Why Alberta should avoid another bitumen boom

A government that doesn't learn from its mistakes is bound to repeat them. Case in point: Alberta's provincial government, which refuses to alter its regulatory approach to the tarsands.

A new report from the Parkland Institute, which I co-authored, explains why the province should avoid the coming bitumen boom. Although it might sound odd to speak of another boom while the business press agonizes over pipeline delays and Premier Alison Redford laments the "bitumen bubble," this is exactly where Alberta is heading.

The government has already approved enough projects to more than double production, and the International Energy Agency forecasts business as usual means adding 1.3 million barrels of daily production over the next five years. If this were to become reality, it would be astonishingly rapid growth considering that the 10 years ending in 2008 saw less than half that production added. While looming production increases put us well into unchartered territory, Albertans do know what to expect from a bitumen boom.

Many don't look back on the chaotic times of 2006 to 2008 especially fondly, and with good reason. At the time, most Albertans were barely better off income-wise than before the boom, and were working harder to stay there. Those on low or fixed incomes, such as seniors, saw their purchasing power eroded by skyrocketing inflation and housing costs. There was also the overcrowded public services, an abundance of teenagers failing to complete high school, exceptionally dangerous working conditions, widespread staff shortages and a homelessness crisis. While employment certainly increased, this is poor compensation for the widespread troubles that were unleashed - especially since the bulk of work was temporary construction jobs. For most Albertans, the boom was a bust.

Not everyone was trampled by the boom, though. There was a small minority that benefited tremendously. The operating profits of the Canadian oil and gas industry grew to $38 billion in 2008, an incredible increase of 165 per cent over six years.

These enormous profits enriched the industry's largely non-Canadian shareholders and their top managers. In 2007, for example, the top five CEOs in the oil and gas industry had an average annual income of $18,491,597. Central to these vast profits and CEO incomes was the bare-bones royalty rates set by the Alberta government. From 2005 to 2008, the public received just $9 billion in royalties from the sale of $103 billion worth of their resources in the tarsands.

And both the industry and Albertans got hosed by the cost of inflation, which took off when the oil corporations, encouraged by government policy, ran up the price of labour and materials by simultaneously scrambling to get their many projects operational. Higher costs meant lower industry profits and, because Alberta's royalty system is partly based on profits, less revenue for the public.

If the government wants to avoid repeating the mistake of out-of-control development, it has several policy options at its disposal. For one, the government could stop trying to entice more investment with its 1997-era royalty break for new projects, which is estimated to have cost the treasury $5 billion since 2004. The government could increase its CO2 levy to $150 per tonne, as organizations like the Pembina Institute have advocated, and use the proceeds to support renewable energy, although studies show that it will have a negligible impact on the industry's bottom line and thus might not significantly slow development.

Channelling the vision of former premier Peter Lougheed, the government could limit the number of concurrent extraction projects while stimulating further industrial development by requiring bitumen to be upgraded in Alberta.

Such policies are often said to be self-defeating. We're told that demanding more social benefits from the tarsands would cause the oil corporations to pack up and leave. But where would they go? Nationally owned corporations control 84 per cent of the world's reserves. That leaves the private oil companies to squabble over the rest, two-thirds of which is in the tarsands. Moreover, tarsands projects are incredibly large and politically safe relative to possible alternatives. While a typical project in the deep waters of the Gulf of Mexico is 100 million barrels, a typical tarsands project is 600 million (steam-assisted gravity drainage) and 2.2 billion barrels (mining). Yes, it's more expensive than oil production used to be, but so are the other major oil frontiers like the Arctic and Brazil's ultra-deep offshore reserves. The bottom line is that Alberta has the capacity to dictate the terms of development, and the government should do so to our collective advantage.

The provincial government has so far refused to learn from the mistake of fuelling a bitumen boom that was detrimental to most Albertans. It refuses to adopt policies that might slow development, even though they could orient the industry toward higher-value, higher-royalties, better and longer-lasting job creation, and real environmental gains. Instead, the province sells these objectives short by keeping regulatory and royalty demands to a minimum in the name of evermore investment and production.

There's no reason why history needs to repeat itself. The government could and should learn from its past. We would all be better off for it.