Proceedings of the Standing Senate Committee on
Foreign Affairs
Issue 6 - Evidence, February 19, 2003 - Afternoon
CALGARY, Wednesday, February 19, 2003
The Standing Senate Committee on Foreign Affairs met this day at 1:32 p.m. to examine and report on the Canada- United States of America trade relationship and on the Canada-Mexico trade relationship.
Senator Peter A. Stollery (Chairman) in the Chair.
[English]
The Chairman: Honourable senators and guests, we have with us this afternoon, Mr. Kenton Ziegler, Chair of the Alberta Canola Producers Commission; Mr. Ward Toma, General Manager of the Alberta Canola Producers Commission; and Mr. Brent McBean from the Wild Rose Agricultural Producers.
Could I ask you to just make a reasonably brief presentation that will leave us time for questions? I must say that, because the subject is very interesting and very important, the question periods have been longer than we had anticipated.
Mr. Kenton Ziegler, Chair, Alberta Canola Producers Commission: First, I would just like to express my gratitude and appreciation for being invited to make a presentation here. It is an opportunity that I had to, admittedly, study up for a little. I am a farmer. I am not an expert on foreign trade, so I had to educate myself a little before I came here. It was quite an eye-opening experience. I have always been on the production end of things, and I am just glad to be here.
I will read from the presentation that was submitted to the committee, and highlight some key points to bring it home.
Ward Toma, our general manager, prepared this report.
I farm at Beiseker, which is 45 minutes northeast of here. I am a fourth-generation farmer, and my goal is to not be the last generation of my family to farm.
The Alberta Canola Producers Commission, ACPC, is a producer-governed organization that represents canola producers in Alberta. It is funded by a refundable check-off on every ton of canola sold in the province.
The activities of the commission include funding research, market and product development efforts, technology transfer, grower extension programs, and representing grower issues and concerns to government — the reason I am here today.
The ACPC is supportive of open, freer trade and of the oilseed industry moving towards a zero-for-zero trade agreement that results in meaningful, progressive reductions in protection and support.
We are supportive of the elimination of tariffs and domestic and export subsidies on a global and reciprocal basis over an agreed period of time.
We divided our report into four key areas. The first is market access issues.
Markets can be affected by direct restriction on access through tariffs and non-tariff trade barriers, export subsidies of our competitors in the international marketplace, or domestic subsidies in the importing country or competitor countries.
In working towards open and freer trade, Canada should negotiate the elimination of all tariffs on a global and reciprocal basis over an agreed period of time. In the interim: all tariffs should be subject to maximum reductions, and there must be no differentiation between single- and two-stage tariffs; significant and meaningful reductions in tariff peaks and significant, meaningful and effective increases in minimum access provisions; elimination of all in-quota duties and the establishment of clear, transparent and binding rules on the administration of tariff rate quotas to ensure commercially meaningful access is achieved.
There should be elimination of tariff escalation on value-added products. I will give the example of canola oil. Canada has developed an ultimate value-added industry over a long period of time, but because of the different tariff rates, seed versus oil, sometimes we are shut out of a market.
There should be elimination of all export subsidies. I think we are dreaming in Technicolor there. I would like to see that happen, but we have a long way to go.
Work toward the elimination of trade-distorting domestic support programs. Remaining domestic support under a new agreement should be disaggregated.
Improve disciplines on export credit, food aid, and other potential measures to ensure that they do not act as export subsidies.
There should be elimination and prohibition of export taxes and restrictions that provide processors with a cost advantage in procuring raw product; also, the development and application of clear definitions and rules aimed at fully incorporating less developed countries into the WTO.
Dispute settlement and trade remedy issues: Disruptions in trade have occurred due to the lack of clarity and less than adequate application of the rules and disciplines under existing trade agreements and under the WTO. All parties should be playing by the rules.
Thus Canada should work towards overall improved time lines and efficiency of dispute settlement systems, ensure that reporting and performance commitments made in previous agreements are actually kept, and that compensation arising from dispute settlement benefits the sector affected by the trade violation.
If the grain and oilseed sector is hurt, we should be receiving the compensation that may come out of that, as with any other sector. There is a need for: dumping rules that address third party dumping situations in agricultural trade and that recognize the cyclical aspects of the agri-food sector; sanitary and phytosanitary rules, SPS, based on, and enforced according to, internationally recognized scientific standards.
Rules and provisions around trade in products of biotechnology should also be based on internationally recognized science, and should not create barriers to international trade in agriculture and agri-food products.
Issues specific to Mexico, which is one of our primary and growing markets for canola products: The Mexican government is investigating the introduction of regulations requiring fumigation of all imported seed at the country of origin.
In Canada, fumigation is inefficient in winter months. This effectively creates a non-tariff trade barrier that will shut Canada out of the important Mexico market for prolonged periods. Current SPS rules governing infestations provide effective assurance against contamination while not hindering trade.
The CFIA announced yesterday that they are going to try to develop a protocol to allay Mexico's concerns, so we are already being somewhat proactive in this regard.
The Mexican government is currently considering bio-safety legislation that could potentially be a trade barrier, as it may require unscientifically based product labelling. Politically motivated regulations are non-tariff trade barriers designed to impede trade rather than protect Mexican citizens from harmful food products.
Like the Canadian regulations, the Mexican regulations must incorporate SPS measures that are based on internationally recognized scientific standards.
Just as a note, the Canola Council of Canada has targeted Mexico as one of our key growth areas. We are trying to double the amount of seed being exported to them.
This year, we are at 400,000 tons because of the drought. Normally we are at around 800,000 tons, and we would like to double that. There is a demographic that is very keen on looking at canola and canola oils, so it is one of our target countries.
Specific issues with the United States of America: The canola industry has long supported harmonization of regulations with the United States. For example, working towards harmonized pesticide regulations will ensure that barriers to trade in canola products are avoided.
An example of that would be a seed treatment system that was being used in Canada. We called for a voluntary withdrawal of that seed treatment, so we were pre-emptive in trying to maintain access to that market.
The same cannot be said for nutritional labelling. A lack of harmonization of nutritional labels between Canada and the U.S. will create a trade barrier. The differing labelling requirements between the countries will impede trade and increase the cost of Canadian products exported to the United States.
As the United States is the single largest market for canola and other food products, labelling requirements must be harmonized to ensure our industries' competitiveness in that market.
Something fairly new is the proposed U.S. bio-terrorism legislation, which we talked about briefly about, senator, and which has a strong potential for becoming a non-tariff trade barrier due to the possible lack of harmonization of food, feed, and environmental safety protocols.
While in general there has been a good degree of cooperation and harmonization with the U.S. on these issues, the potential regulatory hurdles could be used as a method for keeping Canadian agricultural and food products out of the U.S.A.
The problem with non-tariff trade barriers is that there is very little recourse. We cannot go to the WTO to resolve them, and they can be very damaging to our industry. We have to find another method. The non-tariff trade barriers are difficult to deal with.
Only through increased partnership and cooperation with our industry's largest international customer will we have continued opportunities to grow and prosper.
The Canola Council of Canada has also targeted the United States for growth. Currently, we are exporting about 1.5 million metric tons. We would like to see that up to 2.5. Again, it is very much a growth market for us.
In conclusion, Mr. Chairman, the ACPC is supportive of the Canadian government's efforts in negotiating trade agreements that pursue open and free trade on a reciprocal basis. Agreements that result in meaningful, progressive reductions in protection and support will allow us to compete in the global marketplace.
Mr. Brent McBean, Wild Rose Agricultural Producers: Mr. Chairman, I would like to take the opportunity to thank the committee for allowing Wild Rose Agricultural Producers to present to you. I am pinch-hitting for Rod Scarlett, our executive director, who is ill today. Interestingly enough, I wrote most of the brief, so I should be able to get through it.
Wild Rose is the general farm organization in Alberta, so in preparing the brief I tried to look at the general picture of what this NAFTA agreement has done for Alberta producers.
After travelling across the country, a lot of these statistics may seem a little dry, and you are going to say that you have heard this before, but I am going to go through it and see if there are any questions afterwards.
Wild Rose Agricultural Producers recognizes the value that NAFTA has brought to Alberta since the inception of the agreement in 1994. The United States and Alberta share a strong trading relationship based on NAFTA, with the United States representing our largest export market.
In 2000, Alberta exported over $2.8 billion worth of agri-food products, and because of NAFTA, less than five per cent of our total trade is ever in dispute.
Under NAFTA, Alberta's exports to the U.S. have grown from 69 per cent of total exports to 84 per cent. The potential growth in the Mexican market is also very high.
The simple fact is that between 1998 and 2001, Alberta agricultural exports to Mexico rose from in the neighbourhood of $155.2 million to around $414.2 million. This 266 per cent increase shows the agreement has worked fairly well to this point for Alberta producers.
It has improved the standard of living and level of income in Mexico, which, in turn, facilitates the purchase of products such as beef, pork, canola seed, malt and malting barley, and other value-added products processed in and from Alberta.
Since the NAFTA implementation in 1995, there has been a 40 per cent increase in Alberta exports to the U.S. Alberta also imported $1-billion worth of U.S. agri-food products in 2000, an increase over the $890 million in 1999.
Governments within NAFTA face internal pressures on the political and economic front to also use the agreement to their best advantage; however, domestic policy can seriously undermine the nature of NAFTA. Examples of this are the Americans' implementation of country-of-origin labelling on certain products but not on others, their intrusive and constant countervail investigations, and complex anti-dumping procedures or arbitrary food safety protocols that can act as a barrier to free and proper trade.
Also, any changes in the political climate in Mexico must be watched carefully. The current president has only been in office for two years, replacing the party that had governed Mexico for the previous seven decades. A climate of political stability is important to continued increasing trade with Mexico.
It is always important to be mindful of the impact of domestic policies on an agreement such as NAFTA. The policies of governments on taxation, social policy, regulations, internal sector supports and fiscal management have a great deal of impact on the ability of producers to compete effectively within a trade agreement.
Onerous taxation levels can make it difficult to attract the needed skill sets and investments into the value-added sector, which is an important component in adding profit to the agricultural industry in Alberta.
Increasing environmental and bio-safety protocols that put the full financial cost of implementation on the producer, rather than sharing the costs among all those who benefit from such a program, should be avoided to maintain competitiveness with trading partners that have not yet implemented or do not intend to implement these measures.
Yet there needs to be a recognition amongst producers that properly designed, implemented and recognized programs such as HACCP-based on-farm food safety initiatives may help strengthen our position as a safe, clean, properly managed source for agricultural production.
Transportation is another important area, of course, about which the chairman and I spoke briefly.
To properly, effectively and efficiently utilize the NAFTA agreement among Canada, U.S., and Mexico, there needs to be an honest and dedicated review of the transportation issue.
Canada's transportation system was developed to move products east to west. With the need to access markets north and south, the transportation methods and corridors have to be strengthened, with policies put in place that encourage competition and efficiencies in this area, be it recognizing the need for improved roads or allowing more and better access to other forms of transportation.
Railways, for example, continue to lag behind the rest of the transportation system by resisting many of the things that can improve and streamline the movement of products while increasing competition and minimizing transportation costs in a marketplace, which is key to the long-term success of NAFTA for Alberta producers.
The continued success of NAFTA will rely very heavily on the ability to move products quickly and cost effectively to the desired marketplaces.
International borders: With the, at times, perishable products and the ability to capture higher values for premium markets on account of just-in-time delivery and freshness of product, it is important to achieve and maintain an efficient and quick way to transit products across international boundaries.
Untoward delays and loss of transit time can cause serious losses, both financially and in reputation, and to both the shipper and the end user of a product.
It is always important to work towards ways to ensure easier, faster transiting of borders while still satisfying national needs for security and food safety protocols and all other regulatory and customs standards.
A discussion of NAFTA would not be complete without the mention of two other issues. First is the U.S. farm bill and the impact it can or will have on Alberta's crop and livestock sector.
At a recent meeting of representatives of agriculture in Alberta, international trade and the repercussions of enacting the U.S. Farm Bill dominated the session. The summary of the discussions illustrates the depth of concern producers in Alberta have with the present bill.
As it relates to crops, the following concerns were raised: The U.S. Farm Bill will stimulate increased production of corn and soybeans through generous loan margins and, in turn, depress prices and reduce demand for barley and canola.
The development of ethanol plants in the U.S. creates more by-products for feeding. The natural advantage Alberta has in the pulse sector may be jeopardized by U.S. subsidies. There will be a reduced demand for domestic feed if hog and cattle numbers are forced to decline.
As it relates to the red meat industry, producers raised the following points: The growth of the livestock and hog market is uncertain due to obtrusive country-of-origin labelling legislation. This uncertainty may lead to packers and retailers buying Alberta products at discount prices.
Alberta's natural competitive advantage of being a low-cost producer of grains, oilseeds and livestock may no longer exist. The viability of the livestock industry may hinge on the decisions of enterprises, U.S.-controlled enterprises I might add, such as Cargill and IBP, which is now Tyson Foods.
While we can only ponder some of the various complications the U.S. Farm Bill presents to Alberta farmers and ranchers, it is important to remember that much of the future economic viability of our agriculture hinges on mutually beneficial trade policies with the U.S.A.
Alberta farmers and ranchers are willing to adjust and to seek new opportunities, crops and methods of production, but the challenges that the U.S. Farm Bill presents are daunting.
At a time when governments are demanding that our farmers and ranchers become more self-sufficient, possible closure of market opportunities with our largest trading partners leaves the industry in a very precarious situation.
We need a commitment from government, from industry, and from individual producers to allocate resources for developing new markets to reduce our dependency on the American market. We need everyone to work towards ensuring that the country-of-origin labelling legislation remains voluntary. We need to challenge the U.S. and its inward-looking policy and to ensure that they walk the walk of their talk.
I am sure you have heard many times during your meetings in Ottawa and across the country about the issue of water. Wild Rose Agricultural Producers' position is that there should never be a trade of water. There is a dawning realization that water may or will at some point be our most valuable commodity, coveted by the NAFTA trading partners.
We do not feel we have the right to trade away what may be the most valuable thing we can leave to future generations, that is, our water resources.
There are policies that need to be monitored and improved, including cross-border access times and transportation methods. All efforts to increase our competitiveness within the framework of NAFTA should be considered.
In closing, and to summarize my thoughts, the very nature of an accord of this type and its effect on agriculture mean that it benefits the geographical, climatic, political and social strengths of the different partners.
We must capitalize on these strengths in order to fully gain from NAFTA, but with a full understanding that anything that removes or decreases our competitiveness takes away from the benefits of this agreement.
This is a farmer analogy, but the North American Free Trade Agreement is a valuable item in the toolbox of Alberta agri-food producers and processors, but adjustments must always be made in order to gain the maximum usage from, and advantage of, this tool.
The Chairman: I am a little surprised, although it is very interesting, that Mexico, which is an agricultural country, has become a major customer for Alberta farm products. I am sure there is a reason.
I know about the law Roosevelt passed in the 1940s that basically wiped out Mexican wheat production because it made it so cheap for them to buy wheat from the United States.
Is that part of the reason that they lost their wheat production? They have been an importer of wheat since about 1944, but it is a bit surprising that a country with such large numbers of cattle, and which is essentially an agricultural country, is becoming a good customer of ours.
Mr. McBean: Mr. Chairman, from the research I did — and I am in the same boat as Kenton, we are producers — I can probably answer your question.
There are erosion issues. Up to one-third of Mexico's agricultural land is degraded. With NAFTA, and this is my perception, a lot of the manufacturing went to Mexico from the U.S. because of cheap labour.
As I said before, the partners have different geographical and climatic strengths. We are not necessarily exporting wheat to Mexico.
As a personal aside, I delivered some barley two weeks ago that is ``containered'' as being malted and will be going to Grupo Modelo to be made into Corona beer. We are exporting what we are good at. We are not exporting what they are good at. We are importing fruits and vegetables from them. The balance of trade lies in the fact that they need what we have. We have the finished beef.
As Kenton said, the appetite for good canola oil is ever growing around the world. With manufacturing increasing in Mexico, from what I understand, they are attaining a little higher standard of living and their middle class is increasing; therefore, there is more disposable income for food, for meat.
Senators all know that that is the hope around the world, that as certain countries' standard of living increases, they will go from a grain-based staple diet to wanting a little meat in that bowl. That is what we are seeing a little more of in Mexico, I believe.
Senator Setlakwe: Mr. Ziegler, your presentation is very succinct in that it says what I think we all feel, that Canada is a free trade country and we do not like impediments to free trade. We are facing that increasingly today and it is a problem.
You mentioned that problems with non-tariff barriers, if they are imposed, cannot be resolved at the WTO. I say, why not?
Mr. McBean, there is a feeling that American trade impediments are only in their early stages. We have just spent two days in Vancouver, hearing about the bleeding that the softwood lumber industry is undergoing, which is more direct. It is an issue of anti-dumping duties and countervail.
In your case, it is more trade impediments, and I wonder what your views are on what the Canadian government can do about that?
We know that it exists. We know that there is a movement afoot. We are aware of the American agricultural trade barriers that have been imposed worldwide, and I would like to hear your views as to where we should go on this, because it is not a tariff issue. It is a question of impediments to trade, and I think that is more difficult to handle.
Mr. Ziegler: I will attempt to address a couple of your questions. The WTO is our recourse on a tariff trade barrier. It is much more difficult to get them to even hear it when it is a non-tariff trade barrier, so you have to have other methods and other means.
Senator Setlakwe: However, it is not impossible. It can be done?
Mr. Ziegler: Yes, but there is an awful lot of work required to get it there. There probably should be a more transparent and faster mechanism, because those non-tariff trade barriers are just as damaging to our industry and have cost me as a producer considerably more to adhere to.
I hope that addressed the first question.
Second, what can the Canadian government do to deal with this? Quite honestly, I see Canada as being the Boy Scout on some of these ongoing trade issues, and one side of me says no, we should not always play by the rules. Other countries do not seem to be playing by the rules. Meantime, it is impacting us significantly.
When you are sleeping beside an elephant, you probably should not poke it too much, but on the other hand, let's be fair here. We all signed an agreement; let's play by those rules.
Government is in a difficult spot. I sympathize with them over the choices that have to be made there. I am thinking of agriculture, but there are all kinds of other trade issues that our government has to look at every day.
It just does not seem to go in our favour. Bear in mind that this is a farmer speaking. I am not familiar with all the dynamics. It just seems as if we are always on the receiving end of things and there is never any fair play here. Let's have fair trade, and then we can work towards free trade.
Senator Setlakwe: Is the agricultural department listening to you? Are they doing whatever they can to help you out on this issue?
Mr. Ziegler: I would like to think they are. We often meet and bring these issues forward, especially through the Canola Council of Canada. As I mentioned, CFIA is helping us with this upcoming fumigation issue with Mexico.
I believe we have some kind of a rapport there, and we always take the opportunity to speak to them. We are here today because we feel there is value in still communicating our side of things.
As for becoming adversarial, as I said, that is a personal perspective. I am not necessarily saying that the canola commission wants to become adversarial.
Senator Setlakwe: In whose favour is the agricultural trade balance between Canada and Mexico? Are we exporting more, or are they exporting more than us?
Mr. Ziegler: In terms of canola and wheat, we export more products to them by far.
Mr. McBean: I have only researched Alberta's trade. I do not really know about Canada's.
Senator Setlakwe: Forget it, then.
Mr. McBean: As for the Canadian trade, with the fruit and stuff down East, I would be curious to see those figures as well.
Senator Setlakwe: It might be in their favour, and that would be helpful to you.
Mr. McBean: From an Alberta perspective, it is healthy. It is a benefit to us, and if we are the lowest-cost provider, that is a benefit to the consumer.
Senator Setlakwe: However, if they start imposing trade barriers on canola and other products that we produce here in the West, we could do the same across the country with products that we import from them.
Mr. McBean: We can. The sad thing is that it only hurts the consumer; it is children's games.
The Chairman: Just to interject here, I suppose it is our fault, in that we have concentrated so much on the Canada- U.S. aspect of all this that we can quickly come up with the figures on that dimension, but not on the Mexican dimension. It is just the nature of things, but we are obviously going to have to do that.
The committee intends to go to Mexico City, because we have a tendency to go to Washington only and not follow the thing through.
Senator Setlakwe, I am telling our researchers that we are somewhat at fault here, only because we have been working more with the U.S. We have some figures here from Peter Berg, who is our head of research.
Mr. Peter Berg, Researcher, Library of Parliament: These are Canada's trade figures with Mexico for 2001. On the import side we have $441 million, and on the export side, $948 million. There is a trade surplus.
Senator Di Nino: That is not agriculture, though?
Mr. Berg: Yes, this is just agriculture.
The Chairman: This is agricultural trade 1999-01.
Mr. Berg: We had a trade surplus of $500 million.
Senator Austin: We need to drink more Corona.
Mr. McBean: I will vote for that.
The Chairman: I always thought beer was made from barley, but obviously I am wrong.
Mr. McBean: No, you are correct. It is malt barley. I tried to do some research, Mr. Chairman, and Grupo Modelo is the largest brewer in Mexico. They do brew Corona, and they have actually just located a malt plant in Idaho. I was trying to get some background information as to why, but of course they would not tell a small farmer from Southern Alberta about their corporate strategy planning. I suspect it is a transportation issue.
The Chairman: Anyway, I suppose that because they need the barley, they need the barley money. We do not have the information here.
I once did an essay on agriculture in Mexico and Guatemala, and one of the interesting things I learned was that the Americans had a policy in the 1940s to export grain to Mexico so cheaply that the Mexican grain industry was essentially wiped out.
Since then it has always been a large importer; and secondly, of course, the Mexican diet is based on corn. For example, bread has never been a widely eaten product anywhere south of the Rio Grande.
I think these things have an effect on what grains they produce.
I also wanted to ask you, is the fact that they are a huge consumer of edible oils one of the reasons for the increase in our canola exports?
Mr. Ziegler: Yes, absolutely. They love to fry fajitas and other types of food.
I should point out, though, that as the Mexican demographic ages, health becomes a little more important, and they also have more disposable income.
There is a segment of the market that wants to use canola oil for frying because it is healthier, and there is value in that for us.
Currently, only 15 per cent of the canola oil that we export to Mexico or that they crush there and sell is in that higher-value category.
Most of it is just sold off the shelf as vegetable oil. There could be anything in it. Therefore, we are trying to increase that.
Senator Setlakwe: One short question. That canola oil on their shelves, does it carry a Canadian brand?
Mr. Ziegler: I do not believe that any of the crushers in Mexico are using that as a marketing technique at this time. In Japan that is very prevalent.
For example, the Canola Council of Canada is trying to encourage them to label their brand ``Canadian,'' so there would be some momentum and some brand loyalty with the realization that it is such a safe and nutritious oil to use in your home and industry.
The Chairman: I would just like to explain also that it is impossible to cook frijoles, for example, without using a huge amount of oil in order to get the boiling point up, and that is why many a civil war has started over the price of oil.
There have been some terrible accidents with people playing around with cooking oil, because to get the temperature of the beans high enough without evaporation, they have to use oil.
Senator Di Nino: That is a new marketing idea that you just had. You can sell it to the Mexicans as a peace offering from Canada so that they do not have civil wars because of their need for oil. We can supply them with all they need; is that correct?
Mr. Ziegler: That would be correct. Also, they are going to live a lot longer, too.
Senator Austin: So you can sell them more oil.
Mr. Ziegler: Exactly. The longer they live, the more health conscious they get.
Senator Di Nino: Let me get a little more serious. The Farm Bill contains a number of things that we should be concerned about, I think, as exporters to the U.S. One of them, of course, is the country-of-origin labelling.
Mr. McBean, you raised that question in my mind when you talked about your malt being sold to Mexico to make Corona and other beers. You are right; they produce a variety of beers, which are then exported certainly to Canada, but also to the U.S.
Is this an issue that may crop up in the Americans' minds when they buy Corona from Mexico, which they do in large amounts? Is this one of those country-of-origin labelling issues that we should be concerned about in this country?
Mr. McBean: Mr. Chairman, I have not forgotten about the other senator's question. I am burning to answer that.
Senator Di Nino: Answer that one first. It will come out of his time, not mine.
Mr. McBean: That is a wonderful question you asked, and I did not think I would ever be standing here talking about history to a bunch of senators.
You talk about the 1940s, Mr. Chairman. How did America act before the Second World War?
The Chairman: Well, they were, of course, protectionists about 98 per cent of the time.
Mr. McBean: Very similar to what they are doing now, is it not? They were very inward looking, and that is what I, as a simple farmer, see happening in the United States right now.
I think that domestic policies in the U.S. are very protectionist right now, and I am afraid of where this is all leading, because when you act like that you tend to back people into corners and sometimes they come out swinging, as Japan did. That war was precipitated by oil.
Japan was trying to expand, and I am sure I do not have to tell you what started the Second World War, but it was not completely the fault of the Japanese, as we are taught. The Americans had a lot to do with Japan coming out swinging; it was a clash of two empires.
In response to your question, as I said in my speech, the country-of-origin labelling is interesting. It is just another way to introduce a non-tariff barrier.
This comes to me from a fairly expert person and I am going to come at it in a roundabout way. The Americans grow a lot of cattle. It is in their best interest to have the value-added cattle feeding industry in the United States.
The ethanol program, with the extra feeding, creates jobs, but it is in their best interests to try to feed and finish those cattle in the States.
I would not be surprised if they come up with an amendment that says that if the calf is under six months of age, there does not have to be country-of-origin labelling. They can be raised in the States if they are over six months of age to get the feeding and packing industries back. They see those leaving.
In the case of the barley, it is geographical. Alberta, Western Saskatchewan, Montana and Idaho have the best climates on this continent for growing quality malting barley. That is the barley issue.
There are places in Europe that can grow wonderful malt barley, in the FSU, for example, and I suspect that at some point they are going to compete with us.
You see these non-tariff barriers arise when, as I said, there is the political will on a product basis, when they do what we do. They want to retain the market for themselves and they do not want to see cheaper imports coming in. They want to keep the cattle feeding industry in the States. They would do the same thing to Mexico over corn.
Senator Di Nino: Before I get to Mr. Ziegler, let me first of all say, because both of you used a statement like ``I am just a farmer,'' I think it is critical for us to hear it from the source. We welcome you in that capacity, because sometimes, what you hear from the horse's mouth is actually more valuable than some of the expert opinions. At least, your opinions together with the expert opinion can help us make a better judgment.
You said that Modelo is building a malt plant in Idaho. Of course, that should be of some concern to you. I am not sure we can do a heck of a lot about it, but it should be of some concern.
However, what can we as parliamentarians, as senators, say in our report, where we are making recommendations to the Government of Canada, to assist you in protecting and enlarging your market? Or if you are totally happy, that is great. Tell us that as well.
Mr. McBean: I do not think anyone is ever totally happy.
I think I laid it out in the presentation pretty clearly. Everything we do as a government affects the issue, whether it is our taxation policies, our transportation policies, or our competitive nature.
I am sure that all or most of you who came out of business are still involved in business. You know that in business you go where it is easiest to reach your customers, where the transportation roots are strong and competitive.
You do not want to be held captive to one railway. You do not want to be a captive shipper. You want to be somewhere where can reach all of your marketplaces.
As a government and as a committee, I think the best thing you could do to help agriculture in Alberta is do everything possible to effectively improve and maintain our competitive advantage, because NAFTA is just a set of regulations and tools.
It is just like the tax laws. There are a lot of lawyers running around looking for loopholes in NAFTA. All you are doing is making a new set of rules to be broken. That is what they do. We will call it country-of-origin labelling because we need to come up with something new. We never covered country-of-origin labelling in NAFTA.
We have to continually work on these deals to make sure that we are not and they are not throwing up roadblocks.
The border fumigation issue, as Kenton said, is probably not completely directed at Canada. It is probably directed more at the warm countries, but it is still an issue that we always have to be aware of, as well as whatever else they are doing.
As I said, all NAFTA is, is a tool, and if we do not keep sharpening our axe, it will go dull someday and will not chop down trees worth a damn.
Senator Di Nino: Mr. Ziegler, can you comment on the post-September 11 anticipated changes or potential changes, particularly as it concerns transportation? I do not know how you ship your stuff, whether it is by truck or by rail.
Mr. Ziegler: We use all modalities for transporting the seed as well as the oil.
Since September 11, it seems like there is a wall going up around that country, and it is just going to be more and more difficult. No matter what they call it, whatever the semantics some lawyer dreams up, the bottom line is they are becoming more protectionist. How are we going to get through those barriers?
You talked about what suggestions you can make in your report. My caution is if we are talking about what other countries have done with trade and the implications, we had better have our own house in order. As you are aware, there are some interprovincial trade barriers that act as an impediment to trade as well.
We also have to clean up our domestic front a little. Those barriers have an impact on my industry as well. The coloured margarine issue in Quebec is a prime example of that. This is one country and we are part of it. We should be able to ship interprovincially.
Senator Di Nino: You raised an issue that we have heard several times in the last two or three weeks of hearings, that is, we often do not have a unified approach to this and are sometimes creating opportunities for opponents, talking about the Americans, to divide and conquer.
Is this a major issue at this point for you?
Mr. Ziegler: Absolutely. As representatives of the canola industry, we work on our own issues, but in terms of agriculture across the country, we do not necessarily come out with a unified voice.
I will bring up the issue of supply management. It is a healthy sector. I do not see anything wrong with a certain sector of our industry doing well; I wish we all could, but when it is time to come forward with positions, stances and responses, they are very well funded and can come forward with something a lot quicker than the grain sector can, for example.
Ideally, I would like agriculture in Canada to develop that unified voice, and you are right, we sometimes make ourselves easy pickings for other countries.
The Chairman: Just to emphasize your point about the lawyers, I would like to remind everyone that we have been told that the softwood lumber dispute has cost $800 million in legal fees since the 1980s; and I am told that the Wheat Board dispute with North Dakota, which is just starting, has already run up a $5-million legal bill.
$800 million on the softwood lumber issue. That is testimony from the president of the Maritime Lumber Council. In Geneva, Mr. Clayton Yeutter, who is a member of the board of Weyerhaeuser, told me that it was $200 million just for the WTO, but the very able president of the Maritime lumber council said that if you go back to about 1986 or 1987, it would be $800 million. The figures are pretty stunning.
Mr. Ziegler: The Canadian Wheat Board has been challenged nine times already on this issue. This will be the 10th time.
The Chairman: It is $5 million just on this one, I am sure.
Mr. Ziegler: The final bill will probably be closer to $10 million. Just think if we could use all those dollars to actually do something meaningful, like market development or improving our own production capabilities.
It is a waste of time. Lawyers need to make a living too, but why should we be paying their bills all the time?
Senator Austin: It is like the old saying ``you can't get along with them and you can't get along without them.'' The legal profession is a needed service because the other guy has lawyers. However, I am not here to deal with lawyers as a profession.
Mr. Ziegler, can you describe the marketing system for canola?
We have the Wheat Board for grain, and barley in certain circumstances. What is your marketing structure?
Mr. Ziegler: Our marketing structure is basically free enterprise, buyer-seller negotiation and an open market. We do not have specific organizations to market our canola.
Senator Austin: Producers market their own canola?
Mr. Ziegler: Absolutely.
Senator Austin: They search for buyers, individual buyers? For example, you are looking for buyers in the Mexican market?
Mr. Ziegler: I am not specifically looking for that. Ideally, I am looking for grain companies to purchase my canola, and I put out what I produce in an unstructured bid process when I am prepared to sell. When I see the right market conditions, I pull the pin and let the five or six different companies out there bid on my canola and they go out and market it internationally. The Wheat Board is a marketing organization.
When I grow a Wheat Board grain, I can choose whether to sell it to the Wheat Board or not. I am not forced into selling it through the Wheat Board, but it is there as an option.
Senator Austin: For the record, is it your opinion that marketing as individual producers to, if you like, middle-tier purchasers is, from the point of view of the industry, a reasonably successful way to go?
Do you think you are getting your product out into the market for a good price reasonably successfully?
Mr. Ziegler: Yes. That is the short answer. In an open market, just like when you are selling anything else, you are subject to fluctuations, and it takes a fair amount of dedication and regimentation to make sure that you are hitting those markets at the right time. We also have a future's market for canola that helps us to manage some risk.
Senator Austin: I want to pursue a couple more questions in this area. The development of canola as a commercial product, as a Canadian industry, came with government support and assistance.
Is that government support and assistance now finished in terms of new market development, for example, finding further access to Asian markets? Is there any government assistance in marketing, or are you all trying to develop the China market, for example, as individual producers or through middle-tier marketers?
Mr. Ziegler: A number of the international marketing initiatives that we are involved in are co-funded. There are some government dollars there, but it is declining, and rightly so. We have to be careful about where we go and what initiatives we take forward.
As individual grower groups, of which I am a representative, we do fund some initiatives for market development through our national organizations, plus there is the Canadian International Grains Institute. They will bring potential customers over to try to develop markets and tour them around the country.
We have something of a partnership there. There is always so much more market out there, and the more people we have chasing our product, internally or externally, the better.
Senator Austin: I agree. Mr. McBean is against export subsidies, and as we go into the Doha Round, we are very likely to see that government support will be countervailable in many industries.
Of course, there are subsidies on subsidies on subsidies, particularly in the United States.
If I can follow the precedent of the Chair, I will tell you a brief story. I was studying commodity arrangements at Berkeley and took a look at the U.S. cotton industry. That was an unbelievable story.
They were subsidized to grow it, they were subsidized to process it, and they were subsidized to manufacture. At the end of the line, at the retail price level, the garment was paid for entirely by the U.S. taxpayer. That was their political process, and it is not an uncommon one, although often not quite to that extent.
Is the canola industry involved in the Doha Round on agriculture with respect to representations to our international trade department?
Mr. Ziegler: I do not believe we are to any extent at the provincial level, but more so at the national level.
Senator Austin: Your national organization would be involved?
Mr. Ziegler: Yes.
Senator Austin: Do you know essentially what their submission is?
Mr. Ziegler: I am sorry; I do not.
Senator Austin: Are you aware, just generally, what they are asking for from the agricultural round of Doha?
Mr. Ward M. Toma, General Manager, Alberta Canola Producers Commission: Essentially, the presentation that Kenton made would be very similar to the position of the Canola Council of Canada and the Canadian Canola Growers Association, the national organization of the growers.
With regard to issues like market development, yes, government dollars for export subsidies and things like that will become more countervailable.
The U.S. government spends tens of millions of dollars on market development of their products. The Canadian government has been not as generous, but has made significant contributions through matching investments of the grower groups and of industry.
The Canola Council of Canada has received significant dollars to run a national program. We would urge that those funds not disappear and could be strengthened. Government dollars for agricultural research and industry research in general is non-countervailable. The U.S. puts a lot of money into that, as does the Canadian government.
We ourselves have had a longstanding arrangement with Agriculture and Agri-food Canada through their research institutions here in Alberta. Our money has been matched several times, amounting to several hundred million dollars over five years, and the farmers are benefiting from that research.
More money should be used in that way. Those budgets should not be cut.
Senator Austin: Mr. McBean, I will go to a key point that you made in your paper, essentially with respect to the farm bill. You said that one of its principal consequences will be the stimulation of new productivity and, therefore, subsidized supply into the U.S. market, which will have a highly negative effect, even on producers who are entirely in the private marketing system.
As an exporter of barley into the U.S. market, do you see that happening to the Alberta barley producers?
Do you see your competitive position eroding as a result of highly subsidized U.S. domestic products?
Mr. McBean: Senator, as I understand it, what you are referring to is called the loan deferral program, LDP. Any time that there is a subsidy or an impetus to grow something for reasons other than economics, people often turn to substitute agricultural products. If the loan payments support growing more corn than beans next year, the extra corn will replace other products. Southern Alberta this year is a really good example. The extra corn from the U.S. comes into Southern Alberta and displaces the feed barley. All of a sudden, there is more feed barley around; there is more malt barley. The price of malt barley falls.
A program like the LDP is going to have ripple effects on the big pond somewhere.
Senator Austin: The key problem in the farm bill for Canadian agricultural producers is that it will stimulate overproduction, but in the U.S. they have a production removal subsidy.
Mr. McBean: You are talking about the conservation set-aside program?
Senator Austin: Yes, exactly. It will stimulate them to produce, they will opt to produce, and then they will be eligible to be subsidized not to produce.
Mr. McBean: You go with whatever pays you the most, which subsidy pays you the most.
Senator Austin: Or both are possible.
Mr. McBean: It is called farming the programs. I am an Internet fan and I look around the farming sites and talk to the American farmers. ``What are you growing this year, beans or corn?'' ``Well, the LDP supports beans.'' That is going to hurt the canola.
Senator Austin: Let me come then to the role of the processors, because they will ultimately take ownership of your commodity, process it and then move it through the supply chain.
Does the Farm Bill make the major processors in the United States more profitable because there is more supply? I think I know the answer, but I want your view on the record. That is what lawyers do.
Mr. Ziegler: If I am a processor of anything, the cheaper I can buy my raw material, the better.
Senator Austin: Therefore, this whole farm bill subsidy system just works brilliantly for processors, right?
Mr. Ziegler: It is such a convoluted program. It is so subject to manipulation, and we cannot blame the farmer for using the system to decide whether to set aside or to overproduce. It is just the way we try to make our living.
Senator Austin: However, in the U.S., the farmer drives the political process that drives the policy.
Mr. Ziegler: Yes, and there is an election every two years.
Senator Austin: Therefore it is highly political. We are not dealing with a rational economic system in the United States.
Mr. Ziegler: I can see no rationale behind it. It seems that lobbying drives the policy. Whoever has the most effective lobby position, on softwood lumber or you name it, drives policy. That does not make sense.
I can maybe take this a little further here. There are also humanitarian aspects to this overproduction in terms of what it is doing to Third World and developing countries. I am just starting to read a little about that. My goodness, this is messing up the whole world. This is a big mess and it needs to be shut down.
I go back to Brent's comment about that sandbox and people fighting over things. Let's simplify this and eliminate some of this stuff, because it has huge implications for us as producers, for our country, this industry, and other countries around the world.
Senator Austin: If you are an optimist, you may believe that it will go somewhere, but we need a world standard system for agriculture.
Mr. Toma: Further to your question, it has often been said that the U.S. farm bill has been determined to be a subsidy to U.S. industry; however, one of the major crushers in the world has closed 10 plants in the United States and opened plants in China because of the differential tariffs.
It pays that company to do that. That company makes more money crushing beans in China than in the United States, so they prefer to export the beans to China.
The subsequent long-term effects of the U.S. Farm Bill on farmers like Mr. Ziegler and Mr. McBean in terms of Canadian government support are based on history.
The long-term problem is that it negatively impacts prices and revenues at the farm gate, which gets billed into Canadian government support levels and safety net designs.
Therefore, the Canadian farmer is constantly under the gun to find another way to compensate for what is generally an injury caused by trade, because there has been no compensation from the Canadian government. The Alberta government has made an attempt recently to try to address that for the future.
Perhaps a successful conclusion to the Agricultural Policy Framework will try to address that, but I am not too hopeful in that regard, unfortunately.
The Chairman: I want to thank our witnesses. I cannot help but ask how much the U.S. agricultural subsidy costs. The Treasury pays for it.
The pressure in the European Union, of course, comes from the fact that it is the largest single cost. I was told that the largest single agricultural subsidy was for Greek tobacco farmers, but the pressure on the EU is the cost of the entire system.
It does not come out of thin air. Money does not grow in fields. What is the cost of that most recent subsidy in the U.S.? What is the cost to the Treasury?
Mr. McBean: I think it worked out to Can. $108 billion.
I think we all realize sitting around the table here that the trade issue in food is much more complicated than the trade issue in oil, or any other trade issue that we face, because you can do without everything else but food, and most of these countries realize that.
That is why it is such a convoluted issue and very difficult to solve. Also, I want to say on the record that I was not disparaging lawyers at all. I guess I should have said, ``tax accountants.''
The Chairman: I think we should just stop this line about being simple farmers because you are two extremely good witnesses who are very knowledgeable about the problems on farms.
You have been excellent witnesses. On behalf of the committee, I want to thank you for coming to talk to us. We will take your observations very seriously when we go through our material at the end of this week's tour.
Honourable senators, our next witnesses are Mr. Pierre Alvarez, President of the Canadian Association of Petroleum Producers; and from the Canadian Energy Research Institute, Dr. Phil Prince and Mr. Peter Miles.
I know you are very experienced at this sort of thing, so perhaps you could give us a synopsis of your views and leave time for questions, because the questions have been quite extensive since we started in Vancouver on Monday.
[Translation]
Senator De Bané: May I suggest that each one of our distinguished guests briefly describe the organization they represent?
[English]
The Chairman: If you could also just give us a brief description of the organization that you are representing.
Mr. Pierre Alvarez, President, Canadian Association of Petroleum Producers: Mr. Chairman, the Canadian Association of Petroleum Producers is the industry association representing 98 per cent of the production in Canada. Our membership includes the Arctic explorers, the oil sands producers, the East Coast developers and the conventional industry. While we do a lot of traditional industry association work in terms of government and public affairs, I think we offer a unique perspective on some of the issues before the committee today because we also do the vast majority of the regulatory work, both in Canada and the United States.
We are very active before the National Energy Board, the Federal Energy Regulatory Commission, the California Public Utilities Commission and such, and have been very active in the development of policy on both sides of the border since the advent of the open borders in the 1980s and deregulation, which occurred roughly about the same time, in the post-1984 period.
The thesis that I am going to put in front of you and that is contained in our presentation today, senators, is that I think it would be hard, if not impossible, to find a sector which has seen such tremendous growth in response to public policy.
In fact, I would argue the signing of the Free Trade Agreement and the deregulation of energy markets in the late 1980s have probably been the most successful pieces of public policy ever in Canada. At a minimum, it is equal to that of the Auto Pact of the early 1960s and the growth that we saw then.
I am going to take you through a few slides to give you an idea of the size and scope of the industry and then touch on some of the issues that affect us.
I think you have these slides, and we will flip through them quickly.
If you look at the first slide, regarding our trade balance, you can see that sales of oil and natural gas make a tremendous contribution to Canada's trade balance with the United States. Obviously, that is partly in response to price, but year over year, you can see that our sector represents a very significant portion of the trade balance with the United States.
If you were to include electricity sales, that number would be significantly higher. You can understand that, for example, in an industry that will have revenues in the range of $60 billion-plus this year, there is $30 billion-plus in sales flowing directly to the Canadian economy, with its intended impact on the balance of trade and the value of the Canadian dollar.
You can see that the growth really took off in the early 1990s, and that is partly because technology allowed us to develop new resources and reach new and different markets.
The bottom of page 1, the slide called ``Employee Productivity,'' shows you that with the advent of new technologies, we have been able to continue to grow our productivity per employee almost without fail.
The Chairman: Could you tell me the difference between ``total Canadian'' and ``upstream,'' just so it is on the record?
Mr. Alvarez: Total Canadian would include all parts of the economy — autos, trees, or manufactured goods. Upstream is the upstream oil and gas industry. Those are our sales of crude oil, natural gas and sulphur into the United States marketplace.
Senator Di Nino: We are talking about trade balance here.
Mr. Alvarez: Trade balance, that is correct, senator.
If you look at it a slightly different way, on slide number 3, the labour productivity in 1989 — and this is being updated by Industry Canada we understand, but the numbers have not changed — you can see that compared to other industry sectors within Canada, the oil and gas sector is more productive.
If you compare us to our United States peers, which is the line entitled ``United States,'' we are significantly more productive. That has allowed our sector to continue to grow every year since the mid-1980s, and to give you a little snapshot, on the bottom of that second page is the chart entitled ``Sizing Up the Energy Economy.''
This year, we expect revenues within the sector of about $65 billion. Of that, $3 billion goes to general administrative expenses; $18 billion goes directly to governments, and I will talk about that in a little more detail in a moment; $6 billion is paid out to shareholders or leaves Canada in terms of our members' investments in other parts of the world; but the vast majority, 90 per cent, remains in Canada and is reinvested.
You can see there are $24 billion in capital expenditures and $14 billion in exploration and operating expenditures, and those are reinvested within the country at a rate of in excess of 90 per cent. The money keeps going in a circle.
If you turn to the next map, entitled ``Industry Capital Spending,'' you can see roughly where those capital dollars are spent in Canada.
In the Western Canadian Sedimentary Basin, the place of traditional pumpjacks and gas plants, we will see expenditures this year of somewhere between $16 billion and $18 billion.
The oil sands in the Fort McMurray area will represent another $5 billion. The East Coast offshore should be close to $1.5 billion this year, but the big question mark there, and some of you may have read about it, is that one of the projects that had been scheduled for regulatory review this year has been deferred. However, we expect to see a record amount of exploration activity in offshore Nova Scotia.
Northern Canada has seen a steady growth each year, and if accounts are correct and a Mackenzie Valley pipeline moves towards greater regulatory certainty and project approval, I would expect that number to increase significantly.
Finally, as you can see, the international expenditures have grown each and every year. The vast majority of that goes to the Gulf Coast, Alaska, and one or two other countries in the Middle East.
Another way of looking at the growth of the sector is through payments to government. If you look at current Canadian oil and gas industry taxes and royalties, you can see the steady growth in response to price increases over recent years.
What is also important to note, however, if you look at the dark bar in the middle, is the contribution to the federal government through federal corporate taxes. The big growth there is as a result of the fact that the industry has become far larger and far more profitable, and the tax pools are no longer allowed to shield income.
We will expect to pay in the range of $5 billion to the federal government in taxes, with an additional $13 billion flowing directly to provincial governments through taxes, royalties and land sales.
If you turn to the next page, you can see that the reason for that growth is quite simple. With access to the United States market and new technology, we have been able to significantly increase our sales.
Natural gas production has increased every year since the early 1980s, and in some years, quite spectacularly. That is largely driven by the electrical industry in the United States, where they are switching from things such as coal to cleaner-burning Canadian fuels.
You can see at the bottom of that page that Canadian crude oil production continues to grow every year. The main reason for that is the technology allowing the development of the oil sands.
Many of you will know that it was long predicted that development of the oil sands would be too costly to be economic. Those reserves, which rival those of Saudi Arabia, are now in full-stream production, and we expect a number of new projects over the coming years.
The point that I wanted to make, senators, is that that would not have happened without deregulation and the elimination of price controls, both here and in the United States. I address that specifically in our submission, and it is not just a criticism of Canada. In many parts of the Western world — and Phil is probably in a better position to talk about this than I — we saw a very strong government presence in the marketplace. Prices were capped and activity was artificially constrained.
With the Free Trade Agreement, the North American Free Trade Agreement and deregulation, companies were now prepared to enter the North American marketplace in a far more aggressive way.
The U.S. provided markets for projects that simply would not have been possible in a purely Canadian market. It was too small a market when you looked at the size of what was at stake.
The best examples in the oil industry are the oil sands and the Sable project on the East Coast. The population base and the economies in those regions simply are not large enough to sustain the type of activity and production that you need to bring those on stream. Those have been huge and very important economic development opportunities for those communities, as well as providing significant growth opportunities for the Canadian industry.
Where are we today? I think we are in a position where both governments recognize the importance of open borders. We have seen, from our point of view, very positive interaction between regulators in Canada and the United States on the development of new infrastructure.
Pipeline requirements have been coordinated while both regulators have done their own work. They have tried to simplify the processes and ensure that time lines are similar, which has allowed us to bring on new infrastructure quickly and with a minimum of regulatory lag.
As we go forward, clearly issues of North American energy security loom large. There is no question that the American administration views Canada as an important element in its own energy security.
You can understand the interest if they can count on Canadian crude oil shipped via pipe as opposed to Middle Eastern oil shipped via tanker.
From our point of view, we have a resource that far outstrips our ability to consume it in any reasonable time frame, and which therefore offers us a tremendous opportunity.
I believe that our opportunities will remain very robust in the years ahead. We continue to see strong interest from the pipeline community in expanding into the North. We are seeing new forms of industry, such as coal bed methane. We are seeing tremendous growth in British Columbia.
Senator Austin may know that we now account for more revenues to the Government of British Columbia than the forest industry — $1.7 billion last year, which is a considerable change from the $500 million that had historically been the case.
Our challenge, I would argue, is to keep a sound trade policy environment in place while addressing some of the issues that we will need to deal with domestically.
There are concerns about taxation levels in Canada and the way that Kyoto is going to be implemented. In the Canadian industry you are competing against investments in the Middle East; and with finding and development costs of $2 in Yemen, and $12 or $13 in Northern Alberta, you can see the need to remain competitive across the policy field.
In closing, I come back to my thesis. We have a sector that is now active in 11 of the 13 jurisdictions in Canada and spending record amounts of capital, driven by technology.
I think we are truly one of the success stories of free trade and deregulation. As I say in the paper, that is not just from the producer point of view. Study after study shows it also works better for the consumer.
The Chairman: Thank you very much.
Dr. J. Philip Prince, President, Canadian Energy Research Institute: Mr. Chairman, I represent the Canadian Energy Research Institute, along with Dr. Peter Miles, who is the senior vice-president of research for our institute.
The Canadian Energy Research Institute was established in 1975 to provide an independent source of analytical capacity in the energy sector for the benefit of Canadian governments, industry and the public. We have since then produced hundreds of studies, research monographs and so forth on the energy sector.
Dr. Miles will give the introductory presentation. I wanted to introduce him and to emphasize that we are an objective, independent economic research and education organization.
It is not normally our role to try to address policy. It is our role to try to assist those who are making policy by giving them good background information, and that is what we hope to do for you today and also answer any questions you may have.
Dr. Peter L. Miles, Senior Vice-President, Research, Canadian Energy Research Institute: Mr. Chairman, we did manage to produce our pictures in colour. Technology was working for us today, and I have passed out some opening remarks accompanied by some charts.
Of course, as Phil said, I will be happy to answer your questions, but like him, I want to emphasize that we do not profess to any expertise in matters of trade law.
That said, let me just make a few observations about the evolution of the Canada-U.S. energy trade in recent years, and really I am echoing Pierre's comments about the enormous growth since the mid-1980s, when deregulation of the hydrocarbon industry occurred.
As you undoubtedly know, both the oil and gas trade were heavily regulated, as were domestic prices, in the late 1970s and early 1980s. That was true on both sides of the border, to different degrees and in different ways, and it had an extremely inhibiting effect on cross-border trade.
Today, of course, both oil and gas exports are effectively deregulated. It is true that an exporter still needs an NEB authorization, but I think it is clear that that does not involve any onerous requirement and that hydrocarbon trade is effectively deregulated, as is trade in electricity.
The principles of unrestricted trade are essentially embodied in the North American Free Trade Agreement, and they are the same ones that were initially formulated and included in the Canada-U.S. Free Trade Agreement of 1988.
Since 1987, gas exports from Canada to the U.S. have grown from about 1 TCF a year to some 3.7 trillion cubic feet in 2002. About 60 per cent of our gas production is exported, and remarkably, I think, Canadian natural gas now accounts for some 17 per cent of the U.S. consumption.
During the same period, oil exports have more than doubled to some 529 million barrels in 2002.
Electricity is a little different. It has its own idiosyncrasies, and electricity markets, of course, are only now being restructured, and even then, not everywhere in North America. I think it is recognized that there is a lot of work to do in harmonizing the regulation and integration of electricity networks on both sides of the border.
I do not think that is a trade policy issue so much as it is a regulatory issue, and as I understand it, is subject to considerable intergovernmental discussion and, probably, negotiation right now.
The subject of trade, although it has been quiescent, I think, since deregulation in the mid-1980s, was raised again about a year ago by the U.S. administration following publication of the report of the National Energy Policy Development Group.
That report noted that Canada's deregulated energy sector had become the U.S.'s largest overall energy trading partner. It is interesting that energy is still a bit of a hot potato when it comes to trade matters.
I do not know whether you have had a chance to look at that report, but I found it interesting that the first seven chapters talked about the desirability of reducing dependence on imports and increasing energy self-sufficiency.
It was only in chapter 8 that one read about the integration of the North American energy market and the view that integration should be fostered and developed even further.
In my view, again with the notable exception of electricity, it is hard to imagine how there could be closer integration or freer trade in energy than presently exists.
I think it is an area in which one always has to be vigilant, and of course in this country the shoe has been on the other foot. We have been concerned not so much with imports of energy but rather, given our size relative to that of the U.S., with the possibility that energy exports could, in some sense, be detrimental to the national interest. As we all know, Canadian history is replete with attempts to devise policies to foster east-west communication and trade to counter the, in some cases, more natural north-south economic gravity.
That, of course, is not government policy now, and as I mentioned, the governments of both countries are restricted in what they can do by way of trade policy by the NAFTA provisions.
It does seem to me as an informed layperson, and again not being an expert and not wishing to get drawn into a discussion of what the NAFTA provisions do or do not mean, that the energy provisions of NAFTA are widely misunderstood in the public domain.
One occasionally reads stories in the newspaper to the effect that those provisions require Canada to allow the U.S. to have access to X or Y per cent of our energy production. Of course, that is not true. They do restrict the ability of governments to interfere in energy trade, which is quite a different matter from guaranteeing that the U.S. has the right to this or that number of gas molecules or barrels of oil.
I will also offer the observation that that lack of understanding may jeopardize public acceptance of our trading agreements. At the very least, I suggest they inhibit accurate public discussion of energy trade matters.
Now, if I can move on from those general comments, the charts that I have prepared all have to do with natural gas markets. My guess is that if the benefits of unrestricted energy trade were to be called into question, it would be with respect to natural gas. Therefore, I want to conclude by offering some observations on recent developments in natural gas markets.
Charts 1 and 2 provide some perspective on recent price developments. We can note in chart 1 a tendency for gas prices to drift upward over the past few years. Prices in Canada and the U.S. do track closely, except for the mid-1990s when there was a constraint on pipeline capacity out of the Western Canada Basin.
Gas prices were particularly high in 2000 and 2001, reflecting what some have referred to as a ``perfect storm'' in natural gas markets: a very cold winter, low storage and high demand, to some extent related to the coming on stream of increased electricity generating capacity that used gas as a fuel.
It is also interesting, I think, to note in chart 2 that, in real terms, natural gas prices now are at about the same level they were in the early 1980s. It is not as if we are at a point where prices are higher than they have ever been.
I do not want to make too much of that, however, because as we all know, in the early 1980s, prices were highly regulated. That provided a strong incentive for producers to find more gas, and an equally strong incentive for consumers to conserve on their use of natural gas, so we developed a large excess of productive capacity.
The price increases in the past couple of years reflect strong demand and a levelling-off in supply. Chart 3 just shows the trend in gas supply in Canada relative to the amount of gas drilling. Drilling has tended to continue to increase; production has tended to level off. That is providing fodder for considerable discussion these days.
The next chart, chart 4, is a bit fussy, but I find it a rather interesting way of summarizing what has happened recently and what some people are saying is likely to happen in the future.
What it does is show on the vertical axis the gas price plotted against the amount of gas production in Canada. I will not go over the whole of the history, but you can see that for a number of years following deregulation, prices tended to be flat; production tended to increase pretty substantially. In recent years, prices have tended to increase; production has tended not to increase very much.
Now, those who try to project, who try to forecast, and I have included here the two most recent sets of projections by the National Energy Board, are saying that they now think that growth of production will be smaller than they did a few years ago and that prices will tend to be higher.
The final point that I want to make vis-à-vis Canada and the U.S., if I were to show you a similar chart for the U.S., the relationship would be basically similar. Given the projections for gas demand in the two countries, it is interesting to note that there is a sharp divergence between what the Canadian analysts are saying with respect to the export capacity of the Canadian gas industry and what the Americans are saying. I am looking at chart 5 now.
The NEB, for example, is talking about the potential for a drop-off in exports of natural gas, whereas the United States Energy Information Agency, in their latest projection, sees continuing increases.
Now, I do not want to make too much of that. I do not know this, but I suspect that one or both of those agencies is not taking the whole North American picture into account. Clearly, the different results have to be either a function of different methods of doing the projection or different assumptions underlying the two analyses, and I have to say that we have not done any work to try and sort out why they are different.
I just want to conclude by saying that it is critical to understand that in an integrated market such as we have in North American natural gas, the three elements, natural gas production, demand and price, have to be, as we economists say, jointly determined. You have to look at all the demands in North America and all the production, and those production and demand factors will jointly determine price.
I suspect that a lot of people examining markets do not do that. It is a difficult and complicated thing to do. Most people probably do not do it, and that is why you are seeing these different assessments.
They are jointly determined, and it is not correct to say, as has been said in some quarters, that natural gas exports are in some sense determined by American needs. They are partly determined by that, but partly by a whole bunch of other factors.
Senator Setlakwe: My question is addressed to Mr. Alvarez and Dr. Miles. Things seem to be going extremely well for the oil and gas industry in Canada, and we do not have any major differences or conflicts with the United States.
You have said in your presentation, Mr. Miles, that Canada's sustainable-development-based energy strategies contribute to the health of the NAFTA economy and of our shared environment, and further, that a group recently established by NAFTA has developed closer energy integration among Canada, Mexico and the United States.
That seems to be working very well because there is a demand in the United States. There is a need for Canadian energy exports, be they oil, gas or electricity.
However, we have problems in other areas of trade with the United States and Mexico, mostly with the United States, and I wonder to what extent the Canadian petroleum and gas industry is not only aware of that — I am sure you are — but to what extent your policies and your influence with the Americans can help resolve them?
Mr. Alvarez: The one area, senator, where I think we could use more cooperation, by the way, is probably on the energy research and development side.
If we are going to continue to make progress on environmental issues, whether it is clean coal technology or new transmission, those kinds of things, if there is an area that I think is lacking, it would be in closer integration of R & D efforts on both sides of the border.
I just add that to your list.
Clearly, we are aware of the difficulties being faced by other sectors, and we have often said that the benefits of truly open borders are clearly demonstrated by the experience in our sector. We have tried to state to policy makers on both sides that if there is a case study on how to do it right, we think we are it.
On the other hand, there are those who have suggested that we should start linking some of these issues. That is not something that we in any way endorse. Linking issues like that rarely leads to positive benefits. In fact, they generally tend to further heat up the debates.
I think we share a great deal of the concern, particularly with the forestry industry that we work alongside in many parts of Western Canada. We share roads and facilities. Increasingly, we are also picking up forestry employees who are unfortunately not working right now.
We are well aware of it, but we are very concerned about any direct linkages simply because, (a), we do not think it will be effective; and (b), you do not want to set one off against the other, because lord knows where it will stop when it starts to spiral upwards.
Mr. Miles: Mr. Chairman, the only observation I would offer is that, in contrast to some of the other sectors that Senator Setlakwe may have in mind, the energy sector is characterized by a free and competitive market. There is probably less government intervention in oil and gas than in some of the others.
Any time there is intervention, then there is room for suspicion that markets are not working in an unfettered way.
The Chairman: Is not the real issue with energy that the Americans have a deficit? They have used up their own energy supplies. They are totally dependent on finding new supplies — from Venezuela, which must be giving them great concern, Mexico and us.
In a way, we get a free ride because they need it and we have it. Is not that the situation?
Mr. Miles: I would say, partly, but think, for example, about the energy bill. It did not get passed in the last Congress, although it may be resuscitated. It had provisions that would have effectively subsidized the construction of a pipeline to bring Alaskan gas to the U.S.
The Chairman: However, would it not have to come across Canada?
Mr. Miles: Yes, but that could bias decision-making in an uneconomic way.
Mr. Prince: I would like to comment on the notion of linking these areas. From an analytical and objective viewpoint, my principal concern is that these individual businesses are each very complex in their own way, and it is very difficult to thoroughly understand the nuances and the issues that the Americans raise, for example, in softwood lumber, and compare them to things that might happen in the oil and gas sector.
It would seem to me that it would be very difficult to try to link one situation with another appropriately. It is probably better to let the individuals in each industry who are very knowledgeable deal with the issues.
Senator Setlakwe: I understand what you are saying, but my concern is that here we have a situation where the Americans desperately need our products, yet there are other areas where they feel they can do without them for either a temporary or a permanent reason.
Even if you exclude linkage or trade-offs, nevertheless, you have contacts among Americans, you speak to them and you are aware of our problems. Do you mention our other problems to them? Is that a subject of conversation?
Mr. Prince: For me, at least, that is sometimes the subject of informal conversations with people in the United States. However, formal presentations are normally made on a specific topic, and it does not vary. It does not get raised.
Mr. Alvarez: Senator, it is interesting to note that it was only five years ago that we were before Senator Max Baucus on the Hill in Washington when he was strenuously objecting to these imports of subsidized Canadian natural gas.
Through the early 1990s, we had a very vigorous and aggressive campaign to deal with some of our own issues regarding the United States.
We have been strong proponents of the way that open markets have benefited us. We pointed out regularly that there are examples of where regulators can deal with technical issues on both sides of the border to the advantage of both.
We do remind the Americans that it was not that long ago that we were the ones facing countervail investigations.
We are familiar with the point and we do discuss it, but we are concerned about how governments get engaged in trade battles, because it is not just countries that get hurt, it is individual companies as well.
Senator Austin: As you have said, the shape of the industry has changed quite dramatically over the years. The perception today, I think certainly in Ottawa, is one of affording the ``national treatment'' to the U.S. in our gas and oil sectors under NAFTA.
In other words, their buyers are treated as Canadian buyers, and the sellers are treated as sellers, and there is a continental market in the energy system.
I do not think that there are misconceptions amongst the policy makers in the system. I cannot take responsibility for editorial writers or some other people.
I would like to explore two subjects with you. One relates to Kyoto, and the suggestion that Canadians have made that when we supply the United States with relatively non-polluting clean oil and low-sulphur oil and natural gas, there should be a Kyoto premium attached to these products. We get no credit, as you know, from the Kyoto system for producing these products.
In fact, they are charged to us, to the extent that they are treated as pollutants, and the oil sands are high on that calculation. They are charged against Canada under Kyoto, and yet we are transferring the environmental benefit to the U.S. consumer and paying for it at the same time.
I wonder if you would respond to that perception.
Mr. Alvarez: Your depiction is quite correct, senator. I would add, though, that I think we should remember that our contributions to clean energy have also played a significant role in air quality improvements along the Canada- U.S. border with the substitution of natural gas for coal. A lot of those clean-energy power plants and industrial facilities have benefited not only the Americans, but since air does not recognize borders, have also had a tremendously positive impact on Canadian air quality. I know you are well aware of that.
Your characterization of the credit for export I think raises two issues. I have raised it with United States officials, and they more or less said to me, ``Well, we will take the charge until we get the jobs and the royalties that go with it,'' which is a bit of a flippant response, but I think it does put into context the fact that there is a CO2 charge that goes with it. There is also a tremendous uplift in terms of economic activity, productivity, jobs and investment here in Canada, with half a million Canadians working in the oil and gas sector.
Those benefits are not restricted to us. Anywhere from a third to 50 per cent of the economic activity associated with an oil sands plant comes out of Ontario and Quebec — steel, cars, trucks, and those kinds of things.
I think your point, though, does address a very important issue. A fundamental flaw in Kyoto is that because it does not have global coverage, because some countries are in and some are not, an imbalance is occurring.
The most pronounced one is between Canada and the United States. There is no doubt about it. We raised the issue throughout the Kyoto debate, and it is further excacerbated by the fact that the Canadian oil and gas industry is the only one in the world with a target to reduce submissions.
None of our competitors have that. The Venezuelans do not, to pick up on another senator's comments, nor do the Mexicans or OPEC. None of those countries have those charges, yet we still have to compete in a marketplace where we do not set the price.
Your point is a good one, and it is one of the flaws that are the result of the Kyoto process not being a truly global agreement, but rather a very selective agreement with very selective coverage.
Senator Austin: It is a conceptual issue, but it is one that I put aside and treat, as you say, with a considerable degree of flippancy, the economic benefits argument that does not deal with the environmental issue.
Without our energy, there would be fewer jobs in the United States. There is higher-cost economic activity in the United States. The game plays itself to neutral in that argument.
We are still in that strange situation that you mentioned, Mr. Alvarez, where we are conferring an environmental benefit on the United States, far from the border in many cases, and paying under Kyoto to do that. I do not know if there is a solution to our problem, but we definitely have one.
Your oil and gas sector is not currently a problem at NAFTA, and I hope it never becomes one, but there is an aspect to the U.S. demand system that relates to Mexico. We will see the Mexican economy experience serious stress in 2005, 2006, 2007, where they simply will run out of energy capacity.
Their electrical system is almost in chaos today and their oil and gas industry is stressed, and yet they have enormous shut-in gas reserves, non-associated gas reserves in the Bergus Basin and other reserves in the Gulf of Mexico.
I wonder whether, in a NAFTA context, the Canadian oil and gas industry has any views on what may be expected from Mexico with respect to their own requirements and with respect to their dependency on the United States for natural gas.
Do you see the Americans tolerating that dependency when their own shortages of supply in the South are increasing, so that the transportation costs to get gas from other parts of the United States raises the price of energy there?
Mr. Prince: I am not sure that I can cover the entire breadth of your question, senator, but the Mexican situation is very difficult because their constitution does not allow foreign companies to come in and develop their reserves.
I think that the situation that you have described is going to put a lot of pressure on them to change that. In the past few months, they have attempted to introduce a service contract approach to having foreign companies come in and develop their reserves.
I am relatively skeptical about whether that will be really successful in addressing the full scope of their problems. Therefore, I think that eventually they will have to review that historically difficult situation that does not allow for foreign capital to develop the reserves for them.
Those are private arrangements between Mexican and American companies, and I am not sure what the United States might do, other than talk to the Mexicans further about the potential for opening their market to foreign capital.
After all, that is, in a sense, how Canadian resources were developed in the early stages. It worked because we had compatible market systems at the time and it has been very beneficial for us.
This is a very emotional issue for the Mexicans and it is not going to be very easy to resolve it. I do not think it will be resolved by 2006 and the pressure will start to build.
Senator Austin: The Cheney report, if I can call it that, has not been moved along as quickly as I think the administration thought it would be.
Could you give us an update on where you think it is in the U.S. policy structure today, particularly as it affects Canada?
Mr. Alvarez: I happened to be there, quite coincidentally, on Capitol Hill the day the report came out.
I think you can cut it into several slices, senator. One is the ANWR issue. As you know, the opening of the Alaskan Natural Wildlife Reserve was a very significant part of it.
I think it is well known that that issue is stalled, that there is an attempt to find some kind of compromise, but there are a number of senators, including Republicans, who do not support that initiative. Therefore, it is ``in the system,'' as it were.
The second big component was the Alaskan gas proposal, as you well know, and which involved huge market subsidization. That has gone back to the companies to re-examine how a project could proceed without as much direct market intervention.
One of the big concerns was that there was a price-support mechanism built into the assistance. It was not just an issue of loan guarantees or accelerated capital costs. There was an actual market intervention.
Senator Austin: It was a price maintenance system —
Mr. Alvarez: Absolutely.
Senator Austin: — in order to amortize the investments on that pipeline, which would have what kind of impact on Canadian gas producers?
Mr. Alvarez: Well, it is an interesting question, because when you bring 5, 6, 7 BCF of gas a day into a market with one swing of a switch, it is going to, at a minimum, have a short-term impact. I will leave that to these guys to answer.
Two or three other parts of the energy bill are of note. There was a big push to open up more of the Rockies and some of the offshore areas, which has met with absolutely no success.
Probably the greatest success has been on the R & D side, where the Cheney report talked a lot about alternative fuels and new energy sources — ethanol, hydrogen. That is the area where there has been the greatest sustained interest from a broad coalition of legislators and where there has been actual progress, including in the recent State of the Union address, with a massive injection of capital into the hydrogen side.
I think, senator, the rest of it has not progressed very far.
Senator Di Nino: There is no question that the sector that you represent, Mr. Alvarez, has probably had success at least equal to the Auto Pact in the trade relationship with the U.S. I think you refer to it as the ``integration'' of the industry.
We have heard witnesses talk about further integration, or silent integration, or an ongoing process of potential integration. A number of people have questioned the potential impact on our sovereignty, and I wonder if either or both of you can comment on that.
Mr. Alvarez: Of the major projects, senator, that have come through recently, the two best examples are the Alliance pipeline, which goes from Fort St. John down to Chicago, and the Sable offshore pipeline, which goes from the Sable platform, which is about 200 kilometres offshore from Nova Scotia, down into the Boston market.
Both of those serve Canadian and U.S. customers. Both of those went through completely separate environmental regulatory reviews and both were licensed by the national regulators; but there was a concerted effort by regulators on both sides to schedule hearings, information requests and so on so that the applicants could proceed in a logical way, and it worked extremely well.
We did not feel that Canada was losing any sovereignty in that. The role of legislators and regulators on both sides was fully respected, and I think we ended up with better reviews and better approvals, by the way.
There is always a concern in any trade arrangement that you are giving away something; that you could have got more from somebody else. That is always a risk, but I think that is more of an economic argument than a sovereignty issue.
It is not an issue that we are concerned about. Canadian companies are now having tremendous success internationally. We do not want to see our companies fettered, so we should not fetter others.
My view is that this is not an issue of concern, particularly when we look at the benefits to the U.S. economy of working with Canada and, reciprocally, Canada benefits from a strong U.S. economy.
Mr. Prince: I do not have much to add. I generally agree. The one thing I might say, though, is if you look at it from the other side, if you postulated a situation where we restricted the use of our resources to the market within Canada, then we would have many more years' worth of supply available for Canadian use; but then we also get into a situation where we are putting the value of those resources in future years at risk, when other sources of energy become available that are perhaps cheaper.
It is not an easy question. When you start interfering with the market's capacity to project into the future, you have to have a pretty good crystal ball, or else you might get the wrong answer.
If we restrict the use of energy, and then hydrogen power comes along and oil and gas become very much less valuable, then we have lost all that development capacity along the way.
It is not an easy strategy to adopt.
Senator Di Nino: One other point, we have heard several times in the last few weeks that we have been at this that maybe we do not understand, or Canadians or Canadian industry do not understand fully, the implications of the political system and the alliances that build within that sphere of influence.
As you mentioned, it was not that many years ago that the gas industry was being accused of being subsidized, and you were able to overcome that. I wonder if I could ask all of our witnesses to comment on whether there is any validity to the criticism that we do not understand, for instance, that politics is more local, that maybe we should not be directing our resources so much at Washington, but maybe spreading them out a little.
It seems to me that this has been a recurring criticism, and I would appreciate your comments.
Mr. Alvarez: Apart from gas, senator, the other trade dispute we got caught up in was a Commerce Department 333 investigation, which reviews all foreign sales into the United States.
We had the dubious distinction of being lumped in with Libya, Iran, Iraq, Indonesia and a few others.
Senator Di Nino: Great company.
Mr. Alvarez: Yes, exactly. There are times, senator, when national treatment is pretty attractive, because we did not like the company we were being lumped in with.
Every sector has different influences, different regulators and is affected by different levels of government. It is hard to predict what, if any, broad lessons are to be learned.
I would emphasize that throughout our difficult times, we had outstanding support from the Canadian Embassy in Washington. It would have been much more difficult without a strong embassy, well staffed with people in our satellite offices. We do a lot of work in California. Including the Consul General in California, the Canadian Consul General in Houston, we have an outstanding group of people representing this country in the United States.
We could not have done what we did without them, but I do not know whether that works with some of the other sectors or not. I know it has been invaluable for us to have the ambassador, his staff and the consuls general on our side and pushing for us.
It has been a key for us.
Mr. Prince: I think we are agreed. We do not understand the politics in the U.S. very well.
Senator Di Nino: You do not or we do not?
Mr. Prince: We do not.
Senator Di Nino: Join the club.
The Chairman: I would like to ask a question relating to a witness who could not be here this afternoon.
Certainly in the petroleum and, I suppose, electricity sector of our energy exports, we basically have a captive market because they just do not produce enough. They have to have it. I know they have huge reserves of natural gas, which was not the case in 1988.
As I recall, they were still self-sufficient in oil then, although that was changing.
Now, the question that I would like to ask is one that I think would have come from a witness who was supposed to be here today but could not be. I am quoting from this book written for the Council of Canadians by Murray Dobbin.
NAFTA rules out the energy policy instruments that Canadian governments used in the past: different prices for domestic and export users, export taxes, restrictions on export supplies, and incentives favouring Canadianization.
All such initiatives by our governments would make them liable for costly suits from foreign investors under NAFTA's infamous Chapter 11.
As a former chairman of the National Energy Board remarked: ``We have a continental energy market. We do not have a continental energy policy.'' That is from Larry Pratt, I believe.
What about that? I have looked at some of the information on their energy problems, in particular, as I say, the oil problem. It is difficult at this point to conceive of the U.S. becoming self-sufficient again in petroleum and being able to lessen its dependence on ourselves, Mexico, and, in particular, Venezuela.
Did we give away a lot of instruments for no net gain? Mr. Alvarez, would you like to say something about that?
Mr. Alvarez: I never met a microphone I did not like, Mr. Chairman.
Did we give away some instruments? We did not give them away. It was part of a comprehensive trade agreement between two and, ultimately, three countries. There was give and take on all sides.
Do I say it was a giveaway? No, I do not accept that.
Second, do I think those are appropriate things to have eliminated in an increasingly global and open marketplace? Yes, I do. I think that was appropriate, particularly when you remember the rancorous days of the early 1980s, when many of the instruments that Mr. Pratt described were seen as the federal government limiting the cost of a commodity owned by the provinces and significantly restricting the ability of those provinces to achieve market prices. I would argue, certainly from our point of view, that many of those instruments were simply inappropriate.
Do we have a continental energy policy? No, we do not. There is no continental decision-making authority. I think we have three countries, although perhaps less so in the Mexican case, but certainly Canada and the United States, committed to open borders and the free flow of goods back and forth.
However, that is a conscious policy choice of successive governments in both Canada and the United States. I do not see the capacity to develop a continental one.
I would like to see more continental cooperation. I mentioned R & D as one area. I think there are others that we can look at in terms of new developments. I think Mr. Pratt has set out the issue, but I do not agree with his conclusion.
The Chairman: I am looking at the map of oil pipelines, and I remember the Ottawa line policy. As I recall, there was no provincial oil policy in Canada, it was a national policy, and I see the pipeline from Portland to Montreal on this map; and I wonder, is that the same pipeline that was part of the Ottawa Valley line, which allowed Eastern Canada and Quebec to import inexpensive Middle Eastern oil, while we in Ontario subsidized Alberta oil and encouraged Alberta oil exploration? That could not happen today, could it?
Mr. Alvarez: Two or three points, Mr. Chairman. One, I am not sure how Ontario subsidized Alberta exploration.
The Chairman: We bought it when they did not have a customer. That is the answer.
Mr. Alvarez: It is part of the answer.
The Chairman: That is the answer.
Mr. Alvarez: No, there were other options available.
The Chairman: However, they did not use them. They sold it to us.
Senator Austin: There were very few other options.
Mr. Alvarez: Let us remember when that was brought in, and let us look at what has happened. Those Portland and Quebec City lines have now been reversed.
The Chairman: However, I do not see a line between Ontario and Montreal.
Mr. Alvarez: An oil line?
The Chairman: Well, not on this map.
Mr. Alvarez: The line has been reversed now. It is there; it has been reversed because the Eastern Canadian consumers have been able to access cheaper supplies of crude from the Middle East than from Western Canada. It was cheaper for them to bring it in by barge. Therefore, that line was virtually unused and was mothballed for probably 10, 12 years. There was quite a period of time before it was reversed.
Now the customers are saying, ``We do not want to be hostages to Western Canadians, we want access to the world market.'' They have chosen to do that, but the result is that now we are bringing in greater amounts of Middle Eastern oil and selling more American oil into Eastern Canada than had previously been the case.
I think that is right, because the customer has to be allowed to choose.
The Chairman: I understand. I guess the point of the question, and I will not pursue it anymore, is that our national policy under the system that we brought in under NAFTA would not be allowed.
On my street in Toronto, people still talk about the fact that for many years we bought Alberta oil in Ontario through the Ottawa line policy, and that was not a provincial policy. That was the national energy policy at the time.
I think Mr. Pratt's point would be that we would not be able to have a Canadian national energy policy today.
As I say, I am looking at the map and I see the Ottawa line still there. Would anybody else like to say anything about this? Mr. Miles?
Mr. Miles: Mr. Chairman, I know you are questioning us and not the reverse, but I cannot resist asking you, are you saying that the Borden line was a good or a bad thing?
The Chairman: At the time, I think it was a good thing. I am not suggesting that we would do it now, as there may be different circumstances that would require us to do something else. I am not arguing in favour of reinstituting the —
Mr. Miles: No, understood. My observation, and I am not a historian, is that there was a lot of intervention activity on the other side of the border at that time. Oil imports were restricted in the States. Canadian producers were unable to export, and I suspect that had something to do with the Borden line.
The Chairman: My only point was it was not a provincial policy. It was a national policy.
Mr. Miles: Understood. My general observation would be that those who, and I do not want to put words in anybody's mouth, advocate the preservation of those kinds of freedoms have a tendency to greatly overstate their benefits.
Senator Austin: This is my own observation. I agree with Dr. Prince's remark. The present value of these resources, the dollar you earn today, has a tremendous impact compared to the dollar postponed. Essentially, the Borden Royal Commission recommended that the Ontario market be reserved for Alberta producers, because otherwise, there would be no industry.
I want to say that that the federal government introduced tremendous tax incentives to create an industry in Alberta, and then, I would add, crippled it with the principal business test. Bureaucrats are bureaucrats. I was one once; I was there.
Essentially, we created the 20 times reserves policy for natural gas, which the National Energy Board administered, but the U.S. treated Canada as a surge tank. I think Mr. Miles referred to the 1971 quotas imposed on imports of oil into the United States.
We were a surge tank, and what the softwood lumber industry is going through today, the oil industry was going through in the 1970s, when the American producers, the Texas Railway Commission and the people in Louisiana were using the political system to cap our exports into the Chicago market.
All that is ancient history, and frankly, I think we are in the right place with respect to the value to the Canadian economy of our oil and gas resources. That does not mean I love every part of what is happening, but in terms of the macro-strategies, I believe we are in the right place.
Another issue in those early days was that there was virtually total foreign ownership of our producing and refining sector.
One of the consequences was an absence of Canadians in the oil and gas picture. If you needed a refinery engineer, you went to the United States; if you wanted to build a refinery, you went to Florida or Bechtol. There were practically no Canadians in the game.
Therefore, we created a policy in those early days that required Canadians to be part of the industry. The Trudeau government, when I was Deputy Minister of Energy, Mines and Resources, had two policies. One was, as you know, the Petro-Canada commercial purchase, not its appropriation.
That was the minor policy. The major policy was to remove the principal business test and bring Canadian investment capital into the oil and gas sector, which is one of the reasons why the sector is where it is today.
Looking at it today, the macro policy is the right policy as far as I am concerned.
[Translation]
Senator De Bané: My question is for Mr. Alvarez. The Minister of Natural Resources has announced, early in December, that the financial burden of oil companies for the implementation of the Kyoto accord would be eased. Is it fair to say that your industry finds some satisfaction in this statement of the Canadian government? Can we expect an agreement between your industry and the government?
Mr. Alvarez: It is an important step. As I mentioned in my remarks, the lack of information is a terrible problem for us. Many investors, like the Lehman brothers in New York, have always based their judgment on worst case scenarios. Obviously, these scenarios are hardly realistic, but, for lack of information, we are helpless.
Thus, Minister Dhaliwal's letter is most important. For us, it is a sign of trust, and a signal that the economic impact is understood.
Nonetheless, important implementation issues remain. They have an impact not so much on the conventional oil sector, but on projects affecting Canada's North, northern Alberta, and oil sands. These projects represent enormous costs between $2 billion and $6 billion annually. The impact of such projects cannot be foreseen beyond 2012. They are long term projects that span a period of 10 years. We are talking about years 2010 or 2011, when only one year will be left in the Kyoto accord. What would the impact be, should there be a second period of commitment?
As far as major investments are concerned, several questions are still in the air. The minister is aware of the impact of discussions on research and development. These discussions are now underway, and the outcome seems to be quite auspicious up to now. It is a very good sign.
The budget tabled yesterday provides for fairly important investments in research and development. We think this is a crucial step, because the reduction in greenhouse gases releases throughout the world will have to come from scientific breakthroughs that will hopefully contribute to the development of Canada. That is why this announcement is so important for us.
[English]
Senator De Bané: In view of what you have said, and the policy announced by Minister Dhaliwal, can we hope that the industry that you represent is realistic about this? Do you hope that the industry will sign an agreement with the Department of Energy, Mines and Resources on that, or is this unrealistic?
Mr. Alvarez: Issues remain, primarily regarding how the different sectors will be treated, senator. Without picking on any one, if the oil and gas sector is confident that in signing an agreement it will not face a burden any more onerous, proportionately, than any other sector in the economy, I think we can make tremendous progress.
The minister has appointed a new assistant deputy minister in charge of it. Ironically, he is an ADM, industrial emissions. I am not sure I would want that title if I were him, but it is an interesting one.
There were some very good discussions. I think he is finding, and we are finding, that in the past five years, in the run-up to Kyoto, the real work and the real analysis that needed to get done did not get done.
It became a fight over who is going to pay for the Kyoto gap, as opposed to how do we as a country commit ourselves to reducing emissions. I think we have seen a shift towards that. I hope that we can work something out with the department.
This file is as complex as any, and maybe more so, under the Constitution because it touches international agreements, domestic activities, health issues. It is an enormous file.
They have suggested we might wrap it up in 18 months. That is ambitious, but I can assure you, senator, there will be no lack of effort.
Senator De Bané: On the same issue, Mr. Chairman, to Mr. Prince and Mr. Miles, do you think that given what Minister Dhaliwal has announced, and with the financial burden that our energy industry has to shoulder, it will be able to compete, because as you said, there is no sector where free trade is as unrestricted?
Have you studied whether the policy announced in early December will go a long way toward maintaining the competitiveness of our energy industry?
Mr. Prince: I guess the short answer is we have not really looked at it closely so we cannot comment, senator. Sorry.
Senator Austin: Yes. I think the questions on Kyoto are very important and the answers are out there somewhere, and probably the answers to my next question are out there somewhere too.
Coming from British Columbia, I wonder if any of you have done any studies or have any views on the timing of the development and entry into the market of the Pacific coast oil and gas potential?
If you have views on specific policies that would further the development of that sector, I would be delighted to hear them.
The Chairman: Mr. Alvarez?
Mr. Alvarez: I am pleased you did not disappoint me, senator. I was expecting the question when I saw you were in the room, so I cannot say I was not prepared.
I think there are three things you need to keep in mind. One is to be very careful with some of these geological estimates that are out there. We have had some wild numbers floating around in terms of how much, where it is, and those kinds of things.
The level of understanding of the geology in the coastal basins is very limited. The last test well was drilled in the early 1970s, and there are a lot of basic things we need to know about it, as you know.
From an industry point of view, we are confident that activity can be conducted safely in that environment. We operate in environments around the world, from the Arctic to the deep offshore, but I think industry is being very careful about timing issues for three reasons. One is there are moratoria in place, both federal and provincial; therefore no activity is allowed; secondly, it is not clear to us how the industry would be regulated. Would it be something along the lines of the East Coast agreements? Would there be some other kind of federal agreements? We do not really know how that is going to play out.
The third is that there are significant First Nations, Aboriginal claims that may or may not extend into the areas covered by some of those geological formations.
I think when you add those three together, our response is that when and if governments have positioned the basin for industry to come in, it would probably take a couple of years for land sales to occur, a couple of years for seismic work to be done, and who knows whether there would be further activity beyond that.
Therefore, if you can say when the policy framework will be sorted out, I can tell you when the clock will start ticking.
Senator Austin: I will not take this any further.
The Chairman: I want to thank you for coming. I did have one question, and I think this is an appropriate place to ask it.
One of the issues facing the committee, of course, is that of the border, where, as we heard, a truck is crossing every two and a half seconds in order to maintain our trade with the United States.
I presume that is not a problem in the oil and gas business because it uses pipelines. I cannot think of how they would apply. I have been involved in border security and things like that, but I do not see it being a big problem, which, of course, is a huge benefit to the oil and gas industry in the current atmosphere.
Are you prepared to make any prognostications as to which route the Arctic gas or oil pipeline will take, that is, either or both of the other pipelines that are being discussed, following the Alaskan highway or coming down the Mackenzie Valley? Does the industry have a view on that?
Mr. Alvarez: Mr. Chairman, maybe I will touch on the first point. I will be extremely cautious because of the sensitivity, but I can tell you that the oil and gas industry does not take the security issue lightly. It is one in which we are very active.
While it is not trucks going back and forth, I can assure you that there are security issues coming out of 9/11 affecting our sector, and if you would like a private, in camera briefing, we would be prepared to do that for you. However, as you can understand, we have to be very careful, but a tremendous amount of energy and attention has been devoted to it. Security is an issue.
In relation to your latter question, our view is very simple: we remain neutral. However, I think there are a couple of factors you can look at. The first is the size of the Alaska project. It is 5, 6 or 7 times the size of the Delta project in terms of volume, steel, distance and capital costs. It is an enormous project and will have a much bigger market impact than the Mackenzie Delta one.
Other things being equal, and if you follow what is going on in the press, I think most experts, including some of the Alaskan proponents, would suggest that the Mackenzie line will in all likelihood go first, simply because it is a manageable size. It could tie into existing infrastructure relatively quickly and would not have the same market impact as the Alaskan one.
I think the expectation is that the Alaska one would follow fairly quickly thereafter, barring some massive policy shift on one side of the border or the other.
Mr. Prince: We agree. I think we generally agree with what Mr. Alvarez has said. The economics do dictate the Mackenzie line should go first, and the larger, more complex Alaska line later.
The Chairman: On the security of the pipeline, I was just in Columbia. I have been there 20 times, and I watched the American soldiers arrive. I watched the plane come in with the 60 soldiers who are supposed to protect the pipeline.
I know how easy it is to blow up pipelines, but that is not quite the same thing as the transport issue. My mind is creative enough to understand that and how difficult it is to protect.
I want to thank you on behalf of my colleagues for your very interesting testimony today.
The committee adjourned.