Cover

ALBERTA IS ABOUT TO GET WILDLY RICH AND POWERFUL WHAT WILL HAPPEN TO CANADA?

The demand to spread the wealth is sure to grow, writes STEVE MAICH

June 13 2005
Cover

ALBERTA IS ABOUT TO GET WILDLY RICH AND POWERFUL WHAT WILL HAPPEN TO CANADA?

The demand to spread the wealth is sure to grow, writes STEVE MAICH

June 13 2005

ALBERTA IS ABOUT TO GET WILDLY RICH AND POWERFUL WHAT WILL HAPPEN TO CANADA?

Cover

AT SUNCOR ENERGY’S Millennium oil sands project, just north of Fort McMurray, Alta., the unmistakable odour of black gold drifts up from the ground and hangs thick in the air. Everywhere around you, water pooled in footprints, tire ruts and potholes carries the telltale rainbow sheen of oil. “The smell of economic progress,” jokes Brad Bellows, a spokesman for Suncor, playing host on a damp spring afternoon. But it’s much more than that. It’s the smell of raw power—the kind that comes from having plenty of what the rest of the world can’t live without. It’s the smell of a resource locked in the ground for

millions of years and which now has the potential to shape the future of a nation, for better or for worse.

Suncor’s extraction plant on the bank of the Athabasca River looks like a science fiction movie set—hundreds of kilometres of steel pipe twisted into incomprehensible knots around hulking industrial buildings, storage tanks and smokestacks. The whole scene is bathed in a constant haze of steam and exhaust. Two other such plants are now operating within an hour’s drive of here, and several more are scheduled to commence operations over the next few years, all to exploit what may be the biggest petroleum deposit anywhere in the world, a sea of oil-saturated soil covering an area the size of New Brunswick.

Already, one million barrels of petroleum a day are being spun out of the sand and pumped south, and that number is projected to triple within the next decade. Dur-

ing that time, the oil sands will generate about 100,000 new jobs and billions of dollars in royalties and taxes to various levels of government, not to mention billions more in dividends to investors. But the significance of the oil sands beyond Canada’s borders may be even greater.

Energy has become a central obsession of international politics in recent years, as exploding economic growth in Asia and America’s ongoing love affair with gas-guzzling vehicles have accelerated the drain on world petroleum reserves. Terrorism, trade, the war in Iraq, nuclear diplomacy—all of it, on some level, is related to the international preoccupation with energy, and access to affordable oil. So if Canada is to play a more significant global role in the years ahead, experts agree it will be due to the reeking, doughy black soil in northern Alberta, and the rest of the world’s keen desire to share it. “The oil sands give Canada one of the single greatest advantages of any state in the Western world,” says Paul Chastko, a University of Calgary historian who recendy published a book called Developing Alberta’s Oil Sands. “It gives Canada the ability to supply all of North America for the next 50 years without touching a drop of imported oil.” It is, in short, an economic engine and political lever that any nation would desperately love to have.

The demand to spread the wealth is sure to grow, writes STEVE MAICH

But rich inheritances can be mixed blessings—that opportunity comes with a host of potentially poisonous and divisive questions about how best to manage the windfall. Amid Canada’s tangle of regional rivalries, three dominant political cultures have emerged—western conservatives, eastern liberals and Quebec nationalists— each with its own starkly different priorities and visions for the country. While attention has traditionally focused on feelings of alienation in Quebec, the sense of historical grievance and isolation is just as deep in Alberta, where most believe Ottawa has long pandered to the economic interests of eastern elites at the expense of the West. Even the cultural symbols seem irreconcilable: it’s the clash between cowboy oilmen and their libertarian leaders, versus buttoned-down eastern bankers and their old-money political allies.

Now Alberta is poised to reap the biggest bonanza in its history, an economic jackpot giant enough to fundamentally shift the balance of wealth and power westward. The province can control its own destiny more than any other because, in the years to come, Canada will need Alberta far more than Alberta will need the rest of Canada. What remains to be seen is whether the gift of the oil sands will secure the country’s prosperity for generations to come, or be the force that finally pushes the straining seams of federalism to their breaking point.

THE LOCALS HAVE taken to calling this northern outpost “Fort McMoney” and it’s not hard to see why. The signs of sudden, conspicuous growth are everywhere—from the overflowing sewage treatment plant to the huge morning queues at the two Tim Hortons franchises. Housing development and local infrastructure have not kept up with the surging population, so renting a single bedroom in a shared mobile home will set you back about $700 a month.

And this, clearly, is just the beginning.

The region’s population is projected to grow by about 43 per cent in the next five years, all because of the oil sands. The National Energy Board estimates there are approximately 1.6 trillion barrels of crude bitumen saturating the ground in northern Alberta. Bitumen—a form of heavy, thick oil laden with sulphur and deficient in hydrogen—can be refined into synthetic crude oil to make everything from gasoline to plastics. It is the lifeblood of every industrialized economy. According to the Alberta Energy and Utilities Board, about 178 billion barrels of bitumen are economically recoverable using existing technology—enough to produce more than 150 billion barrels of crude.

If these estimates are accurate, Canada’s oil reserves rank second behind only Saudi Arabia’s 260 billion barrels. And there are many who believe the current oil sands assessments understate the true potential here. The AEUB has projected that rising prices and improved technology could ultimately push the oil sands yield close to 300 billion barrels, which would make it the richest petroleum field in the world. By 2015, the oil sands are expected to be producing

roughly three million barrels of petroleum a day. Assuming prices will average US$40 a barrel (well below where they are today), that suggests annual revenues of close to US$43 billion.

Last year alone, Alberta collected almost $900 million in oil sands royalties, and the Athabasca Regional Issues Working Group, an industry association, estimates that provincial revenues will hit $3 billion a year by 2011. Add federal and other taxes not directly related to oil sands production and you’re looking at billions more. The same industry group recently estimated that between 1997 and 2025, total new revenues to various levels of government from the oil sands should be close to $200 billion.

It’s all being driven by a slew of expansions and start-ups scheduled to commence over the next several years, sending an estimated $60 billion in construction and development costs sloshing through the Canadian economy. The Petroleum Human Resources Council of Canada recently estimated that the number of people directly employed in oil sands operations—currently about 50,000—will reach 80,000 by 2008. An additional 70,000 construction, manufacturing and service jobs will also be created—40 per cent of them outside Alberta.

Even now, most Canadians still don’t fully grasp the significance of the industry, says Rick George, the president and chief executive of Suncor. “There’s going to be $6 or $7 billion in new capital put into this business this year,” he says. “What other industry is putting that level of capital into the country? There’s no comparison that I’m aware of. And you will see that each and every year for the next 10 years, if not the next 20. Obviously that’s a huge benefit to the country.”

Especially in Alberta. According to a 2003 study by TD Bank Financial Group, the Calgary-Edmonton corridor is already the fastest growing economic region in the country, boasting per-capita gross domestic product that’s 40 per cent above the Canadian average. And the Canada West Foundation recently projected that Alberta’s economic growth will lead the country this year and next, due in large part to the booming energy sector. For a province that already boasts zero provincial debt, comparatively low

taxes and a budget surplus, the future is bright, and promises to provide even better services, lower taxes and an influx of migration to the new western tiger. And in Canada, that could pose a problem.

In August 2001, Jean Chrétien foreshadowed the coming tension over Alberta’s blossoming oil wealth during a speech in Edmonton. “We have to make sure that every person in every part of Canada benefits from the potential and the wealth that belongs to the people of Canada,” he said. With those words, Chrétien jabbed a stick into the hornet’s nest of western alienation. The reaction in the oil patch was swift and indignant. For many Albertans, it was just another sign that Ottawa was intent on stealing their birthright.

It was also a familiar story. In 1980, Pierre Trudeau’s government imposed the National Energy Program, which slapped hefty export taxes on oil shipments and capped foreign investment in Canadian oil companies, in part to ensure that eastern Canada’s manufacturing base had continued access to cheap oil. The program was deeply resented in Alberta, and was eventually

scrapped by the Mulroney Conservatives. But the bitter aftertaste of the NEP remains.

Barry Cooper wasn’t surprised at Chretien’s audacity. A University of Calgary political science professor and staunch critic of the federal Liberals, Cooper fully expects that, as the oil sands continue to develop, they will become a flashpoint in federal-provincial relations. Alberta already pays far more in equalization transfers to other provinces than it receives in federal program spending. And as the gap grows between rich Alberta and the poorer parts of the country, the demands to spread the wealth are sure to follow—especially if prices for gasoline and heating oil skyrocket, as many predict. It’s guaranteed to fan the flames of western discontent, Cooper says. “It’s Alberta’s oil if you live in Alberta and it’s Canada’s oil if you live in Ottawa,” he says. “Energy has become the basic fault line of federalism.”

Small tremors have already been felt, in the disputes over Hydro-Québec’s plans to explore for oil and gas in the Gulf of St. Lawrence, and the fight by Nova Scotia and Newfoundland over offshore energy royalties and equalization payments. But the biggest showdown is yet to come, Cooper says. It will centre on two conflicting agendas: Alberta’s desire to reap maximum benefit from oil sands development, and Ottawa’s determination to slash greenhouse gas emissions under the Kyoto Protocol.

WHY THE OIL SANDS WILL GO BOOM

Rising oil prices and declining conventional reserves are driving development

OIL SANDS FACTS

■ Area of oil sands deposits:

SIX MILLION HECTARES

■ Current estimated reserves of oil from oil sands: 178 BILLION BARRELS

■ Potential reserves with improved extraction technology: 300 BILLION BARRELS

■ Barrels of oil produced daily:

IN 2004—ONE MILLION

IN 2014-THREE MILLION (EST.)

■ Annual revenues from oil sands:

IN 2004—US$12.5 BILLION

IN 2014—US$43 BILLION (EST.)

■ Annual royalties and taxes from oil sands projects paid to Alberta:

IN 2004—$873 MILLION IN 2011—$3 BILLION (EST.)

■ Number of jobs created by oil sands:

BY 2004-140,000

BY 2008-240,000

So far, the oil industry and federal government are making soothing noises about the impact of Kyoto on development. After initial threats that some oil companies would shelve projects if Canada signed on to Kyoto,

er fuel prices, or will there be renewed calls for government intervention, as there were in the 1970s?

These questions may have a pivotal impact in determining Canada’s place in an increasingly energy-obsessed world, he says. Because when it comes to this country’s relationship with the United States and other economic powers, Alberta holds the trump card, but Ottawa gets to decide how it’s played.

watch those things,” says Robert Ebel, chairman of the energy program at the Center for Strategic and International Studies in Washington, running through a rapid-fire list of the issues routinely cited by the skeptics.

But Cedoz and others say these concerns are insignificant when stacked against the looming prospect of a world oil shortage. Since taking office in 2001, U.S. President George W. Bush has spoken repeatedly about the need to ensure America’s “energy secu-

‘IT’S ALBERTA’S OIL IF YOU LIVE IN ALBERTA AND IT’S CANADA’S OIL IF YOU LIVE IN OTTAWA’

-BARRY COOPER, professor of political science at the University of Calgary, and director of the Fraser Institute’s Alberta Policy Research Centre

industry players are now saying they can cope with the costs without destroying their businesses. But many questions remain about how Ottawa will roll emissions back to pre-1990 levels and who will pay for it.

Although producers like Suncor are reducing emissions on a per-barrel basis with better technology, and are researching ways to cut the amount of gas and water used in the extraction process, the total environmental impact of oil sands development is sure to increase substantially over the next decade. That has many convinced Ottawa is on a collision course with industry. “If government decides to clamp down hard on CO2 emitters to meet the Kyoto commitments, or if they use Kyoto and the treatymaking power to confiscate income that belongs to the province, the anger generated by the National Energy Program would pale in comparison,” says Cooper.

Paul Chastko agrees, and says the environment is just one of many potential conflicts. What will happen if we’re heading for a worldwide oil shortage that will send prices shooting higher? Will the rest of the country, particularly manufacturingreliant commuter cities like Toronto and Montreal, be content to let Alberta profit while their industries are crushed by high-

FREDERICK CEDOZ is used to getting skeptical laughs around Washington when he refers to Canada as a superpower. This country’s image as a mostly boring fringe player in world politics remains deeply entrenched in the U.S. capital. But Cedoz, vicepresident of operations with the Global Water and Energy Strategy Team, is trying to change that. He describes a new world in which power flows more from the end of a gas nozzle than the barrel of a gun, a world in which Canada must be considered among the most critical brokers of petroleum power.

To be sure, many skeptics remain, in part because oil sands present a much greater technological challenge than conventional oil fields. In operations like Suncor’s Millennium project, raw oil sand must be dug up using massive power shovels, or liquefied using steam so bitumen can be pumped to the surface. Either way, the process is arduous, expensive and consumes vast amounts of natural gas and water. Moreover, oil sands operations have been plagued with cost overruns and mechanical breakdowns.

“What’s going to happen to the oil price? Will they have access to enough natural gas? Enough labour? Enough water? Can they contain the pollution? Now that Canada has signed the Kyoto Protocol, you’ve got to

rity.” In his National Energy Policy, outlined four years ago, Bush specifically mentioned Alberta’s oil sands as a key building block in his plan to ensure American refineries never run dry. Canada may have opted out of the war in Iraq, but in the campaign to fuel the North American economy, this country is still Washington’s most prized ally.

In 2003, the U.S. consumed approximately 20 million barrels of petroleum per day, and about 12 million barrels of that was imported. Canada shipped a little over two million barrels a day to its southern neighbour, according to U.S. government estimates, making this country the U.S.’s biggest single energy supplier by far. By 2015, it is projected that Americans will be consuming more than 24 million barrels a day, and if they are going to meet that demand, rising production from the oil sands will be essential.

In early April, oil prices spiked to almost US$60 a barrel on concerns that global demand is growing faster than the industry can produce new supplies. Analysts at Goldman Sachs, a prominent Wall Street investment bank, speculated that the world market may be in the early stages of a “super spike” that could send prices rocketing above US$100 a barrel. All this has only heightened Washington’s fear of another oil crisis, reminiscent of the gas shortages that followed the Arab oil embargo of the 1970s. Nothing can suck the wind out of America’s economic sails faster than spiralling energy costs, and the Bush administration, far from pushing conservation, is determined to satisfy the nation’s thirst for affordable fuel.

“The whole issue of oil is increasingly being seen through the lens of national security,” explains Michael Klare, a professor of peace and world security studies at Hamp-

lision between increased demand around the world and constrained supplies, and that is inevitably going to lead to greater conflict, especially as the U.S. and China come into competition over access to supplies,” he says. “I think there’s going to be growing emphasis in the U.S. on ensuring those oil sands resources come south and don’t go anywhere else. That’s going to be a greater emphasis in the relationship between Canada and the U.S.”

will say only that he doesn’t think the oil sands should be used as a bargaining chip.

And there you have the tension that simmers between Calgary and Ottawa. Two capitals: one economic, the other political. Both eager to exploit the oil sands for their own incompatible, often contradictory agendas.

AT SUNCOR, the hulking machines of Canada’s oil future continue their methodical task. An electric power shovel with a scoop

‘THERE’S GROWING EMPHASIS IN THE U.S. ON ENSURING THOSE RESOURCES COME SOUTH’

-MICHAEL KLARE, professor of peace and security, Hampshire College in Amherst,

Mass., and author of Resource Wars: The New Landscape of Global Conflict

shire College in Amherst, Mass., and the author of Resource Wars: The New Landscape of Global Conflict. “The fact that Canada is nearby, an ally, and its oil doesn’t have to be shipped by sea on ships that could be blocked or attacked by terrorists, all makes it more appealing. So there will be a premium placed on imports from Canada.”

Energy security is not just an American fixation, however. China is in the early stages of an industrial revolution which will vastly increase that country’s energy demands over the next decade. And recently Chinese officials have been eyeing the oil sands as a source of precious fuel. In April, a Chinese firm bought a minority stake in MEG Energy Corp., a tiny oil sands developer, and a few days later PetroChina signed a deal with Enbridge Inc. to build a new $2.5-billion oil pipeline between Edmonton and Canada’s west coast, to ship up to 200,000 barrels a day to China. And last week, another Chinese energy company, Sinopee Group, bought a 40-per-cent stake in Synenco Energy Inc.’s Northern Lights Project for $105 million, and committed to invest an additional $2 billion to help build the project, aiming for completion by the end of 2010.

This, says Klare, is sure to raise anxieties in Washington. “You’re going to see a col-

With two economic superpowers knocking on the door, Canada should wield greater heft in everything from diplomatic efforts to trade negotiations, says Shawn Smallman, director of the International Studies Program at Portland State University. “Even though Canada is our largest trading partner, it’s no secret the country hasn’t really been on the political radar screen in Washington,” he says. “But I think that’s changing now because of the growing importance of Canadian oil. Energy is just so central to all discussion of foreign policy in the U.S. right now. It’s going to make Canada a much higher priority in the U.S.”

But deciding how best to use that power could prove to be yet another thorny question in Canada. Back in 2001, Jean Chrétien hinted the government might link the softwood dispute to Canadian energy exports, arguing that if the U.S. wanted energy, it would have to accept other exports as well. “If they were not to have oil and gas from Canada, they will need a lot of wood to heat their homes,” he joked. Again, Chretien’s bluntness exposed a raw nerve in federalprovincial relations. Oilmen don’t like the sound of anything that might complicate the lucrative flow of petroleum across the border, and these days Suncor’s Rick George

the size of a two-car garage rips a 100-ton chunk of oil-saturated sand away from a black cliff face. The machine stands three storeys tall, and yet is eerily quiet as it goes about its work, merely humming along as it dumps its cargo into the bed of a Caterpillar 797—the world’s largest truck, with 12-foot wheels capable of hauling a load of up to 400 tons. The truck rumbles away, loaded down with enough sand to produce about 200 barrels of oil—about US$10,000 worth at current prices. The work continues, around the clock, 365 days a year. “How can you not be optimistic with these commodity prices?” George says. “And look, prices aren’t going to stay this high. There will be volatility. But even with oil in the mid-US$30s, this industry and Suncor will perform very well.”

But Chastko, who can tell you as much about the oil sands as anyone, knows that keeping politics out of the way won’t be easy. “The oil sands have tremendous potential, but it also has the whiff of political dynamite about it,” he says. “The born-andbred Albertan in me says I should be shouting from the highest rooftop about how the oil sands are going to pave the way for our future. The historian in me recognizes that rarely are things ever so simple.” li1]