Canada's Role in Global Energy Production

Gareth S. Seltzer, President and CEO, TWS Canada Group and Past President, The Empire Club of Canada; Ryan Hinds, Grade 12 Student, North Toronto Collegiate Institute; Rabbi Perry Cohen, Facilitator, Teacher and Author; Donna Cansfield, Parliamentary Assistant to Minister of Energy, Government of Ontario; Dr. Peter George, President and Vice-Chancellor, McMaster University; Antoinette Marwitz, Consul General, U.S. Consulate General, Toronto; Charles S. Coffey, Executive Vice-President, Government and Community Affairs, RBC Financial Group and Director, The Empire Club of Canada; Terence Corcoran, Editor-In-Chief, Financial Post; Dr. Marketa Evans, Executive Director, Munk Centre for International Studies, University of Toronto; and Walter Murray, Vice-Chairman, RBC Capital Markets.

Introduction by John Koopman

The Web site for Petrolia Ontario asks: "Is Petrolia Ontario responsible for the Iraqi war?" The question is not entirely vicious.

For most of the history of man oil was a sticky foul-smelling nuisance, and all it did was contaminate water wells. Supplies were limited to crude oil that oozed to the surface. Hucksters originally sold it as medicinal liniment and an 1855 advertisement for Kier's s Rock 011 advised consumers to "hurry before this product is depleted from nature's laboratory."

In 1858 in Oil Springs Ontario, near Petrolia, James Williams was drilling for water when he inadvertently hit the first oil well in North America.

For the 50 years after the drilling of the Williams Well, Petrolia Ontario was the home of the most advanced oil development and refining technologies in the world. Petrolia drillers took their knowledge to every corner of the globe.

In an age when few people travelled beyond the borders of their own home towns, pioneer oil men from Petrolia discovered most of the world's significant oil fields. From 1879 to 1920 there was not a major oil field anywhere in the world without at least one Petrolia oilman Involved.

The first crew of "hard oilers" left Petrolia in 1874 to drill in Java. William McGarvey drilled a well near Krakow, Poland and then built a refinery there. His daughter married Count von Zeppelin. Unfortunately in the First World War the Russians set fire to his wells and blew up his refineries.

James Brown spent 14 years drilling in Persia. His fields were the life-line of the Royal Navy in the First World War, which earned him an attack by German soldiers and four months hiding in the mountains.

Charles Wallen was drilling near Grosny, Tchennya when the Russian Revolution broke out. He had a harrowing escape with the help of a couple of friendly Cossacks.

Joseph Thompson drilled for three years in Burma, opened a successful stable in Rangoon and never returned to Petrolia.

So many men left Petrolia that it was a single-parent town before that term was invented. Entire streets were without fathers. Some men never returned, casualties in foreign wars or of tropical illnesses. Others settled in foreign lands. The Petrolia Advertiser-Topic lost its last Borneo subscriber only in 1962.

Hard-oilers from Petrolia Ontario discovered and developed the Iraqi oilfields.

The Imperial Oil story started in 1880 when 16 small south-western Ontario oil companies pooled their resources to form Imperial Oil. Imperial Oil's corporate headquarters were in Petrolia from 1883 until it was acquired by John D. Rockefeller in 1898.

Imperial Oil has always been a great corporate citizen. In 1918 it was the second company in Canada to move to an eight-hour work-day. It is consistently named one of the best-managed companies in Canada.

Mr. Hearn was born in Regina and educated at the University of Manitoba. He joined Imperial in 1967 and has held many positions in Imperial and Exxon Including Vice-President, Human Resources for Exxon-Mobil. He has been President of Imperial Oil since January 2002. Between a 10-year overseas posting and a position as Chairman and CEO of a former Petrolia-based oil-company I think Mr. Hearn is also entitled to be called a hard-oiler.

Ladies and gentlemen, please join me in welcoming Mr. Tim Hearn to the podium of the Empire Club of Canada.

Timothy Hearn

Thank you, Mr. Koopman. Good afternoon ladies and gentlemen. It's an honour to be invited to address the Empire Club of Canada, and I thank all of you for attending.

The last time a representative of Imperial Oil addressed the Empire Club was in January, 1989, 15 years ago, when our CEO at the time, Arden Haynes, talked about Canada's energy future. On the assumption that once every 15 years is not visiting a topic too frequently, I plan to speak today on the same broad subject--the global energy scene and Canada's important role, which includes the progress we have made, where we stand today, and where we might expect or hope to go in the future.

The essential message I would like to leave with you today is two-fold. First, to support both the world's growing population and economic development around the globe, particularly in countries, which are just emerging economically, requires increased use of energy in all forms. Secondly, Canada has been blessed with abundant resources of all forms of energy--oil, natural gas, coal, hydroelectricity and uranium for nuclear power generation. Developing these natural resources has made an invaluable contribution to Canadian economic growth, social development and the standard of living that all Canadians enjoy. Without our energy resources and the various industries using it, Canada would be a very different country and society--a much poorer one, in every sense of the term.

Looking ahead, our country's still-abundant energy resources provide for even greater opportunities in the future than they have in the past. We have the opportunity to realize the full value of our resources by developing them at a time when the need, both within Canada and in world energy markets, will be even greater than in the past. In fact, we face a significant opportunity--one that holds the promise of improved prosperity and well-being for all Canadians.

Whether we take advantage of this opportunity will depend, as has been the case in the past, on our willingness as a nation to provide public policies, regulatory and fiscal frameworks that will encourage the levels of investment, technological innovation and sheer effort required in developing Canada's resources.

Before talking more about the future, it is often instructive to look to the past.

It's clear, looking back, that the twentieth century was one of the most remarkable periods in human history. In the developed world at least, prosperity and standards of living for people at all levels of society improved at a pace and to levels that would have staggered the imagination of anyone living at the beginning of the century.

It was a period of tremendous scientific and technological progress. In any field you could name--agriculture, food production, medicine, manufacturing, transportation, communications, education, construction, all of the sciences and technical disciplines--more advances were made during the twentieth century than in the entire history of civilization.

And in almost every field, this progress was made possible by energy. Without the availability of plentiful, readily accessible and affordable energy, the twentieth century could not have unfolded as it did. Fuels and lubricants for machinery to produce goods and vehicles, ships, trains and planes, to transport them. Heat for homes, factories, offices, schools and hospitals. Air conditioning that modifies high temperatures and improves productivity in hot climates. Fertilizers to grow crops. Light and electric power for virtually every human activity from studying books to operating a computer. All depend on the availability of energy.

And today, if anything we are even more dependent on energy than we have ever been in the past. That fact was borne out for many of us during last summer's extended power outage in parts of central Canada and the eastern U.S. In addition to all the day-to-day uses we have for energy, so many essential functions and services are automated and computerized today that a loss of electrical energy is nearly catastrophic.

And at the same time, petroleum--which we generally think of as a source of fuels--also provides the feedstock for literally tens of thousands of products and materials that are essential to our way of life. Asphalt for roads and roofing tiles, food storage containers, insulating materials and plastics for everything from automobiles to medical supplies such as blood bags, furniture and flooring, irrigation, drainage pipes and electrical wiring are all derived from petroleum.

I'd also note that polyester materials, which are derived from petroleum, have clothed the developing world for many years and are now also included in some of the finest fabrics; it's rare to find a fabric today that doesn't contain some polyester fibre.

Petroleum, therefore, touches almost every aspect of modern life. To quote Daniel Yergin's book "The Prize," "Petroleum remains the motive force of modern society and the lifeblood of the civilization it helped create."

During the twentieth century, energy use throughout the world increased more than tenfold. That the world's energy-producing industries have been able to supply that exploding demand for reliable and affordable energy is, in my view, a remarkable accomplishment. It reflects determination, discipline, a willingness to take risks and an ability to develop and adapt innovative technologies.

I also believe--contrary to opinion in some quarters--that the petroleum industry's record of both social and environmental responsibility has been strong and positive over the years. Obviously, not all environmental issues associated with our industry or products have been resolved, but the industry has responded to the legitimate concerns of the day and will continue to do so.

Studies have clearly shown that economic growth and rising prosperity leads directly to improved environmental performance across the board. The more prosperous a society, the more it can afford to focus on both economic growth through productivity and environmental responsibility. The fact remains, however, that to grow an economy, and/or sustain growing populations, added energy is required.

There is also overwhelming evidence that in the United States, in Europe and in Canada, air quality today is substantially better than it was 20 years ago. Through concerted joint efforts by the petroleum and automotive industries, airborne compounds of lead have effectively been eliminated, and levels of particulates and sulphur dioxides have been dramatically reduced. And further improvements will come from fuel reformulation, more fuel-efficient vehicles and refinements to pollution-control systems.

I believe we can have both economic growth, which involves increased energy consumption, and an improving environment. Those are not mutually exclusive goals and they can be tackled with the right public policies.

In looking to the future, it appears that some basic principles that applied in the past will continue to apply. That is, the direct link between energy consumption and population growth, economic growth and improving standards of living is firmly established. The relationship is not always constant, but it is clear that feeding, clothing, housing, caring and providing employment for more people requires more energy.

During the twentieth century the world's population increased from about 1.6 billion to about six billion. Over the next 20 years or so, population is projected to increase to around 7.5 billion. And of the six billion people today, some 85 per cent live in developing countries, where the average gross domestic product per capita is about 6 per cent of that of the developed world. Nearly two billion people have no access to electricity, and 2.5 billion are without proper sanitation. Roughly one person in five lacks access to safe drinking water.

Citizens of developing countries have legitimate aspirations for a better life. To realize those aspirations, they need energy today and as their numbers increase, the greater that need will be.

With the collapse of communism and the failure of centrally planned economies in recent years, market-based systems are spurring industrialization and growth in the developing world. As a result, the International Energy Agency projects that total world energy consumption, that is oil, natural gas, coal, hydro, nuclear, biomass and renewables, will increase by about 45 per cent by 2020, to the equivalent of about 290 million oil-equivalent barrels a day. This is up from 200 million oil-equivalent barrels a day in 2000. Almost 70 per cent of the growth will occur in the developing world--especially in Asia but also in South America, Africa and the Indian subcontinent.

The International Energy Agency also projects that most of the additional energy needed will come from oil and gas. Today, they account for about 60 per cent of all the energy consumed in the world, and that is not expected to change significantly.

This forecast indicated that oil and natural gas will remain the dominant sources of the world's energy needs for quite a long period of time certainly through the first three or four decades of this century, and possibly much longer.

I realize that this may not be a message that some people want to hear. There are some who hope, and believe, that oil and gas will be supplanted, in the short to medium term, by alternative sources of energy. Some think that as a matter of social and political philosophy, we should proceed on that assumption or at least towards that ultimate goal. Rather than invest in developing oil and gas resources, we should only focus on developing and promoting alternative energy sources such as solar and wind power, and alternative fuels such as biofuels derived from plants and other renewable sources.

With the reality of the world's energy rising needs, the accelerated development of all economically viable forms of energy should be pursued, including alternatives, because all forms of energy will be required. We need to support the efficient use of energy, because it is too valuable a commodity to waste. At Imperial, both on our own and through our international affiliations, we participate in research for new and promising technologies such as fuel cells, hybrid vehicles and advanced fuel systems for conventional vehicles.

We are also participating in a groundbreaking research effort known as the Global Climate and Energy Project. Under this program, Stanford University will lead efforts by scientists and engineers from universities and companies like ExxonMobil, General Electric, Toyota and Schlumberger into a wide range of issues associated with energy needs and greenhouse gas emissions. The overall objective, and the hope, is to find new technologies and other solutions that can help us continue to produce reliable and affordable energy while reducing greenhousegas emissions in a cost-effective manner.

Both the research itself and the findings will explicitly consider the needs of developing countries, where the majority of future new emissions will occur, including the transfer of advanced technologies to minimize emissions growth from economic development.

When it comes to alternatives, the reality is that failing some dramatic scientific or technological breakthroughs in the very near future, the known alternative fuels and energy sources cannot be brought into play, in the short to medium term, on a scale necessary to make a significant difference--and certainly not at competitive costs. For example, even with a 20-fold increase in the use of wind and solar power over the next two decades, wind and solar would still account for less than 1 per cent of total world energy consumption projected for 2020.

It is worth noting that the forecast of a 45-per-cent increase in global energy use does take into account increased use of alternatives, as well as significant advances in technologies to improve energy efficiency, including a one-third improvement in new-car fuel economy. Again, however, the efficiency improvements are outpaced by rising demand from population growth and economic development, particularly in the developing world. Traditional energy--mainly oil and gas--will continue to be the dominant source of supply in the short and medium term, with new energy sources providing much needed and valuable support.

Other independent and informed forecasters and observers, including the U.S. Energy Information Administration and the International Energy Agency, generally subscribe to this view of the energy future. So the question then becomes: "How is the demand for additional energy to be met?" The short answer is that it is going to be a real challenge--perhaps the toughest challenge the worldwide energy industries have ever faced. As demand for oil and gas grows, production from existing fields is declining, at an average rate of about 5 per cent a year. This combination of trends results in a gap in the supply-demand curve of nearly 100 million oil-equivalent barrels a day, an amount equal to about 80 per cent of today's production level. To put it another way, about half of the crude oil production that will be needed just 10 years from now will have to come from fields that are not yet on-stream today.

Closing this gap will require both huge investments--to the tune of about $200 billion U.S. per year worldwide, or trillions of dollars over the next several decades and continued technological advances. As I said earlier, new methods and technologies for oil and gas exploration and production have advanced significantly over the years. For example, methods of recovering heavy oil from oil-sands deposits have become more efficient and less costly. And we have seen quantum improvements in seismology as well as in directional and horizontal drilling, under-sea pipeline construction to name just a few. To meet the future demand we will need further developments in all these areas.

I am confident, however, that the investments will be available to bring as-yet undiscovered or undeveloped new resources on-stream to meet the projected demand, at least through the middle of the century. And it is here that Canada faces the significant opportunity that I mentioned at the outset of my remarks.

In Canada, there's no question that developing our energy resources has been crucial to the country's economic growth and standard of living. The energy industry has created many thousands of jobs in service and related businesses, contributed billions of tax dollars, and strengthened every sector of the economy.

The energy sector is a mainstay of Canadian prosperity and international competitiveness. In 2002, the energy sector, essentially the petroleum and electricity-producing industries, accounted for 6.3 per cent of all Canadian economic activity, and at $37 billion, investment in the energy sector accounted for more than 23 per cent of all investment. Canada's almost $47-billion worth of energy-related exports accounted for more than half of its total merchandise trade surplus. (It also represented almost 15 per cent of all Canadian exports to the United States.)

Also, in Canada as in other parts of the world, the petroleum industry has been able to meet steadily rising demand for affordable energy by finding and developing new sources of supply. As the "easier and cheaper" resources have been depleting, we've looked to more remote areas for conventional oil and gas, and we've also developed the abundant but comparatively high-cost oil sands of Western Canada.

This has been accomplished by a willingness to invest in expensive, long-term and high-risk projects, and to develop new technologies for both conventional and heavy-oil recovery and production. Projects such as Syncrude, Imperial's Cold Lake bitumen-producing facility, Hibernia, the Sable Offshore Energy Project and others are outstanding examples of Canadian technical excellence, along with the ability to execute highly ambitious engineering feats under difficult and challenging conditions.

The four largest economies in the world--the United States, the European Union, China and Japan--are all net importers of energy. And while the North American economy in particular has become less energy-intensive over the last decade or so, energy demand is still projected to increase at a rate somewhere between economic and population growth. In fact, Canada's National Energy Board and the U.S. Department of Energy agree that energy consumption in both countries will rise by about 40 per cent between now and 2020--again with oil and gas remaining the primary sources of supply. The United States will continue to be more dependent on imports.

Many of the energy-exporting countries that currently supply the world's largest economies do not all have the same political, legal and regulatory stability, which adds a degree of geopolitical uncertainty to the long-term supply picture.

Canada, by contrast, is a net energy exporter today and is endowed with a huge undeveloped resource base. The oil sands of Western Canada, for example, represent one of the three-largest deposits of liquid hydrocarbons in the world, the others being in the Middle East and in the oil sands of Venezuela. In addition, we have untapped resources in our northern and offshore coastal regions.

This puts Canada in a unique position. Not only do we have abundant resources to meet our own energy needs today and well into the future, but we are the only G7 country with the potential to grow exports, with some distinct advantages.

First, in addition to our resource base, we have extensive infrastructures of pipelines and other facilities in place to deliver what we produce to the largest energy market in the world the United States. That, clearly, is an advantage that some of our potential competitors don't have, especially as they may be forced to develop resources from more remote regions.

Second, in addition to supply security, we offer a degree of political, legal and regulatory stability that is not offered by some other oil-producing countries and regions. In the unfolding world of today, this is not an insignificant consideration.

And third, in Canada we undoubtedly have both the human and the technical capability to undertake, manage and execute projects of the magnitude required to get the job done. Some of you may know that I have spent a good portion of my career working abroad, and I know that Canadians are respected and valued for their talent, know-how and determination. All we lack, sometimes, is the confidence to believe in ourselves as others believe in us.

So, with this outlook and these natural advantages, Canada does face a significant opportunity--that of realizing the full value of its energy resources by developing them during a period of strong and rising demand both in the world in general and in North America in particular.

I also think it's important to emphasize that seizing this opportunity would benefit all Canadians, in all regions and at every social and economic level. As our energy and other natural-resource-based industries have been a major engine of economic growth and broad-based prosperity in the past, they can also provide the basis for future growth, increased prosperity and well-being.

What do we need to do, then, to realize our opportunities and reap the benefits I've referred to?

First, I think we need to begin with the recognition that the opportunity does exist and is important. Energy truly does matter; it is vital to our economy, to our society and to our way of life. All of us continually rely on affordable, uninterruptable energy in our everyday lives and in all our economic activities. We must use energy wisely and efficiently. We should encourage the development of all economically viable forms of energy. And in parallel with our supply-side efforts we must continue to seek out new technologies to minimize the environmental impact of our activities and products.

As far as the energy industry is concerned, I believe our primary responsibility to society is to do our job well--to provide people with much needed, affordable energy, and to do so in a safe, reliable and environmentally responsible manner.

As a society, however, we should not lose sight of the fact that the majority of energy comes from traditional sources, oil and natural gas in particular, and that will continue to be the case well into this century. To believe otherwise is not realistic.

Ensuring the continuing supply of oil and gas, therefore, is important.

Second, I believe we should acknowledge, as a matter of principle, that market-based policies in the energy sector have served Canada well for over a century, are working well today, and should provide the basis for future energy policy formulation.

While Canada is rich in energy resources, there's no question that they are higher-cost than traditional, conventional oil and gas available from other regions. Our particular challenge then is to develop them in a cost-effective, economically viable manner so that all Canadians can share in the economic benefits over the long term.

This means recognizing that very large and long-range investments will be needed, and attracting that investment will require a fiscal, regulatory and tax regime that is conducive to investment and reflects the need to remain competitive with other potential suppliers. Our regulatory regimes need to become much more efficient and productive while maintaining full effectiveness.

Canadian governments, as they have in the past, will play an important role in the future in setting the context for the industry to maintain secure and affordable energy supplies. The industry has, over the last century and more, responded with its best efforts and significant achievements, to the benefit of the country and its people. Working together we can meet the challenges, and seize the opportunities, with confidence and determination.

Thank you.

The appreciation of the meeting was expressed by Charles S. Coffey, Executive Vice-President, Government and Community Affairs, RBC Financial Group and Director, The Empire Club of Canada.