all the things that oil and gas is involved in with our lives, such as clothes and everything. You just barely meet it, so it is almost an impossible target, but we have to start somewhere.

Thank you for coming and talking to us. I'd like you to maybe think about some things that the oil and gas industry is doing to reduce greenhouse gas emissions. You gave us a couple of examples. I appreciate that, but the one you talk about — the drilling rig — I'm quite familiar with it. I used to supply them with fuel, so I know how much they used to take. If you could give us examples of those things industry is doing, that would be great. I would think industry is doing almost all those same things in Texas as they are in Canada. If you could get that back to the clerk, I would certainly appreciate it. Thank you very much.

Mr. Salkeld: It would be my pleasure, senator. Thank you for the opportunity, and thank you for the great questions. I really appreciated the opportunity.

The Chair: That brings us back to the table, and we'll carry on with the second portion of the meeting. For the second segment, I'm pleased to welcome, from the Chemistry Industry Association of Canada, Bob Masterson, President and Chief Executive Officer; and David Podruzny, Vice-President, Business and Economics. Thank you for joining us, gentlemen. Again, I'm sorry we're running so late. We don't do this by design, I can tell you that.

For the benefit of all the committee members, I want to point out that a few of us met with both of our witnesses during our fact-finding visit to Sarnia, which was very enjoyable when we were there.

Please proceed with your presentations, and then we'll go to questions.

Bob Masterson, President and Chief Executive Officer, Chemistry Industry Association of Canada: Thank you, Mr. Chair. It's an honour to meet with this committee again and to follow up on the committee's tour in Sarnia last November. I have a few comments, and then we can move right into questions. We look forward to that.

During your session in Sarnia, we discussed the growth potential of the industry both in Canada and globally. We spent time highlighting the rapid growth of the American chemistry sector, noting that there were over 250 projects under way with a book value of over C$225 billion. We noted that while Canada has seen some recent investments, we lag well behind our historical investment share of 10 per cent.

We also discussed the highly innovative nature of the chemistry industry. We noted that it accounts for 25 per cent of all patents granted in the United States each year, and we talked about the sector and gave examples of the sector being a key enabler for emissions reductions in other sectors of the economy; notably transportation, buildings, energy and agriculture.

We spoke of our highly-skilled work force, 38 per cent of whom are university graduates earning an average annual salary of $110,000, which is twice the manufacturing sector average.

We shared some research from the International Energy Agency that demonstrates that for every unit of greenhouse gas we emit in the production of our products, those chemicals that are produced resulted in a net reduction of 2.6 units of greenhouse gasses during the product's life cycle. A good example of that is the use of modern chemistry-based insulation products in homes, and those are seen to avoid emissions more than 200 times greater than those released during the installation, end of life, and manufacture process. So you have a 200 times advantage. Yes, they are emissions associated with the production, but the use of that product avoids 200 times those emissions.

Finally, we talked about actions taken in our own sector and that the responsible care companies in our membership have reduced their absolute emissions by over 66 per cent or two-thirds since 1992. Those are some things we talked about.

Today I'd like to focus on issues we didn't get to discuss in Sarnia. Those are issues associated with greenhouse gas management policies. I have four key messages I wish to convey this evening as a departure point for some questions, perhaps.

First, globally the chemistry industry is a large, fast-growing industry with significant implications for global climate change. Annual sales of chemicals amount to over $5 trillion. We have growth rates well in excess of global GDP, and in some cases twice global GDP. We expect to reach over $6 trillion in sales by 2020. That should come as no surprise. There are larger and larger parts the global population pursuing middle class lifestyles. Chemistry is the key solutions provider for many of the world's pressing sustainability problems, including climate change. It's those trends that analysts use to predict that we will see a near tripling of the largest volume of what we call our platform chemicals over the next 30 years.

A sector of this size and growth rate has significant implications for global climate change. The chemistry sector alone accounts for about 10 per cent of all global energy demand and roughly 7 per cent of all global greenhouse gas emissions.

Second, there are many different pathways to produce those high-volume, platform industrial chemicals. If we look at just the 18 highest volume chemicals that form the basis of nearly all other chemistries, global production of those 18 chemicals alone is associated with 80 per cent of energy use and 75 per cent of greenhouse gas emissions in the sector.

This is the crucial point. There are many different pathways to produce each of those 18 chemistries, and each pathway has its own unique greenhouse gas profile. If you think of this from a greenhouse gas perspective and visualize a scale, at the low end of the scale, you have biochemicals and electrochemicals which are notionally carbon free. You saw an example of that at the BioAmber production facility in Sarnia. Next you have chemicals made from one carbon molecule methane chemistries, followed by two carbon molecule ethane chemistries, propane chemistries with three carbon molecules, naptha-based chemistries with five or more carbon molecules, and on and on to the high end of the scale where you have high carbon molecule, heavy oil and coal-based chemistries.

Why does this matter? Look at the case of methanol. It is produced here in Canada, in Alberta. The main pathway globally, but solely in Canada, for producing methanol is via methane, the key constituent of natural gas. If we look to Asia, where methane is not abundantly available, the fastest growing pathway to meet demand in that part of the globe is a coal to methanol pathway. From a greenhouse gas perspective, that coal-based pathway to produce methanol results in 10 times the greenhouse gas emissions of methane-based methanol production in Canada.

Third, in Canada we are so fortunate to have an embarrassing richness of the lowest carbon feedstocks available for chemistry production. We have ample access to emissions-free electricity to support a vibrant electrochemical sector. We have enormous biomass resources and an emerging biochemical sector. We have among the highest and richest reserves of natural gas and natural gas liquids that allow for chemical production from methane, ethane and propane, which have the lowest greenhouse gas potential of all the remaining chemical feedstocks.

For those of you that did get to Sarnia, when you consider the production of ethylene at NOVA Chemicals' Sarnia facility, ethylene is the largest volume platform chemical in the world. It's central to the production of nearly all the plastics that touch you every day of your life. Two-thirds of the global production of that ethylene is from cracking high-carbon naphtha crude oil to naphtha and then further processing that to ethylene. The other third of global demand is met by cracking ethane directly to ethylene. At Nova, you heard of their investment of over $500 million in recent years to convert that Sarnia facility to move from naphtha-based production to ethane-based production. Why is that important? You should recall that ethane-based production of ethylene requires half as much energy and releases half as much greenhouse gas as does the more globally dominant naphtha-based production.

Fourth and finally, frankly, Canadian public policy is failing to understand and respond to the three points I've raised above. In short, the path we're on will result in an underutilization of Canada's low-carbon chemistry feedstocks and otherwise an overutilization of higher carbon feedstocks in other jurisdictions to meet global chemistry demand. From our perspective, that's poor public policy. We think it's bad for business, workers and communities in which we work, bad for Canada's balance of trade, deficit and investment prospects, and ultimately, it will have a negative impact on global greenhouse gas emissions.

In the interests of time, I will stop here and look forward to your questions. Thank you again for the opportunity to share some of the similar messages you heard while we were in Sarnia.

The Chair: Thank you very much for that presentation. We will go to questions.

Senator Griffin: Thank you for being here and being so patient with us. The Government of Canada, in order to encourage certain activities or discourage other activities, has a number of means at its disposal. They primarily fall into regulatory instruments and economic instruments. With both of those in mind, what can the Government of Canada do to assist in moving the chemical industry to a lower carbon footprint?

Mr. Masterson: This isn't speculation. This would be based on the record that I discussed where we have achieved a two-thirds reduction in absolute greenhouse gas emissions in the absence of federal carbon pricing or regulation. How did that happen? It was because the industry was able to invest. Every time the industry invested, it's gone to the most modern operations and the best-in-class technologies, and greenhouse gases and every emission of every pollutant is seen to reduce significantly. I won't speak just about greenhouse gases. If you look at our emissions of the CEPA toxic substances under the Canadian Environmental Protection Act, those have reduced by almost 98 per cent over the last 30 years because the industry has invested.

We spoke at length in Sarnia about the fact that investment is lagging. We should be seeing significant investment in new facilities in our operations in Canada. That's not taking place. My response would be that the best thing we can do to ensure we get on the best possible emissions pathway is to encourage, not discourage, investment.

Senator Griffin: So an economic instrument, some way the Government of Canada could encourage investment, is that what you're saying?

Mr. Masterson: No, I would say stop putting in place instruments that discourage investment that otherwise ought to take place.

Senator Griffin: Okay, so you're going the other way. I'm impressed by the way by the reductions that you have already done within the industry. Are there any other actions that the government could do by means of regulation or policy that would assist in this regard further?

Mr. Masterson: I talked, for instance, about the 18 global platform chemicals that are responsible for 80 per cent of emissions. That's not a secret. That's not something we hide behind.

There is a globally coordinated effort to undertake the research that will allow the next generation of production of those chemicals to take place with significantly lower greenhouse gas profiles.

We'd certainly encourage the Government of Canada and the provinces to get engaged in the research that's taking place in Europe, the United States and elsewhere, and perhaps even to consider becoming a centre of excellence in its own right for the next generation, let's say, of ethylene crackers in North America. We have the opportunity to do that, but until now, we have resisted participating. As governments, they have not participated in those global research activities, nor funded them.

Senator MacDonald: I'm very interested in what you have to say about methane and propane having the lowest greenhouse gas potential. You referred here to a method in Asia where methane is not abundantly available, and the fastest growing pathway to meeting increased demand is a coal to methanol pathway. I have a couple of questions with regard to that. What has been done in that regard in Asia? Has anything been done?

Mr. Masterson: I think their primary need in Asia — and I speak specifically of China and India — is to meet public demands of improved lifestyle to enjoy many of the things we have. That's probably where their priorities are.

Senator MacDonald: In terms of applying technology?

Mr. Masterson: That's a key point to make. A lot of people will point to China or Asian countries and say look, they're doing this in a dirty way. It's a highly novel and technical effort to make methanol from coal. It's not easy. The easiest way to do it is from methane. These are highly technologically challenging alternative pathways for people to produce chemicals when they don't have access to the feedstocks that we have.

Senator MacDonald: How much progress have they made in terms of extracting methane from coal?

Mr. Masterson: We certainly know that China is active in trying to produce shale gas, as is the rest of the world, but they're well behind the United States and North America at this time.

David Podruzny, Vice-President, Business and Economics, Chemistry Industry Association of Canada: They're not putting a priority on production from low-CO2-emitting sources. This is almost half of the world's capacity to make methanol. It's located in China and it's all growing from coal. It has that 10-time footprint, and it's continuing to grow. It is because they have that as a resource and they're working with the resources that they have.

They have done the technologies to develop these products, and then they're taking the methanol and they're going coal to ethylene, coal to propylene. They're going in that same direction because that's 80 per cent of their hydrocarbons in the country today. They will do things in major cities to address and introduce carbon trading, but in their industries, they will work with what they have.

Senator MacDonald: I find this intriguing because on the East Coast of Canada there is about 9 tcf offshore from Cape Breton alone of methane and coal. What most people don't know — maybe you don't know this, but I'm going to tell you — is that there's over 60 tcf off the east coast of Prince Edward Island, a coal seam that runs into the west coast of Cape Breton. There is an enormous amount of methane there. Most of it is dry methane. Basically, when you extract it, you can burn it. It's really pure. Is that the future of the coal industry, the successful extraction of methane and its application in these fields?

Mr. Masterson: I don't know that we could fairly comment on that. We do know that recent technologies, the shale gas phenomenon, have resulted in access to massive quantities of liquids, rich natural gas in Western Canada and in the United States. It has had a revolutionary impact on the chemistry and power generation industries in North America.

We had our former guest on here, but if you're a producer in Western Canada, you need to be in the liquids-rich space to do well. What the economics are, then, to talk about coal, you're better to talk to people from that industry.

Senator MacDonald: Thank you.

Senator Patterson: I'm really alarmed by what you say about Canada having poor public policy, that we are on a path to under-utilize our low-carbon chemistry feedstocks, and worse than that, over-utilize higher carbon feedstocks from other jurisdictions to meet global chemistry demand.

I'd like to ask, first of all, do you think carbon pricing is a good vehicle to turn this bad public policy around?

Mr. Masterson: I guess it's the "depends.'' At the end of the day, one of the things we have to remember is it's the consumer that's going to pay the price. If we're not producing from lower cost chemicals in Canada because it's no longer profitable to do so, we will be importing chemicals and finished products from other jurisdictions. The cost to the consumer will go up at the end of the day.

There's no doubt that pricing can affect consumer behaviours, especially in areas where they do not have a lot of mobility. With regulations and pricing on home energy efficiency, we can build homes today that are net zero energy demand. We choose not to do so, but people generally aren't going to move their house and pack away. When you're talking about an industry that is global in nature and people have a choice of where to make their investments, we are making it more difficult to make those investments in Canada.

We're also talking about operations that have 30- to 40-year lifetimes. When we can't tell people what the regulatory and pricing environment looks like after three years from today, in 2020, they're going to be very hesitant to put their money into Canada. The proof is there every day. Again, we discussed it and showed you examples, $250 billion investment in the U.S. We should be seeing $25 billion of that in Canada. We've seen less than $3 billion. We have seen 1 per cent where we should have seen 10 per cent.

When we hear the Finance Minister talking about lack of and slowing foreign direct investment in Canada and that the Government of Canada is concerned about that, we say us too. We have the potential to contribute. Let's talk about how we can get there. And we've demonstrated we can do that responsibly.

Senator Patterson: This sounds like a very big challenge. Can you tell us what the committee should recommend that the Government of Canada should change to turn this around? Can you give us some simple and understandable recommendations about changing our public policy?

Mr. Masterson: I think there are opportunities for no regrets policies, things that won't undermine the economy as a whole. There is probably room to look at improved energy efficiency in our building and transportation sectors in particular.

When you start to look at energy-intensive trade-exposed sectors, which is a term you've heard, I would encourage you to look at the cement sector in British Columbia and see how it responded to carbon pricing there. It was predicted what would happen, and what happened followed the prediction. As the price of carbon increased, dispatch from one of the largest, most modern and efficient facilities in North America declined, and they began importing cement from a 1950s vintage facility in Seattle that used twice as much energy and twice as much greenhouse gas emissions. We switched the border around. We used to export to Seattle. They started to import into British Columbia. The companies involved said, "It's not that great; let's just bring it all the way from China.'' The industry hasn't recovered to the levels of production and export they had prior to the imposition of that tax. Last year, in the B.C. budget, the government took compensatory measures and provided some relief to that sector to try and correct that. That's almost six years after the tax was introduced.

If you want to see what would happen to trade-exposed sectors on the imposition of a carbon price, I would encourage you to look closely at the experience with the British Columbia cement sector.

Senator Patterson: What do we do about your chemical industry, though, to change policy?

Mr. Masterson: Well, I don't think it's the chemistry sector alone. I think you have a number of sectors. What do we do in Canada? We have resources; we process them; we add tremendous value to all the resources we're blessed to have. I can't think of any other sector comparable to chemistry that will do well with the carbon pricing we have before us.

Again I come back to Minister Morneau's comments and the advice of his advisory panel, saying we have a dearth of foreign direct investment in Canada today. Does anybody at this table think imposing a carbon price will help turn that around and encourage more investment? It certainly isn't in our sector.

If you look at some of the studies that have been done, you'll see that the chemistry sector in particular is especially trade-exposed. It's the highest traded manufactured product in the global economy. About 40 per cent of all chemicals produced are traded across borders. This is not a winning scenario if Canada has a go-it-alone process for pricing carbon emissions from our industry.

Mr. Podruzny: One of the things to add to this is that innovation and technology breakthrough is seriously our long- term vision for a solution to this global problem. We are going to address climate change when we find ways through technologies to make commercially valuable and profitable products out of carbon dioxide and concentrate it and remove it from the atmosphere selectively to make stuff. We are looking for technologies that will be step changes rather than incrementality and cutting a per cent there and a per cent there.

We see some of the approaches such as those in Alberta, where they would take their carbon charge and apply it into research and development for CO2 reduction, as a solution to the problem. There is work going on in the oil sands today to find ways to no longer burn gas to push steam down and bring heavy oil up but, rather, to do a continuous cycle of solvent extraction, which would reduce the greenhouse gas emissions enormously. It's a matter of perspective and where we're going to find solutions.

Mr. Masterson: If I may, one last quick response to your question about more sound policy: It remains relatively early days yet, but we were encouraged by the path that Alberta is on. What Alberta is telling industry is if you can demonstrate, like I've told you this evening, that your operations in our province are best in class and performing at the best available technology, best emissions profile because you're using the right feedstock and you've got efficient operations, go ahead and do so. In fact, we'd like to attract more of that investment into Alberta. Again, can we not get the world to invest in our lower carbon resources rather than invest in higher carbon resources elsewhere? We are puzzled how thinking people believe that will solve the global climate problem when we just produce products with higher carbon profile in other jurisdictions.

I'd encourage you, if you haven't already, to look in detail at the example of carbon pricing in British Columbia's cement sector. It is a case study of what goes wrong. You disadvantage very efficient and modern operations and simply bring in the same product with twice as much emissions. B.C.'s emission profile looked great. If you look at their carbon budget, they reduced their emissions. The global environment looked worse. Is global climate change a national problem or a global problem? We believe it's a global problem and we need globally coordinated solutions.

Mr. Podruzny: If I could just add one small other example, you will have heard that the leader in climate change in addressing the issue is Europe. However, most of the chemical production in Europe, more than two-thirds, I believe, is based on oil, with twice the carbon profile per tonne of product. Where they haven't grown, they've moved it and they're importing the finished product from China. So they have reduced their emissions significantly, but only by moving their most energy-intensive industries out of the region. That's not solving our problem. We are looking for technology breakthrough to solve our problem. That is why we're saying that the public policy isn't serving us well.

Senator Patterson: Can you give us some validation or some further background information on what you've just told us?

Mr. Masterson: Yes. We can show you the changes, the trends in global production. It has shrunk in Europe. It has expanded in the U.S., which has the same resources we have. It has grown tremendously in the Middle East, which has similar resources to us, and has also grown exponentially in Asia, which does not have the same resources.

Mr. Podruzny: The biggest example is the Chinese chemical production going back 12 years, which was between 5 and 6 per cent of the world's chemical production. Today it is 36 to 37 per cent. You know how they're making it. That's not a sustainable solution.

Senator Patterson: Thank you very much.

Senator Galvez: This is very interesting. Thank you very much for all this information. It's trying to find the balance between what's good for the environment globally — because it's not a national problem, it's a global problem — and, as you said, corporations that look for profit. I agree 100 per cent that the solution is through technology but also through information, because not everybody knows what you are saying about China. Many people calculate things. We see tables, but we don't understand where these calculations come from. The comparisons you are making between Canada producing these important products and the petroleum industry, petrochemicals, and China producing them is important.

To further clarify this in my head, if we in Canada are blessed, as you said, with all these resources, wouldn't it be more efficient to transform our products here rather than to sell it as crude to other places?

Mr. Masterson: We are very favourable proponents for value-added manufacturing of our resources in Canada, but we also respect the notion of free trade. The resources will go where the owners find it most profitable to do so. We agree entirely.

A good example is Alberta in the past year. Alberta decided that they wanted to do something with propane, which is highly available and has very low value currently, to add value to the Alberta economy. They've put in place a $500- million royalty credit program to encourage global investors to come and invest in propane upgrading, let's call it, in Alberta. In response to that request, they received 16 applications with a value of over $20 billion, and they have selected two of those with a book value of about $8 billion to move hopefully this year to final investment decision.

So absolutely we agree, and the province of Alberta would agree, that it's much better for local economies to take our resources, add value to them here and take them as far as we can. That's only the first step. You take propane and turn it into a chemical called polypropylene. There are many other steps before you get to textiles, auto parts and all the other wonderful things polypropylene does, but we ought to capture some of that value chain and not send the propane away.

Senator Galvez: Can you suggest a policy that goes in this direction?

Mr. Masterson: That's a very good question. We work closely with the Alberta government, and there's an example of a policy. I think we gave copies to this committee when they were in Sarnia of the results of an independent study that was undertaken by the Canadian Energy Research Institute. It looked at the question, why have we seen C$250 billion in investment in the U.S. and next to nothing in Canada? What they concluded on average is that the operating and capital costs in Ontario and Alberta were very similar to those in key U.S. jurisdictions, but on average those jurisdictions provided various forms of investment supports totalling about 15 to 20 per cent of the value of those projects. I've demonstrated, just in the case of Alberta, providing $500 million in royalty tax credits — not a government expenditure but a royalty tax credit — attracted $20 billion of global interest.

There are a range of instruments, and we have written to Deputy Minister Knubley at the Innovation, Science and Economic Development and his colleagues in the provinces just this week to outline the range of instruments that are available and encourage better coordination between federal officials and those in key provinces of Alberta and Ontario.

Senator Galvez: Can we get a copy of that?

Mr. Masterson: Absolutely.

Mr. Podruzny: Just to illustrate that in a tangible way, if we can move the needle in doing some of it here versus somewhere else, there is a sense of proportion that we sometimes fail to recognize here in Canada as we make best efforts to do our part in globally addressing climate change. But the reality is that 18 months of growth in China in their economy equals all of the emissions that Canada produces in total, all of them. Six months equals all of the emissions in Alberta, including the oil sands. When we have a sense of perspective like that, the Chinese chemical industry between 2013 and 2014 grew by $220 billion. That's how much they grew by. Our total industry is $53 billion, and theirs were American dollars and ours were Canadian.

Mr. Masterson: The report you requested is with the committee clerk already, I believe, subsequent to the visit to Sarnia. Again, we're not here to beat up on China. We're just making the case that they're making chemistry out of the resources they have available. My point is we're very blessed with very low carbon resources the rest of the world would literally love to have, and we're disadvantaging the production of chemistry with those resources.

Mr. Podruzny: Exporting very large amounts of natural gas to China would go a long way to reducing global emissions because they could move from producing their chemicals from coal to producing them from methane, from natural gas. So instead of shipping crude oil, we could ship crude gas and let them do the value add. We're simply saying that there's room for us to do some of it here using the most energy efficient and least emitting technology possible.

Senator Wetston: Just to pick up on your last point, we need a few pipelines and LNG plants to accomplish that. If you can find a way to do that, perhaps those are the questions we should ask you about. I won't go there.

Mr. Masterson: No. Thank you.

Senator Wetston: Maybe we should. You seem to be interested in the topic, but no, we won't go there. The chair wouldn't permit that. Thank you for the opportunity to ask you a few questions.

I really don't understand what you're getting at, quite frankly. Overall I certainly understand your perspective, but I see what you do, and you have an industry with a good reputation and a long history, obviously, but it's an input. Your product is really that. The question for me is, who wants your product?

Mr. Masterson: Super question.

Senator Wetston: I'd like to explore that with you a little bit, but only in the sense of who wants it and what market share Canada has. We're obviously a relatively small country. We can't even compare ourselves to China from the point of view of what they are using chemicals for the input of the products they produce and obviously export. We're not in that space, for obvious reasons. We can't meet those kinds of requirements.

The other thing I wanted to ask you just as part of this question is: When you talk about the U.S. with $225 billion, this is not surprising to me because we have a very low rate of productivity enhancement in Canada and investment in technology and innovation. That's one of the reasons our productivity has been a little less — that's the suggestion from a lot of economists — than other countries. The reason I'm asking this question, then — this is the third part of this, excuse me, chair — is you talk about I think $3 billion in Canada. This $225 billion of investment did not occur because of the lack of a carbon tax or a carbon policy. This is very recent. Many of these projects clearly were not developed overnight.

So what I'm trying to understand here is you talk about the impact of something like a carbon tax when there are many other issues associated with this. I'm simply trying to get a better sense of your presentation in that regard.

Mr. Masterson: Absolutely. Let's take those three in order.

Who wants it? Everybody. Chemicals go into 95 per cent of all finished goods, all manufactured goods you see. It's everywhere. Who wants it in particular? If we think of the Canadian economy, you're talking the automotive sector. Dave, what's the number? How many thousands of dollars?

Mr. Podruzny: In every car it's about US$3,500 of chemistry, of chemicals.

Mr. Masterson: The agricultural sector is a very high-demand sector for chemistry. The building sector. If you look around Ottawa, today is a warm day, but in February you can pour concrete. Think back 30, 40 years ago and you weren't pouring concrete in Ottawa. You can you do that today because of the many additives in concrete from chemistry. Chemistry plays a key part in those sectors.

I want to stress, you said some of the points weren't clear. The things happening in those sectors, the light weighting of motor vehicles, that's through the power of chemistry to develop new tools. When we talk about electromotive means of transportation, electrification of transportation, that's chemistry going into making new batteries. There are very large investments there.

That's who wants it. Everybody wants it, and they want it to be better than ever, so that was question number one.

On your question about the scale or the relevance of the sector, we are less than about 2 per cent of global chemical production, but again with potential to be much bigger given the resources at Canada's disposal. It's a very large potential there. We export a little over half of what we make. It does go out, and almost all of that to the United States. Who wants it? The United States wants it. Why do they want it? Because we have not just low-carbon but low-cost chemical products to provide them for them to add value to their own sector.

Mr. Podruzny: Bob, one thing we should say there, and you were maybe going to get to this, but we also have higher productivity in our sector than the U.S. chemical industry, so we are more efficient. We're still swimming upstream in trying to get this message across, but partly because of some of the large world-scale investments that have been made in recent years in Canada in petrochemicals, we are more productive.

Mr. Masterson: Absolutely.

On your last question, I didn't claim that our problems in attracting investment were because of carbon pricing. What I did say, however, is introducing carbon pricing in the way it's proposed right now will make the job much more difficult. That's what I was trying to get at. There are a variety of factors that go into that.

Senator Wetston: I think we ought to understand how markets function. I understand the use of your products and where it goes. This is of no moment, but I have a science degree. I've forgotten most of it today, but I have to say that I also understand and appreciate the importance of the sector.

Really what I was trying to get at is if you're 2 per cent, as you say, why aren't you 5 per cent? Why aren't you 6 per cent? Why aren't you 10 per cent? You're talking about policy, so why do you not have a larger market share with respect to your products?

Mr. Masterson: I would say rather than why don't we, let's look at the cases of economies that have succeeded in probably overproduction of chemicals and investment in that sector. You start to look at countries like Singapore. What have they done? They have a very intentional strategy on how to grow the industry and how to make it attractive for investors to come in and want to invest. I would make the case, with a few exceptions, and Alberta has had interesting policies and successes in recent years, but by and large it would appear that Canadian jurisdictions are indifferent to ongoing investment. We do nothing to try to attract it.

We're talking about trade these days, but after 30 plus years of free trade, the Canadian public generally understands, as do our decision-makers, that we have to compete for a global market share for what we produce in Canada. We understand we're an export-oriented nation. I don't believe that Canadians, or many — not all — elected officials understand that we have to compete equally as hard for attracting investment into Canada. I believe Minister Morneau's panel has made that point clearly.

I don't think we have seen a robust response capable of moving the needle and getting us back to that plus above 2 per cent growth at this time. We have to work very hard to attract investment, and we seem intent when we look at electricity pricing in the provinces, the regulatory environment, other costs, on discouraging it rather than encouraging it.

Senator Mockler: I had three questions. I will reduce it to one, Mr. Chair.

We did ask when we met you previously if you had been consulted on pre-budget. Should Canadian energy and climate change policies align with those of the United States, our largest trading partner? We know what's happening there today.

Mr. Masterson: I think I have a subtle answer to that. We'd reserve the right to pursue whatever policies we want. We think of our approach health care. We have a different approach to health care than U.S. policy and we found a way to succeed.

We can certainly do that, but I don't understand why we would want to do that with energy pricing and carbon pricing in a way that we are fairly certain is going to undermine our economic foundations in established sectors, such as chemistry and energy. I'm sure you've spoken to representatives from that sector. They are highly concerned about where we are going.

So, yes, we can have climate policies and we can have a whole variety of them, but we should choose wisely with absolute discretion over which ones will be helpful to reduce emissions and grow and sustain the economy.

Mr. Podruzny: I can take that one step further. If we want to talk about decarbonizing or reducing carbon, we would bring forward the idea that as we go forward over a long period of time, we see using our hydrocarbons to make stuff instead of just using it for its energy content, its BTU value.

Just like we got rid of the Stone Age and found valuable stones like diamonds to play with, we see in the future that we will find ways that hydrocarbons will be converted into high-value things where we sequester the carbon into things that we use as consumers.

Mr. Masterson: Let me give an example of policy that doesn't work very well. You were in Sarnia and you saw the large NOVA facility, and you saw at the BioAmber facility next door there was a large co-generation plant, combined heat and steam, a very efficient way to produce electricity and steam, approaching
80 per cent efficiency rates.

That piece of equipment is captured within the Ontario cap-and-trade system. It is captured by the federal carbon pricing initiative. The government has a clean electricity standard, the federal government that's emerging, that will add to the cost of that equipment. At the same time, they're now proposing a clean fuel standard that will impose additional costs on the operation of that equipment. At the same time, both levels of government are proposing controls on air emissions that, if those go ahead, the control mechanisms work against greenhouse gas emissions. And you're sitting here saying we are trying to operate these plants with the most efficient equipment available on the face of the earth today, and we're being punished to do it. How can that be sound policy?

The best thing is to encourage as much industrial co-gen for combined heat and steam as possible. That is a good thing. In fact, Ontario encouraged that over many years as it tried to get out of coal-fired generation to address climate change. Let's get industry to produce more of its own combined heat and power, because this is good.

Now the industry does it and everyone wants to penalize it. This is not sound policy. You are not giving the right signals to investors that they should come here and get exposed to this quagmire of competing and inefficient public policies at the federal and provincial level across multiple pollutants and across multiple levels of government: electricity, energy, fuel, air pollutants and climate change. There's a complete lack of coordination. We're talking here about just one piece of equipment that is a very efficient piece of equipment. It is difficult to be optimistic about our economic prospects when we find ourselves in that type of situation currently.

We haven't talked yet about what we believe is going to happen south of the border. Do we have to follow their policy leads? No. But if we're not conscious that they're taking steps to make their economy more efficient and to attract more investment, we will be left in the dust. We don't have to do what they do, but we better figure out what we are going to do, and we better figure it out fast.

Senator Galvez: You're talking about attracting investment. I think you mean foreign investors?

Mr. Masterson: Yes.

Senator Galvez: I was in Lima for APEC, and I dined with the Toronto stock trade, the Canadian Pension Plan, and they said that we have the biggest investment portfolio to invest in the world, and they are investing elsewhere, and they're Canadian. They mentioned an amount of money that I cannot imagine. Why are they not investing here?

Mr. Masterson: The first thing is this is a global industry. You were at BioAmber, which is a French-Canadian company but it's a Canadian company. There are in our sector a few Canadian players, but most of them are Canadian-operating entities of global multinationals. Again, 40 per cent of all chemical products traded are highly globalized. There has been a lot of consolidation across the industry over the last the 30 years.

If you go back a certain distance of time, some people at this table would remember there were chemical companies in Canada that raised money on the Toronto Stock Exchange to spend money in Canada. Those days aren't here anymore. Those companies are global in nature, and it's not company A versus company B to see who will invest in Canada. It is company A saying: Should I invest in Canada, Argentina, the United States or in Asia? They have to do their internal number crunching to find out where the best return on that investment is.

As we talked about in Sarnia, we stressed the point that Canada has a lot of things in its favour, and we find ourselves often on that short list of two or three jurisdictions that chemistry companies are looking at to invest, but we can't get to number one. If you are not number one, you get nothing. There is no silver medal. There is no bronze. We don't get to pat ourselves on the back and say, "Good job, boys, we got the bronze. Let's go have a beer.'' You get nothing.

Again, I come back to Minister Morneau's panel. We know that's not good enough. We know we have to do something about it. We need some serious conversation about how to move from second and third to first place on that investment scale.

Mr. Podruzny: There's a reason why the Canadian pension plan is investing on the U.S. Gulf Coast rather than in Sarnia. It's because they believe they will make a higher return there and they will get an incentive to locate there. And that is in the face of the fact that the companies operating here in Canada, based on natural gas, competing against world prices based on oil production, we have very high profit levels, but the investor is not a fool. They're saying they'll make more money with the help you're giving me — Texas, Louisiana, Pennsylvania, Michigan. We're up against 10 to 15 to 20 per cent incentive.

Do we want this investment? Do we want this technology? Do we want these kinds of global solutions? We go after it.

Somebody was mentioning the natural gas, the methane in coal. We've got one gas field in Western Canada that runs between B.C. and Alberta, the Montney, which has 5,000 trillion cubic feet of gas. It is very liquid rich. We have the resource; we have the option of upgrading it. We need to seize the opportunity and grow the business here rather than somewhere else at a penalty to the global commons.

The Chair: Thank you. I know exactly where that is because I live on top of it. I'm well aware of what's there.

I have a couple of questions, and then I think we're done. I want to thank you for being patient with us and staying later and giving us your presentation.

I first want to look at your presentation. You said: Finally we spoke of the actions taken by Canada's chemistry industry to reduce absolute greenhouse gas emissions from their own operations by more than 66 per cent since 1992. On your website, it says: Domestically, the industry contributes approximately 3 per cent to Canada's total greenhouse gas emissions. Since 1992, it has reduced carbon dioxide emissions by 37 per cent.

Mr. Masterson: Is that a particular province or the sector as a whole?

The Chair: That's on your website. I want to know which number I'm looking at before I ask you the next question.

Mr. Masterson: I referred to our members, the responsible care companies, and that is two-thirds. The chemistry industry as a whole is closer to one-third. My comment was those members that we represent, the largest producers.

The Chair: So the industry totally has reduced carbon dioxide by 37 per cent?

Mr. Masterson: Members, 66 per cent.

The Chair: What encouraged the industry to do that?

Mr. Masterson: Investments. How did that happen? Every time somebody made an investment, new product, new process, adjust the feedstock. These weren't tick, tick, tick, one drop at a time, 1 per cent a year. This was nothing, nothing, nothing, and boom, we reduced our emissions by 25 per cent because we put in a $7oo million or a $1.2 billion investment.

You were in Sarnia, and Nova talked about spending upwards of $500 million to switch from naphtha-based chemistry to ethane-based chemistry. They said when we are completed this project, our greenhouse gas per unit of production will be half of what it used to be.

It is those investments that allowed that to take place, whether that investment is in large energy efficiency, but most of the time the big reductions have come because, unlike a lot of sectors in Canada, we've been able to make ongoing major capital reinvestments to renew our fleet. We're at a point now where people are concerned that we will be somewhat hobbled with aging assets that will continue to lock in current greenhouse gas emissions profiles if we're not able to continue to attract that investment.

The Chair: If you could continue to attract that investment, you could reduce that 3 per cent to just about nothing in no time? Is that what you are telling me? Or are you at the bottom of the barrel?

Mr. Masterson: No, I don't think anybody would ever say you're at the bottom of the barrel. The world is moving quickly and there is a lot of competition to get better all the time. Our message is you're better to get there, in our sector and probably many sectors of the economy, by attracting new investment, not by hobbling assets and ensuring they continue to barely operate at low-capacity factors.

The Chair: I get all that. In your paper, you say that domestically the industry contributes approximately 3 per cent to Canada's total GHG emissions. So if you had a favourable investment climate, could you reduce that 3 per cent further? Could you reduce it to 2?

Mr. Masterson: That's difficult to say, because it depends on how much the industry grows. If we're investing in lower carbon resources in Canada — I gave the example of British Columbia — Canada's emissions could go up if we grow our chemistry sector, but we can reduce global emissions less than they would been otherwise because we'll be avoiding production from higher-carbon products.

The Chair: I'm not sure how you measure that you have reduced by 37 per cent. The industry in Sarnia gets half of their natural gas feedstock from the U.S.

Mr. Masterson: Today.

The Chair: So would you see the industry continuing to do that or actually use some of that liquids-rich stuff from the Montney play?

Mr. Masterson: Well, the Pennsylvania-Ohio basin is much closer, so provided the border stays open, one would think it's economically and environmentally beneficial to source that much closer to Sarnia. We used to bring ethane all the way from Alberta into Ontario. That pipeline is not available any longer.

Mr. Podruzny: There's another thing. If we increase our emissions in products that in their life cycle reduce emissions in other sectors —

The Chair: Exactly. I don't disagree with you for a minute.

Mr. Podruzny: The only other one I would add to what Bob was saying is from time to time, as we produce our products and bring innovation into the mix, we come up with step changes. When DuPont found a way to eliminate its nitrous oxide emissions, it resulted in a worldwide reduction of CO2 by almost 10 per cent because that nitrous oxide has a CO2 value of 320 compared to carbon dioxide, and they virtually eliminated that nitrous oxide emission with a technology change that eliminated those emissions to the air. It's going to be breakthroughs like that.

We have scientists in our sector, one brilliant man in Germany and another in California today, who are working on ways to convert CO2 into high-value, profitable plastics. When we succeed in making that commercial, we will have solved the CO2 emissions issue. That's the long-term sustainable solution, not incrementally turning everything down.

Mr. Masterson: A concrete example would be, would we want this investment or not? You heard in the summer about the Kigali accord, which will result in a new generation — well, the generation of new refrigerants is already there, that will significantly reduce greenhouse gas emissions associated with the use of refrigerants in your house and automotives, et cetera.

That product has a significantly lower greenhouse gas footprint in its manufacture than it used to. Would we want to attract that to Canada knowing that if we don't make that now, we will have more new emissions, but when we use this product globally, we have cut the emissions by hundreds of times over? In fact, we heard our Environment Minister say that the Kigali accord for the new class of refrigerants is the single-largest contributor to avoiding future climate change by up to half a degree. Do we want to bring that investment to Canada, knowing that we will make this stuff as a beneficial impact on climate change, but we will have emissions of our own?

I would say the answer today from public policy is we don't want to do that. We don't want those emissions because they will add to our own ledger and we're not concerned about what happens to the world overall all, and again we would say that's poor public policy.

The Chair: I don't disagree with that. I guess you could meet these targets. It would devastate the economy, and the temperature in the world is still going to go up and emissions are still going up. We have to think of a smarter way to get around this. I'm not sure exactly what that is, but we have to think it through.

I'm not saying we shouldn't look at reducing our GHGs. We should do everything we can, but to meet these targets and destroy an economy and not use a good resource that we have here to create all the jobs, just to say, "We're good guys, we met our targets, but the temperature is still going this way,'' that's the problem.

Thank you very much, gentlemen. We appreciate your time. I don't think there was any request for any more information, but we know where we can go to get some more if we need it.

(The committee adjourned.)