INDU Committee Meeting

STANDING COMMITTEE ON INDUSTRY

COMITÉ PERMANENT DE L'INDUSTRIE

EVIDENCE

[Recorded by Electronic Apparatus]

Tuesday, November 30, 1999

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[English]

The Chair (Ms. Susan Whelan (Essex, Lib.): I call the meeting to order pursuant to the committee's mandate under Standing Order 108(2), a study concerning productivity, innovation and competitiveness.

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We're very pleased to welcome here today the Canadian Association of Petroleum Producers. We have Mr. Bill Simpkins, the vice-president of government relations and communications, and Mr. Andrew Stephens, a member of the association.

I understand that there is no prepared handout for us due to the short notice in inviting the witnesses, but that you do have an opening statement that you could begin with.

Mr. Simpkins.

Mr. Bill Simpkins (Vice-President, Government Relations and Communications, Canadian Association of Petroleum Producers): Andrew Stephens is going to make the presentation on behalf of CPPI.

Mr. Andrew Stephens (Member, Canadian Association of Petroleum Producers): Thank you very much, Madam Chairperson. It's a pleasure to be here.

My name is Andrew Stephens. In addition to being an ex officio board member of the Canadian Petroleum Products Institute, I'm also the vice-president for refining, supply and integration at Petro-Canada.

As previously stated, Bill Simpkins is a vice-president with CPPI, the Canadian Petroleum Products Institute, which represents refiners and marketers, including independent marketers who do business in Canada.

I'm going to leave you with four key messages today, which are as follows: First, the Canadian Petroleum Products Industry is a very productive industry. Secondly, while I won't be looking for your sympathy, I'd like to get some facts on the table that say that the Canadian petroleum products business is a tough business. Thirdly, we are very competitive, and I'll provide some statistics that demonstrate our competitiveness relative to players around the world. And fourthly, for us to continue being a supplier of competitively priced energy products and services in Canada, an important part of the Canadian infrastructure, we need a level playing field.

Before I start, perhaps I'll provide a little bit of an overview regarding the petroleum industry. It's divided into two sectors. The upstream sector, which is the exploration, development and production of crude oil and natural gas, I won't be talking about today. The other sector, which we call the downstream sector, is the refining, distribution and marketing of petroleum products. It is a key infrastructure industry in Canada and has high levels of capital investment supporting it. The member companies of CPPI have over $6 billion of capital employed in the business.

In the downstream business, all the players represent 18 refineries, who process 1.6 million barrels a day of crude oil into refined products, gasoline, distillates, and specialty products such as lubricants. There are 13,000 retail stations across the country, with which you'd be more familiar, which deliver our main product, gasoline, to consumers.

In addition to providing goods and services and employment to Canadians, we're also a significant tax collector. We collect over $9 billion annually in taxes.

Talking first about productivity, we employ directly in the industry 130,000 Canadians, in our refineries and our distribution terminals, driving trucks, and of course all the people in the service stations. In addition to those 130,000 people, we employ indirectly another 100,000 Canadians who supply goods and services to the products business.

Our employees are very productive. For example, our refinery employees generate $200,000 in annual output per employee, which is significantly higher than the average manufacturing employee output of $55,000 per year. Each refinery employee has an employee multiplier of 7 to 1—that is, each refinery employee creates an additional seven jobs somewhere in the Canadian economy. So it is a very productive business.

As a second point around a tough business, financial analysts talk about our business as a commodity business. Some of the attributes of a commodity business are that it's mature—that is, relatively little growth. Returns are usually significantly less than the cost of capital for the average player, although there may be one or two players who make more than that if they are exceptional competitors. It's driven by factors beyond the control of the players, and in our business we are clearly subject to all the global impacts of the global petroleum industry.

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It's going to continue to be a tough business for us as we go forward, because there are increasing requirements for capital to be spent in terms of meeting environmental legislation—for example, sulphur in gasoline, Canada-wide standards, and those sorts of things.

With respect to the competitive nature of the business, we need to be competitive to survive because we're subject to products coming into Canada on both of our coasts, on the east coast and on the west coast, and if we can't make the products competitively, then someone else will find ways to bring them in.

We have had some work done in 1998 by MJ Ervin and Associates that demonstrates that Canadian fuel prices are the cheapest of the G-7 countries before taxes are included. They're as cheap as the United States and significantly cheaper than Japan and Europe. So from a supply cost perspective, we are providing Canadians with very competitive prices.

In addition, the industry undergoes benchmarking surveys. Those are surveys where all the players in an industry are compared to each other. Solomon and Associates is a benchmarking company in the United States, and they do surveys every two years. When we started doing these surveys in 1990, we were in the bottom half of our class looking around the world and in North America. But over the 1990s, through process changes, capital investment, and the use of technology, we have changed our competitive position such that we are now in the top half relative to other players in the world. That's even considering some of the disadvantages of the Canadian climate, including the long population expanse, the fact that our plants aren't world-scale economy, and those sorts of things.

I think both of those statistics in terms of supply costs and in terms of external benchmarking demonstrate that the industry is competitive with any other player in the world.

The fourth point I'd like to talk about is the level playing field. There are really three things here that we need to think about as we move forward: standardized specifications, consistent investment timing, and tariffs.

In terms of standardized specifications, when you don't have standardized specifications in a market area, it allows the opportunity for products to be moved in from other areas if the specifications are lower or it inhibits products from coming in, in terms of the specifications being higher. One of the things we believe strongly in CPPI is that standardized specifications across North America would help keep the economy for our business competitive.

With respect to consistent investment timing, I'm speaking here with particular emphasis around regulatory investment requirements, and there again, if there are differences in terms of regulatory timing, it can cause not only market inconsistencies, but it can also seriously affect access to emerging technologies if one area has to invest earlier than another area.

Finally, with respect to tariffs, as an example of tariffs that hurt our industry, the United States has a tariff of 1.25¢ U.S. per gallon that is imposed on any products coming from outside of Canada or the U.S. on petroleum products in the United States. In one way, that's good for Canada because people can enter the U.S. market without having to pay that tariff, but in another significant way, it's very detrimental in that northeastern Europe has a surplus of gasoline. Of course they find it more economical to export it to Canada than to the United States because of this tariff, and that action probably costs us about $200 million a year in terms of lost opportunity.

In summary, these are the points I'd like to leave you with. We are a very productive business. It is a tough business, but we are up to the challenges. We are very competitive, and our competitive position has improved over the last decade. If we have the level playing field in place moving forward, the industry will continue to provide Canadians with efficient and effective transportation, energy and services.

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The Chair: Thank you very much, Mr. Stephens.

We'll now go to questions, starting with Mr. Penson.

Mr. Charlie Penson (Peace River, Ref.): Thank you.

I would like to welcome the panel members here today.

Just as a start, can you give us some idea of the makeup in terms of Canadian production supplying the Canadian market versus imports?

Mr. Andrew Stephens: I can do that from a crude perspective. I'm not sure I can do it from a products perspective.

We import about 45% of our crude requirements for refineries as a Canadian industry, and 55% of our supply comes from domestic. The numbers are substantially less in terms of the product—i.e., we import much less refined product.

Mr. Charlie Penson: What are you saying in terms of the Canadian domestic industry supplying the Canadian market on the retail side? How would that break down?

Mr. Andrew Stephens: I would guess that our industry supplies over 90% of Canadian retail gasoline.

Mr. Charlie Penson: Therefore, where would the 45% that's imported go?

Mr. Andrew Stephens: I'm sorry, I've confused you. The 45% import is the crude, the feedstock, to make the production.

Mr. Charlie Penson: Yes, but once the production is made, what percentage of the Canadian market in retail sales would that have as opposed to that supplied by the domestic industry?

Mr. Andrew Stephens: Again, probably over 90% of the product made in Canada satisfies Canadian demand. There are small exports out of Ontario, for example—

Mr. Charlie Penson: I'm sorry, but I'm still confused. Is it true, then, that 45% of the crude product that Canada uses is imported from other countries?

Mr. Andrew Stephens: Of the crude that is refined by Canadian refiners, 45% is imported.

Mr. Charlie Penson: Yes, and therefore 55% is domestic....

Mr. Andrew Stephens: And 55% is domestic, but we do produce, as in the upstream part of the business, more than that. So some crude that isn't used in Canada is exported to a foreign country.

Mr. Charlie Penson: Okay. So that makes up the difference.

You were talking about the tariff in terms of the United States. Does that mean we have no tariff on product coming in here, then?

Mr. Andrew Stephens: We have no tariff coming into Canada.

Mr. Charlie Penson: I would gather from your comments that investment in new technologies would be in such things as tar sands development, where the new technologies are an advantage to improving the lower productivity costs or lower costs of production.

Mr. Andrew Stephens: That is correct, although tar sands development falls into upstream activities. The types of things we would be looking at would be more process-unit technologies—catalytic cracking or desulphurization-type technologies.

Mr. Charlie Penson: Can you speak about the other side of this at all, then, the upstream side?

Mr. Andrew Stephens: I can speak a little bit about the upstream, as I did work there for a couple of years in a planning function.

Mr. Charlie Penson: That's the area I'm interested in. I'm interested in investment and what would inhibit companies from investment in the upstream side, developing a new product coming on. I know some problems in terms of land claims have had a detrimental effect, dampening investment by companies. There's also the environmental review process, a long environmental review.

Are you interested in commenting on either of those?

Mr. Andrew Stephens: I can make some general comments from a strategic perspective around investment and then perhaps you can ask further questions.

As I understand the upstream business, the megaprojects we're talking about, the multi-billion dollar projects, have significant risks associated with them. The largest risk overall is what will be the price of oil, going forward. If oil doesn't average something like $17 U.S. or $18 U.S. a barrel on a go-forward basis, I don't think most of these projects would be economically positive.

So that's a very significant question to start with. Depending on the size of the company and what else the company has in its portfolio, it can or cannot take that risk. Partnering is a way to get around that and other types of things.

Mr. Charlie Penson: What were you talking about when you said regulatory timing has an effect on investment?

Mr. Andrew Stephens: In the downstream, when we're talking about regulatory timing on investment, the types of things I was talking about would be the timing associated with having product specifications in place for sulphur and gasoline, for example, with regard to recent legislation that's been passed here. We haven't yet seen what's happened in the U.S. in terms of the same type of legislation.

Mr. Charlie Penson: Are you concerned that we're moving faster than they are? Is that what you're suggesting?

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Mr. Andrew Stephens: If it turns out we're moving faster than they are, I'm concerned that we won't have access to the same newer technology that they may have access to, which will then make us somewhat less competitive given that new technologies are usually cheaper.

Mr. Charlie Penson: While we're talking about sulphur emissions and trying to meet that new target, have you any idea what the cost is going to be to the industry that will be passed on, in turn, through pricing?

Mr. Andrew Stephens: I think the CPPI has numbers in terms of the capital and operating costs associated with the legislation. We have no idea what is going to be passed on. I can say that, in the past, typically very little of the costs associated with environmental legislation has ultimately been passed on to the final consumer.

Mr. Charlie Penson: I would suggest it would be just the opposite. Don't you have to recover those costs?

Mr. Andrew Stephens: That's what you would think, but that's one of the reasons the industry is a tough business. We have not been able to do that in the past, and we've had to find other ways of lowering our own costs to become profitable.

The Chair: Thank you, Mr. Penson.

Mr. McTeague, please.

Mr. Dan McTeague (Pickering—Ajax—Uxbridge, Lib.): Thank you, Madam Chair.

Welcome, gentlemen.

Mr. Simpkins, I don't think we've met before. I knew your predecessor. He was a good man. I'm sure you'll live up to the challenge.

Mr. Bill Simpkins: Thank you. I'm sure I will.

Mr. Dan McTeague: Gentlemen, I want to cut to the chase here and strip away the issue of our taxes compared with those in the U.S. right now, and perhaps also consider the fact that we do pay an international price for crude today.

In Toronto I can buy, I guess at the rack price, gasoline for 32.6¢ a litre. That's bottom-line Canadian. If I were wise and had a ship, or maybe a couple of pup trailers, I could go down to Tulsa and buy that gas for 26.8¢ Canadian; Houston, 28.7¢; and Chicago, 27.7¢.

My first question to you is twofold. The argument made quite often is that gas is cheap now if you compare it with 1957, even though pretty well every other industry has had innovations that have brought cheaper prices. You only have to look at computers. I wouldn't dare try to figure out a price for a computer in 1957 compared with today's prices, in relative terms.

If the argument is still being made that, since July 2 of this year, the prices, ex-tax, are exactly the same as those in the United States, could you tell me, and account for me, why there is a 6¢ or 7¢ difference between us as refiners in Ontario versus the United States?

As well, can you tell me whether any of your member refiners are strictly refiners and are not also involved in the selling of gasoline?

Finally, can you explain to me why some members of your industry segment report—that is, they do differentiate their upstream profits from the retail, from the refinery—and why some members do not do that?

You talked earlier, Mr. Stephens, about investments and dealing with the whole question of ensuring that you had effective regulatory mechanisms. Could you perhaps explain one of...?

I realize there are three questions there, so perhaps I'll allow you to answer them.

Mr. Bill Simpkins: You did have three questions. I think one was about the 6¢ difference in the wholesale price or refining margin between Canada and the U.S. The other was whether there are refiners who are just in refining and not in the downstream business. The other was about profits, and why they wouldn't be segmented in the upstream versus the downstream.

Mr. Andrew Stephens: I can't answer your first question because I'm not familiar with the data you're talking to. I'm sure CPPI and Petro-Canada would be happy to meet with you to share and understand that data and try to come to an understanding as to what's happening with respect to Toronto prices versus prices anywhere else in the world.

Mr. Dan McTeague: Would it possible, Madam Chair, to have CPPI forward information to that effect? I think it's fairly important for the committee to understand this. If the prices are identical, ex-tax, between us and the United States, these rack prices, which are your wholesale prices, show a substantial difference in Canadian terms. In American terms it would be, of course, 3.78 times that amount, so it's a difference of 15¢ or 16¢ a gallon.

Mr. Bill Simpkins: We can have that information prepared for you by Michael J. Ervin and sent along to you.

The Chair: Thank you. We would appreciate that, Mr. Simpkins.

Mr. Dan McTeague: I had two other questions, Madam Chair.

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Mr. Andrew Stephens: With respect to your second question, I believe all of the refiners in Canada have marketing operations associated with their refining activities.

With respect to your third question, I can't comment on why individual CPPI members choose to share information differently with investment analysts through annual reports, etc. I assume it's because they believe their investors value that information.

The Chair: Last question, Mr McTeague.

Mr. Dan McTeague: Thank you, Madam Chair.

You mentioned a concern about tariffs. The reason I asked why there are refiners in the United States who simply refine and are not in the business, as far as the downstream is concerned, of retailing gasoline is because there seems to be, at least from their point of view, an eclectic variety of suppliers. In Canada, would it be fair to say—although this may not include your membership—that some of the greatest benefactors or those who rely most on refined product from those places in Europe that you discussed were in fact the independent sector of the Canadian retail market?

Mr. Andrew Stephens: When you say benefiting—

Mr. Dan McTeague: The greatest number of shipments of refined product coming into Canada is consumed by whom? Would it be your sector, the integrated suppliers, or would it be the independent retailers?

Mr. Andrew Stephens: I don't have statistics on that. I believe it changes depending on the various circumstances in terms of inventories and those sorts of things.

Mr. Dan McTeague: Mr. Stephens, you understand, because the concern is that if you put a tariff on the only means by which an independent can receive product, you may be choking off, for some of us at least, the last line of defence for the consumer and for competitors.

Mr. Andrew Stephens: If I could go back to my comment, I didn't mean to have you interpret, any of you, that we were asking that a duty be added in Canada. What I meant to say was that it's appropriate for tariffs to be equal wherever we are, and if there's duty there, then there should be a duty here. If there's not a duty there, then there probably shouldn't be a duty here. I think that's what's most important from a competitive perspective.

The Chair: Thank you very much, Mr. Stephens. Thank you, Mr. McTeague.

[Translation]

Mr. Cardin, do you have any questions?

Mr. Serge Cardin (Sherbrooke, BQ): Yes, a brief question please. Welcome, gentlemen, thank you for being here.

You spoke of the very difficult conditions under which the industry is presently operating, mentioning that you are often faced with fluctuations brought about at the world level. You also mentioned that you import 45% of Canada's crude oil. Since more than 50% of our crude oil is produced domestically, are these large changes in the price of crude oil on the world market automatically applied to domestic oil and can they be seen the next day at the pump?

[English]

Mr. Andrew Stephens: If I understand your question, you're asking if Canadian product prices, retail prices, reflect fluctuations that the world sees and are they reflected the next day? Prices are set through competitive mechanisms, and all competitors are exposed to those world price fluctuations. In general, if we see a change in the global petroleum business prices, we would expect to see a change in the pricing in Canada. We would expect to see that change work through very quickly. If it was a perfect system, we would see it the same day, not the next day.

However, because of things like different financial conditions of businesses, different access to a product, different customer bases, and those sorts of things, there are other factors that influence competitive pricing. That's the reason we don't see immediate change in Canadian prices relative to international prices.

[Translation]

Mr. Serge Cardin: You spoke of the productivity and efficiency of overall operations, including distribution. We have often noticed that the price of gasoline varies significantly and that, a few hours' drive down the road, gasoline may be 9¢ more or less a litre. Is that to say that there is indeed a productivity issue at the distribution level? Compared to your other operations, would you say that your distribution network is less cost-efficient?

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[English]

Mr. Andrew Stephens: Again my response would be that there are a number of factors affecting the price we have set or that is established at the retail level. In general, I think our distribution systems are very efficient in Canada. They may not be quite as efficient as in the U.S. because there aren't quite the number of pipelines, but I don't think the sorts of differences in price that you are talking about could be referenced back to distribution efficiency or inefficiency.

[Translation]

Mr. Serge Cardin: Can we say that this difference is solely due to distance? When we are talking about a distance that can be covered in just a few hours and when the difference in price can be of up to 9¢ a litre, that is to say quite a significant difference, can we really say that this difference is due to the price of transportation or are other factors involved?

[English]

Mr. Andrew Stephens: Sorry if I implied before that the difference was due to transportation. That was not my intent. The differences you were talking about within an hour's distance would not be 9¢ a litre. Those differences would be caused by the market activities in that particular local market area.

[Translation]

Mr. Serge Cardin: Is it not the Canadian Association of Petroleum Producers' and the distributors' responsibility to ensure that Canadians, wherever they live, might enjoy greater price stability?

[English]

Mr. Andrew Stephens: Personally I think the association needs to ensure that we have effective and efficient supply that's competitive globally and locally to all Canadians, and that's one of the things the CPPI works for.

[Translation]

Mr. Serge Cardin: Thank you.

[English]

The Chair: Mr. Murray, please.

Mr. Ian Murray (Lanark—Carleton, Lib.): Thank you very much.

Mr. Simpkins, Mr. Stephens, you represent a very important industry in this country. I don't want you to think you've been invited under false pretences. I know there are a lot of questions about the nature of your business, but we're trying to talk about...at least we're looking at productivity, innovation, and competitiveness in Canada, and one doesn't normally think of your industry as high-tech perhaps, but I believe it must be.

You talk about how competitive your industry is, and I know a lot of R and D goes on in Canada in the petroleum industry.

But I'd like to bring the discussion around to this whole question of how you see the future in Canada, and how you see the present, to start with, in terms of competing on the basis of the various factors we've been talking about, such as taxation. We're talking about personal and corporate tax or anything else that might impede your potential for success. I'd like to steer the discussion that way if we could.

I'd also like to ask you if you're experiencing any brain drain in your industry. Again, you represent an industry we don't think about too often when we talk about brain drain, but is that a problem? Do you have people moving down to Houston or some place because they can get better jobs or more interesting jobs and higher pay?

Mr. Andrew Stephens: I don't have any specific statistics with respect to brain drain in our industry. I would say, though, that over the last ten years we have been an industry that has been shrinking in terms of the number of employees who work in the industry. That's one of the ways we've reduced our costs and become more efficient. I believe it's probably less likely that you would see brain drain in our industry compared to some of the notionally high-tech industries in Canada or some of the other areas that are being discussed from a brain drain perspective.

Mr. Ian Murray: We're told that one of the problems with Canadian industry, particularly in manufacturing, is that they're slow to adopt new technologies. When you talk about people leaving, and that's one way you've increased your productivity, is that by adopting new technology? Is that the main reason you've been able to do that?

Mr. Andrew Stephens: I think that is one of the main reasons we've been doing it, and the technology we've been adopting tends to be more information technology as opposed to what I might call mechanical or process technology—information technology in terms of our business systems, the accounting and so forth that goes on for all of the activities we do, all of the transactions we have. Also, technology in terms of the optimization of the processes we use, the application of computers to simulate processes and process control—all that has helped us be both more effective in the way we turn crude into products and more efficient in terms of the cost structure.

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We are starting to see some new technology being developed that we're very interested in. In general this is technology associated with taking sulphur out of crude oil or taking sulphur out of products. Because there hasn't been a need in the past to do that, there was some fairly typical technology that required high temperatures and high pressures and was very expensive. But we've seen developed, as a result of some of the legislation that's coming at us, lower-cost, low-pressure, low-temperature technologies, which the Canadian industry would like to use.

However, all of this technology is expensive. I talked about risks earlier. There are risks associated with the new technology, and the more time is available to test the technology, the better we're then able to apply it in our business.

Mr. Ian Murray: Do you have an opportunity to sell any technology abroad that you develop here in Canada? Is that an area you've looked at?

As I say, I don't live in Sarnia now, but I grew up in Sarnia. I represent a riding just outside Ottawa. Petroleum refining is very important to Sarnia. I was aware of the amount of research that appeared to be going on at the time. I don't know if it still does. Is that an area where you can see you could make financial gains by selling the results of your research abroad?

Mr. Andrew Stephens: From a process technology perspective, it is a very costly process to develop new process technology, and I'm not aware of anyone in Canada who does a significant amount of this themselves. They may do it with their parent if they have an international parent, but I'm not familiar, from a process technology perspective, with anybody who reaps significant financial rewards in our business.

However, from a product technology perspective—and there I'm talking about things such as lubricating oils, asphalts, etc.—there are some innovative technologies being applied in Canada that lead the world. Where possible, those technologies are being used in and sold to other parts of the world.

Mr. Ian Murray: Thanks.

The Chair: Thank you very much, Mr. Murray.

Mr. Riis, please.

Mr. Nelson Riis (Kamloops, Thompson and Highland Valleys, NDP): Thank you, Ms. Chair.

Andrew, I grew up in Turner Valley, so I think I have a bit of oil somewhere surging through by bloodstream.

I have four questions.

First, you mentioned standardized specifications. Could you give us a specific example of where that could be a problem or how that's been a problem, to help us understand that issue?

Secondly, the call for a level playing field being so important to the industry generally, can you tell us how the value of the Canadian dollar has impacted on the level playing field issue?

Thirdly, of the 13,000 retail outlets, do you have some idea what percentage would be independent outlets?

And lastly—this is more of a leading question, but you'll get the drift of why I'm asking it—in downtown Kamloops, which I represent, there's a corner that has four gas stations, one on each corner. Last week they all had the price of 62.5¢ a litre. People always tell me this doesn't seem to be a very competitive environment, when everybody charges the same price. Could you give me some reaction to that? I'll relay it to the folks who asked that question.

Mr. Andrew Stephens: Okay, I'll start with the standardized specification question. The example that most comes to mind currently is sulphur in gasoline. Canada currently has a regulation requiring various levels to be met over a certain timeframe. The U.S. is in the process of developing that legislation but does not yet have it in place, and it could be that we will be inconsistent.

Another example that comes to mind is southern California, which has a different legislative environment and has more stringent requirements for gasoline than anywhere else in the world. The one place where refining has been profitable over the last several years happens to be California, because there are barriers to entry for product coming in.

Those would be two examples, and we could probably also talk about Europe.

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With respect to the dollar value, the dollar value affects Canada in two ways. One, it affects our costs of production, wherever anything is in Canadian dollars as opposed to U.S. dollars. Crude price is in U.S. dollars, so it doesn't affect that at all. Technology tends to be bought from the U.S. or outside Canada, so it doesn't affect it there. But Canadian labour rates, because of the decline in the U.S. dollar, have certainly benefited, in a slight way, production costs for Canada. The way it hurts us may be through the apparent costs we incur relative to what we used to be able to do.

With respect to the number of independent stations, I don't have the answer, but I know CPPI has it in the office, and we can get that for you.

Mr. Nelson Riis: Bill, do you have anything?

Mr. Bill Simpkins: I don't have an answer today. I wasn't prepared to bring that today. But certainly it is available.

It also depends on how you define independents. You might want to try to understand that a little bit. But we could give you some background in terms of how we understand it.

Mr. Nelson Riis: Okay, I'll do my best. And the four corners?

Mr. Andrew Stephens: With respect to the four corners question, some people would interpret that as perfect competition, because as soon as one moves, all move. In fact there have been various inquiries over the last many years of the downstream business, and I think all of them have said the business is a competitive business. So that would be my response to your question there.

The Chair: Thank you very much, Mr. Riis.

Mr. Lastewka, please.

Mr. Walt Lastewka (St. Catharines, Lib.): Thank you, Madam Chair.

I want to talk about the productivity and innovation side. I heard you say most of the innovating and research for productivity would be done with an international parent and then technology would be transferred. Did I hear that properly?

Mr. Andrew Stephens: I made a couple of comments: one, players in Canada may work technology through their parents; and secondly, the process technology we use in our industry tends to be developed in the United States.

Mr. Walt Lastewka: When we compare the upstream—let's just talk about that sector—Canada versus U.S., who's more productive?

Mr. Andrew Stephens: I can't answer that question. I don't have the information on the upstream.

Mr. Walt Lastewka: What about the downstream? Are we more competitive or less competitive?

Mr. Andrew Stephens: Everything we see says we are as competitive as the U.S.

Mr. Walt Lastewka: Okay.

We've had discussions with the automotive field, and we talk about productivity, innovation, and so forth. When we get into kilometres per litre and environmental stuff, inadvertently it comes to the fact that the petroleum industry is not advancing, and therefore there are areas where the automotive can't advance. Would you agree with that?

Mr. Andrew Stephens: I wouldn't agree with that. I would make the comment that we need to work together and have been trying to work together as a pair of industries, because ultimately what's going to make good productivity and good environmental sense is a combination of vehicles and fuel. You can't do one without the other. So somehow we need to get better at working together.

Mr. Walt Lastewka: When is that going to happen?

Mr. Andrew Stephens: We continue to try to work with the automakers.

Mr. Walt Lastewka: I had discussions with the tire manufacturers, who play a very key role in the automotive sector—a larger role than some people understand. There has been a lot of cooperation in development and research with the automobile industry over the years, and new advances in tire manufacturing and processes have come about as a result of that. That has not happened as much, or is not evident as much, with the petroleum and the automakers. Why not?

Mr. Andrew Stephens: I think it has happened, when you look at the changes in fuel specifications over the last ten or fifteen years. When you look at the sorts of things that are going on in terms of multi-stakeholder groups, in terms of the Canadian government's standards board, which sets gasoline specifications, you see that the downstream organizations, the automakers, and all stakeholders are trying to work together on the very difficult challenges around what's the best answer.

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The Chair: Mr. Lastewka.

Mr. Walt Lastewka: I have one more question. You gave the figures of 45% imported crude and 55% domestic. We also export crude in Canada. How is that factored into those numbers?

Mr. Andrew Stephens: The numbers I gave were based on the 1.6 million barrels per day of crude that we require to make the refined product. I don't have, off the top of my head, domestic production for Canadian crude, but I think it's something like 1.2 million or 1.3 million barrels. So if you can do the math you can see that the domestic requirements to make the product leave a surplus. That surplus is exported, typically to refineries in the Chicago or Anacortes areas.

The Chair: Thank you very much, Mr. Lastewka.

Mr. Jones, please.

Mr. Jim Jones (Markham, PC): Thank you, Madam Chairman.

Getting back to standards specifications, consistent investment timing, and difference in regulatory timing, what is the impact of trying to meet the Kyoto agreement? What could it cost you in potentially investing in obsolete technology, in potentially the loss of jobs, because trying to be ahead of the neighbour to the south...? Have you any other experiences where we've had regulations whereby we had to be there first, before our neighbour to the south, and then there were serious ramifications from that?

Mr. Andrew Stephens: If I could talk about Kyoto first, perhaps I could by example try to answer, hypothetically, your second question. My understanding of the Kyoto target is that Canada would be at the level 6% below 1990 by 2012. That reflects probably about a 30% reduction in terms of greenhouse gases relative to what they would have been at that timeframe.

The way others around the world are achieving this reduction is through a significant shift in energy from very carbon-intensive energy usage to less carbon-intensive energy. For example, in the United States there's a significant amount of coal being used. They can cut back on coal, which is highly carbon intensive, and move to natural gas. That causes a significant reduction in their CO₂ creation and allows them to achieve some element of their reduction.

Canada has already, relatively speaking, a lesser carbon-intensive industry. The sorts of reductions that we would have to see in terms of utilization of fuels by Canadians is very significant, more significant, in fact, that what they would see in the United States. If a Kyoto type of scenario unfolded, we would see probably a 30% to 35% reduction in demand for fuels that we make in our refineries, whether they're transportation fuels or heating fuels. A 35% reduction means tremendous surplus capacity. It would mean an environment where refiners were unwilling to invest in new technology because there would be no expectation that they would ever get such a return on that investment. I don't think you would see a significant investment again in our business until supply and demand came back into balance.

Mr. Jim Jones: Why are you going to have an anticipated 35% reduction? What's the cause of that?

Mr. Andrew Stephens: My understanding is that when you look at the overall balance—and I understand that there are industry tables working on this as we speak—the only way to achieve the targets is to reduce consumption. Because hydrocarbon fuels...and in particular, transportation is such a significant generator of CO₂. The refining business, which creates those transportation fuels, would be subject to a significant demand for reductions.

Mr. Jim Jones: What type of investment do you anticipate that the oil industry will have to make in trying to make these numbers? Let's say that they had to go when the U.S. was going, two years later. What savings would there be if we postpone the requirement and put it at the same time as the U.S. requirement? Would there be savings to the oil industry?

• 1620

Mr. Andrew Stephens: Theoretically, I guess it would be more advantageous to the oil industry if we went at the same time, because that tremendous excess capacity wouldn't occur until the same time in the U.S., so there would probably be a couple more years of reasonable returns on investment. Even if we went at the same time, though, the Canadian industry is going to be hit harder than the U.S. industry because of the circumstances I mentioned earlier—the lower carbon intensity that Canada already has relative to the United States.

Mr. Jim Jones: You've mentioned price increases of crude. You were saying that it's affected within the next day and that in a perfect and ideal situation it should be the same day. What about price decreases in crude? Are they reflected the next day or should they be reflected the same day or somewhere down the road when they get into the system?

Mr. Andrew Stephens: They should be affected the same day, if that's what happens when prices go up. The competitive marketplace, which causes prices to go higher, has the same set of factors, which would also cause the prices to go lower.

The Chair: Thank you very much, Mr. Jones.

Mr. Pickard.

Mr. Jerry Pickard (Chatham—Kent Essex, Lib.): Thank you very much, Madam Chairman.

Welcome, gentlemen.

I'm probably more naive than the rest of the people around the table. I apologize for not being here when you made your presentation, but Mr. Cardin raised the point that there was a 9¢ differential, and you folks talked about competition.

When he asked what creates that differential, you mentioned that it was the market activities in the local area, which on the surface may seem to be a reasonable answer, but from my view, over the last eleven years I have driven between Ottawa and Windsor very regularly every week, and I've noticed a 5¢ market differential in different spots along the way every week—same tax regime, same costs, I am assuming, same number of people...I think the same number of people exist in Windsor each day. We don't get a huge change in consumers, unfortunately. We don't get a huge change in taxation. We don't get a change in other things. What is this market activity in the local area that you're referring to? I don't know.

Mr. Andrew Stephens: As I said earlier, I'm not particularly prepared to talk about pricing here, but I will make a few comments.

As I also said earlier, the types of local market activities clearly affect the price. Your comment in terms of the differences you see between Windsor and Ottawa reflects exactly that. I think the trip between Ottawa and Windsor would show you differences in other products and services you would buy as well.

It is these same factors that drive those differences. What is the competition doing in the area? What are the supply-demand balances? What are the costs of marketing in certain areas versus other areas? All of these things drive the competitive gasoline marketplace in the same way that they drive the competitive Coca-Cola marketplace or any other product we're looking at.

Mr. Jerry Pickard: But you know, interestingly enough, I see the cans of Coke at probably the same price up and down...I don't see them vary like a litre of fuel does. I'm not talking about pricing. I'm talking about variations. The variations I've seen don't make any sense to me. I see pockets of one group being 54¢ and another being 49¢. That was a couple of months ago; we won't go with the new price increases now. Those variations have been very consistent. It'll be in the Ottawa area one week, in the Toronto area another week, and somewhere else another week. I really think the fuel flow has to be the same, the number of buyers has to be the same...all the factors seem to me to be the same, but I guess I'm naive about that.

• 1625

Mr. Andrew Stephens: Well, I would encourage you, sir, to look at other commodities and understand whether the same things are happening or not. I also extend to you the same offer we extended to Mr. McTeague, that CPPI would be, I think, very comfortable in sharing pricing mechanics and those sorts of things from an industry perspective with you to try to help you understand.

Mr. Jerry Pickard: Right. I think I might be very interested in looking at that, but again on a basis of what causes those variations. Why does it change five cents in Windsor from one day to the next and not in Chatham, but another time changes in Chatham and not in Windsor? I have a problem with that, quite frankly. I think most consumers in this country have a major problem with that; at least I hear that on a regular basis. I am sure all my colleagues hear the same thing.

Mr. Bill Simpkins: I agree, and we certainly would be happy to sit down with you. I think we've heard here today that there's a concern when prices are the same and there's a concern when prices are different. They are both affected by competitive factors, a different case on each side of the table, but we'd be happy to sit down and talk to you about why those things happen.

Mr. Jerry Pickard: I'm glad we didn't hear the finger pointed at taxation, because that seems to be one of the things I hear the industry saying very often: it's the taxes. They haven't varied, yet the price does huge variations.

Now, going back to the next one, the price of oil on the world market has dramatically increased from the summer to today. It appears to me, and I guess it would appear to most Canadians, that the price of gasoline has gone up, as people in the industry have said, in accordance with the world price going up. But profits, the cost of producing that fuel, the storage of fuel—all of the other factors that are there haven't changed; at least I don't see that they've changed. We produced that here in this country—huge amounts, they're there—and yet the price has gone up because the world price went up.

Is there any relationship in your industry between cost of production and cost of selling a commodity? Or is it totally controlled by factors we don't talk about, like world price, and then that costs us? I don't see that a wellhead price has changed in Canada, that the cost of production, pulling crude out of the ground, has changed in any respect, and yet every consumer is paying a heck of a lot more money. Maybe I'm naive. Again, I don't know.

Mr. Andrew Stephens: Again, I can try to address that based on my limited exposure to the upstream. There are some costs associated with upstream production costs, if I understand your question correctly, that are related to energy costs in general, i.e., it does take energy to pull crude up out of the ground. But in general, the price of crude worldwide and in Canada is not set by the cost of production. It's set by the price the product obtains.

The Chair: Last question, Mr. Pickard, please.

Mr. Jerry Pickard: Okay. Because the OPEC nations have decided to take a particular position, it appears to me your industry is reaping tremendous profits. I'm not sure I like that relationship either. If you would like to respond to that, that's fine.

The Chair: Mr. Stephens, do you have any comments?

Mr. Andrew Stephens: I think if you look at the financial reports of companies, you'll see they're not making windfall profits, number one. Number two, I think if you're suggesting what I think I hear you suggesting, that there should be a made-in-Canada price for crude oil, it's been tried.

The Chair: Okay.

Mr. Jerry Pickard: No, I didn't suggest that. I said you're making tremendous profits at those changes if in fact the price is going up in accordance with world practice and nothing else.

The Chair: Okay.

Mr. Andrew Stephens: The response is that the companies are not making windfall profits. Certainly if you'd like to have a little more detail, would like to come and talk to us about that, we certainly can have a chat about the effects of what it would mean if there were a made-in-Canada price for crude oil.

Mr. Jerry Pickard: You said “made-in-Canada”, I didn't.

The Chair: Okay. Thank you, Mr. Pickard.

Marlene Jennings.

[Translation]

Ms. Marlene Jennings (Notre-Dame-de-Grâce—Lachine, Lib.): Thank you very much, Madam Chair. When were our witnesses asked to appear before the Committee?

• 1630

[English]

Mr. Bill Simpkins: I believe it was last Thursday.

Ms. Marlene Jennings: Okay.

[Translation]

Am I mistaken in thinking that when the Committee considered the bill introduced by Mr. McTeague last spring, you were one of those who lobbied vigorously against it, claiming that this bill would lessen the productivity and competitiveness of the industry? Am I correct in believing that it is for these two reasons that you were opposed to the bill introduced by Mr. McTeague?

[English]

Mr. Bill Simpkins: The changes to the Competition Act would have major effects on the business, absolutely.

[Translation]

Ms. Marlene Jennings: Speaking of competitive practices, it seems to me that economists, who are after all the experts in this field, speak of both competitive and anti-competitive pricing practices. I must confess that I am very disappointed to see you appear here today unprepared to speak of anti-competitive pricing practices that can have an impact on the productivity and competitiveness of a whole industry, considering these were arguments that you made to oppose the bill introduced by Mr. McTeague.

Do not tell us that you are not in a position to address the issue of pricing practices today because it comes as a surprise to you. I seem to recall that you have already made presentations on that issue and that you have documentation going back to last May or June.

[English]

Mr. Andrew Stephens: I would make two comments. One, I have talked about the competitiveness in terms of supply costs of Canadian product relative to supply costs around the world, and given some figures that indicate Canada enjoys the cheapest energy costs from our refined petroleum product perspective of any place in the world, including the U.S.

Secondly, we were given five days' notice about this, five calendar days. I was asked to attend at the last minute, and my strength is refining and supply, not marketing. Also, I was not part of CPPI when the previous inquiry went on.

Ms. Marlene Jennings: Monsieur Simpkins.

Mr. Bill Simpkins: Bill C-235 is another issue. That's not what we're here to talk about today, I don't believe. We were asked to come and talk about competitiveness in terms of the industry, international effects, U.S., etc. But we would be happy to enlighten you and talk to you further if you have some specifics about the industry.

[Translation]

Ms. Marlene Jennings: No, Mr. Simpkins, I do not wish to start a debate on the reasons for your being here today. Our committee is currently considering the various aspects of productivity, innovation and competitiveness. You know that pricing practices can variously have a positive or a negative impact on each of these three factors.

I do experience some difficulty when you say that you appeared here on such short notice, having been asked only five days before, since last spring we discussed at length the whole issue of pricing practices in your industry while considering the bill introduced by Mr. McTeague. Furthermore, when your industry was trying to convince us to reject Mr. McTeague's bill, it made the argument that pricing practices are not anti-competitive and that they have no negative impact on innovation within the industry. Your answer is not satisfactory.

• 1635

[English]

The Chair: Madam Jennings, just to make you aware, it appears that when they were contacted to appear before the committee—I've just discussed this with the researcher—they were advised that we're studying productivity competitiveness and innovation as they compare with other industries, not specifically within their industry itself. I take some responsibility if they're not prepared to answer the questions that you're directing, although we do recognize that pricing is a factor in those three areas as well.

Do either Mr. Simpkins or Mr. Stephens have anything further to add to Ms. Jennings?

Mr. Bill Simpkins: No, but we'd be happy to talk about it if you want to let us know exactly what it is you'd like to know. We'd certainly like to meet with you and talk more about it. We would be happy to do it, but we weren't prepared today.

The Chair: Well, Mr. Simpkins, considering there are three or four members who have had very similar questions, perhaps you could answer them in writing to this committee at some point in time in the next few weeks, if that would be acceptable.

Mr. Jones, please.

Mr. Jim Jones: Yes. I have a point of clarification. When gas is at 50¢ a litre, what are the taxes on it, both federally and provincially? When it goes to 80¢ a litre, what are the taxes on it, both provincially and federally? Is it a fixed percentage always of the price?

Mr. Bill Simpkins: Yes, it is.

Mr. Jim Jones: Is it 50%?

Mr. Bill Simpkins: No, it's always about 30¢ here in Ontario.

Mr. Jim Jones: So at 50¢ a litre, the tax is 18¢.

Mr. Bill Simpkins: No, when it's 50¢ a litre, 30¢ would be in taxes.

Mr. Jim Jones: Oh, I see. When it goes to 80¢, what is it?

Mr. Bill Simpkins: Still the same. The only thing that changes is your GST.

Mr. Jim Jones: Okay.

The Chair: Mr. Jones?

Mr. Jim Jones: Well, then if it's at 20¢ a litre, it's still 30¢ a litre?

Mr. Bill Simpkins: That's correct. You're losing 10¢ a litre.

Mr. Jerry Pickard: They aren't doing it at 20¢.

The Chair: Okay. Mr. Malhi.

Mr. Gurbax Singh Malhi (Bramalea—Gore—Malton—Springdale, Lib.): For so many numbers of years the larger gas companies have been gaining and 90% of the small businesses have been closing down their businesses. Is there any monopoly, or could you explain a little bit about that?

Mr. Andrew Stephens: I think in general what we've been seeing over the last 10 or 15 years, as I mentioned earlier, is an increased trend toward efficiency and effectiveness. As you look at retail service station through-puts in Canada, you can see they have been increasing steadily over time. We are still lagging, the average through-puts in Canada relative to the U.S., and I think we'll continue to see a rationalization of facilities going forward.

I can't comment on the ratio of who has closed down more—majors versus independents—which may have been your question. In terms of the reasons they've closed down, I'm assuming it's economically driven, that eventually they get small enough that they can't make a go of it.

Mr. Gurbax Singh Malhi: What role can the federal or the provincial government or the Canadian Petroleum Association play to set up the prices? I guess that's it.

Mr. Andrew Stephens: Can you repeat your question?

Mr. Gurbax Singh Malhi: What role can the federal government or the provincial government or the Canadian Petroleum Association play to set up the gas prices?

Mr. Stephens: If your question is what is the role of—

Mr. Gurbax Singh Malhi: Can they do something? Can they suggest something that the federal government, the province, or the association can do?

Mr. Bill Simpkins: It's the provincial government that has the ability to regulate prices. The federal government does not have that constitutional right to set prices. That is a provincial issue.

The Chair: Okay. Thank you, Mr. Malhi.

[Translation]

Mr. Cardin.

Mr. Serge Cardin: I would like to come back to the issue of productivity and competitiveness. Compared to the same industrial sector in other countries, your industry is very competitive and efficient. You were saying that in Canada, prices are lower than in all the other G-7 countries. I believe you said that we are in a very good position, globally, in terms of productivity and competitiveness.

• 1640

On the other hand, there are, within the industry, several different petroleum companies. The industry itself is efficient but it includes a number of players. For example, you often see, on four different street corners, four different brands being sold. These players are an extension of the refining activities. I imagine that each refinery operates at a different level of productivity. On the other hand, at the street level, the price of gas is all the same. Therefore, we are all right as far as productivity and competitiveness on the world scale is concerned, but at the local level, this does not show up in the price of gas at the pump. Say one of the players is a little less efficient, he can still benefit from the slightly higher price they are setting across the street. He can adjust his own price automatically. Within the industry, here in Canada, not everyone is operating at the level of efficiency. On the other hand, they all get the top price for their product.

Do you have anything to say about this?

[English]

Mr. Andrew Stephens: My comment would be that a number of factors go into the establishment of a price, and one of the less important ones I think is what the product costs. That will determine whether a participant wants to play in that business or not, because at some point if the price is way below what it costs him or her to make it they'll go out of business. But in general, it's not the only, or even the key, determinant in terms of pricing. There are many other determinants of pricing.

[Translation]

Mr. Serge Cardin: I have one last question for you. The government requires that your product respect certain environmental standards. It is accurate to say that the government gets an average of 30¢ for every litre sold and that the government makes more money on gas than your industry does. If the government requires you to invest in order to conform to certain environmental standards, should we not, considering the billions of dollars the government gets in gasoline taxes, help you in your environmental research and development? Otherwise, should the government not be using those billions of dollars generated by your industry to solve the environmental problems that the industry brings about?

[English]

Mr. Andrew Stephens: I'll answer that question in two parts. The first question I'll answer from a CPPI perspective. The second question I'll answer from a personal perspective.

With respect to support from the government, there are scientific research activities that qualify for different tax rate write-offs for new technology. In general in our industry, there's not a large amount of capital or investment that is characterized as that sort of thing, and so we're typically subject to the same tax rates, depreciation rates, CCA allowances, and those sorts of things as other industries are.

With respect to your question, should the government direct some of the funds back to the Canadian industry, in general I don't believe government should subsidize industry. We should allow the free market forces to prevail. If we have too much subsidization or intervention, I believe that is bad from a competitive perspective, because those tend to come and go. Our industry needs to be here for the long term, and if we don't stay competitive because of market forces, if we become uncompetitive and then the fiscal regime changes, we'll be in real trouble.

So my personal perspective is that we should not be investing significant taxpayers' dollars in our industry. We should let it compete and thrive based on its ability to compete worldwide. Only where there are tariffs or advantages to people outside Canada would I see considering some sort of fiscal balancing.

[Translation]

Mr. Serge Cardin: When I spoke of the financial measures that might be taken by the government, I wasn't thinking of the industry's profitability but of the increasingly compelling requirements of the environment. I was referring to research and development and innovation in order to counteract the pollution brought about by the industry. I was not suggesting that we find a way of increasing industry profits.

• 1645

[English]

Mr. Andrew Stephens: I think my same response applies if we can maintain the level playing field, i.e., if the legislation that we face in Canada is consistent with that across North America. If we start to see major differences, then perhaps your comment is worth consideration.

[Translation]

The Chair: Thank you, Mr. Cardin.

[English]

Mr. McTeague.

Mr. Dan McTeague: Thank you, Madam Chair.

I want to go back to the question regarding that famous “To regulate or not to regulate, that really is the question.” There have been some studies that have not suggested as optimistically as Michael Ervin, a benchmarker for Imperial Oil and others, that the industry is as competitive as one would want. I'm interested in the CPPI's position—yes or no would be helpful—on regulation of pricing by provinces, knowing full well that P.E.I. does, Nova Scotia abandoned that, and Quebec is not looking for regulation but rather to put in a margin for independent retailers so that there is some preservation of competition.

My second question deals with the matter of spot pricing at the pumps. I wonder, given that there have been no new entrants into the Canadian market save and except ARCO in British Columbia, whether it is significant from the perspective of competition that the barriers for entry may be significantly high. A new entrant would not be able to acquire pipelines, etc., terminals, access to other means and infrastructure by which to compete effectively at price.

Finally, I'd like to ask another question concerning both specifications and the position CPPI has taken with respect to automatic temperature compensation, which is prohibited by law in many states in the U.S., and the position of APPI, your counterpart in the U.S. And finally, Madam Chair—

The Chair: Mr. McTeague, You have too many questions for five minutes. We only have five minutes.

Mr. Dan McTeague: Those are the four questions, and most of them are yes or no answers.

The final question is, you have alluded to the impact of carb one, carb two in California as being several cents a litre or gallon above the rest of the United States, and given that Canada has a very different step approach to be ahead of the U.S., what overall impact is this going to have on CPPI and the Canadian petroleum industry in general in Canada as far as its competition and productivity is concerned?

The Chair: Mr. Simpkins or Mr. Stephens.

Mr. Andrew Stephens: CPPI does not support price regulation. Barriers to entry are significant at the refining level because of the high capital costs associated with refining. With the environmental permits and the length of time it takes to put these things in place, only very large organizations with diverse portfolios probably can consider moving into that area other than by acquisition.

At the terminal level, it's somewhat less restrictive because there are lower capital requirements. At the retail level, it's much less restrictive because the capital requirements are much less significant and there are many more opportunities to participate.

With respect to temperature correction, I'm not sure I understood your question. With respect to the differing pace of environmental legislation, Canada versus the U.S., the biggest impacts are twofold: one, the impacts of different legislation in terms of what that does to local market economies in terms of product flows moving one way versus the other; and secondly, in terms of access to a lower-cost technology that I spoke of earlier, the earlier the legislation the less the access to that new technology.

The Chair: I think Mr. McTeague's question regarding automatic temperature control had to do with the fact that in the United States this has been banned in several states and the position of the APPI in the United States. And what would be the position of the CPPI here?

Mr. Bill Simpkins: I know you get the same amount of energy whichever way you go. You get what you pay for.

• 1650

Mr. Dan McTeague: Madam Chair, do I have any time? It's up to you.

The Chair: No, you haven't, not right now.

Mr. Dan McTeague: Okay.

The Chair: I've still three more people.

Mr. Andrew Stevens: I have one last comment on the correction.

I believe the Weights and Measures Act supports temperature correction and is aligned with temperature correction in Canada.

The Chair: I don't think we're debating what the rules are right now. We're asking whether or not you have a different opinion.

Mr. Lastewka.

Mr. Walt Lastewka: I have one question that I want to get better understood. It's on competitiveness. I want to stick to competitiveness.

When I compare upstream in Canada and upstream in the U.S., is our industry in Canada as competitive? You talked earlier of the fact that we have the same technology and there are not many improvements over time and so on, so it's kind of stable in its processes and so forth. When we compare Canada versus the U.S., are we as competitive or not as competitive in the upstream?

Mr. Andrew Stephens: On the upstream, the exploration, development, and production of crude oil and natural gas, I can't answer that question.

Mr. Walt Lastewka: I'd ask you to get back to the committee on that.

When we compare Canada versus the U.S. on the downstream, are we as competitive?

Mr. Andrew Stephens: In general, we're as competitive. We're no better off and no worse off than the overall refining-marketing industry in the U.S.

Mr. Walt Lastewka: Thank you.

Mr. Bill Simpkins: One way to answer your question on the upstream is to pose the question to the upstream folks, because we represent the downstream.

But to give you an example of the differences in the structure of the upstream and the downstream, you're probably quite familiar with the Hibernia project, which is a brand-new project. The break-even price of a barrel of crude oil coming out of that project is $12.65. That would be very high compared to something that has been in process for a long period of time. We have that in Canada and we have that in the U.S., but structurally the industries are much the same.

The Chair: Thank you, Mr. Lastewka.

Mr. Cannis.

Mr. John Cannis (Scarborough Centre, Lib.): Thank you, Madam Chair.

I too want to talk about productivity, and innovation more so. Hearing the presenters who were here this morning—and of course they were always comparing us to the United States, and rightfully so—they said one of the reasons we weren't as productive or competitive was the lack of labour involvement or people in the market. They also talked about lack of support for the small and medium-sized entrepreneurs.

My question is, given what we've read and what we've seen happening over the past year and a half or so, that several small or medium-sized businesses, independents in the gasoline industry, have had to close down for different reasons—and I don't want to go into that—if these players, these participants, are coming out of the market in an industry that they're familiar with, then the choices are for them to be possibly retrained. If somebody is a 50-year-old individual who only knows how to run a gasoline station and an auto repair shop, we're then losing productivity and innovation as well. What can you tell us about that, if these players are coming out of the market? Then we're becoming less productive, less competitive, and indeed falling behind.

Because everybody is talking about pricing, I want to add my two cents to that in the last question I have. If there's no answer, I'll appreciate that you didn't come here today to discuss that.

There are other countries that I, and I'm sure other colleagues, have visited that are also faced with the same world conditions as we are here in Canada, even though they are not petroleum-producing nations and they are primarily importers. Yet, again, you don't see the fluctuation of the price at the pump from morning to midday to the afternoon. Why is that so?

If you wish, you could shed some light on it. If not, as I said, I appreciate that you didn't come prepared for that.

There are other commodities being traded in the international market that also fluctuate, yet we don't see the fluctuation on a daily basis.

• 1655

Mr. Andrew Stephens: With respect to your first question, as I said earlier, we are improving our efficiencies, and unfortunately that does mean that some small independent businessmen are no longer working in this industry. However, we do try to obtain all of the ideas from our employees throughout the entire chain, whether it's through marketing associate forums or whether it's working with unions in refineries, with our employees, to bring forward ideas and suggestions for improved productivity and efficiency. We will always continue to do that as an industry, because we believe that's where our future is going to come from—through our employees' and our associates' good ideas.

Mr. John Cannis: Mr. Stephens, are you suggesting that if these small independents were to restructure their operations, they could stay afloat or stay competitive?

Mr. Andrew Stephens: Certainly there are and continue to be, and I believe will continue to be always, small independents in the business who are successful at changing the way they do their operations to be successful.

Mr. John Cannis: Thank you.

Mr. Andrew Stephens: With respect to your second question, I can't talk about what motivates consumer behaviours in other countries. I do know that in Canada people will drive across three lanes of traffic to save two-tenths of a cent a litre. That's what happens, and that's what we live with.

As an industry, we clearly wrestle with the pricing question and how we can do a better job at satisfying our consumers, how we can turn an experience that isn't very much fun into something that is. It's very difficult, and I'm not sure we'll ever come up with an answer, but we will continue to try.

The Chair: Thank you, Mr. Cannis.

[Translation]

Mr. Cardin, do you have any further questions? All right then.

[English]

Mr. Stephens or Mr. Simpkins, unless you have any closing comments.... We do appreciate your coming here on short notice. We would appreciate it if you could take the time to look at the pricing issue and how it may affect your productivity and competitiveness in Canada and whether there's anything that could or should be done about it.

It has been an interesting meeting. It has covered at the same time a couple of other topics that we're presently studying, so I do appreciate your endurance here. We may ask you to meet with us again on another topic. Thank you very much.

Mr. Andrew Stephens: Thank you.

The Chair: The meeting is now adjourned.