Polls have consistently shown that Albertans want to keep valuable oilsands upgrading and refining jobs in the province instead of shipping them down a pipeline to processing facilities in the U. S. Unfortunately, the widely-held dream of moving our province “up the value ladder” suffered two major setbacks last month.

The first came from an unexpected source: Suncor Energy.

For the past 40 years, Suncor has upgraded virtually all of the raw bitumen it extracts right here in Alberta. In the process, the company has created literally tens of thousands of short and long-term jobs for Albertans. But, Suncor CEO Rick George recently announced his company would break with tradition by exporting raw bitumen from its new Firebag 3 project to U. S. refineries. At the same time, he said Suncor’s already postponed Voyageur upgrader will remain in mothballs for the foreseeable future.

George didn’t even bother to mention the Fort Hills project, which Suncor has now inherited as a result of its merger with Petro-Canada. If that project proceeds, most analysts agree it will do so as an extraction-only operation.

When an industry stalwart like Suncor starts looking south of the border for processing, it’s clear something significant has changed in the structure of Alberta’s oilsands market. It’s also clear alarm bells should be going off at the Alberta Legislature.

That brings us to this month’s second setback. At almost the same time Suncor was announcing its plan to send upgrading jobs to the U. S., the government of Premier Ed Stelmach was announcing its long-awaited plan to keep upgrading jobs here.

For months now, the premier’s rhetoric on this issue has been big. But the program that his government has delivered is shockingly small.
How small? According to government documents, the so-called Bitumen Royalty In-Kind program will make between 50,000 and 75,000 barrels per day of raw bitumen available for Alberta-based upgrading.

At first glance, those figures may sound impressive. But compared to the increasing volume of raw bitumen being exported by companies like Imperial, EnCana, Conoco Phillips and Husky, it’s clear that the BRIK program amounts to little more than a drop in the bucket.

In fact, if the program actually reaches its upper threshold, it would represent only about six per cent of the 1.2 million barrels per day produced from the Alberta oilsands. To put it another way, 75,000 barrels per day will, at most, provide feedstock for one new upgrader–and a small one at that.

The image that comes to mind is of someone trying to stop a torrent with a tin cup. The big irony here is that it was the Progressive Conservatives themselves who unleashed the torrent they are now trying to contain.

Some might argue that the Tories are simply bystanders watching helplessly as market forces make it more economical for energy firms to do their upgrading and refining south of the border. But this argument ignores the fact that government policies have an often decisive impact on the shape of markets.

In the case of Alberta’s upgrading industry, the decisive moment came when the Klein and Stelmach governments decided to support the construction of massive pipelines designed to transport vast quantities of raw bitumen from Alberta to U. S. refineries. As a result of these pipelines (another of which is up for approval in September), refineries in the American Mid-West and Gulf Coast have been increasingly able to replace declining supplies from Mexico and Venezuela with heavy oil from Alberta. This, in turn, has increased the price that a barrel of raw bitumen can fetch and has dramatically narrowed the price differential that has traditionally existed between bitumen and conventional oil.
On the surface, this may sound like good news for Alberta. Who could complain about getting more for the oil we sell?The problem– which, the provincial government either ignored or doesn’t understand –is that when it comes to the oilsands, our domestic upgrading and refining industries rely on the price differential between bitumen and conventional oil to remain viable.

In other words, access to cheap feedstock is our competitive advantage, one that the Conservative pipeline policy is undermining.

So, Suncor’s recent announcements shouldn’t be seen as a surprising betrayal. Instead, it’s simply the logical result of changes set in motion by the provincial government’s one-price policy. In this context, the government’s BRIK program starts to look more like a PR effort aimed at appeasing Albertans who were never consulted about the government’s real policy, which in practice (if not word) focuses on raw exports.

The most frustrating part of this story is that there is a proven policy model that could have been employed to keep value-added jobs in the province.

In the ’70s, the Lougheed government successfully used a mix of regulation and direct government investment to upgrade natural gas, and create a value-added petrochemical industry. A similar approach could have been taken with the oilsands.

So, will we learn the lessons of Lougheed?

Or, will upgrading and refining join the ever-growing list of industries that Canadian leaders have needlessly sacrificed on the altar of free market purity?

It’s too early to tell . . . but the window of opportunity is closing.

Calgary Herald, Thurs Aug 6 2009
Byline: Gil McGowan