Proceedings of the Standing Senate Committee on
Energy, the Environment and Natural Resources
Issue 9 - Evidence - Morning meeting
VANCOUVER, Tuesday, November 29, 2011
The Standing Senate Committee on Energy, the Environment and Natural Resources met this day at 8:05 a.m. to study the current state and future of Canada's energy sector (including alternative energy).
Senator W. David Angus (Chair) in the chair.
[English]
The Chair: Good morning, everybody. Welcome to this meeting in Vancouver of the Standing Senate Committee on Energy, the Environment and Natural Resources. We are continuing our national discussion on energy. Let us talk energy and let us try to develop a framework for a policy that will provide Canada in the future with a more sustainable and cleaner and greener energy system with much more efficient convergence of factors from both within and beyond our borders as putting exceptional pressure on Canada's energy systems and risking Canada's long-term economic prosperity. Countries around the world will be mobilizing to meet their energy security needs while addressing unprecedented environmental challenges, namely climate change and, of course, the population boom. We have just passed 7 billion and the projection is somewhere in the 9 billion range by 2050, and energy consumption is increasing at pace. Since Canada is a major producer, consumer, and net exporter of energy, we have much to gain by leveraging opportunities and minimizing risks. We have much to lose if we do not get it right. There is an urgent need for a national discussion on energy. That is what we have been doing for the last nearly three years on this committee as we consult with Canadians in every province of the nation. We are now in the last sort of stage of our study. We are hoping to come up with our report in June of 2012.
This week we are travelling to British Columbia and Alberta, both in Edmonton and Calgary. I have a couple of announcements before we welcome our guest, Mr. Graeme McLaren of the Government of British Columbia. I believe you are Assistant Deputy Minister of the Oil and Gas Division, and we had the great pleasure of spending time with you last night, sir.
Sir, without further ado, I know you are just back from a big trip and you agreed to share with us some thoughts, especially on the gas situation which seems to be on everybody's lips these days, and we would be very interested in hearing your perspective.
You were appointed Assistant Deputy Minister of Oil and Gas in the Department of Energy, Mines, and Petroleum Resources in July of 2010. That division is leading the way towards stimulating investment in the province's traditional oil and gas resources as well as new untapped potential in the way of shale gas. You began your career as an exploration geologist in the mining sector and joined the Ministry of Energy in 1985 as a mineral land use geologist. You were the ministry lead on mineral land use issues through the 1990s where you honed your skills in multi- stakeholder and public consultation processes and consensus building. You joined the Ministry of Sustainable Resource Management in 2001 as the lead on mining, oil, and gas initiatives and then on economic development issues. You returned to the current department for a year as an Executive Regional Director in Mining and Minerals Division in 2005.
I understand that you were born in Toronto but have called this beautiful province your home for quite a few years. You have a passion for travel, which obviously gives you a wide perspective of the important things of life. You have a bachelor of science in geology from the U of T in Toronto and a master of science in economic geology from the UBC. From 1999 to 2008 you made 11 trips to Johannesburg, South Africa. You are probably very glad you are not there this week with the COP17 Environmental Conference, but you travelled there to teach a one-week course each year with mining, sustainability, public consultation, and multi-stakeholder negotiation skills.
Graeme McLaren, Assistant Deputy Minister, Oil and Gas Division, Ministry of Energy and Mines, Government of British Columbia: Mr. Chair, senators and staff, it is a pleasure to be here. I am happy to present on behalf of the B.C. Ministry of Energy and Mines an overview on natural gas development in British Columbia to the Standing Senate Committee on Energy and Environment and Natural Resource. I would also like to say it is a pleasure to see Senator Neufeld here at this hearing because he is extremely knowledgeable on the development of natural gas in B.C. You have my slide deck in front of you, so on the slide 2, my presentation today will outline the current status of natural gas development in B.C. including some background on where we are with development and some of the major basins in the province, some trends in natural gas markets in British Columbia and in North America. I want to talk about British Columbia's vision and priorities for natural gas development in the future and then talk a little bit about partnerships, linkages, and how the provincial and federal governments can collaborate on policy and various initiatives. And I certainly welcome any questions you have at any time throughout the presentation and following.
Moving to slide 3, just as introduction, I just want to start out by saying B.C. recognizes that natural gas is an integral part of Canada's energy future, and this presentation highlights some of the key natural gas opportunities in British Columbia at the present time. Following Alberta, B.C. is the second-largest producer of natural gas in Canada, accounting for nearly 20 per cent of the natural gas production in the country. In 2010 British Columbia's natural gas production was about 1.2 trillion cubic feet, or tcf, per year.
The Chair: Who is the number-one producer in Canada?
Mr. McLaren: Alberta. As you can see in the graph in this chart, natural gas production has been increasing over time as British Columbia becomes a greater contributor to North America's energy markets. That current production rate of 1.2 tcf becomes a bit of a moniker, a bit of a metric by which we will compare some other numbers in the future. This production level is well beyond B.C.'s current requirements, and we currently export more than 80 per cent of that gas to other Canadian provinces and to the United States. So as a result, we are currently very well connected to North American markets and we hope in the near future to be well connected to Asian markets.
One key point: In British Columbia most of the land is Crown land, so 90 per cent of the petroleum and natural gas rights are owned by the province. The oil and gas industry is a major source of employment in B.C. with an estimated 20,000 people currently employed in the industry, and this number will be much greater if you include all the spinoff impacts.
Moving on to slide 4, virtually all of the natural gas activity is located in the far northeast of the province. We have been producing natural gas for almost 60 years, and over that 1952 to 2010 period our total cumulative natural gas production was 22.5 trillion cubic feet. That was mainly from conventional natural gas resources. Provincial revenue is a key factor here. In the fiscal year 2009-10 the province received $1.35 billion from natural gas. Over time this amount of revenue peaked in the year 2005-06 at $2.6 billion. It is a significant contributor to the provincial economy.
The Chair: Is that royalties and sales?
Mr. McLaren: Exactly. There are two aspects of provincial revenue. One is bonus bids from the sale of petroleum and natural gas rights in land sales, and secondly, from royalties.
Senator Neufeld: If I could just interject here, that is not the sale of the gas.
The Chair: It is the sale of the land, and the producers or the lessees do the selling and pay the royalties on that.
Senator Neufeld: Yes.
Mr. McLaren: It is a bonus bid when we sell the rights, but the rights have to be exercised in order to maintain them. If they do not exercise the rights, they go back to the Crown, and we can sell them again.
The Chair: So ``bonus bid'' is a term of art, is it?
Mr. McLaren: It is a term that refers to if a company is willing to pay, they estimate the future resources in the ground at so much, and it then becomes, how much more are you willing to pay as a bonus to buy that ground today. We sell land on monthly sales through a closed envelope bidding process. It becomes a very competitive amount, what is the bonus that you were willing to add to your bid to get that land, and that comes straight to the provincial coffers on each monthly sale.
The Chair: As you said last night, this is what tipped you off in the Horn Valley; suddenly these bids were coming in at very high amounts and from various principals.
Mr. McLaren: For fiscal 2005-06 total provincial revenue was $2.6 billion. That was primarily from the land sales that year.
Senator Sibbeston: I am thinking in terms of the practicality or the way the system works. When a company bids are they not on the land already with their drills? No. So it is not a situation where if they do not win they have to get off the land sort of thing?
Mr. McLaren: No. There is a certain amount of early work you can do to assess what might be in the ground, but you are not drilling before you buy these lands. A company submits a bid in a sealed envelope, at a certain time on a certain day, and a team of people opens all the envelopes. If none of the bids meet what we think is a reasonable bid, we do not have to accept them. Once we open the bids and we say, ``Yes, these are reasonable and here is the winner,'' then those rights are awarded to the company and they have a certain amount of time to then get out on the land and start to drill in order to maintain those rights.
Senator Sibbeston: Once that bid is won, it is for a number of years, so it is not just for a one-month duration, as it were.
Mr. McLaren: No. There is a significant investment required, so a number of years are allowed to get out and mobilize your equipment and start work.
Senator Massicotte: You said they are not allowed to do any drilling before they win the bid, but they are allowed to do some seismic studies or studies of sorts before they win. There are a set of studies available to the bidders; am I not correct?
Mr. McLaren: Yes. They can go out and do some seismic work. Sometimes that happens. Sometimes a company will have land over here and from their drilling over here they think the oil and gas is trending in this direction, so they ask for this land to be posted for sale over here based on their own internal knowledge. So they have a bit of a leg-up in the bidding process.
Senator Massicotte: There is no common set of facts available to all. Everybody does their own confidential work to determine the potential resources.
Mr. McLaren: The information from drilling remains confidential for a certain period of time and then becomes public. So there is sort of basic public knowledge. There is geoscience public knowledge. Companies will do their own research to figure out what this land is worth.
Senator Neufeld: Further to that question, the government does not decide which lands go for sale. The industry asks, ``We would like to see that parcel put up.'' The ministry will know through its geology and through its studies and have an idea of what is there, but it is the industry that says, ``These are the parcels we would like to see come up.'' Different companies might ask for different areas.
Senator Massicotte: What is the delay from the time that they request a response and how much time is allowed for new bidders to study the land before they make a bid?
Senator Neufeld: You would have to ask Mr. McLaren, but I do not think that there is anything there. If company A comes to the government and says, ``We want these areas split up,'' and the government deems it should because there could be a whole bunch of other competing interests, like protected lands or those kinds of things that the government may not be able to put it up for sale, they will just put it up for sale.
Senator Massicotte: What is the time delay?
Senator Neufeld: I do not know the timeline.
Mr. McLaren: It is in the order of months, but I also want to point out when a company requests a parcel of land to be posted, we also then embark on a bit of an investigation on that land, which might include some discussion with First Nations, it might include some notification of public, so that when we actually post the land for bids we can say, ``Here are the things you should know about this parcel of land.'' It may be sensitive for caribou. It may have certain parks within it, that kind of thing. So that takes a few months. There is a period of months for notification of a request for posting before it actually becomes posted so other companies can do their research, and also, when it is finally put up for sale, any caveats or sensitivities on the land base are identified in advance.
The key point there is that it is a significant revenue generator for the province. Also on the economy, industry capital spending in 2010 was approximately $7.1 billion, so a big stimulus to the economy in general. Given our 60 years of experience, B.C. is recognized as a leader I think nationally and globally in regulating oil and gas activities. Currently this is done through the B.C. Oil and Gas Commission, which is a single-window regulatory agency with responsibilities for overseeing oil and gas operations, which includes exploration, development, pipeline transportation, and reclamation of land disturbances.
B.C. modernized its regulatory environment in October 2010 when the Oil and Gas Activities Act and its supporting regulations were brought into force. My point is that over time we are continually trying to improve our regulatory environment and work towards continually improving to have responsible natural gas development.
I will move on to slide 5. So what are we seeing here in terms of B.C. gas production? Well, we are seeing a trend of transitioning from conventional natural gas resource base to the unconventional natural gas resource base, and by that I mean shale and tight gas resources. As much as 40 per cent of B.C.'s gas production stream in 2009 is estimated to have come from unconventional sources, these tight gas sources and shale gas.
The Chair: Could you explain, for the record, ``tight gas'' as opposed to ``shale gas,'' the definition?
Mr. McLaren: It refers to the reservoir in which the gas is held. In a conventional reservoir there is porosity so the gas would flow, and ``tightness'' refers to how tight is that porosity and the ease with which it can flow. With tight gas, there is more difficulty in the flow, and in shale it is even tighter because it is a much finer, tighter rock.
The total gas-in-place estimated now is expected to exceed 1,200 trillion cubic feet, so that is the gas in the ground estimated in Northern B.C., but not all of this gas can be produced and marketed. But currently we conservatively expect there is well over 100 trillion cubic feet that can be produced over time. Now, going back to my remark on our current production of 1.2 trillion cubic feet per year, this equates to over 100 years of future production. Now, certainly we will probably ramp up production above 1.2, so we are certainly talking about many decades of production at least. So a key point here: This is a significant opportunity in the future, and this resource has only been unlocked in the last five years or so through new technology, so the opportunity for growth is tremendous.
Senator Neufeld: You said about 10 per cent. Now, as I understand it, the industry has told me directly that 25 per cent to 30 per cent is possible with today's technology. Thinking out ten years technology will change a lot more. So you are talking 10 per cent. They are talking 25 per cent to 30 per cent. Where is the difference?
Mr. McLaren: I remarked it was very conservative. This is very much an estimate. You are absolutely right. It could be 15 per cent or 25 per cent, 30 per cent that you actually can recover. We are only into shale gas development about five years. With every well drilled, the industry learns more about how to extract more and improve their recovery rates. You are absolutely right, Senator Neufeld, that in the future we will see greater recovery rates and the numbers will be even bigger than I have mentioned here.
The Chair: To be absolutely clear, a very tiny percentage of that is for local consumption, so this is more or less a long-term cash cow for the province.
Mr. McLaren: That is one of way of looking at it for sure. We certainly look at future provincial revenue, and I will get into that as I move through here.
With slide 6 I will give you a little bit of geographic information. Virtually all of the activity in British Columbia is located in four major natural gas plays in the northeast corner of the province shown on this map. The Montney Basin is shown in light beige there, the Horn River Basin in pink, the Liard Basin in grey, and the Cordova Embayment in brown. These are all geologic basins within which there are shale horizons that produce gas. Horn River, Cordova, and Montney have attracted major investments in recent years, and as a result, there is now a strong focus on evaluating and producing gas from those plays. There is a little bit of information on this slide about each one of those basins. You can see Horn River, where over 75 per cent of the land is already tenured, so that is a very active basin. It is fairly large. And the OGIP, which means oil and gas in place, so that is the oil and gas in the ground, is currently estimated at about 448 trillion cubic feet. Now, there is a probability range around that, and I just want to point out that in May of 2011 this year the National Energy Board and our ministry collaborated to publish the Ultimate Potential for Unconventional Natural Gas in the Horn River Basin. This was the first study of its kind in Canada because it is the first time we have this much information on a basin to calculate the gas potential.
The Chair: Did you bring a copy for us?
Mr. McLaren: I can leave one and I can certainly forward the website.
The Chair: Perhaps it is premature, but you have mentioned these four principal basins and the development of them. As you know, we were privileged last night to spend some time with your minister, Mr. Rich Coleman, and he was indicating that in getting these projects under way there is a problem with the overlapping or duplication of regulatory activity from the Province on the one side, and you were mentioning you have a very enlightened and developed regulatory system here, and then the feds get in the way and slow it down. Maybe it is too early for that question.
Mr. McLaren: A tad early. I will get into that, but I will say that the upstream activities, being the exploration and development activities when you do wells and the gathering systems of pipelines, are not subject to environmental assessment. The Oil and Gas Commission takes care of those. They are lower impact activities. So we do not get into the federal-provincial regulatory issue there. It is more in the large transmission pipelines, LNG plants, so I will speak to that in a moment.
You have a little bit of information on the area of those basins. One of the key points that comes out in this report and the geology of each basin is it is not just one shale layer in each basin. There are multiple shale layers, and they are quite thick, in the range of 50 metres, sometimes as high as 200 metres to 300 metres thick. So if you take that thickness, apply it across the area that I have shown for these basins, once again the resource potential is just enormous. So we have really leapt onto the global stage with this.
Slide 7 is a map that shows shale basins across North America in orange. Across North America shale gas development is exploding. You can see that a lot of our competition comes from the United States, and there are major shale gas plays there through the Marcellus Basin. That is the big orange basin over on the right-hand side of the map centred in the Pennsylvania area, but we have the Haynesville Basin in Louisiana, Fayetteville in Arkansas, the Barnett in Texas, and others. Numbers are listed there to show what the gas-in-place might be. If we have over 1,200 tcf in Northeast B.C., you can see that we are a continental player and I would argue a global player when it comes to shale gas basins.
In terms of changes in markets and prices, this is a key point for North America. This explosion of shale gas extraction has led to significant increases in North American gas reserves and supply, and as a result, major changes to the natural gas market within the continent. This increase in supply has had a dramatic increase on prices. Natural gas prices at Henry Hub, which is the major hub for trading natural gas in the U.S.A., they have fallen from around $13.50 per million Btu in 2008 to a little over $3 per million Btu today. So that is quite a dramatic drop in the last three years, and it is all because there is a huge supply. So this has a significant impact for us in Western Canada as major markets for natural gas are in Eastern U.S., and you can see from that map that U.S. suppliers are much closer to those markets than we are in British Columbia.
I move on to slide 8. What does this mean for B.C.? Well, as I just said, British Columbia is a long ways away from the major markets in Eastern North America, so that puts us at a disadvantage due to the transportation costs and the distance from these markets. Putting gas into a pipeline and transporting it to Eastern North America, has costs attached that at these low prices eat into your margin very, very quickly. So the answer: Access to new markets. We have to diversify our markets here in B.C., and at the top of that list is access to new markets through liquefied natural gas exports.
The Chair: You mean Asian markets?
Mr. McLaren: To Asian markets. Other things we are looking at for market diversification are gas-to-liquids technology, clean fuel for transportation. I will speak a bit more about these in a moment. Perhaps highlighting the reason for this, if you look at the graph on that chart, it shows LNG import prices. On the right-hand side of the graph, the red and green lines reflect Asian prices, which, as recent as last week, the Japan/Korea market for LNG was approaching $18 per million Btu, but the bottom line in purple is the U.S.A. price, and in comparison to that $18 in Asia, within B.C., where prices are normally set, it is called station 2, it is a hub on the pipeline system, the price through station 2 right now is about $3.25. You can see what we have trying to capture is that differential of the Asian price. This is critical for driving why we want to diversify our markets and start looking at liquefied natural gas in Asia.
Senator Massicotte: Experts predict that difference to remain the next decade or two?
Mr. McLaren: That takes you into the world of predicting economics. People certainly see the demand will remain in Asia and that it will not outstrip supply, so whether the price remains at $18 or not is a question. However, it will certainly be much higher than North America.
Moving on to slide 9, you can see that shale gas development offers an enormous opportunity for Canada's energy future. I have already demonstrated that the magnitude of B.C.'s natural gas reserves is substantial and the opportunity for B.C. to supply and produce for decades to come, if not 100 years, it is all there. We export most of it already, so we have enough gas to meet our domestic needs and to supply energy to Asia through liquefied natural gas exports. The chart on the current slide in front of you shows projected demand in Asia in the red line and the projected supply, and you can see that there is a significant gap in that. Even our current Kitimat LNG plant is shown in there in orange, and you can see, while it is a significant project for us, it is only filling in a small amount of that Asian opportunity. This is critical. The opportunity is here and the window is here for us to do this. If we can increase this production, what it means for B.C., it means more jobs, more provincial revenue, more investment in B.C. It is good for B.C. It is good for Canada.
The Chair: Lower taxes and more immigration from the poor East.
Mr. McLaren: Labour supply is a critical point, and I will get to that in a few moments. Coming back to that topic, industry now starts to talk about having projects that will last for decades. People can move to these communities. As young people they can start working in this industry and they can retire in this industry in those communities. That is what this is starting to offer on the human front, is that young people can move to a place like Fort Nelson, Fort St. John, Dawson Creek, start a career and retire in that career in one place because of shale gas. That is the future.
Moving on to slide 10, I turn to trends in development that we are seeing. The chart in this graph shows the wells drilled in British Columbia. We are seeing that there is a decline over the last few years in the number of wells drilled in part because with the new technologies of horizontal drilling and hydraulic fracturing each well is more costly, but we are also seeing that each well is producing more gas because I showed before our production is going up. So we have this interesting situation of fewer wells and greater production. Other trends that we will talk about: I mentioned the competitive pressures around North America and therefore the opportunities for Asian markets and liquefied natural gas. I also want to identify clearly there are trends around discussions and concerns on climate change impacts and emissions, and there are trends in regulatory impacts where B.C. is a very clear regulator, and investors, especially from Asia, are looking for regulatory certainty, and B.C. can capitalize on this through our system.
Slide 11, with all the foregoing as context, starts to portray our vision for where we are going in B.C. We are looking to the vision, the latter half of this decade. We see ourselves as a highly competitive jurisdiction for investment. We need the investment to make sure we have the production in order to meet these new markets. And our vision for these new markets, where we see ourselves in the latter half of this decade is that B.C. natural gas is being exported as liquefied natural gas to feed strong Asian demand. We would like to see B.C. natural gas being used as a transportation fuel. We hope to see B.C. natural gas being converted to clean diesel fuel by gas-to-liquid technologies.
If we can achieve all this, we are going to see a significant increase in gas production, which will lead to a significant increase in provincial revenues and the ability of the government to then do good things with those revenues. There will be an increase in jobs and community development. And I want to stress as well, just because it is at the bottom of the list does not mean it is an afterthought. I want to stress that we see ourselves as a leader in environmental stewardship for natural gas development. That is our vision for the future for the latter half of this decade and on into the future beyond then.
Senator Sibbeston: Are there any things that stand in the way of you accomplishing the goals of your vision?
Mr. McLaren: That is an excellent question. Perhaps if I can move through the next slides you will see some of that. If I do not answer your question fully, maybe you can ask it again.
The next slide is number 12. Critical to achieving this vision requires access to Asian markets, just as an example. So in order to access that takes major capital investments in LNG plants and in pipeline infrastructure. I am just using one example here of listing some key facts about the Kitimat LNG plant and the Pacific Trail Pipelines Project because that is the most advanced project and we have information about it. It requires a total of $5.5 billion in capital investment, and they expect to have an in-service date in 2015. I point out that both projects already have provincial and federal environmental assessment approvals. They have been in the process for many years now, and they are currently moving into a permitting phase. This is our most advanced project in the province. Kitimat LNG also has been awarded a 20-year export license following a detailed review by the National Energy Board. A lot of work, time and money have gone into it already. It requires a lot more money and time to build the infrastructure to be able to export gas to the coast.
A smaller second project also located in the Kitimat area called the Douglas Channel Energy Partnership is also currently seeking a National Energy Board export license. If this smaller project is approved, it could lead to the very first shipments of liquefied natural gas from B.C.'s coast in 2013-14. I might add that both of these projects have strong support and partnerships with local First Nations. It is a critical factor in the success here. There are more projects underway, and as recently as this morning I took a phone call, and apparently there was a media release this morning that another major company with assets in B.C. has entered into a joint venture partnership in this time with two Japanese companies, and they are going to jointly study liquefied natural gas opportunities. So we see this constantly. Companies with assets in B.C. are looking to Asia, creating joint ventures to bring in marketplace and technical expertise in LNG.
On the question of what else is needed, Senator Sibbeston, we need regulatory efficiency for these major projects between the province and the federal government to reduce the length of the permit and approval processes to provide certainty to investors, and we want to maintain proper oversight at the same time. The federal government can work on coastal waterways issues. We are at the coast. It is primarily a federal responsibility. So making sure that everything is working there is an important aspect, and we need to develop initiatives to make sure we have the labour force available for all of this development. There are a lot of skilled people needed to build these pipelines and operate these LNG plants, important points that are needed. There are some of the hurdles that we need to get over to make this happen.
Along this slide 13, I will point out on that labour front, in relation to ensuring there is a labour force, the B.C. government recently released a major initiative called Canada Starts Here - The B.C. Jobs Plan. It is up on the provincial government Web site. This plan recognizes a number of sectors where there is huge growth opportunities, and the natural gas sector is clearly identified as one of those key sectors for more jobs in the future in B.C. It is going to draw on strengths of labour market planning and on providing the right training to people in the right places.
If I can move on to slide 14, to achieve the vision I identified, we are currently working on a number of key priority areas, and they are identified down this slide. Jobs and the economy and families first are critical parts of this government's agenda. There are a number of additional priorities identified there. I am just going to explore a couple of these in the sake of brevity and time.
On slide 15, and I am looking under the jobs and economy area, we are focused on innovation and infrastructure. So you can see for innovation, it is new markets, it is LNG, how can we help gas-to-liquid technology come around, how can we help natural gas become a transportation fuel.
With respect to infrastructure and access to the coast, as I just mentioned, how do we make sure we have got our upstream facilities coming on stream? Regulatory efficiencies are very important here. We are working to streamline. We hope we can work with you to streamline those efficiencies. We work with the National Energy Board as well on any processes that they run.
On slide 16, I just want to stress again that environmental management and climate change are still at the top of our agenda. I am going to highlight just a few of the issues here. Access to water for hydraulic fracturing and identifying suitable formations for disposal of drilling fluids is a key consideration in our industry. There is considerable work underway to understand water supply sources, both potable and non-potable, and the potential for risks to impact water. Dr. Lyn Anglin, who is here from Geoscience BC, will be talking to you later today about the scientific work that is going on in relation to water. We are putting a lot of effort into understanding water and ensuring that we are proper stewards of water in relation to this industry. I would like to point out that there is considerable innovation being employed to reduce water use through recycling of water use on the rigs. Another one is drilling deep underground to extract saline water. Highly saline, non-potable water is not going to be used for any other purposes, drilled deep down at great expense, bring it to the surface, treat it, use it in the fracking process, and put it back underground when you are done. There is a lot of work happening on that front.
Thirdly, I just want to point out one innovative and really interesting agreement. One company reached an agreement with the City of Dawson Creek to fund the construction of a water treatment plant. It helped Dawson Creek deal with its water treatment. The grey water that is produced at the end is supplied to the company so that they can use it for their fracking process. That will supply all of their water needs. A fair amount of innovation is coming out of the industry in how to reduce water demands and how to reduce impacts on water.
You would have heard a lot about frac fluids. British Columbia will have a mandatory on-line registry of frac fluid contents come January 2012. It is the first in Canada. We hope that the rest of Canada will work with us and follow with us on this. We are adopting a Web site originating from the United States called fracfocus. We will have that up and running in January. Industry has completely agreed with us on this and they are collaborating. They are very cooperative. Come January when a company drills a well, the contents in their frac fluids, everything that is in those fluids will be identified and will be available for the public to see. Open disclosure is very, very important around this whole thing.
Also, beyond water, we are in wildlife habitat areas. Especially in Northeast B.C., boreal caribou is a critical issue. Species at risk is important to the federal government and important to B.C. We are doing a lot of work. We have a boreal caribou strategy on how we can look out for boreal caribou habitat, how we can try to allow these activities to occur. We have industry-funded research and habitat studies and into habitat restoration. We have specific operating procedures designed to reduce impact on caribou and their habitat.
On climate change, we are doing a lot of work to address emissions. We are working with our climate action secretary. If we can achieve this increase in natural gas production, we understand that will lead to greater emissions, but if we can send this gas to Asia where, if it replaces coal as an energy source, we can reduce global emissions by 66 million tons a year, far greater than the emissions that would come within B.C. by increased production.
The Chair: How do you get to that? Is that because you are going to be replacing fossil fuel consumption in these export markets?
Mr. McLaren: If we look at B.C.'s natural gas replacing coal as an energy-generation fuel, then we will save the planet 66 million tons per year. That is the current estimate given the production estimates and what people would like to see for LNG going to Asia. We have an opportunity here, and we need to take that bigger picture view. What we need is consistency across climate change policy. Investors are looking for that kind of consistency. There is another area where we can work together.
The Chair: You mentioned the climate action secretary. This is a secretary within your government?
Mr. McLaren: It is within our Ministry of Environment, and they have been driving our climate action policies for the last number of years. We work closely with them. We have something that is called a Natural Gas Climate Action Working Group. I co-chair that with one of the vice presidents from the Canadian Association of Petroleum Producers. We work closely to try and come up with how we can reduce emissions. As examples, bringing electrification into the gas fields so that a gas plant that used to be driven by natural gas, taking gas out of the line, driving the operation of the gas plant, it leads to emissions. Well, if you can bring electricity over and run that plant off of electricity, you no longer have emissions. That is happening right now.
There are also greater efficiencies in gas line productions. If you run equipment with modern technology or off electricity rather than gas, you reduce emissions. We are continually working on a lot of small things to reduce emissions. You need to accept that we are looking at ramping up production, which means ramping up emissions, so how do we tackle this in a big way. Another thing we are looking at is carbon capture and sequestration. There is at least one major project up near Fort Nelson where you strip the carbon out of the gas, and you pump it back underground where it came from into a suitable reservoir where it can be stored forever. Again, we are looking at that technology. There are studies going on. We are working hard to try and find ways of reducing our emissions.
In summary, I would like to give a quick snapshot of some of the things that I see as federal and provincial roles and how we could work together. In Asian market development there is a huge opportunity, as I have said. One of the key things here is regulatory efficiency. Because these are major projects that require both federal and provincial approvals, so this is where the regulatory efficiency really comes in. A coastal waterway policy for the federal government, and jointly we can look at training initiatives to make sure Canadians have jobs, and as I say, young people can start a career in this industry and then can retire in this industry. Federal regulatory review processes, the National Energy Board, the Canadian Environmental Assessment Agency, and on my chart I have also identified a unique one, the First Nations Commercial and Industrial Development Act, FNCIDA. I have flagged that one simply because the Kitimat project is on an Indian reserve, which means it is on federal controlled lands. This Act allows for development on those lands. We are working collaboratively with the federal government such that the B.C. Oil and Gas Commission can regulate on those lands. It takes certain machinations under the Act and regulations to allow that to happen. As long as we can streamline that and make it happen, that is great.
Senator McCoy: Could you repeat the act?
Mr. McLaren: The First Nations Commercial and Industrial Development Act, FNCIDA. It is unique. It is a bit of an unusual case of having the Kitimat LNG plant on an Indian reserve at the request of the Haisla First Nation. There is part of your partnership. Transportation and coastal waterways issues, as I have mentioned already, are primarily federal, but we would love to collaborate to make sure that happens. Climate change policy, consistency in policy is critical for investors, so let us work together on having a consistent approach on that.
With regard to training, we both have roles in making sure Canadians are at work, so how can we work together on that. Again, the frac fluids registry, we have got that ball rolling. We would like to see everybody across Canada joining us and using that registry. It is very user friendly. There are a few opportunities as to where we can work together.
Now I would like to thank you very much for the opportunity to talk about B.C.'s natural gas sector and to welcome any further questions.
Senator Mitchell: There is lots of discussion about the downside to carbon taxes. In our proceedings whenever I ask presenters, and I almost always do, ``do we need to price carbon and how,'' they say yes and carbon tax. The downside that is often quoted or stated is that it makes us uncompetitive, but it seems like there are all kinds of activities and investments going on in B.C. You have a carbon tax. Has that in any way reduced your competitiveness?
Mr. McLaren: It has affected our competitiveness.
Senator Mitchell: Negatively, positively?
Mr. McLaren: Everything that adds more costs has a little bit of a negative impact at least. We have had long discussions with industry on this. They certainly recognize the need to address this issue and put a price somehow on carbon, whether that is through a trading system or a tax. I guess what we are talking about is the magnitude of the tax and when do you make your jurisdiction less competitive than your neighbour's. By neighbours, we are competing with Alberta very closely, but the rest of North America, and we are competing very strongly with Australia as our critical competitor for reaching into Asian markets. We have to look around not just North America but the globe and see when does the tax in B.C. reach a point where it starts to really affect us negatively, and we are constantly trying to monitor at that. I could not give you an answer right now as to whether that is negatively shutting us down, but we are constantly monitoring and trying to be aware. Part of our vision is to remain a competitive jurisdiction for investment, and this is a critical part of it.
Senator Mitchell: At the same time it is driving efficiencies. You mentioned, for example, that you are trying to electrify the production of natural gas because it reduces carbon and might even be more efficient. Also the two jurisdictions you mentioned, Alberta has de facto a carbon tax of $15 a ton and Australia just brought in a carbon tax. Norway has a carbon tax and has had for 20 years. I would be interested in knowing where you assess the competitiveness of your carbon tax and its simplification? Is that done in your finance department or in your energy department? Are there reports that you release of that analysis?
Mr. McLaren: It is led by our Climate Action Secretariat. Again, they work with not just us but with all the different sectors, the cement industry, the mining industry, and we are monitoring that. We are actually doing an evaluation with them right now and with industry on how do you do economic modelling that looks at various levels of taxes over time and what is the impact on investment. It takes you into a world of economic modelling that I freely admit is well above my head, but when I listen to the economists and the modellers talk about it, there are very different assumptions that can go into models, so we are wrestling through that right now.
Senator Mitchell: When you mentioned the need for consistency nationally, clearly that is a role that could be played by the federal government. Have you some thoughts about what the federal government could do there? This is not a leading question, but are you saying that we should have a carbon tax all across Canada so we are consistent in that way? What are you looking for in consistency?
Mr. McLaren: I am looking for a level playing field amongst competitors, and really what I would hope is that it would be across North America because 80 per cent of our gas leaves the province and goes elsewhere in North America right now. If we had a level playing field with all the other states and producers around North America, then we can compete. We have challenges here within North America by being so far from the current markets, so we want to just have a level playing field to compete on and not have to have extra costs because money is so mobile. I think Alberta recognized that a few years ago when they played with their royalty system. Money just flowed into B.C. That is partly why we had so many land sales and so much drilling going on a few years ago. It was partly because Alberta drove people out of the province. Alberta has since corrected that measure and money is flowing back again, but that is just an example of how mobile money is. If we do something to a carbon tax we can unwittingly push money out of the province very, very quickly, and we need to be cautious about that.
Senator Neufeld: On your slide 7 where you show the size of the major shale plays in the U.S., the Marcellus play is obviously the big one, estimated to be 1,500 trillion cubic feet. It is a pretty big area on the map, but if you look in Northeastern B.C., you said estimates may exceed 1,200 trillion cubic feet. It is just a small little dot. Can you tell me who draws the maps and why they are drawn that way? Is it to get attention for some reason somewhere? That is one question. I will just pose them both to you because I know we are short of time and I have good knowledge of a lot of this. On page 12 you have a map. There have been lots of questions about why companies are targeting Kitimat when they have to use the Douglas Channel rather than going over to Prince Rupert, which is much closer to the open ocean. There is a reason for that, and maybe you could expand on that just a little bit for the group, understanding that from Alaska one to three VLCCs, very large crude carriers, traverse the West Coast of British Columbia taking crude from Alaska down to Washington State. Maybe you could expand on that a little bit. I would like to know about the size of the Marcellus play.
Mr. McLaren: The sources for the maps are on there. I do not know the exact relation, but I am going to go out on a limb here and go way back to my original career as a geologist and say that may be the size of the Marcellus basin, but in B.C. we are talking about two or three different shale layers. You have to think in three dimensions. I am a geologist. I think in three dimensions. We have very, very thick shales in B.C. Some of them are up to 300 metres thick. That is a lot of shale.
Senator Neufeld: That is a good explanation. Secondly, the population is huge in that area. It would be tough to develop even 10 per cent of that in New York.
Mr. McLaren: That is a very good point. In terms of Kitimat and Prince Rupert, both are excellent deep water ports. There are existing port facilities. Senator Neufeld has pointed out to get to Kitimat there is a long fjord to travel up, Douglas Channel. I am not an expert on navigation, but I have seen the charts that show it is certainly a wide enough channel for large ships to get up and down. You can bring the marine safety issues into play. There is not a problem in getting ships up and down that channel. Getting a pipeline to the port is part of the issue. The Pacific Trail Pipeline that is going to lead to Kitimat has already got its regulatory approvals. It is difficult getting through the Coast Range to get over to the ports. You are taking a very large pipe up hills, over some big mountains, and down again. The extra step to get to Prince Rupert is just one more big step to get over another mountain range. I do not know if any of you have ever driven that road to get to Rupert, but the mountains come straight down, you have got a flat piece here, there is the highway, and there is a railway, and then you have got the Skeena River, which is two or three kilometres wide. You have got some real challenges to get through that, but that is not to say it cannot be done. There are other routes. You could go farther north and come back down. I do want to point it that I mentioned that there is other people looking at LNG. I could probably cite as many as eight different LNG projects that are being studied right now. Some of them are in Prince Rupert. I have not seen exactly how they will get a pipe to Prince Rupert, but the main point I want to say is people are looking at it, the technical expertise is being put into it, and both options are probably viable options in the long run.
Senator Brown: Alberta and B.C. are great with pipelines. They know a lot about pipelines. Your biggest transportation in LNG is going to be ships, unless I am mathematically wrong. We have studied about LNG shipping. I do not know, are they double-hulled, triple-hulled? Are they going to be like slow oil tankers, very large, and should B.C. and Alberta have an interest in that kind of shipping because that is going to be a big part of getting LNG to its market.
Mr. McLaren: You are getting into a field where my expertise starts to dwindle. Shipping is not my strength. I could not quote the sizes right now. LNG vessels are different than oil tankers in terms of volume. When I have talked to companies they certainly talk about having the latest technology in shipping technology. Again, I have seen demonstrations of the size of a ship and the widths of the channel and navigating up and down the channel. You can turn a ship around within the channel if necessary with the use of tugs, of course. Again, there is a federal review process dealing with shipping. When the Kitimat project was approved, the shipping aspect of it was dealt with through Transportation Canada. They have something called the termpol process, T-E-R-M-P-O-L, and they deal with shipping from the wharves and the transshipment of the product on to the ship and on out to the open ocean. They deal with all those safety issues and the regulatory issues in relation to shipping. To be honest, I could only point you in that direction to get the details on that one.
Senator Brown: I just wanted to know if there was any interest in the provinces or the federal government having some of the shipping itself. It has got to be a big part of the cost of getting LNG to market.
Mr. McLaren: On that front, when I talked before about the price differential between Asia and B.C., it sounds like a lot, but when you start to add in the cost of the pipeline and transporting the cost of LNG but also the cost of shipping to Asia, that all has to be added up. That price differential starts to shrink. Someone asked about whether that $18 price is going to stay. Well, it probably will not. At what point does the cost differential get to where it is no longer worth it? The benefit we have in British Columbia is that we have the shortest shipping time to Asia from all our competitors around the globe.
Senator Brown: Yes, I know that. I wonder if you could tell us the percentage of cost. Can you compare a percentage just of the costs between carrying it to New York or from B.C. to our other markets? Is there a measure there in that bracket that you are talking about? Can you give us a percentage at all of the costs of just the shipping by itself?
Mr. McLaren: To be honest, I could not right now.
Senator Brown: I did not mean to ask questions you could not answer. I know nothing about LNG shipping and I wanted to find out a little bit about it.
Mr. McLaren: I could provide an example of some of the costs.
Senator Banks: All predictions are wrong, of course, if some little blip can happen along the way and skew whatever line we have drawn about predictions. Patient capital, as you pointed out, is required to build these kinds of facilities and to make these kinds of things work. Is it reasonable to assume with respect to your projections of export to Asian markets that there are not going to be found, either in Asia or in Eastern Europe, shale gas deposits which will be more cheaply and easily got to those Asian markets? If I were an investor would I be worried about that?
Mr. McLaren: I think a prudent investor would certainly look at that. Any of the investors that we have talked to are not in a worried state about it. They do see other basins. They certainly see Australia as a good example where there are significant resources. They are pouring a huge amount of money in, and they are trying to capture some of the Asian market as well.
Senator Banks: These are very long-term investments, and you would agree that with respect to shale gas and its placement and its practical, affordable extraction, the situation that pertains now by comparison with what we knew 20 years ago, never mind 40 years ago, it is a different universe?
Mr. McLaren: Yes.
Senator Banks: Everybody will take that into account.
Mr. McLaren: It is really the size of the demand, the size of the market that is driving this.
Senator Banks: Everybody talks about jobs connected with pipelines. I am a landlubber like Senator Brown and Senator Mitchell, and we know there are a lot of jobs in building a pipeline, but we also have the impression, at least I have the impression, that once the pipeline is built, it does not take all that many people to run a pipeline. What are the long-term jobs that you see accruing to B.C. and the communities that you have talked about with respect to the pipeline?
Mr. McLaren: Those are good questions.
There are in the range of 1,500 jobs for constructing the Pacific Trail Pipeline, as an example. You are absolutely right. The long term for operating a pipeline is limited, and I am going to guess it is in the order of a few tens of jobs to be out there inspecting and running the pipeline. An LNG plant, again 1,500 jobs over two or three years to construct, but 125, 150 jobs in a town like Kitimat to operate an LNG plant, and these are very well-paid jobs. That is a significant contribution to the town of Kitimat. If you start to see two or three of these plants operating, that is a significant contribution to Kitimat.
Senator Banks: There has been talk about resistance on the part of First Nations of the transit pipeline going across, not the operation of the LNG terminal itself, which, as you pointed out, would be there at the invitation of the First Nations on whose land it would be built. But there is some opposition from First Nations, we understand, of the east to west part of the pipeline going across the province. Is that wrong?
Mr. McLaren: Right now there is strong and unified support for natural gas pipelines in the province.
Senator Banks: As opposed to oil pipelines?
Mr. McLaren: As opposed to oil.
Senator Massicotte: Further to the questions asked earlier, you have a carbon tax today of $25 going up to $30 come January 1. From what I read, it is a retail-based tax. Could you describe that? That is what I read. Who is taxed and what has been the consequence relative to allocation and energy efficiency? In other words, your tax of $20 a carbon ton today, who is being taxed? Is it the consumer? Is it the producer?
Mr. McLaren: No. Right now the tax applied to the oil and gas sector is on emissions when they burn gas. In a gas plant when you are producing gas and you use gas to operate the plant and you burn it, then you are paying $25 a ton. It is on the producer.
Senator Massicotte: Always on the producer, and therefore the consumer does not see a tax on his regional consumption of gasoline, for instance. He sees it through increased cost of supply, but it is not at the retail level.
Mr. McLaren: Right. Remember that the Province has committed to this being revenue neutral. There are other aspects of the economy where grants are given back to the people to balance off that.
Senator Massicotte: Having that as an extra cost, has there been any visual impact to the allocation of capital or how people are behaving as a consequence of the fact that that cost has gone up? Have producers done something as a consequence? Have consumers done something as a sequence?
Mr. McLaren: I am not aware of that, and I think I remarked to you last night that I have not noted anyone driving less because we have a carbon tax.
Senator McCoy: Senator Banks was beginning to explore the international markets. We keep talking about having opportunities in Asia, but we are not ever given or very rarely given information about what the geopolitical situation looks like in its entirety. Maybe I could ask it this way, which would facilitate our proceeding this morning. Could you provide us with a map showing, for example, conventional and non-conventional particularly gas deposits around the Asian markets, so that would take in North America, Latin America, Australia, and Asia, and to show us some of the competitors there?
Mr. McLaren: Sorry, I did not follow that.
Senator McCoy: I am just looking for a map like you have on page 7 that would show the Pacific Rim.
Mr. McLaren: Of all the competitors and end markets?
Senator McCoy: I would like to see the gas deposits that have been identified.
Mr. McLaren: We will come up with something that will be almost like a supply and demand map.
Senator McCoy: That would be excellent. That will help us, I think, so I will not pursue that question anymore.
Discussions were underway with the federal government, the B.C. government and other interests in British Columbia including the coastal First Nations, I believe, about some form of agreement around northern oceans protection, I think it was called. I read two months ago that the federal government had withdrawn from those discussions. From the look on your face I am not sure you are familiar with it.
Mr. McLaren: I am in the same boat as you. I do recall something and reading about that. There is an offshore planning process. I would have to go back and look at that myself.
Senator McCoy: Perhaps you could again just provide our clerk with the name of somebody whom we could follow that up with. That will be somebody in British Columbia with whom we could liaise to find out more about that.
Mr. McLaren: Let me look into that.
The Chair: Mr. McLaren, you have a wonderful way of explaining these issues. On behalf of all colleagues here and the Senate of Canada, thank you for your time and the work you have done to prepare this excellent presentation. We look forward to the documents you have agreed to produce, and would like to retain the option to ask you for further input if necessary.
Mr. McLaren: I really appreciate this opportunity to be here. It was great meeting you all.
The Chair: Our next witnesses are Ralph Torrie and Tyler Bryant from Trottier Energy Futures Project. Welcome, gentlemen.
Mr. Torrie is known for combining visionary thinking with rigorous analysis and has made original and important contributions in the field of sustainable development. He was the assistant coordinator of the energy research group of the UN University and the International Development Research Centre and went on to establish and run his own consulting firm. He pioneered the methods and conventions that are now used throughout the world in local greenhouse gas quantification and analysis. Mr. Torrie is the co-inventor of environmental planning software that has been translated into several languages for use in more than 300 municipalities, companies, and institutions on five continents. He has a life-long interest in sustainable energy futures and produced the first low carbon scenario analysis for Canada. He has assembled and led the team that carried out the strategic policy analysis for greenhouse gas emission reduction for numerous public sector clients such as the states of California, Hawaii, Wisconsin, and Illinois, the governments of Canada and Ontario, the Western Climate Initiative, as well as a number of local governments including the county of San Bernardino and the city of Toronto. Mr. Torrie is the recipient of the Canadian environment silver award for his work on climate change response strategies and no doubt will go away today with the gold award from this committee.
Tyler Bryant is an energy policy analyst with the David Suzuki Foundation, well-known to many of us, focused on transitioning to a clean energy future. This includes energy and economic system modelling, policy analysis, and research on implementation pathways and relationship building with stakeholders. Tyler is a public policy wonk, which is a good thing, a practitioner, by training focused on developing realistic, feasible, and positive change for Canadian society. His experience is in understanding the key drivers of our energy economy as well as evaluating the costs and benefits of climate solutions and no doubt will be helping to dispel those myths that the Suzuki Foundation is opposed to development of energy projects.
Ralph Torrie, Managing Director, Trottier Energy Futures Project: Thank you Mr. Chairman and committee members for inviting us to meet with you this morning to share some of our thoughts at this stage in the work that we are doing at the Trottier Energy Futures Project.
I preface my remarks by saying that neither of us is here speaking in an official capacity as representatives of the Canadian Academy of Engineering, whom I know has appeared on their own before you in past months, or the David Suzuki Foundation. The opinions that I may express as we go along this morning are really my own comments in that regard.
What I thought I would do is tell you a little bit about this project. I do not think that you have heard too much about it before on your travels around the country. I will describe to you the approach that we are taking to the mandate that we have, and then give you a little bit of a taste of some of the insights that we are starting to get. It is still early for us, so I hope that there will be an opportunity to come back some day further along in our process and report back to you again. We did come with some handouts. I am not going to run through these like a presentation. We may or may not turn to them depending on how the discussion develops. They are there to illustrate certain points which may come up either in my remarks or in the discussion that follows. I am going to try to be relatively brief so that we can help you get back on time and also maximize the amount of time for questions, the discussion.
The Trottier Energy Futures Project is a really interesting and unique collaboration between the Canadian Academy of Engineering on the one hand and the David Suzuki Foundation on the other hand. Right away you can see that something unique is going on here. These are two organizations, both great Canadian institutions in their own right, both dedicated to improving the future for Canadians, that historically at least have come at thinking about the future, if you like, from different perspectives. What is unique and potentially powerful about this particular collaboration amongst all the various discussions that are going on about energy futures in Canada, is that at the core we have this coming together of the engineering perspective, if you want to call it that, and the ecological perspective as represented by these two partnering organizations. What interests me about that is that ultimately the type of relationship we have with nature, the kind of impacts that we have on environment, and the way that we make our money in our economy has got engineering right at the centre of it in the broad sense of the word. We are what we build, you might say, and everything that we build goes through an engineering process on its way to being designed and constructed. You can almost think of engineering as a language that we speak, and it is the language that we use to communicate with the rest of nature. This project you can say is thinking about what we want to be saying with that language. The ecologists on the other hand bring a perspective to the issues that tends to be integrated and looks at the interconnections between the types of economic development issues and priorities, which you have just heard about in the past hour, with the concerns that are arising about the environmental and other impacts of that economic development, particularly with regard to the energy sector and climate change with respect to this particular project.
The mandate that was developed through discussion between the Suzuki Foundation and the Canadian Academy of Engineering for this project, which is called the Trottier Energy Futures Project, by the way, because it is being funded by the Trottier Family Foundation, which is headed by Lorne Trottier in Montreal, entrepreneur and founder of Matrox, was to actually identify in some detail and begin to implement a low carbon sustainable energy future for Canada, and it went further to say by low carbon we mean could we get our emissions down by 80 per cent by the middle of this century. It is a transformative mandate right off the top. That is another thing that perhaps is not unique among the various conversations that are going on in this country about our energy future, but it is right at the centre of our mandate. We are not only paying lip service to the deep reduction. We are actually going in with engineers and ecologists working together suspending disbelief in this future because frankly most people look at the energy system, and if you say 80 per cent reduction, they say, ``You have got to be kidding.'' We are saying, ``Well, let us just suspend that disbelief and exercise our imaginations and bring our understanding of energy systems to bear and see whether or not there are such futures out there and what will be involved in achieving them.'' That is what we are trying to do.
We have organized the project in phases. The first phase is essentially a research in which we are trying to get some basic perspectives and background information and data in place to support the rest of the work we want to do. That phase of the work is nearing completion. Then we will be moving into a much more process-oriented phase in which we will be engaging selected Canadians in a creative sort of scenario-building exercise around the mandate that I just described.
So far we are finding that this is proving to be a very rich experience and the bringing together of these two perspectives is yielding the fresh and interesting new ways of looking at the problem that we hoped it would. In this first research phase that I described to you we are engaged in four or five separate streams. I will briefly tell you what they are.
First, we are doing a retrospective analysis of energy and emissions in Canada over the past 40 years. Some of the charts that we have provided show a little bit of what we are learning from that exercise, but the purpose of that is before we go off and start thinking rigorously and quantitatively about where we may be going over the next 40 or 50 years, let us make sure we really understand what just happened because there are some interesting and rather surprising discoveries when you start to stand back a little bit and look at what we have just been through particularly with regard to the contribution that improvements in energy productivity have made both in Canada and all of the OECD countries to our energy security, a very large and often overlooked factor. In general, with regard to the extent to which fuels and electricity while still growing, the growth has slowed down relative to the growth in the economy. I notice, for example, in the committee's report from last year the number of references to the way that GDP drives the demand for fuels and electricity. That was true when I got involved in the 1970s. That was standard conventional wisdom that the only way the GDP would ever grow was if fuel and electricity grew along with it. From World War II until about 1971 or 1972 every time the GDP would notch up by a point so too would the consumption of fuels and electricity. It is perhaps understandable that people began to think that this was some sort of ironclad relationship. The central finding that you see when you do this type of retrospective analysis that is stream one of our research is the decoupling, which is quite dramatic, that has occurred between growth in our GDP and growth in the fuel and electricity consumption to the point where we stopped using GDP, for example, and our utilities stopped using GDP as a basis for forecasting the demand for electricity in Ontario years ago because it is useless for the purpose.
Underneath that big relationship between increase in GDP and consumption of fuels and electricity, are huge dynamic changes taking place that are in general slowing down the rate of growth of fuel and electricity relative to all of the other contributions that are made to providing the value and the services that we get from energy. We may come back to that point in the discussion if you like, but it connects directly back to Senator Banks' question about the patience of capital that is needed for some of these large supply projects because the changes that are taking place in that relationship, largely on the demand side, but also with regard to some of the new electricity technologies on the supply side, are happening at a pace that is much, much faster than you can design, get approval for, build, and commission a traditional energy mega project, which can take ten years, 15 years. In 15 years the technology of electronic devices, the technology even of buildings, many of the technologies of fuel and electricity consumption can go through two or three or four generations of technology. This is not an academic point. This is why our electric utilities and our oil and gas companies got their projections for future demand and therefore for capital investment so badly wrong in the 1970s. Some of you may remember. We hugely overshot the investments that were being made in power and oil and gas production because we failed to see the changes that were coming, disruptive technologies, as they are called, on the demand side that would change our historical understanding of the amount of fuel and electricity growth that goes along with wealth and prosperity. I will not belabour this point any further, but this is why we felt that we should take a long, hard look at the last 40 years before we go off and create scenarios for the next 40 years to make sure that we are capturing the kinds of trends and factors that are apt to change in the future and which put at risk both our public policy and our business strategies if we ignore them.
The second stream of research that we are doing is putting together basically a budget of the low carbon energy sources in Canada. If our mandate is to come up with a scenario or scenarios of how we might have a much lower carbon system in this country, let us find out what we have to work with. We are actually figuring out how much solar could there be in 2050, how much wind could there be, how much bioenergy supply could there be, how much hydro, how much nuclear, and so on. We are not putting a lot of constraints on this exercise. We are just saying what is the technical potential, which as it turns out is very, very large, and what really constrains you on the 2050 time frame tends to be questions about just what is feasible in terms of business development and the basic economics just how much supply could be in place. In summary, we are doing an exercise in which we are just trying to get a sense of the supply that we would have to live within if we were going to reduce our carbon dramatically.
The third stream of research has to do with simply taking a look around the world at others who have taken on a question like this, not just the carbon challenge, but all these other very, very dynamic changes that are going on in the energy economies throughout the world. What do they look like in terms of the type of energy systems we might have in the year 2050 and especially who is looking at what very low carbon energy futures might look like.
The first thing you notice when you go down this path is that there is a relatively small number of rigorous quantitative strategic analyses of what these futures might look like. It was mentioned in the introduction that I did the first one in Canada. It was actually the first or the second one that had been done anywhere. To this date there is only a couple of dozen of these kinds of studies that have really been done in the world, and probably, in our view, only about eight or nine of them that are really worth taking a serious look. We are doing that to see how the British, French, Germans, Australians, Fins and Swedes have been tackling the same question that we are trying to answer here in Canada, which is to look at whether there are futures out there that are sustainable with much lower carbon that rich, industrial countries could pursue and how you would go about doing it. We are finding some very interesting common conclusions in that research of other best practices in this field, and I will say a few things about some of those common findings.
One is that almost without exception there is a technological optimism that runs through this work. There is a sense that when you run the numbers, and there are some exceptions and it is uneven, the conclusion generally is that technology or want of technology is not what is holding us back. We know how to make low energy and even zero- energy buildings. We know how to build vehicles that are radically more efficient than the ones we have now. We know how to improve the productivity of fuel and electricity use by several-fold. There are some difficult areas, as I said, where there are still technological challenges, so I do not want to completely dismiss it, but it is generally true that there is a consensus in this literature that technology or lack of technology is not the limiting factor.
Another universal thing that you see in all of these outlooks and which I am sure will be reflected as our work proceeds here in Canada is that the role of electricity is going to get bigger in the end-use sector. It often surprises people to learn that the percentage of our actual energy use that must be required by electricity, there is really no choice, like the lights and the electronics and electrochemistry and telecommunications and information processing, it is only about 12 per cent of our total energy use. There is different ways this can be verified, but one easy way in Canada is just look at the per cent that electricity contributes to total energy use in Alberta where electricity is generally not used for anything that it does not have to be used for. You will see that 12 per cent or 14 per cent of energy use is typically for electricity. That number is going to start to grow as electricity gets market share in transportation, of which it has never had a significant share, and as some of our industrial processes find electricity-driven ways to do what they do that allow them to use much less high-temperature heat. We are seeing a transition in industrial production towards systems that will be more electricity intensive, yes, but much less energy intensive, much less fossil fuel intensive. That is a trend that we see throughout all of these studies.
There is also typical of these views the tendency to try and accomplish the objective, whether it is to lower carbon emissions, which it is in our case in a sustainable frame work, by improving the efficiency of fuel and electricity use and then switching as much as possible to lower carbon or no carbon sources. We will have more to say about this as our work unfolds, but what we are finding is that when you do that you are ignoring one of the most powerful groups of changes that may help us achieve a more sustainable energy future. That is all of the things that go on sort of upstream from the demand for fuel and electricity, the things we did not see coming in the 1970s and then again in the late 1980s which led us to overshoot in our supply side investments but which are continuing.
For example, of the improvement in energy efficiency in the broad sense that we have seen in Canada, only about a third of it has come about because we are using fuel and electricity more efficiently in a technical sense. The other two- thirds, over 2:1 ratio, are coming from these types of structural changes I am referring to. We are moving from manufacturing to services within our primary processing industries like steel and chemicals and smelting and refining. We are moving up the value-added curve, not really to save energy, although that is a bonus, just to survive against third world competition. The value-added profile of products from energy intensive primary industries in North America is going up. That has the effect of more GDP fueled with per kilowatt hour or barrel of oil use. We are seeing a saturation in the post-war baby boom generation. Once you have a fridge and a stove and a car and a dryer, there is a limit to how much more energy consumption is going to occur there, and you combine that with some of the downsizing that is occurring in that generation, and we are seeing a very dramatic falling off and even levelling off of growth and demand for fuel and electricity in the residential sector. That is another trend that we are seeing throughout these studies.
There are huge implications to the electric grid coming in all of these scenarios. Even in a future in which the central power plant continues to be the backbone of the system, in some of the studies we are looking at and some of the outlooks that we are looking at, there will be a dramatically increased contribution from the distributed generation sources, combined heat and power, windmills, rooftop solar, community-scale power plants, small natural gas, combined heat and power plants, all those kinds of things. The scale economies and the electric power industry have basically been stood on their head from where they were when I was young where bigger was always cheaper. Now we are finding that the smaller distributed generation sources are quite competitive, not only in their own right, but for the added resiliency that they bring to capital investment planning and the flexibility that they bring.
Plus you just cannot stop them. This is another thing that in some ways I think is a concern here in Canada. Here we are in a country with very cheap fuel and electricity, an export-oriented oil and gas production sector, the expectation of ongoing population growth off into the future driven by immigration, but we live in a world where in many if not most other places in the rich world energy prices are higher, they do not have the advantage of having oil and gas production to spare, and so there is a tremendous pressure to develop new technologies, both on the demand side in the area of distributed generation that is greater than we have here, and this is the downside of living in a country with cheap energy prices. You can fall behind what is going on in the technology world to the point where you end up increasingly dependent on the Germans, the Japanese and the other countries that are getting a priority to being leaders in the new energy technologies. I think when you are talking about being an energy superpower, that is fine, but it is important to realize that if you pull away from the general direction that all of our trading partners are heading in towards increased efficiency and increased use of distributed resources, you run the risk of planting yourself pretty low down on the value-added chain of the energy system where the higher value-added opportunities are being gobbled up by countries that are tackling climate change more aggressively and seeing the development of these new technologies not as a threat but as an economic bonus. There are some other general trends that we are finding, but I do not want to go on to the point where we do not have sufficient time for discussion.
With our fourth area of research, we are creating some initial quick scenarios of what a very low carbon future for Canada might look like. We are doing this with a big model of the Canadian energy system and we are doing it in — we call them seed scenarios because we are trying to get a sense of just what combination of efficiency, improvement, lower carbon sources, and changes in this third family of factors I was referring to a moment ago, what combinations of assumptions in each of these three areas or changes in each of these three areas would be necessary in order to hit these very low carbon numbers that we are targeting.
Those are the four areas that we are researching. The papers and other forms disseminating this work will be coming out in the early months of 2012. We will at that point, starting in January, be moving on to the next phase of the Trottier project, which is based on what we have learned in this research, based on identifying not just the usual suspects, if I can use that term, who always show up when you want to have a meeting about energy or energy and climate, which are the commodity producers and the environmental NGOs and the government departments that referee that whole process, but extending beyond that to the architects, urban planners, bankers and educators who our research tells us have to be engaged in thinking about this if we are going to find effective solutions. We will be bringing a selected group of Canadians from all of those different backgrounds together for a creative scenario-building process where the analytical staff of the Trottier project will be there to support them, but the actual creative work of thinking about the way Canada's energy future could evolve over the next several decades will be done by this invited group of probably somewhere between 100 and 200 Canadians who have been identified in our work as coming from the types of backgrounds we need and also being the kinds of thought leaders and opinion leaders within their disciplines so that their influence will sort of extend beyond our little project because we are a fairly modest little project at the end of the day.
That gives you a sense of the work that we have been doing and where we hope to take it next. I am just checking my notes here to see if I have made any egregious omissions, but I think that gives you a sense of what we are doing. You will be hearing more from this project as this work I have been describing starts to be published and disseminated in the months ahead and as the process that we are now starting to initiate for a broader discussion gets underway.
With those remarks, I will stop there. If you have any questions or any particular points I have touched on that you would like me to elaborate on, I would be happy to do that.
The Chair: Mr. Bryant, do you have a presentation as well?
Tyler Bryant, Energy Policy Analyst, Trottier Energy Futures Project: No. I am just following with Mr. Torrie for any questions that may be a little too technical.
The Chair: First of all, sir, thank you. You were before us, were you not, last March with the Sierra Club?
Mr. Torrie: I was here in my capacity as a member of the board of the Sierra Club Foundation at that time.
The Chair: I happen to know Mr. Lorne Trottier. He is a very generous man. Could you give us a sense of the funding that you have obtained for this project on energy futures and how many people are involved in the study? You said it is a modest little project, but it sounds like it has tremendous potential.
Mr. Torrie: I do not think there is anything confidential about the donation. The size of his endowment for the project is $2.5 million spread over a number of years. We are probably about a third of the way through the timeline for the project. The number of people, Mr. Bryant is sort of our king pin when it comes to the research effort. We also have another full-time researcher, about 80 per cent of my time. We have a couple of contractors. That is what I meant by modest.
The Chair: Right. It is a think tank.
Mr. Torrie: Then there is quite a bit of support being provided especially by the David Suzuki Foundation offices here in Vancouver, administrative support and so on, and also by the Canadian Academy of Engineering out of Ottawa. We get more value than the dollars might indicate by virtue of the contributions that are being made by the partnering organizations. When I compare the kind of effort that is going into even just the research component of what we are doing in some other countries I blanch. The Americans just produced a low carbon future scenario analysis for the States a couple of weeks ago. It is called Reinventing Fire. It came out of the Rocky Mountain Institute. There are 21 authors, two years, and I think about 60 people worked on it. It is not uncommon to find behind some of these best practices studies that we have been looking at budgets and levels of effort that are into the millions of dollars. I do not see a comparable effort going on in Canada in our strategic thinking and analysis of what is coming in the energy sector. I think that is an issue in this country.
Senator Mitchell: I am very taken by the spirit of this idea you just finished with, the sense of we are making decisions today that will not be applied today. They will be applied to a very different future. You made the point very powerfully that in the 1970s we made some real mistakes because we did not understand what was going on. We thought we could make the case in the U.S. that ethical oil as a public relations exercise would sell the Keystone Pipeline. There are those who think that that decision or non-decision, that delay, is really just kind of election politics leading a year out, but maybe it is a fundamental change about the way that people are viewing climate change, are viewing Canada. We see the FQD, the fuel quality issue in Europe, we saw what happened to the forestry industry when this kind of thing began to emerge and all of a sudden the crunch came. Are we failing to see that the world is truly changing and that this will have an enormous impact on how people view Canada, how people view not only our energy products but also our role in the world and our influence and so on?
Mr. Torrie: It is a good question, and the comment that is embedded in it I think is quite valid, which is the world is changing very rapidly with regard to not just the energy sector but all of the other areas of economic activity which determine what goes on in the energy sector. We often forget this, and I think it was Dwight Eisenhower who said if you have a tough problem that you are having trouble solving, make it bigger, and that is what we are finding in the Trottier work. If you take too narrow a look at what is going on in the energy business you will miss what is coming in a very similar way to the way we have missed it in the past. So we are expanding the focus of our work and trying to deliberately look internationally for the trends that are coming.
As far as something like the Keystone Pipeline is concerned, it got selected. It fell into the crosshairs. It became an iconic symbol and direction for people who expressed their opposition to the pipeline. My personal opinion is that it was because it symbolized to them a moving forward in the wrong direction, not because the pipeline by itself makes much difference one way or the other. That is the problem with the environmental crisis in a nutshell, is it not? Nothing matters that much, but everything matters a whole lot. It is possible for anyone to say and even Canada as a country can say, ``What difference does it make what we do? We are only 2 per cent,'' and walk away. I came from a family of nine kids. I would get in big trouble when I tried that argument at home. Why should I have to do anything he does not have to do? You did not go there in my home.
Aside from that sort of value perspective, the real risk of shirking or walking away from these changes is that we will fall behind technologically and economically. You can see it coming. The other thing is not only the danger of falling behind, but there is just such enormous opportunities that we could miss if we continue to sort of amplify our role in the world as just being hewers of wood, drawers of water and pumpers of oil and gas. We miss all of the opportunities that are coming outside of that narrow slice of the pie.
Take automobiles as one example. Where it looks like cars are headed, so to speak, is that they are going to get a lot lighter. It is inevitable. Most of the energy that moves a car is there to move the car. The car weighs ten times. It would be funny if it were not so pathetic. We move these 4,000 and 5,000-ton machines around because we have a 200-pound person that needs to get from A to B. It is kind of funny when you think about it. What is happening is with the demand for cars that is emerging in Asia and the emerging economies, they are redesigning it. A lot of the design of the future is going to be driven by needs of the Asian economies. They are going to be smaller, lighter, made out of carbon fibre, and electrified. One of the consequences of those technologies changes is that suddenly a car is not necessarily something that you need billions of dollars to be in the business of making. You need hundreds of millions maybe because you are stamping out the bodies with carbon fibre. Instead of thousands and thousands of pieces, there is just dozens of parts that basically snap together. It is kind of like the change the computer industry went through when it went from mainframes to PCs.
Those kinds of business opportunities are coming on the horizon. They are being driven by technology change in the energy sector which create whole new opportunities for players who maybe have not historically been involved in car production, just to take that one example. Those are the kinds of things where Canada's future participation in the world economy could start to look quite different if not only our governments but also our business class as well rises to the challenge.
Mr. Bryant: I just wanted to jump in one second. The auto is a great example of this third wave of change that is going on, and the Keystone Pipeline is by and large to fuel American oil demand. What we see in the United States in the past three years is an indication that maybe peak auto is happening in that country, not peak oil. We are seeing that people are actually driving less. It is a noticeable trend. People are buying fewer cars. The fleet is starting to shrink. We are engaged in adding new capacity, more and more oil to the United States, without maybe recognizing that there is a larger fundamental shift going on, and we would be drilling a lot of oil for not a lot of people that want it.
Senator Mitchell: On that note, just to follow up and talk about fundamental shifts, Jeffrey Rubin, who was the economist of one of the major banks and quite controversial and provocative, made the point that just maybe the 2008 meltdown was not simply because of mortgages. It might have been because energy prices reached $150 a barrel and no economies can be sustained. If you subscribe to any kind of peak oil scenario, then all of a sudden you can see where there is going to be this regulator. Oil keeps going up and bang, economies collapse because they cannot sustain that kind of fuel price. Can you see that becoming some sort of trend that drives people more and more to what seems to be expensive right now, wind, solar, thermal, geothermal, you name it, alternatives of all kinds, but in the end actually become cheap, low-priced energy sources that keep energies down and allow economies to thrive, rather than this ceiling they are going to keep hitting?
Mr. Torrie: I think that fuel and electricity prices are definitely an important driver. They can be overestimated. Their relative contribution to most of what we do is fairly small. The contribution that fuel and electricity makes to the cost of owning and operating this hotel is probably a few per cent. However, what happens when fuel and electricity prices go up, of course, is the people that do think about these things start to change the way they design things and start to change the way they think. That is what causes the really disruptive changes.
As I said, the less time that it takes you to design and build a pipeline can suddenly have a big effect on your demand. It is not only that more expensive things get cheaper. It is cheaper opportunities that we have just walked away from in the past starting to be picked up.
One of the characteristics of focusing on energy is that other benefits start to accrue. There is no better example in my mind than the green building story. When I say ``example'' I mean an example of how price matters, yes, but so do the other benefits from rethinking energy. We tried to save energy in the 1980s in buildings, and we succeeded. People got sick. Building managers got annoyed. It was not a sustainable and, many would argue, very successful strategy. We just sealed the buildings up. There was not an integrated approach. While the energy got saved, there were other negative consequences.
Fast-forward 20 years and look at what is happening with green buildings. People are lining up to invest in them, to buy them, to work in them, to study in them, and so on. Why? Because they save energy? No. That may have been one of the triggers. It definitely was one of the triggers that started the building design people rethinking the way they did things. Once they did that, what they found was, ``Oh, my gosh, these are better buildings.'' We have to replicate I think that kind of a story in many of the other areas where we have crunches coming in the energy sector. In other words, the vehicles have to be better, not just more energy efficient. The industrial production systems have to be more profitable, not just more energy efficient. If we can pursue that kind of thinking, then a lot of the opportunities will already be there, just waiting to be discovered.
I met with a developer in Ottawa a couple weeks ago who had completed a $10 million retrofit on an old class C government building that was about 50 years old, about a five-storey building, maybe worth about $20 million. It was a big refit. It was not just an energy refit. Present value of the energy savings of the $10 million investment, $7.5 million. Not bad. Increase in the value of the building the day they moved back in because it had gone from class C to class B, another $7 million. Not bad. The estimated value of the increased productivity of the people working in the building due to measured lower absentee rates and higher levels of output of the departments working in there is $32 million.
It is a game changer. It has been sitting there all along. It is just that energy price increases and a focus on energy are helping us to go looking for these opportunities. More often than not, the technologies, as I said at the beginning of my remarks, are not what is lacking. It is just the business strategies, the financing strategies, and the logistical strategies necessary to exploit the opportunity. Those can be developed really fast.
Senator Mitchell: The other technology that is lacking is the technology to convince people that we have to do something about climate change and the environment. The other opportunity that is being missed in this, I think, is distributed energy as a way to promote rural development and sustain these rural communities that we see slipping away, and we lament at some emotional level, but we could shift from huge, huge plants to distributed energy where farms and small communities can produce their own energy and put that investment and that income into their communities rather than some place a thousand miles away.
Mr. Bryant: That aligns with the research we have been doing on the energy budgets that set that. Basically for rural and remote communities the renewable energy options available to them are almost unlimited. In Canada we have about 50 thousand megawatts of capacity of enhanced geothermal across Canada, not just in B.C. or Yukon or Alberta. It is across Canada. Right now it is not necessarily at parity with other generation sources, but you can imagine rural communities that just had their own global enhanced geothermal production site. This technology is currently increasing energy in places like Europe. It is just one example of things that can be installed in these rural communities.
Senator Banks: You will be very please to know that I am going to save a lot of time by simply making a statement that will probably embarrass Mr. Torrie. Mr. Torrie, you have been before this committee more than once before, I think. Each time you have knocked our socks off. We have never, since I came to this committee in 2000, had anybody who thinks outside the box the way Mr. Torrie does. If you look in the thesaurus beside ``think outside the box'' there will be a picture of Mr. Torrie. The point that he makes is the point that he has made to us before when he was under a different office. That is, we can do all this stuff, and it is really easy, and it is to our universal profit in every respect. The only reason we are not doing it is that of stasis and inertia and convention and because the business case has not been properly made. I just want to make an analogy.
When the Second World War came along and we were faced with an urgency, Lord Beaverbrook in England and Mr. Howe here were tasked with bringing about revolutionary industrial strategies that everybody said were impossible. ``You cannot do that in that short space of time,'' the conventions said. However, they both did. If we were to accept the fact that we are facing that kind of urgency now, Mr. Torrie and people like him are the people who would be the C.D. Howes and the Lord Beaverbrooks of fixing this situation in very short order by bringing to bear thinking outside the box and breaking down those conventions and making use of the things that we already have access to. That is not a question. You can take me off the list, Chair.
Senator McCoy: I could definitely reiterate what Senator Banks has just said and certainly endorse it. Let me phrase my question coming from what Senator Banks just said. What are the motivators or what is going to get us past the inertia? I presume that is Amory Lovins' Reinventing Fire. I presume it is an update of factor 4, is it? Have you read it?
Mr. Torrie: Yes. I am on the last few pages. It just came out a couple weeks ago.
Senator McCoy: Walt Patterson of Chatham House, has been saying this since 1971, and you, yourself, have been a member of that illustrious group. What are we going to do? What do we need to do in order to move us forward into a highly productive, high performing society, world competitor in the energy field?
Mr. Torrie: Well, again, as I said at the outset, I can only offer my personal thoughts on these questions, but one area in which I agree strongly with Mr. Lovins' perspective is reflected in his latest work Reinventing Fire. This, if it happens, will be led by the business sector. It is not to say that there is not a really important role for public policy. There is, but it is very much an enabling role. This is so fundamentally innovative and entrepreneurial at its heart that it seems unlikely that the magnitude of the transition will happen unless there is full and enthusiastic engagement from the entrepreneurial class.
I think it is coming. I think that there is a ground swell, if you like, of innovation that is taking place on how to do these things. I know there is. I see it. It is also not one problem. It is not 150 big problems. There are about seven or eight different transitions going on. There is the transition in personal mobility and automobiles. There is the transition in residential housing. There is the transition in commercial buildings. I think that we will get to a tipping point. If you look at what is going on with green buildings, for example, it is moving so fast now that the limiting factor is probably the number of people that actually know how to design and build them. If you look at what is going on in the residential sector, it looks a lot like that to me too. It is trying to find the skilled work force that knows how to do a deep retrofit or convert a house.
You can see where the implied role for government starts to define itself in statements like that. We have a manpower shortage looming for what will have to take place. Our community and technical colleges are going to have to up the game a lot, and there is definitely a role for government there. We will be enumerating the various public policy things and options that we believe could help accelerate the transition that you are talking about as we go forward. There is quite a bit of it in Lovins' book. One final comment on this, and you can say lots more about this obviously, but an interesting observation he makes is that it does not necessarily require an integrated national energy strategy because so many of the enabling mechanisms that can speed this up can be implemented at the state and local government level and are being implemented at the state and local government level.
I worked with local governments around the world for about ten years in the 1990s. It was amazing how much can be done once the local government takes on an issue like this to enable local businesses and local economic activity. It goes to your point, Senator Mitchell, about encouraging local economic development. You can pick any small town in Canada and calculate how much money is leaving the community for fuel and electricity. It is a big, big number. It is $1 million a day in my rural Ontario town. $1 million a day leaves the town. Some of it stays in Canada, but a lot of it ends up God knows where, bringing oil in and so on. You can start to see the advantages of reinvesting that outflow in the community. It creates jobs. It creates economic multipliers right in the local community. There is definitely a connection between the renewal of small town economies and the energy sector. It has to do with the amount of money that is leaving those communities right now.
Senator Brown: I am amazed at your studies and what you have come out of them with. You talked about technology growth and that it creates jobs. I do not disagree with you, but something seems to be happening just in the last few months in our world. It looks to me like we are losing a lot of jobs. I got a chart just a week or two ago about the European Union. One of their countries is spending 125 per cent of their GDP, which means that they are consuming all of their money and borrowing 25 per cent. Canada seems to be at the top of the list of the most stable financial countries there is right now, which is between 35 and 39 per cent of GDP. The United States is at 62 per cent.
To jump back a little bit, I got my first scare about technology over 20 years ago when I discovered all of a sudden that my bank's accounts had been taken away from Calgary and sent to Toronto. My parents and I had been clients of that bank for about 40 years. All of a sudden our bank accounts were in Toronto. When I asked, ``Why is that?'', they said, ``We can save 500 clerks in the city of Calgary by moving all of our banking to Toronto.'' I went straight to a different bank that still deals with me in Calgary. I see that happening all the time.
I have had some discussions with people that were running the western think tank in Alberta. I am trying to find out where the jobs are going to be. We have people who serve hamburgers and people who are waitresses and we have people who teach golf and those kinds of things, but I think this technology is a two-edged sword. The growth of it is definitely a two-edged sword. As an example, the first cell phone I ever had was huge and cost $2,400 and people could bump me off every time I called somebody else or took a call. Now I have a little one in my shirt pocket, and I can call anywhere in North America except for Mexico. Think of all the people who used to answer the phones and make the call for you. My point is that any time we create new technology we have less jobs.
What scares me about it is the city of Calgary is now 1 million people. When I was young we did not have any worries about theft or anything else. So many people are out of jobs in the city of Calgary right now, which is one of the financial centres of Canada. My own home got broken into three times in four years. I have got all the technology in the world watching it now, but when I talked to the police about it, they said, ``Hey, you are not the only one. Just four miles north of you five homes were broken into.'' It is going all the time because there are not very many hard working jobs.
The Chair: Senator, I think your point is clear. Do you want the witnesses to comment, or are you simply making a statement?
Senator Brown: I want to know whether the technology will give us jobs. That is what I want to know, thousands and thousands of jobs instead of fewer and fewer jobs.
Mr. Bryant: I would say that in this era of deeper international integration with our economies that technology development will actually save us in a way where our manufacturing jobs are being sourced overseas. We can be the designers. We can be the developers. We can be the implementers of these technologies. Embracing technological innovation, especially on a clean energy theme, will be one way that Canada can emerge in a low carbon world. Right now we are simply relying on resource extraction as our main economic driver. The danger there is that if the world wakes up and sees that we are moving forward with clean fuels, then our relatively dirty fuels, which are marginal and high cost, will be the first ones to fall off. There will be much cheaper fuels to be supplied elsewhere. I would say that if we can be implementers and designers of technology it will really spur our job growth and the resilience of our labour markets.
Senator Brown: I went through the Dingolfing plant in Germany that produces some of the finest cars in the world. They had six lines. They come off with a BMW in less than a minute from those six lines. I walked the entire line with a supervisor. It was over 50 per cent robotics. I rest my case.
Mr. Torrie: This is a vast topic that you are touching on. It is a concern to all of us, especially those of us who have children who are in their 20s and are facing this whole new employment problem.
Senator McCoy: Still living at home?
Mr. Torrie: Well, still struggling to find a foothold. The old economy has left them and the new one is not really very well defined yet, so it is difficult. I think it is a big issue throughout the OECD countries right now, the employment implications of the changes that are going on.
I have two quick comments, Mr. Chair. One is with regard to the very cheap fuel and electricity over the years, which is what we still have here. I know we all think it is expensive compared to what it used to be, but the long-term trend is it is going to get more expensive. However, because it has been so cheap it is allowing us to substitute energy for work. There will be a certain amount of job creation that comes back as the price of energy goes up. There is no better example than the residential housing situation. We are going to have to go in, and it will be worth paying people to go in and improve the efficiency of our residential housing. There are tens of thousands of jobs that will be created, some of them labour, some of them quite skilled labour, some of them experts who will go in and do the assessment to determine what has to be done. It is a good example of how some of the changes coming in the energy sector will generate employment at quite a high rate across a range of spectrums.
You also, however, have in the sector very capital-intensive projects with high levels of automation where the job creation per dollar of investment is actually quite low. It creates the kind of structural unemployment that you are talking about. That is one of the big problems of our age. I do not pretend to have an easy or quick fix to that, but I am glad that it came up here this morning because it has to be on the mind of anyone who is thinking about what kind of feasible future is out there and how will we make our living in it.
Senator Massicotte: I want to understand your message. When I look at what is happening with climate change, one can get easily discouraged and say, ``We are way off target,'' even from what the government said in reference to a recent study of the international energy industry. Yet when I listen to you I somewhat am getting the feeling that in spite of what these experts are saying, we will come to a resolution through technology. You give us a sense of being very optimistic by saying, ``Do not worry. The problem is going to get resolved. In fact, federal government, there is no need for national energy strategy because it is going to get resolved by different levels of government.'' Is that what I am hearing? Or are you saying, ``We all agree that the solutions are there if people want to pay for it.'' We know that, but what is the message you are trying to tell us? I sense a real note of optimism on the technology side. Are we going to have a problem or not have a problem?
Mr. Torrie: We are going to have a problem from the way I read the climate science in the sense that the amount of climate change that is already locked and loaded in the system is quite significant, and even with heroic efforts to turn down the emissions level globally it is going to get a lot worse before it gets better. For those of us who have been working in this field, that makes the outlook actually much bleaker than it was. When I first got involved in this issue in the 1980s it looked to me like if we jumped on it there would have been a chance to cut the problem off.
Senator Massicotte: We are heading into the wall.
Mr. Torrie: We are going to hit the wall.
Senator Massicotte: What do you recommend we do?
Mr. Torrie: The problem that that presents is that even if you do all of these things we are talking about, all these technology changes, the climate is still going to deteriorate all around us. You are not going to be able to convince people.
Senator Massicotte: What should we do?
Mr. Torrie: Just give me one minute. I guess what we have to do is we have to stress all of the other benefits that come from doing the things that will lower our emissions because that is what is going to sell them. That is what is going to make them possible from a business perspective and that is what is going to get us past the tipping points that Senator McCoy was referring to in her question. You will not sell this stuff based on avoiding climate change. It is unavoidable at this point.
Senator Massicotte: What do we have to sell? I presume pricing. In other words, you have to pay for what you are contributing. Is that the solution?
Mr. Torrie: I think that the pricing signals have to be there, but it is not enough by itself in most areas of the economy because the contribution that fuel and electricity prices makes is too small. We already heard evidence today. People did not change their driving habits.
Senator Massicotte: What else do we need to do?
Mr. Torrie: Financing is a bottleneck. We cannot attract investment to these new technologies as easily as we can to the more traditional technologies. There needs to be changes in the finance sector to rectify this.
Senator Massicotte: Why, though? If the entrepreneurs can make money and it is feasible, I have to believe people will invest into it to make money.
Mr. Torrie: Part of the solution is highly disaggregated. If you are trying to lend $1 billion, it is more difficult with these solutions than it might be if somebody came to you wanting to build a pipeline or power plant.
Senator Massicotte: But if they can make 20 per cent, as you referred to, in retrofitting a building, I highly suspect the $1 billion is going to be there pretty fast.
Mr. Torrie: One of the things they run up against is split incentives. The owner of the building or the builder of the building is not going to be responsible for the fuel and electricity costs. There is not necessarily the incentive to spend the incremental capital at the front even though it has a payback to make the building more energy efficient.
Senator Massicotte: I am not sure I agree with you there. You are arguing that most leases are net leases. Therefore that is borne by the tenant. I have been in business nearly all of my life and I still am. When you compete for a new tenant, with all the brokers, they will take a look at gross leasing costs. I have run buildings with low taxes, high taxes. They are smart. They are going to calculate it. They look at the gross occupancy costs, is what they call it. People are smart, but they have to pay for it. There has got to be a price difference. Do governments have a role in your solution, the federal government?
Mr. Torrie: Yes, there are things that the government can be doing all along the chain. I am reluctant to go into a menu of those right now. I did not come prepared to do that today. I indicated at the outset that as far as what government can do to encourage these kinds of low emission scenarios we are looking at, that is what we are doing our research on. I know that most of the types of things government can do have to do with enabling technologies, but there is a role for codes and standards in some sectors. There is definitely a research and development role in some sectors where technology development is lagging. There is definitely more that can be done to bridge the valley of death between the new technologies and their full implementation and roll-out where government can play a role. There is a manpower and training challenge that the government can take a leadership position on. There is a more general pedagogical challenge, which is we need to change the way that we educate engineers and architects and other professionals that have really highly leveraged influence on the energy system that we get. Again, the role of government in the education sector plays a role there. It is a patchwork quilt of things.
The Chair: Thank you, Mr. Torrie. We will be very interested to read the tracks and work that come out of your research. I hope you will be providing us with them.
Senators, our next witness is Cam Matheson from B.C. Hydro Regeneration.
We welcome you, sir. You are the Vice President of Asset Investment Management, Transmission and Distribution. You are going to share your thoughts with us. As you know, one of your former bosses is here in the person of Richard Neufeld.
There is a deck that has been circulated to us, so over to you, sir. Do you have any questions for us, because we are sort of rushing here, so I may not have said all the things that you might need to hear.
Cam Matheson, Vice President, Asset Management, B.C. Hydro: No, that is fine. I thought I would walk through the presentation. I very much enjoy talking about the B.C. Hydro electricity system. In my view it is one of the great electricity systems in the world. It beautifully serves the people of the province. I always enjoy the opportunity to come and share that with people, especially from outside the province. It is my pleasure to be here.
The Chair: I think you may know that when we were here not so long ago we paid a visit to the new transmission centre in Langley. We were highly impressed with that state-of-the-art facility.
Mr. Matheson: That is a beautiful facility.
I very much enjoy talking about the electricity system we have here in the province. We face some unique challenges in managing the system. We certainly have some future challenges coming up, as you will hear about, but we have wonderful opportunities because the assets we have in this province around electricity are absolutely world-class, and if they are calibrated properly, we can take advantage of these for generations to come, so it is my great pleasure to be here with you today.
One of the big challenges we face is electricity is a difficult product for the average consumer to understand and ultimately get. That is partly because electricity is invisible, and yet it is absolutely fundamental to our lifestyles and how we live our lives in Canadian society and British Columbia and society, and yet people do not really understand the cost of producing it, not necessarily where it comes from. Senator Neufeld I think knows this well. The majority of it is consumed in a place like the Lower Mainland of British Columbia, and yet much of it is generated in a far away remote region like the Peace River area. That fundamentally is a real conundrum for us. As the cost of energy around the world rises, including electricity, fundamentally we need to get over that hump so that people actually understand this product and are able to consume it in a way that is mindful of the fact that it is a scares resource and it actually is quite costly. Electricity in British Columbia has always been used to effectively provide the backbone to our economy and provide economic development in the province. I think it needs to play that role in the future as well. There are competing elements on this and other systems in North America and in fact world-wide in my opinion.
I will talk to you a little about B.C. Hydro. B.C. Hydro is wholly owned by the Province of British Columbia. It is a Crown corporation. It is publicly regulated by the British Columbia Utilities Commission. We serve approximately 1.8 million customers of which, roughly speaking, a third are industrial-sized customers, big pulp and paper operations for instance; a third are commercial customers, small and large businesses, spanning a very wide range. Universities and hospitals are part of that commercial sector; and roughly a third are residential customers. When I say ``a third, a third, a third,'' this is the amount of energy each of those sectors actually takes from the electricity system, not numerically. Obviously numerically the vast majority of customers are residential customers in the province.
The company right now has about 5,800 employees, and approximately 3,400 of those fall within the wire side of the business, the transmission and distribution lines. B.C. Hydro has many years of a very proud history of keeping the lights on. Much of that role falls to the people who climb the poles in storms, like the ones we have experienced over the last week in Vancouver, so that we can continue to run power to our customers. On the generating side, because we are by and large similar to Hydro Quebec, a large hydroelectric generating system, the amount we generate from that system will vary depending on the water supply we get in any given year, and that can fluctuate widely, in fact about 40 per cent small to large in any given year.
If you go to page 4 of our brief, you will see that the vast majority of generating resources come from two areas of the province that are very remote from where the majority of electricity is consumed. In the northeast you have the Peace River area where we have our biggest generating plants. Then in the southeast of the province, mainly on the Columbia River, you will see a number of other large hydroelectric storage facilities and generating plants. Those two river systems make up about 80 per cent of the generating capacity on our system. A real conundrum for our system is that the vast majority of demand occurs in the southwest of the province, in the Lower Mainland of British Columbia. As a planner and an operator, I have experienced the challenges of moving electricity through a very large track of land right across the centre of the province in very remote and mountainous regions to get that electricity reliably to customers that are by and large located in a very concise and confined Lower Mainland and Lower Vancouver Island area. That is a conundrum and a challenge that we continually face in the company: How to deal with the risks and the challenges associated with generating most of the electricity so remote from the location of the demand.
By and large that characteristic is not uncommon to electricity systems. It is just that in British Columbia it is a fairly extreme characteristic. We have generating capacity in the Lower Mainland to make up for that. One of the ways we have that is in using a thermal plant in Vancouver called Burrard Thermal. The company and the provincial government have struggled for many years on what to do with Burrard Thermal because it, first of all, uses natural gas to burn to make electricity; secondly, it is old and inefficient. The reality is in a system like ours you need to have firm, dependable capacity in your load centre to help avoid some of the problems you might have in a system where the vast majority of generation occurs so far away from where it is actually consumed. Broadly speaking, in our system we have 31 hydroelectric facilities. We have three thermal generating facilities of which Burrard Thermal is only one. We have about 18,000 kilometres of transmission line, 56,000 kilometres of distribution line, 300 substations, and about 1 million distribution wooden poles. That covers the system.
Another characteristic of our system is you will notice on this map that the transmission grid or a network really does not extend to about a third of the province itself. That over time I think will be addressed as we begin to try to provide energy to more and more newer industrial applications that are occurring, oil and gas in the northeast, mining right across the province, and the emerging notion of liquefied natural gas development on the North Coast, in the northwest near Prince Rupert. The extension of the electricity grid in British Columbia and moving northward into those vast areas where now it does not exist will be, and is now in fact, a real challenge for us as we begin to, again, use the electricity system to effect economic development in the way it always has.
The Chair: So the northwest and all up the coast there, Prince Rupert, Kitimat, and all these areas are the ones that are really the most challenging at the moment, are they?
Mr. Matheson: Partly. There is transmission extension that does go out to Prince Rupert and the North Coast, but if we are going to see a reasonably large increase in industrial development in that area, it will not be enough. We will need to provide more somehow.
The Chair: That is what I was wondering, because they are talking about big development.
Mr. Matheson: Yes. In areas in the northeast, like Fort Nelson where there is no interconnection with the grid and you are seeing a tremendous amount of natural gas development occurring up in the Horn River Basin and other areas, eventually the province will have to make decisions about whether or not it wants to extend the transmission grid to serve and provide energy to those industrial developments and users.
The Chair: Maybe it is a silly question, but why would it not want to decide to do that? There is the need.
Mr. Matheson: It is a good question. The choices are always related to the cost to consumers, current rate payers, for very expensive extensions of the electricity grid versus the way in which those industrial developers could self-supply using that same natural gas. Generally that is the choice. In the case of the Northeast there is a small and fairly tenuous connection with the province of Alberta. For many years there was consideration as to whether that should be strengthened and service to that far northeast corner of the province should come from the province of Alberta. My view is that is not particularly realistic, and I do not think Alberta feels that that is something that they would want to provide themselves. Ultimately it probably will come down to industry either self-supplying or extending the electricity grid to serve them. Much of that is wrapped up ultimately in public policy that is really for the provincial government to decide.
If I can turn to page 6, you will see some old and newer photographs. I wanted to make the point that in British Columbia our modern fleet was developed beginning in the 1960s. The build-out began in the 1960s. The planning for it began in the 1950s. That build-out continued through the 1970s into about the mid-1980s when the final installment of the big, modern generating system at Revelstoke was finally put into service in 1985.
One of the things we are facing, along with this industrial growth in the province that I have talked about, is the fact that our modern fleet is in many ways reaching end of life, and major component parts on the transmission, distribution, and the generating side now need to be changed through a very substantial capital program that we are undertaking in the company. Right at the point where British Columbia is seeing happily a growth in the economy in new industry bringing major private investment into the province and therefore expecting to take service from the electricity system, we are also seeing the need to change out these major component parts which are also very expensive. The result of all of that is the potential to put serious cost pressures on the electricity system and therefore an inflationary pressure on rates themselves for rate payers in British Columbia. How we deal with that over the next ten years will be interesting and very important for the province as a whole. There are some significant policy decisions to be made on that front.
If you turn to page 7 you will see that this graph shows where major investments and capital expenditures on the system have been made. You will see starting in the late 1950s moving through the 1980s there was a lot of money spent on building the modern fleet. Then for a period of roughly 20 years, there was essentially a supply surplus on the system, and very little investment went into it, until that surplus was finally taken up about the mid part of the last decade. All of a sudden the capital expenditure has gone way, way up again in the last few years to reflect the fact that not only is there growth on the system but in fact there is the need to change out major component parts.
Now, B.C. Hydro is not facing this alone. Electricity systems all across North America are finding that they have a need to reinvest in their system so that that infrastructure is capable of operating well into the next century and are facing major challenges with inflationary pressures on rates themselves. Of course the climate change agenda has also come along, which means that many of those jurisdictions, including British Columbia, are building renewable clean resources as a way to meet the new growth on the system. Those tend to be very expensive. They bring intermittency on the system, which adds challenges to operating the system as well.
There are a number of things that electricity systems are facing in North America together. We are one of them. That, again, is this combination of new growth, the need to reinvest in the existing assets, and the rise of intermittency on the systems as jurisdictions respond to climate change as a way to deal with global warming. The combination of all of those things is putting a great deal of cost pressures on the systems as a whole.
In British Columbia we are facing anywhere between 25 to 40 per cent growth over the next 20 years or so. It could be higher than that as well, depending on how these industrial applications occur.
I will talk a little bit about electricity rates, if I might. This is on page 10. You can see on the graph that in Vancouver and British Columbia generally we have some of the lowest electricity rates in North America. These low rates have always been seen quite rightly by respected governments over the years that this was a competitive advantage for British Columbia, that we would be able to attract high-consuming industry like pulp and paper into the province because they are attracted by low electricity rates. These are very energy-intensive businesses. The question for us now as we go forward is: Can we still maintain that competitive advantage, and if so, what are the trade-offs that we have to make in order to do that?
If you move to slide 11, part of what we are doing as well is the need to revitalize our grid in urban areas like Vancouver. We are finding we increasingly need to go underground. Many of our main feeders and transmission lines have to be replaced as they reach end of life. As cities like Vancouver become more densely populated, we cannot just take giant rights-of-way corridors and run them through the middle of town. We need to be able to deal with them in different ways. We are challenged with that as well. We have a number of projects going on. There are two major substations in Downtown Vancouver, one in Chinatown called Murrin, and the other one on Burrard Street called Dal Grauer. We have major redevelopment occurring in those substations.
Just like cities and generation resources, the transmission network is undergoing some major shifts as well. I will not talk about all of them, but I will talk about a few of them. One of them is the Interior to Lower Mainland Transmission Line which will eventually remove the congestion of moving electricity from those big remote sources into our load centre in the Vancouver/Victoria corridor where we have a relatively small number of transmission lines interconnecting all of that generation, four in fact, into the Lower Mainland area which creates a lot of risk on our system, which is why we need plants like Burrard Thermal to continue to operate to provide that backup capacity when things go wrong. In addition to the Interior to Lower Mainland Transmission Line, we are building the Northwest Transmission Line, or we would like to, that will, again, extend power up into the northwest section of the province and help interconnect mines and renewable resources, supply resources up there. Those are two examples of where new transmission is critical to the well-being of the electricity system in B.C.
One of the real challenges we are facing here is being able to work with First Nations to find an acceptable level of accommodation for those folks who will have to deal with the impacts that are created by transmission. The Interior to Lower Mainland Transmission Line alone I think crosses some 50 or 60 reserve lands for First Nations. It is very challenging building a transmission project like that, in fact in this case, alongside the Fraser River where First Nations have historically used those territories for hunting and fishing.
In similar ways we are seeing major changes on the distribution side of the network. We are in the middle of installing a comprehensive Smart meter program in British Columbia where over the next year we will replace all the existing analog meters with electronic devices called Smart meters. We are now I think at about 350,000 out of 1.8 million that we plan to install by the end of calendar year 2012.
Some of the major changes in our business are in fact occurring on the distribution side. If you move to slide 14, you can see an example of a traditional electricity system where you had major supply being built in a giant plant, like a hydroelectric facility or a natural gas facility or in other jurisdictions a coal plant or a nuclear power station, a very, very big plant with a lot of capacity pushing electrons through high-voltage transmission lines that were either used directly to power industrial applications, big industrial consumers, or increasingly step down in voltage to eventually come to the doorstep of your house and mine as a residential consumer. Those electrons really flowed one way. The grid was built and conditioned so that you had this mass supply moving into increasingly large numbers of small consuming customers in the residential sector. The power was essentially flowing one way. The planner or the operator's job was to make sure that the system that was planned and ultimately put in place would be able to optimally move those electrons through to the consumer.
If you move now to slide 15, you will see that in fact on the distribution side of the equation the modern grid is going to get a whole lot more complicated. That is because we can now interconnect very small supply in very large numbers on the distribution side of the equation. People, for instance, can put solar panels on their homes. We can use Smart meters to detect outages and be able to react much quicker to deal with those outages and not have to do return trips, which drives costs out of our business and actually restores reliability to a higher level to consumers. The world is changing very quickly. The Smart meters will allow us to fundamentally change the nature of our conversation with our customers in a way that we could not possibly have conceived with analog meters.
That takes me back to the first part of my story about how electricity is invisible to consumers. Now that we have home-based computers and we can use in-home displays that can be attached to people's appliances, for the first time people can actually begin to see and get their heads around what they are consuming in the electricity product.
If I might, I will stop here and talk a little bit about a real conundrum I think that electricity companies face all over the world, particularly in North America. That is that electricity is the most volatile, publicly- openly-traded commodity in the world. Its value at the wholesale level changes minute by minute across jurisdictions and marketplaces that can span very large areas. In British Columbia we are part of the Western Interconnected Grid, and that virtually covers half of North America from the Mexico/California border all the way to the B.C./Alaska border. We are all interconnected. Electricity is a publicly traded commodity that occurs every minute of every day, and its value dramatically changes. It can be as high as $500, $600, $700, $800 a megawatt hour right down to negative pricing. This spring we were able to buy energy on the B.C. Hydro system that, not only did the developer provide us the energy, they paid us to take their energy minus $30 a megawatt hour. You can see the range in pricing that occurs. All of that pricing is just like any other openly traded commodity. It is based purely on supply-demand principles that are bringing to bear on this product.
Yet at the retail level, electricity systems across North America generally a have flat retail rate so that the price people pay for it at the retail level bears no resemblance to those very powerful supply-demand principles that drive its value on the open commodity markets. In my opinion, over time ultimately those things will have to square. They likely cannot sustain themselves, especially as pressure on energy in general, not just electricity, but energy as a whole grows internationally as China and India and places like that develop and people have discretionary income in a way that they never had before. The demand on energy resources will increase as a result. I think you will see that that situation where you have got flat retail pricing and a wildly fluctuating value on commodity markets probably cannot stay. Ultimately creating a modern grid that can help provide people with choices and can help them understand what they are consuming when they are consuming it is the wave of the future, in my opinion.
I am probably taking up too much time, so I am just going to talk a little bit about Power Smart and conservation and then maybe I can take some questions from you.
In British Columbia conservation and energy efficiency is going to make up a very large proportion of how we meet new need in the province. We have a well-branded and well-executed program called Power Smart. We are in fact legislated by law in British Columbia to meet at least 66 per cent of all new need between now and 2020. It has to be met through conservation and Power Smart initiatives. We are very seriously working away at seeing that we achieve that. Again, a modernized grid with Smart meters at its core will fundamentally help us get there, in my opinion. Perhaps I will stop there and take questions.
Senator Neufeld: I do not want anybody to misunderstand that the prices that you see in the price sheet for number ten is just for Vancouver. That is a postage stamp rate on anybody that is connected with the grid in British Columbia and in fact includes Fort Nelson for residential only, which is not connected to the grid. I think that is similar across Canada.
The 66 per cent of new incremental supply to be met by conservation, maybe you could just expand for the senators a little bit more on what processes you are using to get there because that is a high target, in fact a very high target. I think when I started out it was 50 per cent and it has gone to 66 per cent. You have obviously discovered some more ways to actually save energy. The cheapest energy we can get is through conservation. We should be conserving. I think B.C. Hydro has led the way through Power Smart across Canada in all of those kinds of things and maybe you could just expand on that a little bit for us to better understand.
Mr. Matheson: It is a very aggressive target. As far as I know no other utility in North America is going for anything close to that amount of meeting new need, 66 per cent. We generally get this in three ways. The largest of the three is in programs. These would be putting in place programs that incent people to change out inefficient appliances in their homes.
You have probably all heard of the Energy Star rating that you can find when you go and buy refrigerators, for instance, from any of the retailers that sell them. Incentives around windows and sealing the envelope around your home to be more efficient, those are examples of programs that we have in place. The majority of Power Smart will come from those programs.
Another very important element is called codes and standards, which is working with governments locally and provincially to make sure they are changing their codes and standards so that we are setting a benchmark or a floor, if you like, on what developers need to do when they build new homes and new buildings. Those are codes and standards. They have to be legislated either through the provincial legislature or passed as bylaws with municipal governments. We are working very closely with all of those governments to get them to do the things that we think we need to do in order to effect this 66 per cent.
Finally, the third element is electricity rates. We know that consumers are responsive to rate increases. When they see rate increases, ultimately we see a decrease in usage on the system. Now, in this one, we are not proposing that we should intentionally raise rates in order to effect conservation, but because we know that rates are going up over time for all the reasons that I took you through, we will see a proportion of energy saved over time because people will respond to rate increases. In British Columbia it is a little more difficult and challenging because our rates are so low to begin with whereas utilities in jurisdictions like California, where rates are roughly four times as high as they are in B.C., have programs that are much more sophisticated than we have because their consumers are already so sensitive to the price of electricity to begin with. It is those three areas that we utilize in developing Power Smart and hopefully achieving the 66 per cent.
Senator Neufeld: How much electricity generated in British Columbia comes from clean sources, hydro or wind?
Mr. Matheson: It is about 95 per cent. I think Senator Neufeld is referring to another provincial law that was put in place through the Clean Energy Act in 2010. That is that all generated capacity in the province needs to be at least 93 per cent. The B.C. Hydro system right now tends to operate in about the 94 per cent to 95 per cent clean element. By and large that is because we have a large hydroelectric system that does not create greenhouse gases.
The Chair: On these electricity prices on page 10, I notice Quebec, Manitoba, and B.C. are the three lowest and they are the three provinces with the hydroelectric resources that the others do not have. Clearly this is a graphic illustration of how clean and cheap hydro is as a resource.
Mr. Matheson: Yes. In fact Seattle, the next one over, is also by and large a hydroelectric utility.
The Chair: Newfoundland is coming up there.
Mr. Matheson: Yes. I think this is a very good question and worth exploring a little bit. Part of the reason why hydroelectric systems tend to ultimately over time offer lower rates for their consumers is that the high upfront capital cost when they are originally built even out over time because they last so long. For instance, a thermal producer might last 25 years or 30 years. A hydroelectric facility can last up to 100 years. You see them being amortized. The very high cost of building them in the first instance gets amortized over time, but once that is done, the operating costs are very low.
In fact a system like ours that has long since been amortized and in Quebec and in Manitoba, you see that the operating costs are very low, and ultimately rates reflect that. There is another very big reason why this is the case for hydroelectric systems. That is because if they are calibrated properly they can beautifully trade in and out of marketplaces in a way that no other system can trade. By that, I mean you can store water in the reservoirs and then you can instantaneously generate. Those two facts allow the hydroelectric utility to be able to work the market either on the buy side or the sell side.
I talked about the volatility of electricity commodity prices which move and change minute by minute. When prices rise greatly because there are outages or there is high demand on the system in the United States, for instance, B.C. Hydro can instantaneously turn on its generators and begin generating with that stored water to sell into that high marketplace. Conversely, when the market price inevitably drops, as it does at nighttime when everybody goes to sleep and shuts down their lights and turns off their heating in their homes and all of that, and the thermal generators have to essentially dump cheap energy onto the markets at nighttime, entities like B.C. Hydro, Quebec, and Manitoba can actually shut off their generators, store the water in their reservoirs, and simply buy that energy on the market. We have this natural arbitrage advantage on the market. That advantage cannot be overstated.
In my opinion, the advent of intermittency and clean resources on the marketplace that is occurring all over the United States, this is wind and solar and small generating hydro capacity, will add to those market opportunities, not take them away. We have to be very, very careful, in my opinion, with our hydroelectric systems to continue to calibrate them so that they are capable to fully optimize their ability to move in and out of those marketplaces. That is how you keep rates low for consumers.
The Chair: Where is the Waneta Dam located? I am having trouble finding it on the map.
Mr. Matheson: The Waneta facility is on the Columbia River in the southeast part of the province.
The Chair: Is it near the Kootenay Canal?
Mr. Matheson: Yes, geographically. It is on a river system called the Pend-d'Oreille River, which is a major tributary to the Columbia River immediately north of the Canadian-U.S. border.
Senator Banks: You probably do not know, or maybe you do, and I am not even sure that Senator Neufeld knows, but more than ten years ago this committee started touting Power Smart in other parts of the country as a perfect example of the best place to meet the new demands of energy. You have the luxury that the rest of us in some other parts of the country envy very much. We did that. We touted that concept, which was hard for people to grasp because what it means is that the supplier of a commodity is going to have to go to its customers and try and talk them into using less of it. That was a hard concept to get past, but they did get it, particularly between 1986 and 2006, as you pointed out. Is B.C. Hydro a monopoly?
Mr. Matheson: Yes. We are a regulated monopoly.
Senator Banks: I guess you do not need to consider the use of nuclear really because you have such a plethora of options because there are options in the northern part of the province that have not yet been developed that are potentially there. The lovely part that you just pointed out is that in fact storing water in a hydro reservoir is the only way that we can effectively store electricity for any length of time so far.
Mr. Matheson: That is correct.
Senator Banks: You talked about the difficulties and challenges of building transmission lines across First Nations land. There are lots of people who have difficulty with people building high-voltage transmission lines across their land, but it is exacerbated, I would imagine, by the jurisdictional question of building across First Nations land. Would you expand on that a little bit?
Mr. Matheson: This is an area where First Nations are trying to effect economic development on their own, bringing their people out of, in many cases, impoverished situations. They want to share in the returns that come from the development of natural resources, like mines and electricity systems and generating plants. They are quite rightly, I think, working very hard to make sure they get a piece of that, especially if they have to undergo the impact that comes with them. There are always impacts. There is no free game here. Whatever you develop on the electricity side, whether it is wind or small hydro or a large storage facility, there are impacts big and small.
Senator Banks: With respect to building those required transmission lines across First Nations land, is it going well? Are the lines that you need to build being built? Are there difficulties in negotiating the kind of outcome that you just described, or is it going okay?
Mr. Matheson: I think it is going okay. It is certainly challenging. I would suggest that increasingly over time we need to think creatively about how we find solutions. First Nations increasingly want to take a partnership approach to this. That has not been the way in which, in Canada anyway, we have historically worked agreements with them. In my opinion, generally we will have to think more and more about how to get creative and provide them with long-term benefits that they have not received in the past. That takes us into areas that we have not tried before. In my opinion, it is going well, given the challenges we face. In British Columbia there are many, many treaty processes that First Nations are involved in. They do not want to do anything that will ultimately tie them up relative to what they are doing in the future on a treaty process. That provides a bit of a political overlay that makes things even more complicated than they would otherwise be.
Senator Banks: The treaty process has been late in British Columbia by comparison with other parts of the country. Specifically is there a line that you now want to build and are constrained from building or at the rate that you want to because of those challenges that you are talking about?
Mr. Matheson: You could say that about both the Interior to Lower Mainland Transmission Line and the Northwest Transmission Line. I believe we will get there. I believe we will build them. They are very important to the people of the province. We are right now challenged, and it may be taking a little longer than we originally thought because we have to deal with a very complex series of negotiations involving many different First Nations.
Senator McCoy: I am interested in your modern grid. I notice you do not call it a Smart grid. I have a series of questions.
First of all, are you talking about a Smart grid, or are you simply talking about Smart meters?
Mr. Matheson: No. I am talking about the grid. It is often referred to as a Smart grid. My preferred term is ``modernized grid'' because I think it is easier for people to understand what a modernized grid might be as opposed to smart. Many things have the prefix ``smart'' attached to them these days. My preference is that we think of it as a modernized grid. It goes back to the comment I have made about the fact that our electricity system by and large, including the one here in B.C., has been conditioned to move electricity one way and one way only. A modernized grid will now have to deal with big supply that we already have in the Peace River and Columbia River basins and then a host of solar panels, maybe some windmills that are attached to the other end of the system on the distribution lines, and they will feed back in when whatever home they are attached to has a surplus because it has been hot during the summer for a number of days and they do not need all that energy. They will push some of that back onto the grid. The grid has to be capable in a way that it currently is not of being able to manage the constant to'ing and fro'ing of electrons rather than electrons moving one way.
That is going to set up challenges for us operationally to try and balance the voltages that we continually have to balance on a normal electricity system. We have to recondition the grid so that it is capable of doing that. That is really, to me, something called grid modernization. In the middle of that, you now will have the advent potentially of electric vehicles as a major new consumer of electricity coming on. There will have to be infrastructure put in place with that. That will have to all occur on the distribution side. That is part of grid modernization as well.
Senator McCoy: So it is clear, then, in my mind, the technology that is being applied is simply a Smart meter, but when you talk about the concept of a smart grid you are talking about the configuration and the dynamics of operation?
Mr. Matheson: Yes. Think of it this way: The Smart meter is attached to somebody's home or business and will allow us to have a very different conversation, if you like, with that customer than we have ever been able to have because we will actually be able to send signals electronically back to our operations and gather data about usage on the system, voltages on the system, outages on the system. The customers will be able to have a view into how they are actually consuming the product and actually respond ultimately to different signals from us about whether they should consume it or not or if there is an outage or if there are capacity problems or something like that. If you step back from that meter attached to somebody's home or business, the grid is the wires that actually take those signals back and forth and allow us to change and move the operations. They are quite different things. Smart meters are only a part of a modernized grid.
Senator McCoy: We do understand that in order to keep an electricity system going you have to keep it balanced. Whatever is taken out, you have to put in at the same time instantly.
Mr. Matheson: That is right.
Senator McCoy: What I am hearing is two things. One, you need to know when more electricity is coming in from these small or semi-small suppliers. What you are saying is the Smart meter can detect when they are on the system. Then you can turn off one of your spillways and stop generating electricity. Is that what I am hearing? Is that the flexibility?
Mr. Matheson: That is right. I think that is right. Another example might be where we have a wind storm, like the ones we are experiencing at this time of year, and all of a sudden a distribution feeder goes out because a tree has fallen on that distribution line. Right now, believe it or not, we depend on somebody picking up the phone and telling us that they are out. Then we will send a crew out to look at it and fix it. With Smart meters we will be able to instantaneously see that a feeder has gone out. We can dispatch a crew right away without having to do that front-end leg work. Ultimately we can get the power restored much more quickly, and reliability for our customers should go up as a result of that.
Senator McCoy: From what I know of California, the meters attached to residences will allow the system control centre, for example, to turn off my air conditioner. I do not do it. The central control system does it. They do that for a short period, and my house does not suffer. They do this on a rotating basis. I want to know about your Smart meter, whether you are building that kind of capacity into it or if you plan to do so.
Mr. Matheson: I had not heard of that, and I have a hard time believing that a system control centre of a size in the state of California could actually pinpoint somebody's air conditioner and turn it off. What they might be able to do is to say we are going to constrain the amount of energy that goes into a feeder or a distribution line that covers a community, but it would be very hard to think they could actually turn off somebody's air conditioner on that level. No, we are not planning on doing anything like that, and I am frankly not sure that that technology would even enable us to do that even if we wanted to, and I do not think we do.
Senator McCoy: It has something to do with smart air conditioners as well. That is why I was asking about your technology. Have you experimented with time of use pricing?
Mr. Matheson: No, we have not.
Senator McCoy: Is there a reason for that?
Mr. Matheson: Yes. It depends on what you mean. Right now we are putting in place tiered pricing, but that is not timed. It is not timed to time of use. When people think of time of use pricing they think of a block of time when peak demand on the system occurs and then the pricing goes up. The concept for this goes back to the very same supply- demand principles I talked about. In our consumer society we are very used to this. We know that if we want to buy a hotel room on New Year's Eve in Hawaii we are going to pay more for it than we probably are in the middle of June. We are very attuned in our consumer society to know that when the demand for a product rises, we generally pay more for it. Electricity systems, in my opinion, are going to move in that direction.
In British Columbia we have the advantage of already having enough capacity to serve the peaks on our system. By the way, our system has very large peaks. Unlike California, they occur in the winter months, in December, January, and February, and they can move very dramatically off the base. As much as a third again power could be consumed on a peak day somewhere in December and January. You are faced with the choice as a utility: Do you build all that extra capacity into your system so that you have enough just for that one day when you hit your peak? Right now we are lucky. We have that in our system. It is not necessary for us to move to time of use rates at this point, and there is no intention to do that right now. Others are not so lucky, and they are probably going to have to in order to avoid the inflationary costs that will go with building a system purely to hit those peaks. What they will choose to do instead is to put an incentive in front of consumers so that when the product hits that peak period they will actually pay more for it.
Of course, this is already occurring in high-cost jurisdictions like California and New York. We happen to be very lucky in Canada in that the generating capacity that we have by and large means that we do not need to do this at this point.
Senator Mitchell: You have outlined two possibilities. You can increase price so people would use less in peak periods. The other one would be to begin to accept power from small producers around the province. You are talking about going back the other way. What about feed-in tariffs? Is that a prospect in your kind of electric system?
Mr. Matheson: Absolutely, but you are not going to put a feed-in tariff in place in order to affect meeting peak demand. A feed-in tariff generally is a way to provide small producers an avenue to get into the grid and actually to help test and true out emerging resources, for instance. In B.C. we have a whole host of those things. Wind and wave would be examples of those. They are not really commercial yet, but a feed-in tariff would be a way to provide an incentive for developers to come along and build enough of them so we can begin to true them out and get them to commerciality.
Senator Mitchell: Then one day they limit the need to build big plants of some other variety?
Mr. Matheson: Sure. Again, you are talking about intermittent resources. If you think of the small wind, the small hydro, the non-commercial wave and tidal power, and solar systems, they are all intermittent. That means that when the sun is shining and the wind is blowing they create electricity, and when it is not, they do not. They will always have to be backed up by large, capacity-rich, what I call dispatchable resources, like large hydro and natural gas powered facilities, and coal is another example used most often in the United States as a way to provide that capacity. The reason is because consumers want electricity instantly when they want it. They do not want to think about is the wind blowing or is it not. They want electricity.
The intermittency that I talked about earlier is a very fundamental important concept in the future for us. Yes, those resources come with wonderful advantages. They are clean. They are small. They do not have the small degree of footprint. At least individually they do not. Whether they do collectively is an open question. They are intermittent in nature. That does not square with the way in fact the product is consumed. You have to have these big capacity resources that bridge that fluctuation.
Senator Neufeld: Just to add to that. We have had that metering, senator, for a long time. We also have a feed-in tariff and have had for a number of years for anything under 10 megawatts. That feed-in tariff, it is complicated how they figure out the rate, but they do have it for anything under ten megawatts.
The Chair: I just want to thank you very much, sir, but I have one clarification to conclude. We have been blessed, as you know, having Senator Neufeld on our committee since he moved to Ottawa and the under-privileged East. You are billing yourself as B.C. Hydro Regeneration. I tend to focus of words. I have assumed that was a new division within B.C. Hydro. You have a heading ``The time has come to invest in our electricity system'' and all these new projects that are needed to be done. Can you just clarify?
Mr. Matheson: That refers to the fact that the modern grid or the modern fleet, if you like, that was originally built in the 1960s, 1970s and 1980s has to be reconditioned and refurbished so it will continue to work for British Columbians for another 50 years basically.
The Chair: It is B.C. Hydro, as you say, a corporation publicly regulated, and then it has various divisions like the transmission.
Mr. Matheson: Regeneration is not a division. Generation is a division. Regeneration is more of a brand, I would say.
The Chair: Right, and this is your thrust and you are driving that, so good for you. Thank you very much, sir.
Moving to our last witness of the morning, last but not least Douglas Bloom is the ``duke of energy.'' Spectra has been working itself into our consciousness. It is a huge conglomeration of companies of which the parts were all household names originally.
We have had the pleasure of seeing you in Ottawa in the last month. You also appeared before the committee a year ago with Brenda Kenny on the Canadian Energy Pipeline Initiative.
Mr. Bloom is President of Spectra Energy Transmission West, responsible for four of the company's Western-based divisions: B.C. Pipeline, B.C. Field Services, Midstream, and Natural Gas Liquids. Prior to his current role, Doug served as President of Maritimes and Northeast Pipeline, a joint venture of Spectra Energy, Emera Inc., and ExxonMobil Corporation.
Over to you, sir.
Douglas P. Bloom, President, Spectra Energy Transmission West: Mr. Chair, senators, thank you for allowing me the opportunity to appear before the committee. I have distributed a little bit of prepared material. I will go through this. There are a couple of maps there. Being a pipeline company, we do not go anywhere without maps, so there are a couple there that I will refer to. I hope my remarks this morning are of assistance to you as you compile your final report focused on improving understanding of the issues affecting Canada's energy sector.
By way of introduction, Spectra Energy is one of the largest natural gas gathering, processing, transportation, and delivery systems in North America, and we operate in seven Canadian provincial jurisdictions. We have a significant presence in British Columbia, Ontario, and Atlantic Canada and 3,400 Canadian employees coast to coast. Our operations have deep roots in Canada. We have more than 50 years of history here in British Columbia, and in 2011 we are celebrating 100 years of operation at our Union Gas business in Ontario.
Let me first take a moment to talk about our cultural commitment to safety. Out employees live and work in many Canadian communities. We are committed to their safety and the safety of the public. We operate and maintain our facilities using thoroughly tested procedures and standards while adhering to and surpassing strict regulations. With respect to safety, we have a relentless commitment to zero work-related injuries and illness culture.
To give you a sense of our efforts, in 2010 we completed our scheduled 30-day maintenance turnaround on our operations in British Columbia's Grizzly Valley without a single lost time injury and in fact without a single incident requiring medical aid during 170,000 person hours of work.
In support of these efforts, we ask provincial and federal governments across Canada to work together to support the creation of a national ``Call Before You Dig'' program. Third party excavation damage continues to cause pipeline incidents in Canada, and it is preventable.
Given Spectra Energy's geographic footprint in British Columbia and our current and future investment profile in the province, we are very pleased to be in Vancouver today speaking about one of the key elements of Canada's energy value chain: pipelines.
Let me start with Northeast British Columbia. Spectra Energy's pipeline and processing assets in B.C. form the backbone of the natural gas sector in B.C. We connect B.C.'s natural gas exploration and production industry with millions of consumers who rely on natural gas as a feedstock for manufacturing, as a boiler fuel for electric generation, or as a means to heat their homes and businesses.
We process and transport 60 per cent of the natural gas produced in the province, with growth underway. Our system supplies virtually all of the natural gas needs for British Columbia and 50 per cent of the natural gas demand in the states of Washington, Oregon, and Idaho, and is interconnected with the North American Pipeline Grid.
In response to natural gas supply growth in the Horn River and Montney resource areas, Spectra Energy is investing heavily in B.C.'s future. We are expanding our infrastructure to carry these new unconventional natural gas supplies from shale and tight sands to markets in Western Canada and beyond. Here I may refer you to the first of the two charts in your package.
Our expansion program now underway is tracking to invest about $1.5 billion in our B.C. assets between 2009 and 2012. To give you a sense of the importance of Western Canada in our corporate strategy, that $1.5 billion represents about a half of our company's current capital expansion program. To give you a sense of the benefits of these kinds of investments, this expansion program to respond to the ramp-up in production means boots on the ground in Northeast B.C. and resulting direct and indirect benefits across the country. It is much broader than just the northern communities, B.C., and Western Canada. In total, our regional expansion activities now underway include an estimated incremental 1,350 direct construction and inspection jobs over the next three years, close to 2 million person hours of work, with additional jobs related to the many engineering, design, manufacturing, trucking, and logistics services required during an expansion of this scale.
The natural gas industry is a critical economic engine in British Columbia. We are encouraged by the focus that Premier Christy Clark has put on making sure that we capture the economic opportunities of natural gas for the benefit of British Columbians. The inclusion of the natural gas industry in the province's jobs agenda reflects the significant existing and future benefits that are delivered by our sector.
Beyond B.C. we firmly believe that the natural gas sector will play an important role in delivering on our national objectives as an energy superpower. But there is work to do. The inescapable truth is that our best energy export market, the United States, is becoming increasingly self-sufficient when it comes to natural gas. Between 2006 and 2010, U.S. shale gas production grew by an average of 48 per cent per year. The U.S. is now the largest natural gas producer in the world, and it has over 100 years of gas supply. Further increases in shale gas production are expected, with total production forecast to grow threefold 2009 to 2035, according to the U.S. Department of Energy.
Currently Canada's only export market for natural gas is the U.S. No longer can we expect all natural gas supplies to flow only over traditional long-distance routes from Western Canada to the rest of North America. With more than 100 years of domestic natural gas supply in both Canada and the U.S., commodity prices are expected to remain modest for the foreseeable future. The bottom line, if we are not able to build demand for natural gas use within Canada and develop offshore market outlets, it will impede the growth of exploration and production across Canada, a major source of revenue and economic benefits for regions across the country.
Let me pause here and provide some insights from my recent trip to Asia to meet with market participants who are interested in importing natural gas from British Columbia. In our meetings with companies in Japan, South Korea, China, and Malaysia, there was genuine interest in the potential for natural gas imports from Canada. Here we are entering a global competitive playing field, and we are starting from behind. Jurisdictions such as Australia have decades-long relationships with these markets and have a demonstrated ability to get the job done. The United States, our biggest customer, may become our biggest competitor. The U.S. government has already approved exports from several Gulf Coast LNG terminals, and one these terminals has already announced two long-term agreements with LNG players.
Asian markets are looking for their next long-term stable source of natural gas supplies, and in my view, we have a short window to capitalize on this opportunity. The economic benefits that will flow from capturing the LNG export opportunity are vast. Just one LNG export project can deliver 1,500 person years of employment during construction. That is just the tip of the iceberg. Without additional market outlets for B.C.'s massive natural gas supplies, we will not be able to maintain or grow the thousands of existing jobs and millions of dollars of economic development created by the natural gas sector from wellhead to burner tip. I have also included a second map that just locates B.C.'s supplies and supply areas and some of the export points that have been referenced in the press lately.
In my view, it is ours to win or lose. Industry cannot do it alone. As we know, companies who plan to spend billions buying our products will want to meet with us face to face to build relationships, and so they should. These countries do not have the wealth of natural resources that we are blessed with in B.C. and across Canada. They rely on other countries for a significant portion of their imports, from natural gas to agricultural products. They need to be crystal clear that we can deliver on our commitments.
When we, as industry representatives, meet with these companies they expect government to be standing together with us. Our Asian customers need to know that governments at all levels are supportive of the major investments that will be made here in B.C. to deliver natural gas to Asia.
During Premier Clark's mission to Asia, the LNG delegation, led by the province and supported by the federal government, ably demonstrated the partnership of industry and the provincial and federal governments to work together to pursue this critical natural gas export opportunity. Federal Natural Resources Minister Joe Oliver confirmed this statement stating, ``Canada is open for business.''
The Chair: He came and had dinner with us the other night. He also confirmed your point on the competition and the narrow window. He said everywhere in these Asian countries he was second fiddle to the Australian person. He found it very telling that we are playing catch-up ball in those areas.
Mr. Bloom: The Australians are very prevalent in Asia. They have been developing LNG projects for the last couple of decades, and they have about eight more underway. They are going to be a very important competitive force out there.
The Chair: Another interruption for which I apologize. This map you have just referred to, maybe my reading of it is flawed, but it looks to me that a vast amount of this prospective shale is offshore.
Mr. Bloom: There are shale deposits that are offshore. Currently none have been developed in British Columbia. Right now the focus is on several established shale plays in B.C., the Horn River Basin, the Montney, the Cordova Embayment, and the Liard Basin. With such vast resources in those plays, it may be a long time before any offshore plays are seriously considered.
The Chair: They have been identified?
Mr. Bloom: They have been identified, exactly. We share the federal government's objectives to create jobs, grow the economy, and strengthen Canada's global standing. However, we will need to move quickly. As I noted and we just discussed, Australia is ahead of us when it comes to meeting the energy needs of China, Japan, and other Asian markets. They have been a trusted supplier for more than 20 years. You can be sure they will not easily give up ground to Canada. Both Australia and the United States will shortly have free trade agreements in place with Korea, a major potential market. Canada does not. Other suppliers around the world are moving quickly as well, Australia and the U.S. in particular, to access these markets.
Moving quickly and capitalizing on the window we have requires immediate action. There is much to be done. Commercial deals must be concluded, projects must be permitted, and pipelines and infrastructure must be built. The biggest challenge on this front is the regulatory process for major projects. While we fully support strong environmental standards, the environmental assessment processes are too costly, too lengthy, and burdened with too much overlap and duplication. This represents the single greatest risk factor for project planning. We hear this repeatedly from our potential partners in Asia. Luckily there are solutions that are not complicated.
In 2008 the Province of British Columbia signed an agreement with the National Energy Board to accept federal environmental assessment of federally regulated pipelines as equivalent to its own. This has eliminated duplication on that front. The federal government now needs to amend its environmental assessment legislation to enable it to do the exact same thing: to rely on provincial assessments of provincially regulated pipelines and to avoid costly and wasteful duplication of effort. This would be a major step, in our view, toward a true ``one project-one assessment'' process.
At Spectra Energy we look forward to the next stage of growth in British Columbia's natural gas gathering, processing, and pipeline infrastructure. It has already begun. Today we are transporting large volumes of new unconventional natural gas resources into the North American market. The next step is to connect new pipeline infrastructure to the West Coast, a significant undertaking but one that is achievable.
However, as we look to the export opportunity in Asia, let us ensure we maintain our existing seamless energy trade relationship with our U.S. neighbours and increase our use of this home-grown fuel within our own borders. It has been said that our singular focus on the United States as the export market for our natural gas has lulled us into a sense of complacency with respect to market diversity. Let us make sure that as we turn our attention to export markets in Asia we keep our focus on nearby markets in the U.S. and on building home-grown demand for natural gas in Canada.
Alternative sources of energy are essential and an important part of the overall energy mix, but the reality is that natural gas will continue to provide a significant share of energy for generations to come and will provide back-up to renewables when the wind does not blow and the sun does not shine.
We must take advantage of the fuel before us today, a clean, abundant, domestic, efficient, and versatile fuel. This important step will set the stage for economic benefits at the local, regional, and national level.
As Spectra Energy continues to invest in infrastructure in Western Canada to deliver natural gas supplies to traditional and new markets, we offer the committee the following recommendations.
The first is that the government demonstrate immediate and real commitment to eliminating duplication and overlap in the regulatory process. We recommend the following: (a) introduce firm time limits for the review of major projects; (b) establish a single comprehensive Crown consultation with First Nations; (c) achieve a true ``one project- one review'' process for projects. Specifically, the federal government should enable the use of environmental assessment equivalency agreements. The federal government should amend the Canadian Environmental Assessment Act to enable it to accept provincial environmental assessments as equivalent in appropriate cases or classes of cases. Precedent for this already exists in Section 27 of the B.C. Environmental Assessment Act and some other provincial statues as well. Including a mirror provision in federal law would send a strong signal to markets and partners in Asia that the regulatory leviathan of duplication and overlap in environmental assessment can finally be slain. It would also have a profoundly positive effect on First Nations consultation as efforts and resources could be dedicated to a single consultation process at the environmental assessment stage.
The second is to support development and growth of markets for natural gas, both domestic and import. As I mentioned earlier, no longer can we expect all natural gas supplies to flow over traditional long-distance routes from Western Canada. With more than 100 years of domestic natural gas, commodity prices are expected to remain modest for the foreseeable future. This presents opportunities to: (a) deliver reliable, efficient, and cost-effective power generation in close proximity to load centres. This also avoids significant investments in high voltage transmission infrastructure; (b) ``green'' our large ``point to point'' and ``return to base'' transportation fleets with natural gas in major Canadian centres and in high-traffic cross-border corridors; (c)continue our long-standing seamless energy trade relationship with the United States and maintain and improve upon Canada's ability to attract investment in energy infrastructure through competitive fiscal frameworks; (d) build new export markets for natural gas in Asia through partnership between all levels of government and our natural gas industry to ensure the necessary regulatory harmonization required to deliver on this once-in-a-lifetime LNG export opportunity.
I hope my remarks are helpful to your deliberations. I look forward to your questions.
The Chair: Mr. Bloom, you have certainly echoed what Minister Coleman told us last night in terms of the number- one priority, this duplication of environmental assessment and the need to get the federal and provincial deals working. You have cited one very striking example of how it can be done and work well.
Senator Mitchell: Mr. Bloom, you mentioned the need to take immediate action to capitalize upon the development of LNG markets. What is the hold-up in this case? I know there is the duplication of environmental review issue, but really in the case of a pipeline for LGN out of Kitimat, there is not the resistance from Aboriginal groups that there is for an oil pipeline. Why is industry not just forging ahead? You have been to Asia creating agreements with China to replace coal-fired plants with LNG plants. What is the hold-up?
Mr. Bloom: That is a great question, senator. We still require legislative change in the country. We have under various parts and pieces of federal legislation the obligation to carry out environmental assessments under certain conditions. We have a similar requirement at the provincial level. There is a possibility that a project pursued today under provincial jurisdiction could still trigger a federal environmental assessment, and we have to eliminate duplication.
Senator Mitchell: If that was eliminated, it would be LGN nirvana. We would get projects done.
Mr. Bloom: We think it would be a very big help. It was very telling when we were in China as we had a couple of very pointed questions directed to us. I am paraphrasing here, but one was focused on oil first. The observation was, ``We — the Chinese company is making the comment — have had discussions with Canadian oil companies about exporting oil to us for the last six or seven years. Where is the project? Where is the pipeline?'' The follow-on question was, ``What makes you so sure that you will be able to do it with natural gas and not fall into the same pattern of project delay?'' It is important from a competitive standpoint to find ways of performing our regulatory reviews efficiently. As Canadians we all hold ourselves to a high level of environmental performance and take a great deal of pride in the environment that we have. At the same time we have simply got to be as efficient as we can in these regulatory reviews if we are going to have any chance of competing with other jurisdictions.
Senator Mitchell: Of course, a lot of that environmental review issue does focus around pipelines going west to China. We visited Westport Transportation yesterday. We are finding there is also this huge potential market for LNG vehicles, particularly heavy vehicles which produce 30 per cent of the GHG emissions in our transportation sector. What does it take by way of infrastructure within Canada to deliver the kind of LNG resources that we need, that is pipeline infrastructure, and what could government do to catalyze that whole operation or evolution from diesel to LNG vehicles?
Mr. Bloom: I think that is a great opportunity in Canada with gas prices as low as they are. While we cannot predict the future, it certainly looks like they are going to stay very affordable for a long, long time to come. A couple of things can be done.
Number one, we have got to put some infrastructure in place that will allow return to base trucking fleets to use liquefied natural gas in their vehicles. That is a great opportunity for distribution companies, LDCs, that perform a public utility service. Through their regulatory commissions, if they could be incented to make the investments in LNG refueling stations at some of these good locations in urban environments that would be accessible to trucking fleets, that would really go a long ways to helping the accessibility.
Number two, another thing that governments could consider is providing some accelerated tax depreciation for conversions of some of these existing fleets. It is going to be more expensive to convert a vehicle. It is probably more expensive to acquire one in the first place. Maybe without providing direct subsidies, the government could nonetheless provide some accelerated write-offs that would help defray some of those high upfront costs. I do not think it would take too much. Lots of trucking companies are looking for opportunities to lower their costs. This is a terrific opportunity for a win-win here, as you mentioned, a real win on the GHG and the ash emissions as well.
Senator Banks: I want to pursue Senator Mitchell's question because everywhere we have gone in the country — Montreal, here, everywhere — everybody who operates a truck fleet has said, ``We would love to use natural gas. It is more efficient, not only in terms of the cost of our fuel, but in the length that our equipment lasts before we have to throw it out because a natural gas engine lasts a lot longer than an internal combustion that burns either diesel or gasoline.'' I think Senator Massicotte asked this question before of gas producers or distributors.
To make the odious comparison, Shell and Esso and the oil companies, White Rose and Texaco and all those people, did not ask for any government incentives that I know of to build service stations in order to be able to sell their product. Why is your industry not saying, ``We have to build this infrastructure. We have to take the leap ahead and build the infrastructure so that we can have LNG refueling stations both for return to base and long distance trucking along the main routes so that we can incent the truckers to buy that equipment?'' I agree that accelerated capital cost amounts for the purchase of the capital equipment on the part of the truckers is a good idea, and that is something that the government can do, but is the access to the fuel not the chicken that lays the egg in this case, and why is your industry not doing it?
Mr. Bloom: That is a great question, and it is very much a chicken-and-egg issue here. Twenty years ago we, in our industry, and we, our company in particular, made some pretty aggressive forays into natural gas for vehicle use. Unfortunately at that time we took a rather shotgun approach to the market. We tried to make the fuel equally accessible for retail and residential usage as it was to commercial fleets. In retrospect we really should have taken a more focused approach. I think as we look at it this time, we really need to start by priming the pump for this opportunity by focusing on some of the return to fleet transportation uses and urban trucking fleets or fleets that operate largely between two pretty populated centres, Calgary/Edmonton, Vancouver/Victoria. That kind of thing would be probably the best way to get going.
Senator Banks: Pretty cheaply, would it not?
Mr. Bloom: Pretty cheap, if you focus first on the low-hanging fruit or the opportunity areas where the economics are going to be most favourable for converting and using natural gas as a transportation fuel, which would be a good start to building the usage. From there we probably will see it become available at service stations and other places. Right now I do not think it is likely that that will happen because we just do not have the base of usage to really warrant putting in distribution centres there. As we are here in British Columbia with companies like Vedder Transport and Westport Innovations Technology, I would start with those transportation fleets, use the LDC to help make the product available. Then, with time, we will see the market opportunities develop, and it probably will not need subsidy or government intervention, though it probably needs a little help to get it over the hump to begin with.
Senator Banks: My last question is along the lines of the best-laid plans of mice and men. As you have said, the capacity of the United States to serve itself with respect to natural gas is increasing exponentially at a rate that nobody anticipated ten years ago. The likelihood of our continuing to have that as a good viable market is not only already diminished, but we can almost see the virtual end of it. We have to have other markets, LNG shipping to Asia, but there is a big lag time in there, I presume. The accelerated rate at which the United States appears to be able to serve itself with its own gas, which is very attractive to Americans, is coming within the very foreseeable future. I do not know how foreseeable the future is for the building of LNG plants and establishing those markets at a viable price. Is there a danger that if that lag time between our not being able to be competitive with our gas in the United States and the capacity to establish viable Asian markets will be longer time than we are hoping it will be? Is there not a danger that there will be a terrible depression in gas prices during that time which would lead to difficulty in getting capital investment to build LNG plants? Could this be a downward spiral?
Mr. Bloom: There is that risk for sure. That is a real worry. As our current only export market is increasingly finding its own supply and weaning itself off of imports from Canada, that we do not move quickly enough and capture the opportunity in Asia and we lose that opportunity too, that is clearly the worst-case scenario for the natural gas supply industry and would likely lead to not only prolonged weak prices but a significant pull-back in investment into the sector. We tend to look at the opportunity. We certainly have to be mindful of the risk, but we really do need to move quickly and develop new export markets because the supply growth in the United States, as I was mentioning in my prepared remarks, has grown extremely quickly in the last few years.
This whole revolution in shale gas supply has come upon us very quickly, and therefore it is creating market disruption and dislocation very quickly, which means we have to move very quickly as a result to develop new markets. There is going to be a little bit of a lag as you build the infrastructure; several years but we need to make sure it is not any longer than that.
Senator Massicotte: To follow up on that same point, in your presentation you talk a lot about the immense importance of getting on with it. There is an urgency, and you are scared, obviously, that if you do not move quickly enough other world competitors will satisfy that Asian demand. We heard earlier about this whole issue of natural gas pricing and what should we predict in the future. Nobody knows for sure, but obviously you do expect the price for gas will allow your significant investments to be profitable, I presume, at a premium to the price in North America. If you make that assumption, what is the urgency? What is it that you expect to occur within five or ten years that would make your project non-feasible if it was delayed somewhat?
Mr. Bloom: The big issue is the many competing sources of supply out there, Australia being one. A really vivid example is they build up their LNG trade which is already a going concern. In the United States, and to Senator Banks' earlier point, the expectation 10 years ago was that North America would need to import natural gas. As a result of that, about five or six import terminals were built around North America, one on Canada's east coast. Those now provide the infrastructure. While not immediately reusable as export facilities, they certainly have a lot of the facilities — storage tanks, port facilities and the like, pipeline connections. That gives them an opportunity to turn around and export as well. There is competing LNG supplies and competing supplies on land from Russia, Turkmenistan, and other regions in Asia that can access these markets. The urgency is really that we get crowded out of the market growth opportunities by other competing supplies that can move in more quickly than we can.
Senator Massicotte: So that supply would satisfy Asia's demand in your mind for the next 15 to 20 years satisfactorily. If that is the case, it seems to suggest there is an excess supply and that price will go way down because it is a fixed commodity. You have a fixed demand for it. I am just trying to see what your scenario is on that.
Mr. Bloom: The scenario is that if you do not capture the markets and are unable to sign the long-term contracts to capture growth in China or Korea or Japan or wherever, then there are going to be other supplies that will come in and meet those needs on a long-term basis. Unlike the way the natural gas market works in North America, which is of a much shorter term and focus, high levels of liquidity, lots of trading points, huge degrees of interconnection in a well- established pipeline grid, that is typically not the case in LNG trade. Generally what you have is individual reserves that are dedicated to an LNG export terminal and then in turn dedicated in an LNG bilateral trade. As a result, you have very large, lumpy investments that will take a large block of market at any given time. To the extent you missed those opportunities, then you are on the outside looking in for some time.
Senator Massicotte: Is there a possibility that a Canadian company could actually usurp you and reach that market faster?
Mr. Bloom: Usurp Spectra? Certainly that is possible, yes. We have a very well-developed natural gas industry in Canada. There are plenty of able competitors eager to do the same thing.
Senator Neufeld: With regard to North American LNG import terminals, you talked about the Gulf Coast, so I am just going to refer to the Gulf Coast. Existing now, Gulf Coast import terminals can handle 11 billion cubic feet a day. That is existing. Approved but not under construction is a further 7 billion. When we look at export terminals out of the U.S. that are proposed, it is 6.4 billion. That is all on the Gulf Coast. There is a huge amount of import. Now they are talking about export. Can they not change those plants around a little bit? When we look at British Columbia, there are three proposed sites, including Kitimat, but that is not proposed. That is approved. It is just under 2 billion cubic feet a day.
All these numbers surprise me a little bit when I look at just the Gulf Coast given existing import and proposed export. Can you actually turn those terminals around. I think it adds to what you have been saying. We need to actually make sure we do it as fast and as efficiently as we can so that we can get that LNG to market, or we are going to lose to those places in the Gulf Coast. Would I be correct in that thinking?
Mr. Bloom: Yes. That is a big concern right now, senator. The import of natural gas through those terminals that were approved and built in the Gulf Coast of the United States is pretty minimal. There is virtually no gas now getting imported through those terminals into the United States. However, they were built and they exist and they have, in that case, vaporization capability and storage. They can be converted to export terminals. It takes a significant capital investment to do it because you are turning the process around. Now you are delivering the natural gas through the Interstate Pipeline Network which does run right by the door of those Gulf Coast facilities. Now you have got to install liquefaction capability. That will be a significant investment. However, you do have storage. You do have the terminal facilities. You have got a lot of what you need to get started. We have seen several export authorizations approved by the U.S. Department of Energy. For countries that have free trade agreements with the United States, those are automatic. With respect to countries for which no trade restrictions exist with the United States, there is a review that is required by the Department of Energy, but as we have seen, those too can and are getting approved.
Senator Neufeld: With the approvals that are in place for Kitimat, are there boots on the ground, to use your words? Are things happening right now on the ground to make sure that that takes place? That was approved quite a while ago.
Mr. Bloom: Yes, it was, and that was very important that the export license was approved. That was a strong signal to the market.
Senator Banks: When was that?
Mr. Bloom: That was September of this year. The folks from KM LNG, Apache, EOG, and Encana would be able to speak to this better than I can, but I do know they are clearing the site at Kitimat and they are trying to do the work that is necessary to keep them on track for a late 2015 or early 2016 in-service.
Senator Brown: Do we not still have a bit of an advantage on natural gas going into the U.S. I was looking at the map, and we are supplying all the way through the least populated states all the way to Chicago. It seems like the shale gas that the Americans would want to be producing are on the Eastern Seaboard and on the southern part of the United States. If our pipelines were all paid for, which I think they pretty much are, amortized that far, then we should not be in too much of a panic immediately about keeping natural gas going into the U.S.
Also, we do have an LNG station at Strathmore, Alberta just outside of Calgary. Westport tells us we can go 2,000 kilometres. I was amazed. That is 1,200 miles back and forth from Calgary to Edmonton already with LNG trucks.
Mr. Bloom: With regard to the markets like the midwest and we would hope, from our company's interests, the Pacific Northwest, there are going to be markets in the United States that we think will continue to be served by Canadian natural gas and markets where we think that we will still be competitive with shale gas supplies that develop there. What we may see though is imports into Canada from shale gas plays like the Marcellus in Pennsylvania and New York and the Utica play in Ohio that are very closely located to places like Ontario in Canada that could end up flowing northbound where they previously had been supplied eastbound. It may be that we will still have some exports to the United States, but we will have some imports from the United States as well as the industry adjusts to the location of these new shale gas deposits.
Senator Brown: Some of that is in the future, though. It is not immediate. It has not already happened in Pennsylvania. It is beginning, is it not?
Mr. Bloom: I know there are a number of projects from the United States or a number of companies that are looking at markets in Canada, so it is quite possible that it could occur in the near future.
The Chair: Thank you, Mr. Bloom. The discussion was very interesting, right on point. Your opening statement was very comprehensive as well and most helpful to us. We would like to stay in touch with you as boots hit the ground. We will do anything we can to help with streamlining these approval processes.
(The committee adjourned.)