Published Friday, Jun. 05, 2015
When I was a child in the 1970s, a cloud of doom hung over our heads in Alberta. One day, the adults told us in solemn tones, the province will run out of oil. This was the rationale for Peter Lougheed setting up of the Heritage Savings and Trust Fund.
Now we know that Alberta will never, ever run out of molecules of oil in the ground. But new clouds of doom lurk on the horizon. The problem for Alberta isn’t its shrinking volume of oil. It’s more complicated than that.
There are three major risks facing Alberta’s petroleum sector – some decades old, others more recent. The skeptics in the industry would point out that each could potentially derail the industry. But the optimists will counter that each can also be managed.
The first and most obvious risk is price. As a small global player, Alberta is the textbook example of a price taker. World supply is dictated by decisions in Saudi Arabia, Venezuela, Russia and – more recently – North Dakota. Demand is determined by economic growth in China and White House policies to make America greener. Nothing said or done in Alberta has any bearing on oil prices. We check our apps or look at the stock market ticker, and the price is the price.
And lately, that price hasn’t been so great. As pure price takers, the only recourse producers have is to control and lower their expenses. Reducing production costs and raising efficiency is job number in the industry this year. Some will succeed, others won’t. But cost reduction is the only way to manage the risk of permanently lower oil prices.
The second major risk is transportation, or what’s known in Alberta as “market access.” Moving oil to refineries is a growing concern for producers who have invested billions in getting the oil out of the ground. Pipeline construction – once a fairly straightforward activity involving little more than filling out a few forms – is now fraught with uncertainty and opposition.
But over the past few decades, Canadian society has become much more consultative with communities and Aboriginal bands that might have some thoughts about pipelines running through their yards. On balance, more consultation is positive. But the notion of consultation has become misunderstood as everyone possessing a veto. And that threatens to ground all activity to a halt.
Getting Alberta’s oil to tidewater is increasingly the focus of producers and the federal government. Moving bitumen and refined oil by rail is filling this gap, but that option has its drawbacks – both financial and environmental. However, if free enterprise is good at doing one thing, it’s getting the products to the buyers. If the profit motivation is strong enough, producers will find ways to work around the transportation risk.
The third and newest risk is reputational, related generally to Canada’s environmental record and particularly to Alberta’s oil sands. The global war on carbon is real and not going away (although some naysayers are still hoping it does).
That leaves Alberta in a tricky spot. When our largest industry involves the extraction and sale of hydrocarbons, what do we do when the world doesn’t want it any more? Or worse, they don’t want to buy it from Canada?
Fortunately, there are currently some chances to manage this risk by improving our image and reputation – but these are limited-time offers. Alberta’s new NDP government presents a rare “reset” button for the province’s reputation. Fairly or unfairly, the previous PC government had lost credibility with environmental critics. The new government has no unfortunate baggage to lug around, and could make significant inroads in repairing Alberta’s reputation. This comes in the run-up to the United Nations Climate Change Conference in Paris later this year. It’s an opportunity for both Ottawa and Edmonton to position us as leaders, not laggards, in environmental stewardship.
The question isn’t when will we run out of oil. The questions are can we afford to produce it? Can we move it to markets? And will an environmentally-conscious world accept us as a supplier? It’s not just Alberta’s problem – it affects all Canadians. Significant risks, but all manageable if we are smart about it.
Todd Hirsch is the Calgary-based chief economist of ATB Financial and author of The Boiling Frog Dilemma: Saving Canada from Economic Decline.