Oilsands suck dollars from cleaner oil and gas
Dave Yager, For The Calgary Herald
Published: Sunday, May 04, 2008
There's a giant sucking noise emanating from northeast Alberta that gets louder as oil prices rise.
Called the Athabasca Tar Sands, its rapid development is draining imagination from the Stelmach government, flexibility from labour markets and diversification from Alberta's economy. It has also sucked Edmonton into a hopeless global environmental confrontation.
Alberta is committed to unrestricted oilsands development and to defending it against growing opposition. Good. The world needs the oil.
But not at the expense of the rest of Alberta's oil business. Determined to increase its share of production revenue and maintain aggressive oilsands development, the province's impending royalty rates are much too high.
That there are problems in Alberta's oilpatch is surely incomprehensible to Joe Public. With everything hydrocarbon fetching record prices, continued whining from oil guys like me must be annoying. But Stelmach's new royalties will soon make Alberta the least attractive place to develop conventional oil and natural gas in North America. Alberta has put most of its energy eggs in the oilsands basket. This will be the most damaging "unintended consequence" of all.
Canadian politicians love megaprojects. Big investments. Big jobs. Big taxes. Big photo ops. And so it goes for the oilsands. There's no bigger project in Canadian history. Once they contract megaproject fever, formerly rational elected officials will always choose 1,000 high profile megaproject jobs over 2,000 random private sector jobs. You can't get political credit for a bunch of small companies hiring a lot of people.
Take, for example, conventional oil and gas exploration -- hundreds of developers supported by hundreds of service and supply companies.
When Premier Ed Stelmach announced a review and possible royalty increase for oilsands last year, the conventional oilpatch cheered. The big, expensive black holes they dig suck in so much money and manpower they distort the provincial economy. Therefore, it was hugely disappointing that future oilsands royalties will actually be lower than for most conventional production.
Because of the enormity of the oilsands resource, higher royalties will have little impact on investment. But for everything else, the increased royalties will hurt, regardless of commodity prices.
Alberta's gas production fell by seven per cent from January 2006 to March 2008. Continued decline is now assured. Considering natural gas accounts for 60 per cent of provincial royalties -- and is the main heat source for oilsands extraction -- you'd think maintaining production would matter.
The new royalty program encourages drilling for non-conventional, coal bed gas. But they're the high density wells farmers hate. Will farmer Ed support industry when the inevitable conflicts resume?
One solution is to cut costs. Unfortunately, the only big expense left to reduce is labour. Thanks to the big vacuum up north, this is impossible.
Stelmach's recent budget earmarked $100 million to spur technology development and diversification. But in conventional oil and gas, Albertans already have a vibrant, home grown, high-tech oilfield service sector that exports knowledge, technology and equipment worldwide. Many fabrication and manufacturing companies have sprung up to support the oilsands, especially in Edmonton. But these products have no export potential.
Looking to reduce costs, oilsands operators are examining manufacturing major components offshore with construction and assembly done by imported foreign workers. By tilting the royalty system so far in favour of the oilsands, Stelmach's program punishes developers of Alberta's advanced conventional oil and gas technology and supports low-tech foreign suppliers. China wins, Red Deer loses.
Intoxicated by megaprojects, the Tories are comfortable there will be future jobs, growth and royalties without having to think. But at what cost?
Punitive royalties and high labour costs mean the oil business that carried us this far will continue to wither. As for "broadening the economy," everything I see coming out of northeast Alberta is going in the wrong direction. Foreign suppliers of equipment and labour to extract oil many don't want to buy?
The environmental file is terrifying. Edmonton backs the dirtiest oil while penalizing natural gas, which is, by comparison, benign. I support oilsands development. But must it be at the expense of conventional oil and gas?
David Yager is a Calgary oil executive
© The Calgary Herald 2008