Mr. Chairman, honourable committee members, thank you for inviting me to speak to you today. The Green Budget Coalition, as many of you know, comprises 20 of Canada's leading environmental and conservation organizations, which in turn represent over 500,000 Canadians as members, supporters, and active volunteers.
As you are well aware, Canadians are now demanding environmental progress. We--and I expect all of you too--want clean air, clean water, and effective action to reduce climate change; yet preserving Canada's environment continues to be akin to swimming against the current. We make occasional progress, and then we slip back because we have not yet aligned our economy with our environment. Too often we still view environmental progress as threatening economic health, and vice versa.
When Canada finally shifts to a healthy green economy, the pursuit of profit, cost-savings, and greater economic activity will inherently serve to preserve and restore environmental and human health. Similarly, companies who pursue environmentally friendly strategies should save money, increase profits, and gain a competitive advantage. Unfortunately, we are not there yet.
The coalition believes that to achieve a dynamic green economy we must integrate environmental values into market prices using well-designed fiscal policies, much as many OECD countries have already done.
One of the first steps to doing this, as the OECD has reiterated, is to phase out subsidies to limited energy-intensive resources such as conventional oil and natural gas. Such subsidies expedite the development and use of one-time polluting energy sources while making it less economically viable to develop low-impact renewable energy whose growth is pivotal to our environmental future.
The Green Budget Coalition believes that the accelerated capital cost allowance for the oil sands should be eliminated. It is expensive, unnecessary, and a waste of taxpayers' money.
My colleague Amy Taylor of the Pembina Institute has done substantial research on the oil sands ACCA and has submitted a more detailed brief, which the Green Budget Coalition fully supports. As she was unable to appear before you this week, I want to highlight some key points from her submission.
The oil sands currently qualify for a 100% accelerated capital cost allowance, which is much higher than the 25% provided to conventional oil and natural gas.
In 2000, the Commissioner of the Environment and Sustainable Development undertook a study of the level of federal government support for energy investments in Canada. His analysis found that the ACCA results in a significant tax concession for the oil sands. The finance department estimates that the benefit of this tax concession is between $5 million and $40 million for every $1 billion invested. This means that from 1996 to 2005, anywhere from $200 million to $1.6 billion in tax expenditures was allowed because of the oil sands ACCA.
As you can see in the bar chart included in our brief, these figures continue to escalate. The ACCA for oil sands is a very generous tax subsidy that is no longer needed. It was established to help spur capital spending and increase production from the oil sands. This it has done in spades. Between 1995 and 2002, capital spending in the oil sands increased by a staggering 1,649% and oil sands production increased by 131%. Furthermore, in the last decade technical know-how has improved, and oil prices have increased by over 200%.
The oil sands ACCA is clearly an unnecessary tax expenditure and a waste of taxpayers' money. The oil sands sector no longer needs this preferential tax treatment. It's a highly profitable sector. In fact, the oil and gas industry achieved a historical record for profits in 2005, when operating profits reached $30.3 billion, an increase of 50% over 2004.
To conclude, the Green Budget Coalition recommends that the Department of Finance eliminate the 100% accelerated capital cost allowance for the oil sands and put oil sands on a level playing field with conventional oil and natural gas. This can be done by eliminating the accelerated treatment currently granted to the oil sands within the Income Tax Act.
I'd like to thank committee members for inviting me to attend this meeting. I also take the opportunity to congratulate you on the motion you passed.
In my view, it has great potential for exploring the potential of new and most desirable policy approaches.
In addition to the paper I have submitted for your consideration, which in essence says that the current federal tax regime is antiquated, out of synch, perhaps even absurd, and the subject, internationally speaking, particularly at the OECD, of criticism ranging from despair to derision, there are five points I would like to make here this morning.
The first point is about your committee. It could play, it seems to me, a determining role in solving the problems caused by climate change. You could give guidance to your respective caucuses and to cabinet. You're entering a territory that other finance committees in earlier Parliaments have carefully avoided. Your findings could guide the Department of Finance, which, despite its claims to the contrary, can play, and does play, a central and very influential role in the process of policy development, federally and provincially.
For all these reasons, the motion before us today could represent the initial step towards a badly needed substantive policy for the Government of Canada. In so doing, you would be upholding the fine tradition established by other committees in the House and the Senate wherein they tackled difficult policy areas, be it in health, languages, justice, or the environment.
My second point has to do with your motion itself. It addresses two areas. One is the taxation regime for fossil fuels. In the text of my submission, I've done my best to highlight the highly contradictory nature of Canada's tax system. It promotes and encourages greenhouse gas emissions at a time when we want to reduce them. No wonder, therefore, we are encountering great difficulties.
It does not make sense to have the Government of Canada attempting to ride two horses galloping in opposite directions, the Kyoto horse in one, and the fiscal horse in the opposite. Canada's tax system has to be modernized and redesigned to facilitate and not to hinder the achievement of the Kyoto objectives.
The other area of taxation addressed in your motion is renewable sources of energy. While achieving a level playing field might have been desirable a few years ago, today, with only six years separating us from 2012, what we need to achieve is a playing field considerably tilted in favour of renewables, as much as it is tilted in favour of fossil fuels now. That, coupled with a program offered by the climate change innovation fund, could take us a long way. In addition, perhaps a Canadian solar energy institute funded jointly by public and private sources could be very helpful in stimulating innovative thinking and innovative technologies.
The third point I would like to make is rooted in the report by the Commissioner of the Environment and Sustainable Development. In 2004 she made an interesting observation:
||Finance Canada has not done a systematic job of assessing opportunities and options for using the tax system to advance sustainable development....
|| In other words, the federal government has not established a systematic basis for deciding whether and how to tap the potential of the tax system to help shift Canada toward a sustainable economy.
She also said:
||...the federal government has acknowledged the important role that economic instruments—including tax measures—can play in making progress...
She concluded that the OECD
||...has also repeatedly noted that Canada needs to make more use of economic instruments and, in particular, “green” tax reform, for environmental improvement.
Mr. Van Iterson has already referred to this.
Finally, the Commissioner notes that Parliament's role in holding the government to account is vital to progress on sustainable development, and this role, I suggest, is important for government backbenchers as well as for opposition backbenchers, because what they have in common is definitely their desire to be re-elected.
Finally, the Commissioner writes in section 45 of her report:
|| It is time for the deputy ministers' Environment and Sustainable Development Coordinating Committee to deliver....
||This is a unique and powerful mandate, coming directly from the Clerk of the Privy Council. In my view, the Committee is falling short of its potential...
||It is up to senior departmental officials to better use the opportunities available to advance sustainable development.
The fourth point, Mr. Chairman, has to do with a communication by the assistant deputy minister of finance, Mr. Drummond, who is no longer holding that position, when he wrote on fiscal matters raised by the committee on the environment and sustainable development. He made a number of interesting points that may be helpful to your committee. Time does not permit me to go into the details, but his letter and the appendix are public documents, easily available from the clerk of the committee. Your committee may want to explore the taxation areas analyzed by Mr. Drummond to determine their potential, which in my view is considerable, and incorporate the findings in your report. It may turn out to be a very worthwhile exercise.
The last point, Mr. Chairman, is about observations by the minister and a quote. The minister says:
||Environmental issues–including climate change–have traditionally been placed in a category separate from the economy and from economic policy. But this is no longer tenable. Across a range of environmental issues--from soil erosion to the depletion of marine stocks, from water scarcity to air pollution--it is clear now not just that economic activity is their cause, but that these problems in themselves threaten future economic activity and growth....
||And we now have sufficient evidence that human-made climate change is the most far-reaching--and almost certainly the most threatening--of all the environmental challenges facing us.
That, Mr. Chairman, was Gordon Brown, the United Kingdom's Chancellor of the Exchequer.
Thank you to the committee members for the opportunity to speak with you today on this very important subject.
I will focus my brief introductory remarks this morning around three points. First, I would like to describe the economic impact of the mining and oil and gas sectors, including the oil sands. These sectors underpin much of the present prosperity we see in Canada, including the strong fiscal position of the federal government. Second, I would like to provide some context to the tax treatment currently provided to oil sands investment in Canada. Third, I would like to discuss the accelerated capital cost allowance tool.
On the economic impact, the Canadian mining industry employs almost 400,000 people and contributes $42 billion to gross domestic product. The oil and gas industry, including oil sands, employs a further half-million Canadians, and the industry trade surplus contributes four-fifths of Canada's merchandise trade balance in a given year.
The oil sands segment alone employs some 200,000 people in activities relating to existing and new projects. This is almost a tenfold employment increase from a decade ago and has come with perfect timing, helping to offset a comparable national decline in manufacturing employment.
The oil and gas industry paid over $26 billion to Canadian governments in 2006 in the form of royalties, lease bids, income taxes, and other payments. That is a lot of money, $26 billion. Some $5 billion of this figure represents corporate income tax payments to Ottawa. In addition, it is important to note that industry employees and oil sands employees are highly paid, considerably higher than the average manufacturing or financial sector employees, for example, and personal income taxes also amount to many billions of dollars.
While primarily centred in western Canada, the economic benefits of oil sands development span the entire country, with considerable spending taking place in Ontario and Quebec. The oil sands represent a form of anchor tenant at present, attracting world-scale goods and services companies to Canada.
The industry also brings important employment and investment benefits to Canada's aboriginal communities. For example, an estimated $1.5 billion worth of contracts have been awarded to local aboriginal companies over the past decade.
Turning to tax treatment, the tax treatment of the oil sands sector is affected by many facets, including its levels of exploration, capital investment, research, employment, and profitability. In some areas, such as the corporate tax rate, the oil and gas industry has paid a higher tax rate than other sectors for several years, a rate that is finally being equalized this year.
Accelerated capital cost allowance is the most significant tax structure element for the oil sands. Finance Canada classifies ACCA as a tax deferral. It delays the timing of taxes payable from the early years to the later years of a project, once the capital has been recovered.
It generally takes many years of planning, approval, consultation, engineering, and construction before an oil sands project reaches the production stage. Suncor, for example, has recently received approval for its Voyager project, yet it will not reach production until 2012.
The ACCA treatment accorded to the sector is important. It reflects the fact that very large amounts are being invested over long time periods in important and risky natural resource projects before receiving a financial return. The ACCA has been part of the fiscal regime of Canada since 1974, and in 1996 was extended to in-situ oil sands costs. The ACCA regime in the oil sands works well. Companies are investing large sums and projects are gradually moving forward.
Note also that 33 of the 65 oil sands projects are in post-payout stage, paying 25% royalty. Capital is being invested, projects are being completed, many have paid off their original investment, and they are now reaching the full royalty stage. In other words, the system is working as intended.
It is important to note that the ACCA treatment of oil sands investment is the federal component of a federal-provincial tax package. It was established by the previous government as an essential prerequisite to enable the development we are witnessing today. Weakening this treatment would impose a chill on Canada's investment climate and would significantly devalue Canada's natural resources, negatively impacting the provinces' resource revenues, as well as employment and GDP.
And for those who argue that such a mechanism is unnecessary, given current oil prices, I would point out that it was but a few years ago that oil was earning $20 to $30 per barrel. It is a cyclical industry, and there is no guarantee prices will remain at current levels over the long term. Some analysts are currently of the view that cost pressures are making oil sands projects relatively expensive and risky and that further oil price declines could cause a considerable softening or deferral of investment.
Let's talk about ACCA and other sectors. As a final point of my opening remarks, it's worth noting that the oil sands industry is not unique in receiving ACCA treatment. Incentives for investment in efficient or renewable energy production equipment are provided through ACCA under class 43(1) of the Income Tax Act. Cogeneration, wind turbines, small hydro facilities, solar and photovoltaic equipment, geothermal, landfill methane capture, and many other energy technologies and industries are provided with accelerated writeoff treatment.
In addition, committee members should be aware that excise tax exemptions and a broad range of R and D incentives and technology investments are also provided in support of these industries.
In closing, allow me to quote Department of Finance remarks contained in a recent response to a petition from the Sierra Legal Defence Fund. To quote:
||The resource sector is vitally important as a source of investment, exports, income, and jobs in many communities in Canada and to the country as a whole. The sector also faces distinct commercial risks, including the uncertainty related to exploration, large capital requirements for development, and financial vulnerability due to price volatility and cyclicality. At the same time, investments in resource exploration can generate significant benefits beyond those captured by the firm performing the activity. Many resource producing jurisdictions provide special tax treatment for similar reasons, an important factor to be taken into account if Canada is to be competitive in attracting internationally mobile capital.
These Department of Finance remarks accurately summarize the situation, and I could not state things more eloquently myself, Mr. Chair.
That will conclude my formal remarks. I would add, however, that I have not discussed the environmental theme in my remarks.
Thank you very much for giving us the opportunity to speak to you today.
I have a few comments on Nexen. We're a $20-billion worldwide energy company. We operate in roughly half a dozen countries in the world. We've been involved in the oil sands for several decades, and currently we are investing, together with a joint venture partner, $4.6 billion in bringing in an oil sands plant on stream later this year.
I want to make three or four points.
The first point is that investment thrives on consistency and stability. Investment returns in the oil sands today are in the mid-teens, and despite higher oil prices, margins and returns on these new investments have been eroded largely by higher input costs. This has already happened. And if you look forward, prices in the oil sector have dropped roughly 20% from the peaks we saw last summer. We appear to be facing an area where we'll have new environmental obligations to meet, which are uncertain. We're undertaking a royalty review, which may pose an additional burden on the sector, and collective agreements in the building trades area are up for renegotiation this spring. This is not really a great, conducive environment to be further tinkering with the economic system, and this is not conducive for the big investments that have to be made.
If you look at some of the policy reasons that ACCA was originally put in place back in the mid-1990s, it was to recognize the very substantial investments that are made in these large mining and oil sands businesses. It was also to recognize the large single-event risk that occurs when these investments are made. If you've read the newspapers over the last five years, these single-event risks have been substantial. It is unfortunately more common to read about cost overruns in oil sands plant development than it is to read the reverse of that. So this is not a business that can handle an infinite amount of tinkering and additional obligations put onto it.
The second point I'd like to make is the comment on subsidies. First of all, we deduct our actual cost, both capital and operating, in running this business, just like any other industry. The structure of the oil sands business and its tax and royalty regime is similar to what you find in many international jurisdictions. It is also consistent with the theme of big capital investments moving forward and the requirement to earn a return.
There is also a natural structure here, with oil and gas organizations having higher embedded costs of capital than governments. So from a financial point of view, it makes eminent sense to move these projects forward, to have oil and gas companies get their returns in the earlier period, and governments, with their lower cost of capital, get their returns during a later, after-payout period. They also get spinoff benefits, annuity benefits, and a future tax base from which economies are built.
There has been much said about the large absolute dollar profits in our industries, but nobody remembers the very substantial investments that are made. In many ways, these large profits are related to the size of the industry as opposed to high rates of return. This is no more complicated than, if you go to the bank and put in $1,000, you would expect to make a higher absolute earning on that than if you went and put $100 into the bank. These returns have to be put in the context of the investments that are being made.
The oil sands today, at current production rates, have roughly a 500,000-year resource life index. This is not an over-invested sector. Typical in our industry would be five to fifteen years. If we look at the period of time we've been at the oil sands, we had a large plant go in 40 years ago—and that was Suncor. Syncrude went in approximately 30 years ago. Shell went in a few years ago. As well, we have a number of smaller projects. But we have been working hard over a long period of time to bring this resource to market.
If you look at what brings innovation into our sector, it is, number one, an enhanced economic outcome. It is a robust, consistent, and supportive investment environment. Capital is among the most portable commodities in the world, and commercial organizations have many choices worldwide.
Canada has a chance to be a worldwide leader in sustainable, economic, and environmentally supportive oil sands development, and we need to support it.
I don't plan on going through the full extent of that, but I thought it would be useful to provide your committee with the background documents associated with what's going on in the oil sands industry right now. I will touch on a couple of them to help clarify some of these points.
As Mr. Peeling has already said--so I won't repeat many of the things that are in the first few slides of that--the Canadian oil and gas industry is a major driver in the Canadian economy today and a major contributor to government revenues through royalties, taxes, and fees.
Recently we have heard a number of comments in the media and amongst your committee and others that there is a subsidy that's being provided to our industry by the government. In response to that, we feel it's important that we reiterate the facts about what is going on, to help ensure a full understanding of that.
The first assertion we've heard, which has been covered very well by Mr. Peeling, is that the oil and gas industry pays no royalty or no tax. That couldn't be further from the truth, as you've heard. Mr. Peeling has covered that. But I did want to add one point regarding tax and royalties that he mentioned, and that is the fact that in addition to the direct tax, there is a significant amount of indirect tax that is paid through to local governments in property tax, and to the federal and provincial governments through income tax on employees and on incomes that are generated by our industry.
The Canadian Energy Research Institute recently conducted a study--which is shown on slide 3 of the package I gave you--that showed that just for the oil sands sector, for the period from 2000 to 2002, there was $123 billion that will be generated for governments of all levels--federal, provincial, and municipal. You can see the split that's associated with that.
Actually the federal government, according to that study, because of the indirect taxation, ends up getting 41% of that $123 billion. Now, lest we think that all of these benefits accrued to western Canada, the investment in the oil and gas industry this year of $40 billion will generate economic activity, employment, and taxes across the country. We have a very strong need for goods and services. In fact, Alberta buys more from Ontario and Quebec than they get. So growth in the oil sands industry is benefiting not just western Canada but, as again shown in that study by CERI, there's $155 billion in GDP that is generated to Ontario and Quebec and Atlantic Canada. Along with that, there are employment benefits, to which Mr. Peeling referred. I'll just put a number to that: there are 1.8 million person-years of jobs generated from this activity that go into Ontario and Quebec and Atlantic Canada.
Certainly the second assertion we've heard is that the oil and gas industry receives over $1.5 billion per year in subsidies directly from the government. We've addressed this assertion many times over the past few years, and it's based on an old and incorrect analysis that included many of the tax elements in a system that no longer applies. The assertion relates to tax elements that are simply, as Mr. Romanow referred to them, deductions of actual expenditures. Most of those are the Canadian exploration expense and the Canadian development expense, which are deductions of amounts that we spend on exploration, development, and drilling. Many of the elements in that number that has been thrown around are things that are just no longer there when it comes to oil sands.
For example, the resource allowance is mentioned. That resource allowance is gone as of this year. Earned depletion is mentioned as a tax feature. It is long gone, since 1990. The Syncrude remission order was mentioned. It is now gone. The investment tax credits are gone, except for of course in Atlantic Canada, where they apply to all industries.
The one that actually gets the most attention right now is the accelerated capital cost allowance, and this is where I'd like to spend the last few minutes of my time.
The accelerated capital cost allowance is not a subsidy for the oil and gas industries. As has been explained by other witnesses, it is simply the deducting of capital costs, with restrictions that apply only to the extent of the revenue generated from that mine or that project. This is applicable to the entire mining industry across Canada--from iron ore to potash to coal to diamonds--including oil sands. This has been the prescribed mechanism for deducting capital costs for the mining sector since 1974. Within the oil sands industry, it has been applying only to the oil sands projects, and it levels the playing field between oil sands mining and other mining projects across Canada.
In 1996 it was extended to include the oil sands in situ projects. Those are projects that are not mines but that extract oil from oil sands projects deeper underground. The ACCA is a deduction only of costs that are actually incurred. There has to be revenue from the project before that cost can be deducted. And for an illustration of this, I would ask you to turn to slide 7 in what I handed out. That slide is entitled “Capital Cost Deduction for Income Tax”, and it's simply a bar chart. What it tries to explain is the misconception on what accelerated capital cost allowance is.
As you can see from that chart, you get normal capital cost allowance, but only two to three years after you have spent that money in the oil sands, because you will not get production until year six on most of those projects. And you can see that in years six, seven, and eight what you really are doing is taking the deductions that would happen from year six to year twenty and moving them forward, but again, limited only to the revenue that's generated from that individual mine. So it is not a 100% writeoff of the entire capital in the first year.
Then you'll notice in years nine through seventeen on that chart, actually the deduction then is lower for the remainder of the life of the project. A lower deduction of that same $100 cost in this example means that there are higher taxes generated to governments during those later years of the project. So you can see it is a shift in timing of the same $100 deduction, but it is not a subsidy to the industry.
Thank you, Mr. Chairman and members of the committee. It's a pleasure to speak to you from Calgary.
I received about four hours' notice for this, so you have no handout from me at all. I'm going to speak totally off the cuff. If you want further information provided later, I can do that.
EnergyINet is a completely neutral body. It is neither a lobby group for the industry nor a representative of environmental interests. It is purely a neutral gathering place and network to provide information on energy technologies.
My own background is not as a tax expert or an economist but as somebody who's worked in the areas of energy R and D, innovation, and venture capital. I've been an entrepreneur and a senior government official. My remarks are made in this context.
First of all, Canada need the liquids that are produced and will be produced by increasing activities in the oil sands. We have no other choice if we are to preserve our role as a net energy exporter, with the enormous economic benefits that go along with that.
In spite of the best will in the world on renewable resources--and I applaud initiatives to accelerate the deployment and introduction of alternative and renewable energy resources--many experts will tell you that there is no doubt that we will be using fossil fuels in the amount of 80% to 90% for our energy supplies for the next 50 to 100 years. No tax measures will alter that reality. It is based solely on the amount of energy that this world consumes. Any energy economy measures, any conservation measures, will not close that gap.
So we need the oil that will come from oil sands projects. There are no other practical sources for this. In fact, conventional oil is declining at an increasing rate. Gas has probably plateaued and will decline also.
Not producing oil would give rise to huge negative economic consequences, potential geopolitical tensions, and so on and so forth. We're asked, just as an example, why we can't turn to wind power, and I'd like to give you some numbers on that. A million barrels a day of oil is equivalent to 75% of the total Canadian electricity-generating capacity installed today. It would require 20,000 wind turbines, which is one and one-quarter times the world's installed capacity, and five years of the total wind-turbine production of every manufacturer in the world simply to replace that million barrels a day, dedicated just to Canada. It won't happen.
And anyway, wind turbines produce electricity. Airplanes don't fly very well on electricity. They need liquid fuels. We must have a source of liquid fuels.
The problem, then, which I think can be rationalized with the environmental concerns, is the need to integrate energy and the economy and environmental matters. This comes down simply to a question of providing the right incentives and risk-sharing by government to make certain that innovations that will reduce greenhouse gasses, reduce water usage, and reduce conventional fuel usage are brought into effect.
Canada has had for a long time a very high R and D tax writeoff. This has been ineffective in spurring business research and development. We have one of the highest rates of R and D tax credits. At the same time, we have one of the lowest OECD rates of corporate R and D. Why? Because tax writeoffs for R and D encourage R and D, perhaps, but they do not encourage the implementation and commercialization of such technologies.
It has been repeatedly shown that capital cost allowance and other capital deployment incentives encourage the deployment and commercialization of technologies and innovations. Therefore, my strong recommendation is that this committee look very seriously at encouraging innovations--innovations that would mitigate the impacts of greenhouse gases, that would mitigate the use of excessive amounts of water, that would mitigate other negative environmental effects of increased oil sands production--by providing strong capital incentives for the deployment of technologies that provide those mitigations. Those technologies are today either there or close. We see many oil sands project technologies that in fact have focused on such things as gasification, the possible use of nuclear fuels as a source of energy in the oil sands, alternative sources for hydrogen, and so on and so forth. I'll leave the experts to figure out what the level of risk is and what's tolerable and what's not.
I think the capital tax structure can be used very effectively to encourage oil sands production, which is needed if we are not to fall into a total energy-deficit picture, and at the same time, it can be used to help mitigate the environmental negative impacts.
I listened carefully to the evidence and I was somewhat surprised at the seriousness of the situation that was reported by the representatives of the oil companies. The situation is serious for our environment, but definitely not for the oil companies.
They raised three main arguments for maintaining the tax benefits. The first is that the oil companies generate economic activity. However, it seems to me that, if we encouraged other industries, such as renewable industries, they would also generate economic activity.
I'd like to ask Mr. Caccia or Mr. Iterson the following question. If we developed larger numbers of renewable energy companies in Canada, would those companies also pay taxes? Wouldn't their employees also pay taxes? Lastly, wouldn't that generate as much economic activity, or perhaps even more? Would that be economically advantageous for Canada?
The second argument presented to us concerns the fact that, ultimately, it was not really a subsidy or a genuine advantage that was given, since, ultimately, in any case, tax will be paid later.
That argument somewhat surprised me coming from representatives of the oil industry, because, if it isn't a tax benefit, why are they asking that it be preserved? It seems clear to me that, if they want to keep it, it's because it's economically profitable; it's an advantage. If it's advantageous for them, then it's necessarily a cost to government and society.
Do we have an idea of the value that benefit represents from a public finance standpoint? Do we have an idea of the cost of this benefit that we're granting the oil companies?
Absolutely. Thank you very much.
The number I put forward was from the Canadian Energy Research Institute study that looked at oil sands alone, not the entire industry, over the period 2000 to 2020. Those oil sands generated revenue of $123 billion to governments, including the federal government and relevant provincial governments, and the other provinces as well, and associated municipalities.
We have seen this dramatically affecting Canada all the way across. We have had the Canadian Manufacturers' Association say this has been a lifeline to them as they look for opportunities to supply goods and services to the oil sands, which then generate wealth throughout all of Canada.
Everyone is very familiar with the labour issues we are struggling with in the oil sands area, which have actually turned out to be an economic boon for many people coming from Atlantic Canada, who are bringing their skills and providing services to us and returning that revenue back to those provinces.
So it is very widespread across Canada.
Every time there has been a measure or at least the suggestion of changing the taxation system or existing laws in order to broaden them to include the significance of the environment, industry has threatened with unemployment, or with greater risks, or loss of opportunities, or with abysmal consequences. Every time, systematically, industry successfully and effectively uses that threat.
Well, here again we have the same phenomenon this morning. Industry is raising the issue of risk, the issue of unemployment, the issue of losing markets, the issue of an uncertain future. But the demand is rising all the time. The availability of their supply is decreasing. The future looks rosy for industry. There is nothing to be afraid of.
You guys are going to do extremely well, no matter what is done to the tax system. So I don't think there is any reason to be concerned about it.
The fact is, however, that we have an international commitment with Kyoto. We are anxious about 2012. We don't want to be penalized when we reach that year, when we will be fined for the tonnes that we will not be able to deliver. So we have every incentive to move.
One of the major incentives, which so far has been carefully avoided, should be the one of looking at our taxation system and modernizing it.
My question is to Dr. Raymont.
I thank you very much. For having no preparation time, you gave an excellent presentation.
The oil and gas industry, particularly the oil sands, have been a great economic generator for Canada. We benefit from it in many ways. But there is the problem of the pace of development. In a sense, I'd like to see it grow, but I'd like to see that period of growth go 200 years rather than have those resources expire in too short a period of time.
It does benefit us across the country, there's no doubt. We hate to see our youth leaving for Alberta, but we're happy that they have a place to work in Canada, and we do sell from all across the country into that market.
The problem, other than this pace of development, is the greenhouse gas emissions and the point that you raised about our commercialization of R and D. I don't know if simply changing the tax structure or making it less efficient for investments in the oil sands solves any problem.
How do we in Canada structure so that we do commercialize our R and D and encourage investment in greenhouse gas emissions or new technologies, or remediation in other areas to compensate for this?
Several witnesses have talked about reality. The reality is that we absolutely must have the oil from the oil sands. There are no other sources of energy that can come on stream quickly enough to replace them.
The number one priority for this government and for you, as a finance committee, is to figure out a way to triage the environmental impact of the conventional energy sources we already have. Therefore I'm suggesting that if you tinker to some extent with this capital cost allowance, please do so in a way that will encourage innovative technologies to be deployed.
As I've said, encouragements for R and D don't really work. It is capital cost instruments and taxes that in many other countries have been shown to encourage the rapid deployment of innovative technologies in a commercial way.
I'm suggesting that since the oil sands are absolutely needed but pose an environmental challenge for us that we use this tax structure to help the oil sands producers and those who live in that area produce those oil sands with mitigated environmental impacts, which we can do by the deployment of new technology that can be encouraged by tax measures.
I'd simply like to react to the last comment that was made.
We've already talked about the need for the oil from the oil sands. Most of that oil is exported to the United States. Canada doesn't really need it for the moment. Furthermore, while we drain our oil reserves to export them to the United States, the Americans are consuming very little of their own oil. They'll probably be the last ones on the planet to have oil. They'll have gotten it everywhere in the world and we won't have any more.
Mr. Dykstra somewhat misrepresented my remarks about economic activity. I don't doubt that a lot of jobs depend on oil, but it's a matter of choice. Are we going to generate economic activity in the oil industry, or in the renewable energy industries?
Renewable energies will make it possible to create jobs and will create tax revenues for governments. That's the same thing; it's merely a choice. Should our fiscal policy encourage development of an industry that, by definition is ephemeral, since oil resources aren't eternal? Should we encourage the development of an extremely polluting economy? Should we instead take the government's same financial and fiscal resources and invest them in clean energies that will really structure our economy and permit longer-term development?
We've talked a lot about accelerated depreciation. In my opinion, we can't seriously continue to encourage the fastest possible development of petroleum energies. Perhaps we should also assess provincial government incentives. Discussions are currently taking place on equalization, to determine whether or not we should include non-renewable natural resources in calculating equalization. Of course, that's not out of the question. It's an encouragement for the provinces to develop this sector of the economy to the detriment of other sectors, such as the renewable energy sector.
Do you think we should include these calculations in equalization?
Thank you very much, Mr. Chair.
Ladies and gentlemen, thank you very much for having me here today. The main message of my presentation focuses on accountability—accountability to present and future Canadians, as well as to the international community.
We have heard strong pronouncements from government about taking action on climate change, but when we get to the real indicator of action, the finances, we see a system of subsidization and tax breaks that does not match the rhetoric. The Canadian development expense program, the Canadian exploration expense program, and the accelerated capital cost allowance bring together a system of subsidization that is not only unnecessary, given the profitability and growth of the oil sector, but one that is also irresponsible, in that the programs are counterproductive to the goal of reducing greenhouse gas emissions. It is time that words be matched with action. It is time for accountability.
Because many environmental goods and services, such as carbon sequestration through the maintenance of our forests, are not generally valued or traded in Canadian markets, we fail to provide appropriate signals that might otherwise contribute to efficient allocation and sustainable resource use. The 2001 Nobel Prize in Economics winner Joseph Stiglitz emphasizes that these services must be accounted for through mechanisms such as carbon emissions trading so that these environmental services are recognized by the market, and so that the maintenance of ecosystem integrity and the benefits generated therefrom can be rewarded. Without such mechanisms, even if they are aware of the services provided by ecosystems, they're neither compensated for providing these services, nor penalized for reducing them.
The OECD defines “subsidy” as “any measure that keeps prices for energy consumers below market levels or for energy producers above market levels, or that reduces costs for consumers or producers”. The International Energy Agency defines “energy subsidies” as “any government action that concerns primarily the energy sector that lowers the cost of energy production, raises the price received by energy producers or lowers the price paid by energy consumers”.
Economic and financial interventions are powerful means to regulate the use of environmental goods and services. In their worst form, subsidies can substantially increase rates of resource consumption and increase negative externalities.
In its recommendations to lessen the severity of these problems, the UN millennium ecosystem assessment stressed the need for the elimination of perverse subsidies that promote excessive use of environmental services and the reallocation of these subsidies to payments for non-marketed environmental services. These sorts of recommendations are not new. In 2004, the OECD called on Canada to systematically review its environmentally harmful subsidies in sectors such as energy, and to phase out environmentally harmful subsidies, including subsidies in the form of tax incentives for the resource-based economic sectors. Moreover, under the Kyoto Protocol, Canada committed itself to implementing measures for the progressive reduction or phasing out of subsidies in all greenhouse-gas-emitting sectors.
Today, the federal government is unfortunately going in the opposite direction, through its subsidies to the oil industry. Not only do these actions not account for the value of the environmental goods and services lost due to the destruction of the boreal forests above the tar sands, they provide dramatic incentives for the acceleration of greenhouse gas emissions through high-emissions-intensity tar sands oil extraction and through consumption of the oil produced from these activities. Instead of accounting for environmental goods and services, we are rewarding their neglect.
In his recent report for the U.K. Treasury, former World Bank chief economist Nicholas Stern addressed the issue of the cost of increasing greenhouse gas emissions and the issue of energy subsidies. He emphasized that these subsidies “are a source of economic distortion and loss” providing “a strong historical bias toward the more polluting fuels.”
Investors, operators, and consumers in a liberalized energy market should face the full cost of their decisions, but this is not the case in the Canadian energy sector. Federal subsidies distort the market in favour of existing fossil fuel technologies despite the greenhouse gas and other negative externalities that they create. As noted by Stern, these subsidies compound failures to internalize the environmental externality of greenhouse gases and affect the incentive to innovate by reducing the expectation of innovators that their products will be able to compete with existing choices. They also detract investment from more sustainable energy supplies and conservation initiatives.
Canada has signed and ratified the Kyoto Protocol, committing this country to reduce its greenhouse gas emissions by 6% below 1990 levels by 2008 to 2012. However, ladies and gentlemen, as you well know, our emissions have increased dramatically since that time, and we need to take more effective action.
Since 1997, when the Kyoto Protocol was created, the federal government has spent more than two dollars in tax subsidies to oil companies for every one dollar spent on meeting its Kyoto targets. Canadian oil and gas companies have been making billions of dollars in record profits over the past several years, yet these companies annually collect about $1.4 billion in government subsidies.
Good afternoon, everyone.
I'm going to start by emphasizing that we're making two recommendations today and that they are related to each other.
First, we are recommending advancing a sustainable energy future for Canada by implementing a capital cost allowance for the oil sands industry that is consistent with conventional oil and natural gas, that is 25 percent, rather than 100 percent. We talked a lot about this this morning.
Second, since that gives us some fiscal flexibility, we recommend that this retained benefit be reinvested to accelerate growth in the renewable energy and energy efficiency sectors rather than simply being absorbed.
The Green Budget Coalition proposes specific measures for doing this.
We also heard this morning a vision for Canada that saw our economy being almost exclusively dependent on fossil fuels for the next 100 years. I would posit that it's not the role of the Parliament of Canada to sit back and be told what Canada will look like in 100 years.
In fact, that's not what other governments have done. That's not what other signatories to the Kyoto Protocol have done. I'll refer committee members to the Sierra Club report on Kyoto that was issued a couple of weeks ago, in which we outlined the steps taken by the U.K., Denmark, Sweden, and several other countries that are kicking their petroleum habit and are meeting and exceeding their Kyoto targets.
This remains the goal of Canadians and one that I think can be achieved if our fiscal policy, as we've heard over and over today, matches the goals of Canadian society.
I'll leave my comments at that. Thank you.
My name is Robert Plexman, and I'm the senior oil and gas analyst and managing director at CIBC World Markets. I've worked at CIBC for the last 11 years, and I've worked as a petroleum analyst for over 30 years.
My responsibilities as an oil and gas analyst are to determine the fair stock market value of the shares of the larger Canadian oil and gas companies. As far as accountability goes, everyone is accountable to somebody. I'm accountable to CIBC World Markets' institutional and retail investing clients.
I want to thank you for your invitation here today.
My understanding is that the purpose of today's meeting is to review the issue of tax incentives, specifically the accelerated capital cost allowance. How I can help today to make a contribution is to provide a capital markets perspective, as you haven't had someone talk about the capital markets yet, and to deal with this issue of whether the industry needs this incentive or not.
Before I get into the details, let me take 30 seconds to tell you how I do my job, just so that you have a clear understanding. My analysis is based on current trends as well as on my expectations for the future. All the conclusions are based on publicly disclosed information. l don't know what the accelerated capital cost allowance balances are for these companies, or their CEE or their CDE. We are looking at the industry from a bit of a distance, but we normally come pretty close to the mark.
Please don't ask me about ABM fees or interest rates on VISA, because I'm in the investment side of the bank, not the commercial side.
As far as the issue goes, yes, tax incentives are controversial, but I think the most important factors affecting the pace of the Canadian oil sands development are the following. First is the oil price and the oil price outlook. Oil prices drive everything else. Costs, of course, are an important consideration, and I will return to that, and expected returns. I hear a lot of people talking about how much money this industry makes, but it's just like when you go home at night: the money is one thing; it comes in and it goes out, and you try to get a return on your investment. The return is key. This is a big industry with big volumes and big dollars. That is an important part to remember.
In my own work in looking at oil prices, if we start with the oil price, I'm assuming that the west Texas oil price--which is the benchmark for North America--averages U.S. $60 per barrel going forward. In other words, the world tomorrow is going to look like the world today, and we adjust it for inflation going out.
Just for your information, though, over the past 12 months that oil price has been as high as U.S. $77 a barrel, and last month we saw it pushing U.S. $50, so it's a pretty wild ride here. And these oil operations, if you go to the oil sands, they're trying to do their planning around these parameters, so they are looking for stability. We can get into more discussion about the thinking behind the price outlook, but the important point that you take away here is that oil is a highly volatile commodity in more than one way.
As far as valuing the sector, my preferred metric is to calculate the internal rate of return of these projects. In this way we combine these factors. We start off with what we think oil prices are going to be. We make projections about what we think the costs are going to be, and then recognizing that all this happens in the future, we adjust for the time value of money. What we've provided for you today is a summary of a 96-page report we put out last month on the oil sands, which I think is a factor in why I got invited here today. I appreciate that. The point is that when we add up the numbers in today's environment, we think that if we're going to start out to build a new oil sands plant, we'd probably get about a 13% return on investment. That's the internal rate of return. That's not bad. It's not spectacular. It used to be higher.
A couple of years ago, when we were calculating these numbers, when we were using the high oil price forecast and not factoring in the rising cost, the numbers were in the mid-teens to the high teens. But oil is like any other commodity: when prices rise, costs do too. This is what's happening now. That is a very important point to keep in mind.
If we were to use a $45 oil price, we'd be crazy to start up one of these plants. That is the minimum. We calculate about a 10% internal rate of return, the financial term over the cost of capital. That's when these projects start to make sense.
Basically, if I'm going to do one of these things, I'd have to be pretty confident that oil is going to average $50 a barrel. That's when I'd start. At $60 a barrel, I'd get a 13% return. Is that worth the time and aggravation? Maybe. However, the idea of this industry making windfall gains might have been the case a couple of years ago, but my numbers don't show that at all.
I should also say that these estimates are about as precise as I can get them. We're taking them to two decimal places, but we're starting with assumptions and trying to be realistic.
Let me make one last point. One of the unintended effects of changing the accelerated capital cost allowance may be that it has a more negative effect on the Canadian companies. When you look at this industry, you have big players, big names. Every big oil company wants to be in this business. The Exxons and the others are much bigger and much stronger financially, operationally, and technically. They have different time perspectives. The Canadian companies are competing. We have a great Canadian presence and a number of the smaller companies are involved in this. There is a risk, from my point of view, that you could see these Canadian companies put at a disadvantage as this resource is developed, and I don't think that's the intention here.
I'll end with that, as I've probably used up my time.
Good afternoon, ladies and gentlemen. Thank you for allowing us to appear before you today.
My name is Marlo Raynolds, and I am the executive director of the Pembina Institute. I am joined by Dan Woynillowicz, a senior policy analyst and an expert on the oil sands. Normally our senior economist, Amy Taylor, would be here today, but unfortunately she is out of the country. It takes two of us to replace our one senior economist. She did submit a written submission to the committee, and I hope you all have copies of that.
As many of you know, the Pembina Institute is a non-profit organization, often described as a think tank, focused on energy and environment issues. We are a national organization with just over 55 staff across six offices. We grew up in Alberta, and we consider ourselves to be still very much Alberta-based.
Today the focus of our discussion is the tax treatment of the oil sands and specifically, the accelerated capital cost allowance. We respectfully recommend to the committee that the Department of Finance eliminate the 100% accelerated capital cost allowance for the oil sands and return the rate to the standard 25%. We believe that the 100% ACCA for oil sands is an irresponsible use of the taxpayers' money.
The oil sands sector is mature by all measures: by the presence of all major multinational oil companies; by its international recognition; by the scale of capital investment, which was over $40 billion over the past 10 years; by the scale of approved projects and associated capital in the order of $40 billion to $60 billion over the next decade; by today's production of 1.2 million barrels per day, a target that was set for the year 2020 but achieved in the year 2004; by the fact that approved projects today will take us beyond two million barrels per day; and by the fact that all the companies with high stakes in the oil sands are among the most profitable companies in Canada. For all these reasons, it is very clear that the oil sands sector is a mature industry.
There is a clear establishment of the industry and there are strong drivers for continued growth, including continued demand for oil from our neighbours to the south and from our Asian partners. We have the second largest proven oil reserves in the world, second only to Saudi Arabia. We are the single largest oil reserve in a democratic country, and we have highly skilled workers who want to live in our country because it is a modern and safe country. For all these reasons, it's very clear that we have very strong investment opportunities in Canada in the oil sands sector.
In a market-based economy, there will be winners and losers. Given all these favourable market conditions, there will surely continue to be investors who will win. In other words, access to capital and investments in the oil sands will continue to be strong.
Canadians should be equally if not more concerned about developing this resource too fast, without adequate protection of the environment. The oil sands are not only the fastest growing industry in Canada, but are also the fastest growing source of greenhouse gas pollution in Canada. Any subsidy to the oil sands is really a subsidy to the production of pollution.
The 100% ACCA for oil sands, when established, was severely flawed in its original design. Any targeted subsidy to a particular sector should have a sunset clause. It should end when economic conditions have evolved to the point where the industry has matured. Because such a sunset clause was not included, the committee is now having to investigate the matter to ensure that taxpayers are getting value for their investment.
In 1995, the cost of production of the oil sands represented 64% of the value of a barrel of oil. In 2006, only 44% of the value of a barrel of oil was spent on production. Given the profits of oil sands companies--in the order of $2.6 billion in 2006 for Imperial Oil; $2 billion for Shell Canada--these companies no longer need the help of the taxpayer. Clearly, profits are good. It is why individuals invest. You and I no longer need to add to those profits with our tax dollars, especially since a growing number of shareholders are not Canadian. In other words, Canadian taxpayers are subsidizing profits for shareholders outside of Canada.
It is therefore our recommendation that in the interest of the responsible use of taxpayer dollars, we eliminate the 100% ACCA for oil sands and invest those dollars in 21st-century energy sources, such as low impact, renewable energy.
Thank you very much.
Thank you, Mr. Chairman, and good afternoon, honourable members of the committee and fellow speakers.
I'm pleased to be here today to discuss the current economic environment surrounding Canada's oil sands industry and some of the trends that are expected to impact its future development.
With recently high oil prices of $60 U.S. per barrel and above, and given the level of activity in the oil sands sector, one would think that the economics for oil sands projects are strong. However, I can tell you that the returns the project sponsors are seeing today are not materially different from those they saw seven years ago when oil was trading at $20 U.S. per barrel.
First, I work with TD Securities, which is the most active investment dealer in the oil sands. TD has led approximately $8 billion of debt and equity financings for new oil sands projects over the last seven years, is a top trader of oil sands stocks in general, is a leader on providing research on the sector, and has advised on over 25 oil sands financial advisory assignments over the past two years.
Canada's oil sands have recently taken on more significance as a result of security-of-supply concerns, low geological risk, and a growing scarcity of new oil resources worldwide. Given Canada's diminishing conventional oil production, the oil sands are expected to become an increasingly large percentage of Canada's overall oil production. Despite this increased significance and resulting rapid pace of development, the oil sands sector has recently been showing signs of slowing, including delays in announced development plans, with the start-up of a number of projects being pushed back one or more years, weakening equity capital in M and A markets, and asset transaction prices that have declined from the pace of a year ago.
This slowdown has been the result of a number of factors, including: increasingly overheated construction and labour markets; higher capital and operating costs; higher natural gas costs; reduced diluent supply, which is used for blending with bitumen from oil sands for transportation; concerns over water access; concerns over the potential costs of complying with a future carbon dioxide emissions system; concerns over our changing fiscal regime, both in terms of royalties and taxes; and a higher Canadian dollar.
These challenges to the development of the oil sands have resulted in increased risks of significantly lower returns. Assuming long-term oil prices in the $40 U.S. per barrel range would render many of them uneconomic, and that sort of number is what a number of companies will use in their long-term planning.
Although no new projects have yet been terminated, continued pressures resulting from these factors will most likely yield that result. At the very least, a number if not the majority of announced projects or expansions will not proceed according to their currently disclosed time frames.
Oil prices have been a significant catalyst to the growth in the oil sands; however, they have weakened over the last 12 months, and industry cannot rely on continued increases in commodity prices to justify billions of dollars of investment in the sector.
Furthermore, the gap between light and heavy oil prices has widened significantly over the past three to four years, and therefore the price the oil sands producers receive for their bitumen production has not kept up with increases in global oil prices. While the future growth of oil sands production may provide assurances of a secure source of long-term supply for Canada, that production may also further depress heavy oil prices as the market adjusts to the significant increase. Oil sands producers will also have to bear this risk.
Along with increasing prices, capital costs have increased dramatically, with the last three major projects completed experiencing cost overruns of their initial budgets of 60%-plus.
Among oil sands projects with abilities to upgrade bitumen to synthetic crude oil that were completed between 2001 to 2004, capital costs averaged approximately $33,000 per daily flowing barrel of synthetic crude oil production. The average announced capital costs for similar projects that have been recently built or are currently under development has increased 125% from that level, to $74,000 per daily flowing barrel of synthetic crude oil production.
The cost increases for some projects have been well above that level. For instance, the industry's latest project to start development, Shell's Athabasca oil sands project, announced capital costs on its next expansion phase, expected to be producing by 2010, of over three times the cost per barrel of daily production in its first phase, which was completed in early 2003.
In situ projects that used to cost $10,000 per barrel of bitumen production now cost $25,000 to $30,000 per barrel of bitumen production. Project returns of 10% are now difficult to come by, and with the continued increase in costs, they're becoming harder still. Capital cost pressures have become particularly damaging for oil sands projects in the past, with projects such as Fort Hills and Petro-Canada's Edmonton refinery conversion being mothballed three to four years ago, primarily as a result of higher capital costs.
Likewise, operating costs have also increased dramatically over the last several years. Suncor, for instance, announced cash operating costs in 2006 of approximately $22 per barrel, which is approximately 80% higher than its operating cost of about $12 per barrel in 2004.
Based on the various oil sands projects that have been announced, the Construction Owners Association of Alberta has estimated that the number of construction craft personnel among industrial construction projects over $100 million is expected to increase from 16,000 people currently to 36,000 people in 2010. This is expected to result in continued pressure on operating costs.
In conclusion, while several factors have encouraged the development of Canada's oil sands, after many years of largely remaining dormant, significant cost increases and other industry pressures are already threatening the survival of a number of these projects. Through TD Securities' capacity as a financial advisor to a number of these companies, we are seeing these pressures continue to mount, and they will ultimately result in only some of these projects getting built. We are seeing huge warning signs in the industry--not necessarily public--that convince us that the pace of development is going to be much slower than currently anticipated. The continuation of existing federal tax and provincial royalty regimes, which have been key to encouraging development of Canada's oil sands in the face of much longer project lead times and much higher capital costs, typically, than conventional oil projects face, may therefore continue to be very significant to assuring the industry that a stable fiscal system exists in Canada and that it is worth bearing the risks of these increased economic pressures.
I think you could have applied that second vote.
Mr. Plexman, as you know, what's really behind this whole thing is a sneaking suspicion on the part of some Canadians that the oil sands are making like bandits and making an enormous amount of money and really we should get more of it. It's not too much more subtle than that.
I want you to turn to page 10 of your presentation, “Oil Sands Economics”, “Canadian Oil Sands 2007 Guidance For Syncrude”. I want you to help me read this, because it seems pretty impressive.
The revenues of the oil sands--this particular project, I take it--were $2.3 billion. Interestingly, they had purchased energy costs of a little over 10% of their gross revenues--an interesting statistic. Their production costs were about 44% and their gross margin was 56%--pretty healthy. Then they take off their non-production costs, and it includes some royalties and cash taxes and “other”--I'm not quite sure what that means--and that brings them down to total costs of 63%, a cash margin of 37%, which is $881 million. Then you have something called Capex--I don't really understand what that is--so you have a pre-cashflow of $621 million, or 26% of your revenues.
Am I reading this correctly to say that they only have used up 39 million to 44 million barrels on a mid-point production of 40 billion barrels? Am I reading that correctly?
Anyway, your final comment is “COS's expected 2007 cash-on-cash return is 239%...”--that kind of catches your attention--“which we think should rank near the top when compared to conventional oil projects.” It seems to me that on page 10 you've captured the heart of the argument here, and that is, that looks like a pretty fine return. Do I have your presentation correctly, as a general concept? If so, can you give me some explanation as to how, even if we killed the accelerated capital cost allowance today, that would impact on that financial statement?
That's a great question. I'm glad you asked me that one, because the thing about the Canadian oil sands is they have a 37% interest in the Syncrude oil sands project. I don't know if you had the chance to visit that one, but that's the second oldest. It has been in business for about 30 years, has a lot of history, and is very profitable. If you look at the bottom here, you have the existing oil sands operations, which are ranked at the top of our list in terms of returns, so that makes them highly desirable investments. Everyone wants to be in this business.
Does the accelerated capital cost allowance impact this return? Well, probably not at this point, because Syncrude is paying taxes. Did it help them get to this level? Yes, probably during their evolution it did.
What makes these numbers work—this is what you have to understand about oil sands—is that they take that raw bitumen and convert it, in the case of Syncrude, into a barrel of high-quality light oil. That's the upgrading process. They add a lot of value to that barrel. They mine it and upgrade it; and as well, what you're looking at with oil sands is large reserves. I forget the exact number of reserves at Syncrude, but when you depreciate those reserves over their life, you get a low investment cost. So if you put the fact that they maximize the value, maximize the revenue, and put that against the cost, which is spread over millions of barrels, the economics look great.
This is mainly historical, and this is the whole key to the oil sands. You have to separate the accounting from the economics of it. For those companies that are in business, this is why they want to be in oil sands. What we're talking about here with the accelerated capital cost allowance are the projects that are to be built. Syncrude and Suncor, to a certain extent, are benefiting from history, because they've been in this business a long time. They have established their resource base over a long time. It's tough to compare these numbers to a new project.
I find the discussion very interesting. I enjoyed Mr. Raynolds' presentation. I also had the chance to talk with Ms. Taylor, who could not be here today, but who is doing a very good job.
Mr. Raynolds, you have done a very good job as well. It's interesting to show that there are significant economic aspects behind the question we're addressing today.
I find it somewhat paradoxical that it is the Conservatives, those free market supporters, who are fighting to preserve a tax benefit for the oil companies. That's all the more strange since, in cases such as those of Boeing, older workers, the bicycle industry, textiles and I don't know what else, when we ask them to intervene, they always respond that, if you let the market operate, it will adjust to demand. However, when it comes to the oil industry, that's something else: the oil companies obviously need government assistance in order to develop.
As a progressive, I'm not opposed to the government intervening in the economy, but it should do so in areas that we want to develop, that is to say industries that benefit society.
Earlier we talked about costs, but we didn't talk about environmental costs, costs that society would have to bear for all this development of the oil companies. Analysts have told us about the benefits to be derived, more so or less so depending on the positions the government would adopt, but no one has ever considered the amount of money that society would have to pay for all that.
Apart from any economic consideration, is the question submitted to us simply a question of choice? A business could very well be engaged in a completely pointless activity, such as destroying mountains, then rebuilding them.
I'm sure Mr. Roberts in Calgary will want to say something too.
On the point about useless activity and pointless activity, I don't think those people who are trying to get to work in Toronto today and who can't buy gasoline will consider this industry to be pointless or useless. That's sort of tongue in cheek, but that's what it comes down to. This is a resource.
I was born in Iran, so I grew up with some familiarity with mining. For me, Canada's mining is about resources, oil and gas. That's why I don't analyze bank stocks; I analyze oil and gas.
Is this important? Is it vital? The oil companies have access to 15% of the world's reserves. If you take OPEC, that's 75%; Russia is another 10% of the world's reserves; and that means there's 15% left over to find the oil that we need so people can get to work. And some of them can't get to work in Ontario today.
We never run out of oil. You made the point earlier about whether we are squandering this resource. We never run out. However, it costs more. And this is why I answered the question about $80 oil. If oil prices go up to $80, you can be sure the operating costs to build one of these things, the capital costs, go up as well.
This is Bill Roberts speaking.
I guess, from our perspective, the rate of return is going to be very much dependent on the commodity price assumptions used, as these projects typically run for many years. That's really key to coming up with a conclusion on what sort of rate of return these projects are earning.
What we've seen--and further to this escalation in costs and this theme that keeps coming up--is that as far as the oil sands have been concerned, that has eroded, to a significant degree, those returns earned by projects. If you're looking at $45 crude, which, again, is a typical price that a lot of major oil companies will use for planning purposes because they can't rely on $60 or $100 oil to remain for the next 40 years while their projects operate, then you're seeing returns that are in the high single digits. If you compare that against returns that would have existed a number of years ago, when costs were significantly lower, those two sort of roughly equate, as far as returns go.
Thank you, Mr. Chairman.
I didn't catch the whole story here. Also, I've been involved with the natural resources committee for about three months.
I think, clearly, what you're saying is that you need this tax break to encourage the companies to invest, but when we are looking at the industry, we are looking at projections of an expansion to three and a half million barrels a day by 2015. We are at a million barrels right now.
Within the projects that are going ahead right now, we are experiencing labour shortages throughout western Canada. We have overheated the economy. The goods and services that are being used in the tar sands are taking away from the profit in the projects that are going ahead. So there is a bit of a relationship. As this thing heats up, then, you're making the argument that we can't afford to give back the tax break that was put in in 1995.
At the same time, we are also looking, in the industry, at starting to outsource from offshore some of the major pieces of equipment that are going into the tar sands. From my understanding, we are looking at bringing them down the Mackenzie River and then through the waterway system to Fort McMurray, in 2,000 tonne groups, from offshore, from other countries.
So we may be losing employment and economics as well, if we continue to expand at the same rate and see this sort of buildup of activity in the area.
Is there a reasonable limit in the Canadian economy to what we're doing in the tar sands? That would be my question to all of you. Should we have an industrial strategy, which sets some kind of parameters for the expansion of this area in a logical fashion, that will deliver resource revenue and taxation to government, ensure that costs remain reasonable, and ensure that the rest of the economy is not altered in a negative fashion through this rapid expansion?
I'm happy to respond to that one.
I guess the first point I want to make is regarding offshore. Most of the large vessels and equipment for these oil sands plants have, for a long time, been built offshore. Korean fabrication shops are highly skilled. They're global. This is a global industry. So that isn't something new that we've gone offshore.
You mentioned floating the stuff down the Mackenzie River. That's highly innovative. That is one way the industry is reacting to these cost pressures. Because for the project you're talking about, the Northern Lights project, the only way they can compete is to come up with a highly innovative strategy to develop their oil sands, and we can talk about that later.
As far as addressing that one, the industry will get there first. You're already seeing changes. I will give you examples. There is Imperial Oil with their Kearl project. Tim Hearn, the CEO of Imperial Oil, was the first one to warn about escalating costs. They have slowed down that project. There is Husky and their Sunrise project. If you went up to Shell's Albian project, Husky's the one right next to it. Their Sunrise project is a fantastic project. That thing has basically been on hold for the past year. It has received regulatory approval and board sanctioning. They're trying to figure out a way to market that oil and still generate a fair return for their shareholders, recognizing the escalation in costs. Fort Hills is the third one I will mention.
What I'm saying is that the people running these projects are not stupid. When they feel the limit is reached, they will back off. So what I'm saying is that Imperial Oil has already hit the limit for Kearl. Husky has hit the limit, and we are seeing modification at Fort Hills, because they realize that they are approaching the limit.
So that process is under way without having to plan for it. That's how the industry is reacting to these pressures.
There is no doubt that there will be winners and losers as we choose to work in a market-based economy. We've heard examples of some companies that are losing, but if you look at Canadian Natural Resources Limited, their Horizon project is on budget and on schedule, despite many of these market changes.
Shell Canada and Suncor have just announced new expansion projects in the last two weeks; they have demonstrated confidence in it. We've also heard that 15% of oil reserves are in non-OPEC, an incredible driver to continue investment in Canadian oil sands.
I think the key here is to ask whether it is really the responsibility of the Canadian taxpayers to be subsidizing this now mature and very competitive industry. To set limits on development, the most powerful method will be to ensure that the full cost of production is incorporated.
Right now there's an amazing environmental subsidy in terms of air, land, water, and global warming. If we capture those costs and ensure that the oil sands have to compete on a level playing field, that will be a driver to ensure that we're protecting the environment. It's government's role, in my mind, to set the environmental outcomes that are desirable for all Canadians around air, land, water, and global warming. Let companies compete on how best to achieve those environmental outcomes, but it's a requirement to put forth very clear outcomes that ensure protection of the environment.
It's a fair question, a great question.
When I first started reading about these possible changes, I started fooling around with the numbers, and here again, as I said at the beginning, the companies don't tell me what their capital cost balances are and actually how much is available for the accelerated capital cost allowance. But playing around with some numbers....
I'll use Suncor as an example. When I add up my numbers on Suncor, I think a fair value for that company's stock is $100 per share. That's our price target. It's my job to set price targets.
If I go through the analysis—and here again, I'm looking at it completely from outside—if we cut that accelerated capital cost allowance down to 25%, so that it's the same as CDE, my net asset value drops from $100 per share to $80 per share. That's the impact on one of the leading companies in the industry.
I don't have the numbers for the other ones—
If I understand correctly what you're telling me, the international price of oil isn't high enough for some oil sands deposits to be profitable, or at least as profitable as the deposits that are easier to exploit. Isn't that similar to the argument that people gave us in the 1960s for keeping our coal mines?
At the time, the price of oil was so low that it was much more costly to produce a tonne of energy with coal. People said we had to keep those jobs, in Cape Breton, among other places, and we subsidized them. However, a lot of people, particularly in the investment world, said we should let the market determine what should stay open, particularly since coal, as we know, pollutes.
I get the impression that, if we want to let the market operate, the day the price of oil is high enough to justify developing the oil sands, without preferential treatment, consumers will pay for that. I admit that you haven't yet convinced me. I'll give you one last chance; you have 30 seconds to do it.
Okay. This will take maybe 32 seconds.
You're right about the grade of the resource, and it gets back to your question about the oil sands economics. Syncrude, the Shell part that you saw, and Suncor are the best deposits. They're the ones that were developed first.
In the presentation I left for you, there are a couple of charts looking at the quality, and there are changes in the quality. This is basic resource economics. As the price goes up, the stuff that wasn't economical before starts to become economical.
You still have companies buying leases. You have Royal Dutch spending hundreds of millions of dollars on leases. They're still in the very early research stage of studying how to get this stuff out. It's oil and carbonate rather than oil sand.
So that's what you get when you have this increase in oil prices. Does that mean that the cost doesn't go up? Well, no. It costs more. There's more competition. I guess that's the point I'm trying to make, that as this industry is developed, we just see more and more competition, which is great for our business.
Thank you, Mr. Chairman.
I've done a little bit of reading on this, and there is a history to the accelerated capital piece that we're dealing with today. I want to remind everyone that it started way back in the early seventies. Oil sands were added in 1996 by the Liberal Party. I think the Liberal Party might have been in power in 1974, actually.
And this doesn't just apply to oil sands, it applies to all mining, which we were reminded about earlier, whether it's diamond mines in the north, potash in Manitoba, or mining in Quebec or any other province. For those highly capital-intensive industries that take a long time to get up and going, it is a tax system that is used to try to generate economic wealth in that area and development in that area.
On the environment, which we've heard a little bit about today—I'm pulling a little Thierry here—we've heard a lot about having the oil sands pay their way in terms of the environment and trying to have them do something to be more environmentally sensitive. I think they're working in that way, but then we're penalizing them by taking away an opportunity for them to invest in new capital and new innovation, based on what's been discussed here today by a number of groups.
It makes no sense to me that in an area where we think there needs to be improvements, we take a tool away for them to actually invest in those improvements, and I think a reduction in the accelerated capital cost allowance would do that for that industry.
The other issue that we talked about today was cashflow. We have an example here of the oil sands economy, a sample of Syncrude, at almost $59 a barrel. We heard testimony earlier that a mere seven years ago, it was at $20 a barrel. It wasn't that long ago, then, that there was that kind of fluctuation.
We also heard, at the very same time, that it takes seven to up to twelve years to get one of these projects off the drawing board, into the ground, and actually producing revenue. This capital tax allowance only happens when the revenue is generated. So there's a big investment, both domestically and to attract capital from around the world, to try to get this here.
If we thought accelerated capital allowances didn't work, then this is my question to the rest of the committee, and then I have a question for the panel.
I just want to point out to the committee that there is a report on manufacturing, “Manufacturing: Moving Forward–Rising to the Challenge”. It was supported by every party in the House, including the Bloc. I've looked at this, and the Bloc, which brought this motion to begin with, talked about increasing the “capital cost allowance for machinery and equipment used in manufacturing and processing and equipment associated with information, energy and environmental technologies”.
So you agree that they work. You want them to happen. They are working in this environment. They are working in this industry. Even in your additional supplementary opinion, which is not opposite what the recommendations are—you say that right in your supplementary report—you state, “The government must make a rapid about-face and propose a set of measures to provide better support for industry.” We are doing that and we will continue to do that.
You name a number of industries, including furniture and forestry. I'm assuming that if it's good enough for oil, you understand that reducing the upfront costs in companies on capital cost allowance is important for them to survive.
Is that about four minutes, then?
So you have to introduce a motion, Mr. St-Cyr.
It's not unanimous. Okay?
You have to introduce a motion in the prescribed manner.
Before we go, I'd like to give formal consideration to a motion. I'm just going to read it into the record, and then we can adjourn.
Given that the finance committee has adopted a motion to study charges related to ATM fees, and that during the hearings of the finance committee concerning Bill , testimony was received respecting the timeliness and charges related to electronic payments, I move that in addition to the Standing Committee on Finance's study of ATM fees, it include concurrently an examination of any issues related to the electronic payment process.
You will get that in writing.
On that note, thank you very much.
The meeting is adjourned. We'll see you Thursday.