Alsands faces the future—uncertainly

Thomas Hopkins March 8 1982

Alsands faces the future—uncertainly

Thomas Hopkins March 8 1982

Alsands faces the future—uncertainly


Thomas Hopkins

I was the ill economic winds of the 1980s, fanned by political delay, that seemed to be grinding down the

multibillion-dollar Alsands mega-project last week. In a series of brutal, if not unexpected, blows the $13.5-billion scheme lost three major participants. They joined two earlier defectors who together held 50 per cent of the equity capital in a venture to extract crude from the vast oil sand deposits surrounding Fort McMurray in northeastern Alberta. Now, if the remaining three partners—propped up by the Alberta and federal governments—fail to come up with new cash-rich investors by the consortium’s final deadline of July 31, the project may founder. Its collapse would cast doubt on a whole squadron of other, mainly energy-related, mega-projects worth $256 billion. And it is on just such undertakings that the federal government has staked Canada’s future economic strategy and energy self-sufficiency.

Alsands, along with the Alaska Highway gas pipeline, is the mega-project flagship. It would boost Canadian oil supply by 137,000 bbl a day—11 per cent of Canadian production at completion in 1989. It would also be the third oil sand operation in the Fort McMurray area, following 15-year-old Suncor and three-year-old, $2.5-billion Syncrude.

By all accounts Alsands should have been under way. But for two years Ottawa-Alberta revenue wrangles left an eight-member consortium fuming and waiting in the anteroom. When the two governments finally went to the industry after their Sept. 1 oil-pricing agreement, the companies didn’t like what they heard. The consortium, which had already spent $100 million on Alsands, wanted pricing and royalty structures that gave them at least a 20per-cent return on investment. American partners were most unhappy. They were ineligible for the grants that the Canadian companies received from the Petroleum Incentive Program.

Earlier this year, Amoco Canada Petroleum Co. and Chevron Standard pulled out. Last week, cash-poor, Calgary-based Dome Petroleum and its subsidiary, Hudson’s Bay Oil and Gas (HBOG), also defected. Twelve hours later a limping Alsands was rocked by the withdrawal of Shell Explorer of Houston and its 20-per-cent equity share. Only Shell Canada with 25 per cent remained, along with government-

owned Petro-Canada and Gulf Canada Resources with 17 and eight per cent respectively.

A weary Joe Mariash, Alsands spokesman, says everyone had expected a shakeout that would leave a “hole” in the Alsands financing package. “But I’m not sure people expected it to be this big.” The sudden rush for the doors by Dome, HBOG and Shell Explorer was an attempt to meet a “trigger-point,” a deadline after which still-committed project sponsors would have to continue helping to pay the consortium’s $l-million-a-week carrying costs.

If the Alsands partners didn’t like the government’s figures last fall, they liked the view down the road even less. Like other big energy projects conceived during the era of supply scares and skyrocketing oil prices of the 1970s, Alsands is suffering from an enormous unexpected shift in the economies of energy pricing. Today’s world oil glut has drastically altered price expectations. Synthetic oil is expensive oil. Consortium profit projections drawn in the 1970s were based on expectations of $80 to $100 a barrel by 1989. If a continuing oil surplus produces prices that hover at $50, it would be disastrous for Alsands.

That combined with recessiondrained company cash flows and brutal interest rates has conspired to make long-term projects far less alluring than they were.

Even as Nova Scotia and the federal government reached a tentative agreement on offshore oil prices last week, experts worried about the effect of an oil glut and a miserable economic brew on second-generation mega-projects such as Hibernia, Beaufort Sea and the Arctic Pilot Project. Analysts speculate that if the price of world oil continues to fall, the urgent need for frontier oil projects in general, and even Petro-Canada, with its heavy frontier exploration commitment, will slacken.

Still, there are clearly other imperatives at work. “If Alsands were a straight economic decision, I don’t think it would get built—but it’s not,” says sí Larry Pratt, Alberta political ^scientist and author of The Tar $ Sands. “The key element is the «industrial and job benefits it can produce.”

The politicians need Alsands to go ahead. The project’s troubles have already caused an unusual amount of heat for Alberta Premier Peter Lougheed. A newly feisty opposition, emboldened by the election of an Alberta separatist candidate and an upwardly creeping provincial jobless rate, accuses Lougheed of using Alsands as a hostage

in the federal-provincial oil-pricing talks. They charge that during the negotiations the project’s price skyrocketed, along with interest rates, from $5 billion to $13.5 billion. For his part, federal Energy Minister Marc Lalonde considers Alsands vital both economically and psychologically, as a fluttering banner of economic recovery.

Throughout the week, Lalonde stoically maintained that new private partners would be found, although the ranks of companies with enough cash to be significant are perilously thin. And the oil companies claim that their profits have been slashed by the National Energy Program. Nova Corp. of Calgary is reported to be distressed by Alsands’ long-term figures. Stelco of Hamilton, a benficiary of an Alsands start-up, has also demurred.

Imperial Oil, faced with the same problem of attempting to guess whether its vast Cold Lake, Alta., heavy-oil project will be viable in 1991, put its 140,000-bbl-a-day scheme on hold last July. If Alsands collapses, Imperial may well have to take another look at Cold Lake. Given the times, a decision would not be easy. One industry insider commented that Imperial would have to determine if it is stepping into the vacuum or into the same pit.

Given the reluctance of private capital to come to the rescue, it now seems likely government will have to move. Last week Lalonde said government participation was something that Alberta and Ottawa would consider. “We don’t have any particular doctrinaire view about public and private participation,” he said. Shell Canada Resources, the lead company in Alsands, is committed to going ahead with the project even if Gulf Canada Resources, which holds eight per cent, drops out.

What is being discussed in government circles is a possible deal under which Alberta might take 25 per cent of the project, Ottawa would do the same and Shell Canada would hold its 25 per cent. The three possible partners would split up the remaining percentages or find private sector firms willing to come into the restructured group. Ottawa’s 25 per cent would be accomplished through asking Petro-Canada, which already has 17 per cent, to up its share by eight per cent.

While this solution is still only a possibility, it was viewed as significant that Lalonde recently drew a pointed comparison between the Alsands situation and the problems encountered putting together the troubled Syncrude tar sands project. In that case, Ontario, Alberta and Ottawa were forced to bail out the project in 1975 when Atlantic Richfield quit for lack of funds.

Trying to play down the crisis atmosphere last week, Lalonde said the proj-

ect is not really necessary to reach the goal of energy security by 1990. It is necessary to generate much-needed economic growth. Exactly how Lalonde and Merv Leitch, Alberta’s energy minister, intend to proceed remains unclear. Their hardball pricing performance in the past—at the cost of losing half the consortium—appears to preclude any sweetening of the company’s return to more than 20 per cent. As a result, despite Lalonde’s claim that “there is a limit to how much the taxpayers of Canada should be asked to pay for any project,” it is apparent the government funding scenario is attractive.

Pressure on governments, including Ontario, which has thousands of jobs at stake, to come up with a bailout formula will be severe. And Canada will still need energy self-sufficiency, despite the

short-term oil glut. Alsands currently is a better building block toward that than offshore oil, despite still unproven technology that led to cold-weather shutdowns at Syncrude this winter. Both Dome and Shell Explorer have said they would return if the deal were brightened enough.

Meanwhile, the people of the oncefabled boom town of Fort McMurray in the heart of the tar sands have begun to feel some of the dry wind of economic uncertainty blowing on their cousins in Windsor, Ont., Port Alberni, B.C., or Uranium City, Sask. They know the oil locked into the thick, gritty sand of the Alsands region north of them will remain that way for at least a little while yet.

With files from Peter Gorrie in Edmonton.