Energy in Quebec: central to change in North America

Presented by
Gaétan Caron
Board Member
National Energy Board

Troisième Forum québécois sur l'énergie
Montréal, Québec

20 September 2004

I am very pleased to be associated with this conference, and I would like to thank the organizers for inviting the National Energy Board. As the preliminary program says so eloquently, energy and energy security are key issues for Quebec. I believe that energy is also the key issue throughout Canada and in North America.

Highlights

This presentation is divided into five areas. First, we will compare the energy situation in Quebec with the situation across Canada and in North America.

Then, we will look at the role of the key players in the energy industry's evolution.

I will then identify the key issues facing Quebec, Canada and North America as a whole.

We will then look at possible solutions for addressing those issues.

Finally, I will present a decision-making model.

The NEB has eight Board Members

Before addressing the issue at hand, I would like to briefly describe the Board and who we are.

The Board currently has eight full-time Members and 300 employees. Our offices have been located in Calgary since 1991. We are an independent agency, and our annual reports are submitted to Parliament by the Minister of Natural Resources.

Our mandate

The National Energy Board Act (NEB Act) sets out the Board's main functions, i.e., regulating, in the public interest, several aspects of the energy industry, specifically, the construction and operation of pipelines and international power lines, pipeline tolls and tariffs, exports of oil, gas and electricity, and oil and gas development in the Northwest Territories and certain offshore areas.

The Board also advises the Minister of Natural Resources on the development and use of energy resources.

Canada's energy industry represents 6% of the Gross Domestic Product.

Our goals

The Board has five major goals, which are listed above and are aimed at ensuring public safety, protecting the environment, maximizing economic benefits, and respecting the rights of all those affected by the energy facilities and activities under the Board's jurisdiction.

Overview of energy markets in Quebec and North America

Essential World facts

Let's begin with a look at some world figures that have major consequences for Quebec, Canada and North America. When we talk about energy from a global perspective, oil is the main common denominator. Let's briefly examine oil prices on international markets and world oil demand, given that these data have a major impact on energy prices in North America.

Crude oil prices

This chart shows oil prices over the last five years. It was only five years ago, with prices hovering around $10 per barrel, that many experts were warning that we should brace ourselves for single digit oil prices. Well, we flirted briefly with that world, but oil prices have taken a dramatically different path in the last four years.

The OPEC basket traded above OPEC's target price of $US 25/bbl for most of 2003 and up until now this year, which was in the middle of the OPEC's established target band of $22 to $28. A number of experts estimate today that in the future, we can expect oil prices well above that target band. However, remember what the experts were saying in 1999!

World oil demand

There are, however, some fundamental reasons to believe that oil prices will remain high. World demand for crude oil, illustrated above, will continue to grow despite current price levels. Economic recovery in the western world, coupled with strong growth in Asian markets, are major contributing factors.

Notes: Data Source - BP Historical Review 1980-2003; PEL Forecast 2003-2010.
The "Other" category includes Africa and Latin America.

World energy demand, by source

Oil represents 43% of world energy demand, by far its biggest component. Percentages for natural gas and electricity are approximately the same, at about 15%.

Canada accounts for about 3% of world energy demand, and Quebec represents one-fifth of Canadian demand.

Note: On this graph, Other includes wind, solar, geothermal and other forms of energy.

Bird's-eye view

Let's get a bird's-eye view of energy market trends in Quebec, Canada and North America, within this global context we have just touched on.

Bird's-eye view - Energy balances

Comparison of main energy sources in the energy balance

First, let's compare energy balances for Quebec and for Canada as a whole.

They share one thing in common: the relative importance of oil in the balance: 39% for Quebec and 38% for Canada, almost identical.

The differences are not surprising: Quebec meets 36% of its demand via electricity, the majority of it hydroelectricity, while for Canada, that figure is 20%, just slightly more than half of the Quebec figure. Please note that the electricity share in this balance includes nuclear, particularly in Ontario, and coal-fired, particularly in Alberta, where close to 70% of electricity is generated at coal-fired facilities.

Another unsurprising difference: for Canada overall, natural gas accounts for 27% of the energy balance, whereas in Quebec, that percentage is just over half that, at 13%.

Bird's-eye view - Oil

Canadian crude oil production

Canada currently produces approximately two and one-half million barrels per day. That number is expected to increase to three and half million per day by 2025.

Oil sands production is growing rapidly, and the oil sands should soon become Canada's main source of oil supply.

Quebec does not produce oil, and thus relies completely on external markets for crude oil. We should note, however, that given the refining capacity at its three refineries, Quebec is more than self-sufficient in terms of refined products.

Oil supply - Destination

Exports to the United States now represent 63% of total production. We have become the leading supplier of oil and oil products to the United States, ahead of Saudi Arabia.

Bird's-eye view - Natural gas

Let's look now at natural gas, which, as you'll remember, represents 13% of Quebec's energy balance and 27% of Canada's.

Canadian natural gas prices

For natural gas prices, it's a good idea to show them in terms of continent-wide price changes, because the natural gas market is better defined at this level, although global influences are increasingly being felt.

Natural gas prices have increased significantly since 1990. Since the winter of 2000 however, in response to steady gas demand, maturing of many supply basins, and high oil prices, we've seen prices averaging $5.60 Cdn/MMBtu but with great volatility around that number. The price path will depend on the North American energy policy framework, the response of supply and demand to price, and on the decisions that we take as regulators, particularly with respect to new infrastructure.

Source: Report by the Canadian Association of Petroleum Producers, CAPP Natural Gas Report: weighted average of all deals completed in previous month for month of delivery.

Natural gas demand in North America

This chart shows past and future natural gas demand in North America. High demand is predicted across the continent, given that gas is cleaner than oil or coal, and because of its high energy efficiency when used for heating purposes and to generate electricity.

Canadian natural gas production

The Western Canadian Sedimentary Basic (WCSB) is an important part of the natural gas outlook. It is Canada's main natural gas source, and provides over 20% of North American supply. There is also Nova Scotia's large offshore basin. Gas production has increased rapidly since the mid-1980s, fuelled in large part by the growth in exports to the United States. A number of stakeholders estimate that WCSB production seems to have peaked, however, Canada has large resources of natural gas, particularly coal-bed methane and frontier gas. Moreover, several sites in Mexico, the United States and Canada are currently being assessed as potential sites for the construction of liquefied natural gas (LNG) sites.

Clearly, securing supply that can meet demand will require major investment.

LNG development

I'd like to briefly review LNG. LNG is, as we know natural gas, but cooled to below 160°C and maintained at a pressure slightly higher than atmospheric pressure. Under these conditions, the mixture of methane and other hydrocarbons that make up natural gas becomes liquid, and can thus be transported much more economically, because LNG takes up 600 times less volume than natural gas in a gaseous phase. This means that LNG can be carried in tankers over long distances, which would be impossible in the gaseous phase via pipeline, given the prohibitve costs. This requires liquefaction facilities at the tanker loading point (imagine a huge freezer) and regasification facilities at the destination (imagine a heat exchanger with compressors) to convert the liquid to gas and compress it for transmission via pipeline.

The above picture shows a typical LNG tanker.

LNG projects in North America

I'm sure you've heard about LNG terminal projects. This map shows the North American projects that have been covered to date in the media.

We're talking about a total of approximately 50 projects, about 10 of them in Canada. Observers agree that only a few will actually be completed.

Coal-bed methane - A promising source

A few minutes ago I referred to a potential source of natural gas in the future: coal-bed methane. There are about 20 pilot projects underway in Canada. A number of observers believe that the potential is huge. According to some estimates, coal-bed methane could account for up to nine times the volume of conventional natural gas still remaining in the Western Canadian Sedimentary Basin.

This picture shows a typical facility. A single well sunk in a coal bed produces less natural gas than a conventional well, but is capable of producing gas at a stable rate for a considerably longer period of time - in some cases, for 20 to 30 years.

Gas supply - Destination

In terms of destination of Canadian natural gas production, the situation is similar to oil production - 60% of the 16 to 17 billion cubic feet of natural gas produced every day in Canada is shipped to American markets. Ninety four percent (94%) of the natural gas imported by the US comes from Canada. Canadian production meets 17% of natural gas demand in the US.

As is the case with oil, we can say that North American natural gas markets are integrated.

Bird's-eye view - Electricity

Let's look now at electricity, which, you will remember, represents 36% of Quebec's energy balance and 20% of Canada's.

Comparison of residential power rates in Canada and the United States

You can see that prices are often lower in Canada than in adjacent American cities. The price for electricity is set regionally, unlike continental prices for gas and world prices for oil. Furthermore, electricity prices are, in the vast majority of cases, set by regulators, whereas gas and oil prices are in large part market-driven.

In Canada, in terms of residential rates, Quebec is in second-last position. Manitoba, which is also rich in hydro resources, has a slightly lower rate. The highest prices were in Edmonton and Charlottetown.

Electricity demand

Total electricity demand in Canada in 2003 was 563 T.Wh. Over the last ten years, demand has grown by 2% per year, on average.

This chart shows demand by province. Quebec accounts for the highest percentage of Canadian demand, at 35%, for one obvious reason - its extensive hydroelectric resources. Ontario places second at 28%, and British Columbia third, at 12% of Canadian demand.

Installed power in Canada

Canada's total installed power is 118 gigawatts (GW), approximately 60% of which is hydroelectric. The remainder is mainly nuclear or thermal, the latter of which is coal- or gas-fired.

Quebec accounts for 31% of electricity generation in Canada, and Ontario 27%.

In Canada, production has not kept pace with the growth in demand over the last two decades, with the result that reserve margins have declined steadily. Electricity demand should continue growing at approximately the same pace as the economy, which will require significant investment in new generation facilities or an increase in imports. At this rate, we will have to increase generation capacity by about 40 gigawatts over the next two decades.

Nuclear facilities in Quebec and Canada

Nuclear power generally receives less attention than other sources of energy. However, we should remember that this energy source makes an important contribution to balancing supply and demand. Nuclear power represents approximately 13% of power generation in Canada. The table above lists Canada's nuclear facilities. There is talk of extending the useful life of existing facilities. In Ontario, nuclear power is part of the province's long-term energy supply strategy.

The outlook for emerging energy sources

We know that we are going to need fossil fuels until at least 2025. However, we also know that there is much room for adjustments in the industrial sector, particularly via the efficient use of energy, and that these adjustments are, for the most part, market driven, partly in response to energy prices. The same can be said for the residential sector: Canadians are increasingly talking about, finding out about and taking an interest in conservation and new sources of energy.

Energy efficiency is one of the ultimate goals of technological development, and a basic condition in sustainable development scenarios. Technology also has an impact on new sources of energy, for example, passive solar energy.

According to NEB estimates, emerging energies (including wind, biomass, micro hydro stations and solar energy) currently represent approximately 1.5% of electricity generation in Canada. According to our analyses, that percentage could quintuple and reach 8% by 2025. In other words, the percentage of Canada's electricity generation produced via new energy sources could quintuple by 2025.

Integration of electricity markets

Most electricity generated in Canada is for the domestic market. Exports generally account for 7% to 9% of Canadian production. Exports have fallen significantly over the last three years, mainly the result of low water levels. As a result, Canada became a net importer of electricity in the fourth quarter of last year. However, based on the most recent data available, we believe that net exports recovered over the last two quarters.

Electricity markets are not as integrated as oil and natural gas markets, however, as the above chart shows, both imports and exports each show a clear upward trend over the long-term, meaning that the markets are in fact well integrated.

The situation in Quebec is comparable. Quebec became a net importer of electricity during the fourth quarter of 2003.

To summarize...

To summarize... (cont'd)

To summarize, in terms of energy, Quebec, Canada and North America as a whole share many common characteristics. Energy prices will probably remain high and volatile until the end of the decade. Although we will continue improving energy efficiency, economic growth will drive energy demand. Energy demand will increase, despite high prices. To meet demand, industry will step up its activities in terms of conventional energy production and the development of non-conventional sources, such as coal-bed methane, offshore frontier gas deposits, oil sands, and LNG imports. In addition to the capital required to develop new oil, gas and power supply, we will have to invest in new energy sources and in conservation.

Canada's energy industry will have to increase its total annual spending from current levels, i.e., $30 billion to $40 billion, to approximately $50 billion over the next 10 years.

Role of markets, factors external to markets, governments and regulators

In a market economy like ours, market forces and the actions of economic agents define the status of and changes in the energy industry. There is constant interplay among these market forces and non-market factors. Furthermore, these markets are operating within a political and regulatory framework.

Non-market factors

The impact of non-market factors is increasing. First, the public's desire for healthy and diverse environments is a fundamental aspect of the public interest.

Growing public participation in regulatory processes is another factor. Recent NEB hearings have set new records in terms of number of participants. In addition to environmental and health concerns, numerous communities are questioning new industrial development.

Aboriginal communities are increasingly interested in resource development on their traditional lands. They are concerned about environmental impacts, economic opportunities resulting from resource development activities and the impacts of these activities on their Aboriginal and treaty rights. Additionally, issues around the Crown's obligation to consult with Aboriginal people where resource development may have an impact on their Aboriginal or treaty rights pose further challenges.

Role of government - Policy framework

Let's not forget that Canada remains committed to market-based principles. However, for the first time in 20 years, some industry stakeholders are asking governments to review energy policies. The demands range from 'tweaking' current policy to creating a more explicit and precise policy framework.

The regulator's role

Let's look now at the role of regulators. That role boils down to two words: protect and enable.

The protection part of the role of regulators probably comes more naturally to us. Indeed, much of what we listen to in public hearings concerns protecting property, protecting rights, protecting earnings, protecting safety, protecting consumers, protecting the environment, protecting wildlife, and so on. As a result, the concept of "protection" is clearly understood.

Enabling and protecting

Fulfilling all our responsibilities includes pursuing a complementary use the word "enable" because it implies a responsibility to "make possible". Investment in energy infrastructure is needed to get energy where consumers ask for it - to heat our homes, power our appliances, move us around and make products. Good regulatory processes and policies are required to enable the necessary investments.

Enabling means providing an efficient and effective framework for disclosure of information and negotiation between various stakeholders to reduce uncertainty and shorten timelines. It means providing a clear set of rules which protect investors as well as consumers .

Finally, enabling means that we are also responsible for ensuring that projects found to be in the public interest can proceed.

Key issues

Key issues (cont'd)

Obviously, as a society, we aim for steady economic growth. We can disagree on the pace of growth, but we all agree on the need for growth, in the short or long term. A corollary of this is that a growing economy needs more energy. Even making extremely positive assumptions about energy efficiency, demand for energy is growing, and energy supply will have to meet that growing demand. The market forces will make it happen.

Environmental issues, in the broad sense, are a significant challenge. It is relatively easy to agree on philosophical issues. Should we be concerned about the environment? Should we subscribe to the basic principles of sustainable development. The vast majority of Canadians say yes. The challenge is in making choices and decisions. That is the point at which disputes arise over how and when.

We talk less about social choices, but they do exist. For example, higher energy prices impact poverty and social programs. How should a society respond to that reality? The same is true for decisions on land use - when should industrial development be allowed? How can we prohibit industry from using our land when we demand that our economy continue growing? These questions represent choices that we have to address when defining quality of life in the broadest sense, and they involve all citizens.

Finally, the regulatory framework is also one of the key issues facing us. A number of energy industry stakeholders are demanding that their regulators make improvements, both in terms of the process and the scope of their actions.

Regulation is bucking the trend

Regulation has received a lot of attention lately as one of the impediments to desirable investment. Earlier I discussed the increased integration that has occurred in energy markets. But regulation has bucked that trend. While commodity markets in North America have become more integrated and less regulated, the regulation of infrastructure has actually moved towards more jurisdictional and regional segregation in Canada.
The result is a tension between the two worlds, the world of commodity markets and the world of infrastructure, where it has become more complicated to bring new energy projects on stream.

Solutions

I have listed what, in my opinion, are the main strategic energy issues in Quebec, Canada and North America. Let's move on now to identifying some solutions.

Market - Energy industry

Obviously, the markets have their own role to play. They will have to invest in infrastructure and research. their expertise and the impact of their choices, market participants will have to continue contributing to public debate of broad policies as well as more specific regulatory discussions.

Government

Governments will obviously continue implementing policies that will have a direct and indirect impact on the future of energy issues. They also have an essential role to play in identifying areas of research that could benefit society as a whole, because governments are required to see beyond the outside interests of a company or industry. Finally, because it is governments that create regulators, governments can also refocus and help regulators modernize and adapt to new legislation or regulations in that direction.

Regulators

Finally, as regulators, we have a role to play in the evolution of energy issues, and solutions to those issues. We have to do everything in our power to remain impartial. If we are not fair, what are we? We also have to constantly seek out ways to improve our processes. Modernizing regulations is a never-ending task, and involves seeking partnerships with other agencies, streamlining processes, goal-oriented regulation, the publication of impartial information, and effective citizen involvement in the hearing process.

Partnership example

Above is an example of a partnership to which the Board has made a major contribution. Examining the proposed construction of a gas pipeline from the Mackenzie Delta to the existing system involves at least a dozen regulators and agencies responsible for the environmental assessment of at least one aspect of the project. Using our cooperation plan, we have successfully agreed that there will be only one public consultation process, with each participating agency retainings its powers. We are extremely proud of this achievement.

An application should be filed shortly and the regulatory process completed within two years.

Choosing solutions

Finally, we have to make choices. Naturally, I don't have THE answer, but I have given thought to providing you with a very simple, and probably very obvious decision-making model.

I believe that our choices have to be based on objective information that is as complete as possible, and on a range of options that are well-documented, with an impartial list of pros and cons. That is basic. However, it is equally important that our choices take into account the inevitable interplay among all forms of energy, and the interplay among our choices and the choices of others, whether our neighbours, our partners or our competitors. Any decision we make may rebound, impacting us.

Choosing solutions - A model

The issues raised in current broad debates involve society as a whole. Market forces are central to any energy issue. And when there is debate, stakeholder input is essential. Obviously, governments play a monitoring role via the legislation they enact. However, I would like to emphasize the role of regulators, such as the Board. These agencies have the tools and knowledge required to produce objective analyses that contain facts, data and potential solutions, information that stimulates debate.

As participants in that debate, we all have an interest in assimilating and incorporating the information available to us, and there is a lot of it. Solid knowledge of the North American context is essential, as is solid knowledge of the interactions among regions, forms of energy and potential solutions to the issues facing our society.

Decision-making model

The above illustration is a summary of what I have said.

We must have a clear understanding of the potential impact of what appears to be the best solution. One example that comes to mind is deciding whether or not to generate more electricity via hydrocarbon-based facilities. If we decide not to, there may be a rebound, i.e., more electricity imports from the US. Using surplus American electricity may have more negative environmental effects than generating our own power using the very latest technology. Remember, about 50% of the power generated in the United States comes from coal-fired facilities. At the very least, thorough analysis of the issue requires objective consideration of the possibility of an indirect or direct rebound that may prove more harmful than the original problem.

Contact us!

I would like to close by reminding you that the National Energy Board belongs to you. The Board is a national institution. Our Web site contains a large volume of documentation on the status of Canada's national and provincial markets and how those markets are changing. Making informed decisions on societal issues requires a solid base of facts, data and objective analyses, and I encourage you to contact us for information. One of our goals is to be accessible to Canadians. I really encourage you to make use of this tool - it's yours, so don't be shy about using it. Please refer to the information I have provided, i.e., the Board's contact information to access a list of staff and their responsibilites, my own e-mail address, and our 1-800 number - our operators can put you in touch with anyone at the Board.

Thank you for your attention and have a great forum - I would be more than happy to answer any questions you may have.