Alberta’s tar sands, the last if not the only thoroughly dependable non-domestic source of fossil fuels for the United States and increasingly a principal source of oil for the American market, suddenly last month became undependable.
The Alberta government announced major increases in the royalty rates paid by the companies that extract oil-bearing bitumen from a vast area in northeastern Alberta. The announcement sent oil producers into what one corporate spokesman described as “a state of shock.”
With many billions already invested in existing tar sands plants and billions more in plants under construction, the announcement threatened an abrupt halt to the biggest economic boom ever in Alberta. It also represented the first time in the 60-year history of major oil and gas production that the Alberta government –either deliberately or unwittingly – aroused its people to distrust the industry that feeds them.
Ever since the province’s first major oil strike near Edmonton in 1947, Alberta governments have worked closely with producers to enable the industry to thrive and thereby create the most economically ascendant province in Canada.
This pro-industry provincial attitude was in sharp contrast with that fostered by the socialist government of neighboring Saskatchewan, whose first concern was to prevent exploitation by “Big Oil.” Saskatchewan protected itself so thoroughly that it has seen almost no oil and gas development ever since. Meanwhile, its population has scarcely changed since the 1940s – 831,000 in 1941against 996,000 last year. In the same period, Alberta’s population has more than tripled to 3,350,000.
Now, however, the new Alberta Conservative government of “Honest Ed” Stelmach appears to be following the example set by Saskatchewan. Vigilant against “exploitation” by Big Oil, it appointed a committee to re-examine the royalties it charges on oil and gas. Its five members consisted of one long-time provincial bureaucrat, two economics professors, one high-tech accountant and one lone representative of the oil industry. The committee was chaired by a man who had spent a lifetime in forestry, zero time in oil and gas. After public hearings in which left-wing witnesses demanded far greater exactions from the tar sands plants, the committee became persuaded that Big Oil was robbing Alberta. It produced a report, which if adopted, would have significantly reduced further Alberta tar sands development.
After assuring the alarmed industry that his government would not adopt the committee’s draconian recommendations, Honest Ed announced Oct. 25 what he would do. He would raise the initial royalty paid by new tar sands plants before their capital investment is recovered by as much as 900 percent, and the subsequent royalty paid after capital payout by as much as 60 percent. The two companies that pioneered the tar sands extraction process – Suncor and Syncrude – which thought their royalty rate had been guaranteed by signed agreements until the year 2016, discovered they were wrong. They have been given 90 days to renegotiate their rates, or else!
The initial response of the industry varied from one of somber pessimism to exasperated outrage. Research Capital, much respected for its assessments of the industry’s economic viability, saw some good points in the new policy, insofar as it applied to conventional oil and gas – a simpler royalty formula, relatively low royalties if oil and gas prices were to decline, and continuing incentives for both shallow and deep gas wells.
But for the tar sands, it said that a downturn in investment “could result,” while the treatment of Suncor and Syncrude will have “a negative impact on Canada’s business reputation.” Moreover, it said, the committee report ignored the effects of a declining American dollar, which in the last year had effectively reduced the price of oil paid to Canadian producers by more than 20 percent.
Allan MacRae of Calgary, who played a central role in initiating the new royalty formula that saw vast expansion in Alberta tar sands development, views the government’s decision as a huge mistake. “Alberta’s breach of promises and signed contracts will cost us far more in the future in lost reputation and diminished investment than the hypothetical $1.4 billion gain from the new royalty regime. The new terms ignore the very low rate of return of Alberta oilsands projects – already at the bottom of the pack of global energy project returns, according to DeutscheBank.”
The government’s probable motive for the move seemed even less admirable. Honest Ed won the Conservative leadership last year as a compromise candidate in a standoff between two powerful contenders – Jim Dinning, who represented the Calgary “establishment,” and Ted Morton, who represented the Alberta thrust for greater independence from Ottawa domination. Honest Ed, a distant third, came up the middle and won. Since then, his party’s polled popularity has steadily diminished. He needed to do something spectacular. Well, he’s certainly done that.
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