Thank you, Mr. Chair, for inviting us here today. Both Ms. Milutinovic and I are honoured to appear before the committee today to discuss the future of Canada's oil and gas sector.
We've provided the clerk with a few slides, and I'll make some brief comments on them.
The National Energy Board is an independent quasi-judicial regulator that was established in 1959. The board reports to Parliament through the . Our main responsibilities are established in the National Energy Board Act. These include regulating the following: construction, operation, and abandonment of interprovincial and international pipelines that transport oil, natural gas, and other commodities as well as the associated pipeline tolls and tariffs; construction and operation of international power lines and any designated interprovincial power lines; and export of crude oil, natural gas, natural gas liquids, refined petroleum products and electricity. The board also monitors aspects of energy supply, demand, production, development, and trade. My slides will go through highlights of our recent projections of Canada's energy supply and demand.
The NEB's publication “Canada's Energy Future 2016” is a key reference point. It's the only publicly available long-term Canadian energy outlook covering every energy commodity for all provinces and territories. This study continues a very long tradition of energy outlook reporting by the NEB. We've been publishing this study regularly since 1967.
The analysis we do in the report is not a prediction of the future. It is a projection of what might occur based on a set of assumptions. We make three key assumptions in the report, which are important to set out right up front. First, any energy produced in Canada will find a market either in Canada or through export. Second, infrastructure will be available to move energy products to markets once they are produced. Third, only government policies that are either set out in law or near to being set out in law at the time the analysis is done are actually included in the publication.
With regard to total energy production, as you can imagine, Canada's energy future will be determined by the interaction of many forces. Prices, economic growth, policies and regulations, market access, and the development and use of new technologies will all play a significant role.
While recently there has been much debate around Canada's oil and gas reserves, one thing I think we can all agree on is that we have a lot of them. We have more than 170 billion barrels of proven oil reserves. That's third in the world, behind only Saudi Arabia and Venezuela. Most of those, of course, are in the northern Alberta oil sands. Every day, Canadian refineries process about 1.7 million barrels of oil.
On the natural gas side, Canada's total remaining marketable gas resource is 1,087 trillion cubic feet. That's enough natural gas to meet the country's needs for more than 300 years, based on current consumption levels.
There is an amazing amount of oil and gas resource in Canada, and the production and sale of it represents a significant part of the national economy. In all our cases, we see energy production growing significantly up to the end of our projection in 2040.
Our reference case projects that Canadian oil production will grow by 56% over 2014 levels to 6.1 million barrels per day by the year 2040; natural gas production will grow 22% to 17.9 billion cubic feet per day, with liquefied natural gas exports being a key driver of that growth. Electricity production will hold fairly steady, but coal-generating capacity will decline and natural gas-fired generating capacity will increase significantly.
These projections come with the significant challenge, of course, of producing that energy in an environmentally responsible manner.
On the third slide, we show levels of future oil and gas prices. The numbers in the study were finalized last August, and developments since that time, including some significant ones in carbon pricing, are not included in this analysis. We're currently working on an update, which will be ready for Canadians this fall.
In our reference case, Canadian energy demand will continue to increase by 0.7% each year through to 2040. We project significant growth in all major forms of renewable energy including hydro, solar, wind, and biomass. By 2040, we project that non-hydro renewable electricity generation capacity will account for 16% of Canada's total. That is on top of hydro, which will account for 51% of Canada's electricity generation capacity. Greenhouse gas intensity will diminish due to a higher demand for lower-intensity fuels such as natural gas as opposed to oil or coal.
I'd like to highlight three primary findings from the study that are particularly relevant to today's discussion.
The first finding is that levels of future oil and gas production are highly dependent on future prices, which are subject to considerable uncertainty. To examine this uncertainty, the board explored a high price case as well as a low price case to compare them to the baseline.
In our reference case, oil prices rise from just over $50 per barrel to $80 in 2020, and a bit over $100 in 2040. The high and low price cases are about $25 U.S. above and below that through the projection period.
For natural gas, the reference case Henry Hub price rises from just under $3 per million BTUs in 2015 to $3.85 in 2020, and $4.55 in 2040. The high and the low cases are about $1 above and below this level.
On slide 4 we show the total oil and gas production. As I said earlier, the reference case projects that total oil production will release 6.1 million barrels per day by 2040, which is 56% higher than 2014 levels.
Oil sands production will more than double by 2040 from 2.3 million barrels to 4.8 million. I'd like to point out at this stage that in the copy we provided to the committee there's a mistake on the line where we show that oil sands production would grow by 24%. That's incorrect, as it will more than double the 2.3 million barrels—and the 4.8 million barrels is correct.
In our high price case, production is about 800,000 barrels per day higher in 2040, and in the low price case production is flat after 2020 at 4.8 million barrels a day.
Natural gas production in 2040 ranges from approximately where we are today, at 15 billion cubic feet per day, to 23.5 billion cubic a day in the high price case.
The second finding is that liquefied natural gas export is an important driver of Canadian natural gas production growth. The reference case assumes that LNG exports increase to 2.5 billion cubic feet a day by 2023. This is an assumption, as there's considerable uncertainty regarding the volume and timing of LNG exports from Canada.
We examined two cases around this uncertainty: a high LNG case and a no LNG case. In the high LNG case, we assume that LNG exports will grow to reach 6 billion cubic feet a day by 2030. In the no LNG case, we assume that no LNG exports will occur by 2040. In the high LNG case, total natural gas production reaches 22 billion cubic feet a day by 2040 compared to the reference case number of about 17.9 billion cubic feet a day. In the no LNG case, the total production is only 15 billion cubic feet per day in 2040.
On slide 6, we look at our third major finding of what would happen if none of the major proposed oil export pipelines were built. That would mean no Keystone XL. no Northern Gateway, no Trans Mountain expansion, and no Energy East. We refer to this as the constrained case. In this case, which is built on the reference case oil prices, Canadian crude oil production continues to grow, but delayed projects and reduced investment over the projection period reduce total Canadian crude oil production in 2040 by about 500,000 barrels, or about 8% compared to the reference case. In this case, much more crude will be moved by rail at about 1.2 million barrels a day in 2040.
That concludes my opening remarks.
We would be happy to answer any questions the committee has.
Thanks for this opportunity.
As most of you probably know, my organization represents thousands of people who work in and rely upon Alberta's energy economy. I'm here today to tell you that the industry that has sustained our members and created so many jobs for other Albertans and Canadians is an industry that's not just going through a rough patch, but is at a crossroads.
Not that long ago our energy resources made us one of the wealthiest jurisdictions in the world, but the global energy market that fuelled our prosperity has changed in fundamental ways. New technologies like fracking have allowed producers to flood the market with vast amounts of oil and natural gas. This has led to an unprecedented and persistent glut, which in turn has driven down prices. At the same time, demand for fossil fuels has been waning in both advanced and developing nations.
The global oil glut has also been exacerbated by geopolitical forces outside the control of any Canadian government. Most notably, the price war that the Saudis have been waging, frankly, has been having its intended effect: higher cost producers in Canada and the United States are scaling back, they're shedding jobs, and in some cases they're going bankrupt. The final major geopolitical factor affecting oil prices has to do with global warming and climate change. Policies dealing with these issues are necessary, but they are having an impact on the viability of businesses in the energy sector.
All of these factors suggest that the days of oil at $120 a barrel are gone, at least for the medium term, and likely for the long term. This is not a controversial statement. Just today the CBC released a previously confidential study by a government think tank called Policy Horizons Canada. The report, which I'd encourage members of the committee to read, warned that Canada's position as an oil and gas heavyweight is likely to wane much more quickly than expected. The question for policy-makers in government, people like yourselves, and policy-makers in business and, indeed, in labour, and people who are concerned about the future of our oil and gas industry is not if we face a long-term low-price environment. That is pretty much a given.
The real question is: how do the industry and people who are concerned about the industry, including the tens of thousands of people in the industry whom we represent, find ways to prosper in this new, more challenging environment? We submit today that the answer is that we need to fundamentally change the way that we think about oil and gas development in Canada. To put it simply, we need a paradigm shift. The current paradigm is based on ripping our resources out of the ground and building pipelines to ship those resources raw or lightly diluted to new markets. This is what industry and government players are talking about when they refer to gaining access to tidewater. The notion is that by accessing new markets, especially in Asia, we'll be able to get a higher global price—that's a phrase that's often bandied about—that we'll be able to get these higher prices for our resources. However, there are serious problem with this paradigm.
First, it assumes that exporting more Alberta bitumen will lead to higher prices, when the opposite is actually likely to happen. When you feed more product into a market that is already glutted, prices go down, not up.
Second, it assumes that the world actually wants our bitumen, when the reality is that the vast majority of refineries in markets outside North American can't even use bitumen as a feedstock. It's important to remember that refineries are our customers. If our prospective customers can't use our products, how can we ever expect them to buy those products, let alone pay a premium price?
The pipelines as a “panacea paradigm”, to coin an alliterative phrase, was developed at a time when oil prices were twice as high as they are now, at a time when unrestrained development in Alberta was driving up the cost of construction, making homegrown value-added projects like upgraders and refineries less attractive, and at a time when big American refineries were eager to gobble up cheap Canadian feedstock because they had excess heavy oil refining capacity. But now the world has changed. Prices are low, cost pressures in Alberta and across the country have abated, and American refiners have more domestic and international options for feedstock than they ever imagined possible 10 years ago. What might have made sense in 2012 doesn't make sense today.
What do we propose as an alternative paradigm? Well, we think that Canadian governments and Canadian industry should start looking at low prices, and especially low prices for oil sands bitumen, as a potential competitive advantage.
Specifically, we think that low feedstock prices could be the new Alberta advantage that drives investment and job creation in the refining and petrochemical branches of the energy sector. Some companies have already been taking this approach, and they're thriving as a result.
Suncor, which is a heavily unionized company that we have a lot of experience with, is just one example. It's an integrated company with significant investments in both upstream extraction and downstream upgrading and refining. They make money on shipping raw products when prices are high, and they also make money on the value-added products when prices are low. Thanks to lower prices of oil, Suncor is able to do what business school textbooks encourage businesses to do all the time, which is to buy low, in the case of cheap feedstock, and sell high the finished products like diesel, gasoline, and jet fuel.
So what do the Suncor example and the example of other refining companies around the world that are recording strong profits in a low-price environment show us? Not to be too flippant, but the experience of these companies shows us that when the world gives you lemons, you should make lemonade. More to the point, when the world gives you low oil prices, you should take that cheap oil and make it into higher-value products like diesel, gasoline, jet fuel, and petrochemicals.
From our perspective as a labour organization, there are four main reasons the value-added path is the road worth taking. First, we should strive to upgrade and refine more of our collectively owned resources, because jobs in upgrading, refining, and petrochemical manufacturing are good jobs. On average, downstream energy sector jobs pay significantly more than the industrial average. They are family- and community-sustaining jobs.
The second reason that we, as the owners of the resource, should prioritize adding value is that jobs in upgrading, refining, and petrochemicals are stable jobs. Jobs in the upstream section of the energy sector and jobs in construction crash, depending on the price of oil, while jobs in the downstream section of the energy economy remain stable in good times and in bad times. So they are sort of automatic economic stabilizers in low-price environments. As we've seen, companies like Suncor refer to their downstream investments and assets as a hedge against volatility in the oil market. We agree, and we would add that having more value-added jobs should be seen as a hedge against volatility in the labour market.
Third, we should prioritize value-added development, because these kinds of investments not only create jobs directly in upgrading, refining, and petrochemicals but also create other jobs. More specifically, large industrial facilities like upgraders, refineries, and petrochemical plants generate a lot of spinoffs in terms of jobs and business opportunities. A recent Conference Board of Canada report on refining estimates that for every dollar spent on refining, the total Canadian GDP rises by another $3 because refining has very large and very long supply chains.
The importance of construction employment related to the regular maintenance of large facilities like existing upgrading operations and refineries cannot be emphasized enough. In an average year here in Alberta, maintenance projects on existing industrial facilities in our province generate between 15,000 and 20,000 jobs, even when the price of oil is low. These construction maintenance positions, which wouldn't be created if we didn't build more industrial facilities, are over and above the thousands of jobs created and sustained by the day-to-day operations of these facilities.
Fourth, as the owners of our resource, we should take the value-added road because doing so allows us to capture a greater proportion of the true value of our asset. Research conducted by the Government of Alberta shows that the “rip it and ship it” approach that focuses on raw exports allows us to capture less than 40% of the ultimate value of those assets. When we upgrade bitumen to synthetic crude, we capture 70% of the value chain, and when we go another step further to refine products like diesel, gasoline, jet fuel, petrochemicals, and plastics, we have the potential to capture all of the potential value of our resources.
The questions that Albertans, as the owners of the resource in our province, should be asking governments are simple. Why should we be selling low-value products like Western Canadian Select, which can be used as feedstock in only a minority of the world's refineries when we could be selling higher-value products like synthetic crude, gasoline, diesel, jet fuel, petrochemicals, and plastics, for which there is strong demand around the world? To put it more simply, why should we be sending the jobs, profits, and spinoff opportunities associated with maximizing the value chain down the pipeline to other jurisdictions when we could keep all or most of those things for ourselves?
The significance to Albertans of doing more value-added work in our energy economy is clear, but the trends are troubling. From our perspective, we are in the midst of missing out on an historic opportunity for jobs, stability, private profits, and government revenue.
I'll just wrap up by pointing out the statistics. There was a time, not that long ago, when we upgraded about two-thirds of our bitumen to higher-value products. That's dropped to about 50% now, and experts commissioned by the Alberta government project that this will fall to only 26% by 2025.
We think now is the time to turn the ship around. Now is the time to stop shipping good jobs down the pipeline to other jurisdictions.
Thank you, Mr. Chairman, for extending the invitation to us to present before this committee.
As you mentioned, my name is Richard Sendall. I am the chair of the In Situ Oil Sands Alliance, and I am also the senior vice-president of strategy and government relations at MEG Energy. I have with me Pat Nelson, our vice-chair of the In Situ Oil Sands Alliance, and also Alexandra Taylor, who is going to help us run the slide presentation.
Before I get started, I would like to recognize those still dealing with the Fort McMurray wildfire and reconstruction efforts now under way. The support from Canadians across the country has meant a great deal to the residents of the area working through this difficult time. IOSA members are assisting their local and indigenous communities, and together, we will come back stronger than ever. We will rebuild Fort McMurray.
IOSA is an alliance of Canadian oil sands developers dedicated to responsible development of our country's oil sands using in situ technologies. “In situ” means “in place”. Our members remove the oil using low-impact drilling and production processes while leaving the sand in place.
IOSA members manage the development of over 30 billion barrels of oil resources. We fund our operations and innovation through financial markets rather than from internally generated cash flows. As we are reliant on those financial markets, we represent the barometer upon which to judge investor confidence in our sector. Successful investment in innovation and the development of the oil sands are key factors in maintaining investor confidence. As we are land-locked to a single U.S. market, it remains crucial that we access higher-value markets for our products. We must reach tidewater from which we can distribute our products worldwide.
Our members are environmentally responsible, committed to Canada, cost-effective, and leaders in innovation. Our low-impact drilling technology accesses oil deep underground, leaving 85% to 90% of the land undisturbed. The water we use is sourced from deep non-potable sources, and over 90% is recycled within our operations. We are focused on meeting the greenhouse gas emissions challenge at every stage of our operations. In Situ members are Canadian companies focused on local job creation. We believe that the solid relationships we have built with our local and indigenous communities are a key component in the successful development of the resource. We are invested in Canadian resource development. Our livelihoods are based here. We are here for the long term.
In situ projects can be developed in smaller, incremental stages, relative to traditional mining operations, providing lean project execution and corporate cost structures.
Our industry is built on research, development, and commercialization of technology. IOSA members are technology companies focused on finding innovative solutions to improve efficiencies, enhance oil recovery, and reduce greenhouse gas emissions. Small to medium-sized companies, like the IOSA members, are critical to fostering further innovation for a lower-carbon future. For us to continue innovating, we need certainty that investments in technology today will be deployed and the resulting production will reach global markets.
Canada has a world-leading resource. We have the third largest oil reserve globally, 97% of which is in the oil sands. In fact, because the oil sands are open to private sector investment, they represent 50% of the world's free enterprise oil.
Canada also has world-leading environmental regulations. Of the top oil reserve holders, only Canada is covered by world-class, stringent environmental regulations and oversight. It is the only major oil-producing jurisdiction with comprehensive greenhouse gas regulations. As the world demand continues to grow, Canada’s environmental and socially responsible production will be an important source of supply; the world needs more Canadian energy.
The future of the oil sands is in situ production. Eighty per cent of the oil sands resource will be developed through advanced drilling technologies. Steam-assisted gravity drainage, or SAGD, is a primary recovery technology used for in situ production. It is a low-pressure process that extracts oil while leaving the sand in place. With SAGD, the landscape remains intact with no tailings ponds. The process uses non-drinkable water, 90% of which is recycled. SAGD innovation continues beyond initial SAGD; we now use infill wells and non-condensable gas injection to increase the efficiency of resource extraction while reducing the energy required for production.
The innovation doesn’t stop at the resource extraction stage. Our operators use the latest technologies for better environmental outcomes in water recycling, air emission controls, and heat integration within our facilities. Producers have also integrated cogeneration technology to further increase efficiencies and reduce greenhouse gas emissions.
Cogeneration produces two energy products, electricity and the steam we require for resource extraction, from one energy source: clean natural gas. Cogen is the most efficient use of a fossil fuel. Electricity from oil sands cogeneration produces one-third of the greenhouse gas emissions of Alberta’s electrical grid. Excess electricity that is not consumed on site is offered to the power grid. This electricity helps coal-fired power plants retire sooner while supporting renewables. It also lowers electricity prices for consumers. Canada is a leading jurisdiction worldwide on the use of cogeneration to curb greenhouse gas emissions.
Combining in situ production with cogeneration results in one of the greenest barrels globally. With cogeneration, emissions per barrel of production are below the range of common imports to the U.S. and eastern Canada.
IOSA members are also integrating other technologies to reduce greenhouse gas emissions, such as the application of solvents and electromagnetic heating. These technologies further reduce emissions per barrel of production. This innovation also extends to upgrading, the stage where our product is prepared for refining. MEG Energy’s HI-Q technology reduces greenhouse gas emissions by a further 20% from traditional upgrading processes. We are committed to a low-carbon future. Further innovation will be driven by small and intermediate companies like the members of IOSA.
To enable innovation our investors require confidence, and in turn require certainty that the regulatory systems will provide clarity of conditions to be met in a predictable and timely approval process. Additional costs such as taxation and environmental levies must consider our competitiveness with respect to other top oil-producing jurisdictions. The cumulative cost of these policies needs to be taken into account.
Ensuring further innovation also requires new transportation infrastructure to tidewater. The economics of both production and further innovation improve as Canada gains access to tidewater and higher global pricing. A predictable and timely regulatory process for pipelines is essential for the industry and Canada’s prosperity.
Thank you, Mr. Chairman, for the opportunity to discuss in situ technology and the future of the oil sands.
The first question is about how our members would benefit from sustainable resource development. I would begin to answer that question by acknowledging the basic fact that here in Alberta we have petroleum resources. That is our competitive advantage. People have talked about the Alberta advantage in the past as being some product of government policy, perhaps low-tax regimes. However, the reality is that what has given us a real advantage and really underpinned our prosperity and our ability to create sustained jobs is our resources. The main benefits of developing these resources are job creation, economic development, and profits for corporations so that they can reinvest, and government revenue.
To put it simply, these are the resources we have, and in that respect we're not really that different from any other Canadian province. We're a resource-producing country, and we have to take advantage of what we have, and what we have are natural resources in Alberta. We have petroleum resources. We would be foolish not to develop them.
On the subject of refining and upgrading, as I said, we support moving up the value ladder, because it creates more jobs, better jobs, spinoff jobs, and jobs that are more impervious to the ups and downs of the price of oil and economic conditions. I want to stress that point. When you have an upgrader, if you have a petrochemical plant, the statistics show that they are economic stabilizers.
In the upstream of the energy sector, when the price of oil drops—as it has over the last year-and-a-half here in Alberta—jobs are shed very quickly. But in the downstream that doesn't happen. If you look at the number of people employed in Alberta in upgrading and refining, it's pretty much steady, whether the price of oil is high or low. This is an advantage for us, obviously, because it helps us to ride out recessions. But I would also argue that it would be an advantage that could be enjoyed in any other province where refining, upgrading, or petrochemical manufacturing took place.
As an Albertan and someone who represents Alberta workers, I'd like to see the resource we own collectively as Albertans used to better the interests of our members, but if it's not going to be an Albertan—
I'm going to take this one, because I think it's a critical that we all have a message that we carry outside of our offices to people not only outside of Canada but also across Canada. The message is that we're very small in population but very mighty in resources, human and natural.
I look at the development that's taken place. There's been massive partnership from coast to coast, whether we're talking about the people manufacturing steel in Ontario, the people building pipelines or rail lines, or our indigenous people, who have been some of the best partners you could ever find in the world.
It was mentioned earlier that some of our top service companies for the oil sands in Alberta are owned and operated by the aboriginals. If you could get them and book them, you'd be doing great. They are the best of the best. They're totally engaged in the process with us, and it's been a phenomenal relationship.
I'm going to tell you a quick little story, Mr. Chair. I've heard about environmental issues. I look at Syncrude. I see Syncrude doing a reclamation process that involves reclaiming mined lands, which is very difficult, and bringing them back to be better than what they were. In partnership with our aboriginal people, they've been able to breed baby buffalo on that reclaimed land to restock Wood Buffalo National Park at the north end of our province. It's a testimonial to a partnership coming together to make things happen.
The long term that we need to look at, whether it's for renewables or the changes that are taking place.... Alberta is the only jurisdiction in all of Canada that has already installed cogeneration in our industrial campuses, and the vast majority of it is in the oil sands area. We've already done that in Alberta, not because a government said to do it or a political group said to do it, but because it made sense. Over 4,000 megawatts of power today is installed and working in Alberta, and 2,600 megawatts of that power is in the oil sands. They're a leader in the transition to a new carbon, lower-carbon future that we need for this country. That's the messaging we need to send internationally. There are lots of countries out there. As for our friends to the south, they're always going to, but they never get to it.
Canada has been the leader. That's why Canada gets applauded often, for moving forward. We're not afraid to step up without policies or laws being made. We do it because it makes sense. We've done that in Canada all across the board. When it makes sense to do it, let's get it done.
If we continue on that path, then whether it's jobs, whether it's innovation, or whether it's technology, we can make that happen. We all have to be prepared to think differently. We can't think about the way it was 20 years ago, because it isn't like that today. We're into a new era of innovation and technology. We can be the best competitor ever if we put our heads together and we back ourselves. That's the messaging on the PR side, as far as I'm concerned, that has to take place.
It doesn't matter which province or which political party you're from, we're all Canadians. Canada needs to be in the global market. We can show the way to a lot of countries that don't have any future or any opportunity, that can't feed themselves, or that have no industrialization. Our message could be that we can be there to help them develop so that they could look after themselves. We have the technology and the smart young people, brilliant young people, who can lead the way.
To me, the thing that binds us is coming together and making that happen. That's what our IOSA members are all about. Let us go out and compete. Don't hold us back. Give us a structure and an environment that let us do what we do best. We can train. We can guide. We can help. And we're there, because we believe in the future of this country. That's the whole message.