Thank you, again, Mr. Chair, for the invitation.
Good morning. It's a pleasure to appear before the committee this morning.
My name is Andrew Leach. I am an associate professor at the University of Alberta School of Business, where I also hold the Enbridge professorship in energy policy. For those who may have concerns about that, I thought I would lead off just by stating for the record that this position is a school position, not an Enbridge position, and does not in any way influence my research, nor do my views represent those of Enbridge this morning.
My presentation today will focus primarily on oil sands, in particular three aspects of oil sands: oil sands growth and the potential for the sector to grow, the risks to that growth, and questions you've been hearing about with respect to how to capture the greatest amount of value from that growth trajectory.
The first question is how large the oil sands sector will grow to be. If you look at industry forecasts, you'll see numbers that see the oil sand sector growing from two million barrels per day today to levels two to three times that within the next couple of decades, up to and above six million barrels a day. I feel, however, that these forecasts are likely underpinned by unrealistic assumptions about cost. I think the evidence of recent history supports that contention.
If you go back not to the beginnings of the oil sands but to the beginnings of the rapid growth of the sector in the 2000s to compare with today, operating costs since then have increased threefold to fourfold, and costs of building facilities within the oil sands have increased up to five times.
I'll cite a couple of examples for your consideration.
On the capital cost side, phase one of Imperial Oil’s Kearl project came online this year. That project initially sought regulatory approval with a budget of $5.5 billion for a project of 345,000 barrels a day.
The first phase of the project, at 110,000 barrels per day, cost Imperial Oil more than $12 billion. What you have is a project that costs basically on a per barrel basis more than five times what it was initially slated to cost.
That should be a concern for you, because of course the majority of those costs are felt in the form of defrayed taxes and royalties. When you hear about benefits, what you're often hearing about in the guise of benefits is really increased costs.
The same thing occurs on the operating cost side. You heard already from Ms. Kennedy from Suncor. I'm going to use them as an example here.
In 2003, Suncor set out a goal to reduce oil sands operating costs below $10 per barrel. Unfortunately, I can report that their last quarterly report saw their operating cost at $36 per barrel, out of relatively similar facilities.
Sadly, these two examples aren't the exception; they are the rule across the sector. These inflated costs and stretched project timelines are the reason we have seen lower production than we would have forecast.
Why am I telling you about this? If you look back a decade ago, forecasts in the oil sands had production much higher than it is today. The 2004 forecast would have seen us producing today three and a half million barrels per day of oil in the oil sands, whereas we're now producing just over two million. We're essentially five to six years behind what those forecasts would have held.
You might say that's not a big deal; why am I worried about it? To put it into perspective, those forecasts were made assuming $30 WTI oil prices, or oil prices at a third at what we see them at today. When you consider that oil prices have essentially more than doubled and yet we still haven't met growth forecasts in the sector, we may want to consider whether or not we're basing our future benefits forecast on an unrealistic assumption.
The second element I want to bring forward—and the previous witness alluded to this as well, but I'm going to take a little bit of a different view on it—is with respect to climate change policy risks.
This week we saw ExxonMobil come out with a report to their investors stating the degree to which they felt their own assets were at risk from future climate change policies, both within their operating areas and elsewhere throughout the world. In fact, they state, “Governments' constraints on use of carbon-based energy sources and limits on greenhouse gas emissions are expected to increase”.
My submission to your committee this morning, Mr. Chair, is to say that I believe Canadians deserve a similar assessment of the risks compared with the benefits that you're hearing about and the risks to oil sands development that arise from climate change policies here and abroad.
Interestingly—I think it's interesting, anyway—in research I have done with my colleague Branko Boskovic at the University of Alberta, we have asked these questions. We've asked how exposed oil sands projects are to climate policies and whether oil sands projects remain viable in low carbon economies. These are similar to the questions ExxonMobil asks.
We actually find that these projects are very robust to low carbon scenarios and to significantly more stringent carbon policies at home than those they face today.
The question this research leaves me with is, briefly for you this morning, why Canadians are generally told that you have to pick one. It might be implicit or explicit, but Canadians are generally told that they have to pick either climate change policy or oil sands development. Our research suggests that this is not necessarily the case.
The third element I'd like to raise, which has been raised a lot in your hearings to date, is the question of value-added. For those of you who don't have them in front of you, let me report that this term is in italics in my speaking notes.
I would like to remind you that most of our hydrocarbon reserves are in the form of bitumen. They are not light sweet crude, even though I think from everybody's perspective, we would certainly rather they were. But you're told often in this context that Canada should encourage more value-added processing of this bitumen.
I want to concentrate this morning on two words, the words “processing” and “encourage”, and I want to differentiate between value-added and increased processing.
If we're going to think about governments encouraging more processing of bitumen in the country, I want to ask how they would do it. The ways they can do it are really simple: through trade policy, fiscal policy, or direct involvement in the sector, as we've seen most recently in Alberta with an essentially government RFP for a new bitumen upgrader in the province.
Implicitly what these policies would do is either directly assign government assets, resources, or direct financial support to the upgrading of bitumen or de-value Canada's bitumen through trade policies in order to underpin increased processing. Neither of those options would generally be value-added; they would be value-transfer or value-detracting; they would be taking away the value of our natural resource to support greater processing. We must recognize that using resources to support processing is not the same as adding value. We should all want to add value; we should not necessarily want more processing.
I hope these topics are ones you'll choose to explore. I will leave my statement at that and look forward to your questions.
Thank you very much.