But we can win says economist Robyn Allan. Last in a series on Norway's petro-policies and lesson
[Editor's note: The Tyee sent veteran energy issues journalist Mitchell Anderson to Norway to learn how it amassed a $600 billion oil savings fund for its population of under 5 million, a stark contrast to Canada. To finish the series we invited him to share his views on how those lessons could be applied here. With input from economist Robyn Allan, here they are.]
Why do we tolerate homelessness and poverty in Canada? Underfunding for our schools and health care system? Why is our government eliminating 20,000 public sector jobs in a supposed effort to balance the books?
Imagine instead if Canada was a country capable of developing a national oil strategy similar to what has been achieved in Norway. This tiny nation enjoys full employment and enviable social programs, has no public debt, $600 billion in the bank, and remarkable public buy-in about their petroleum industry. Could we do it here? Do we have the guts to seize our economic destiny?
Such a system might seek to maximize employment, tax revenues and environmental protection -- exactly the opposite motivations of most extractive industries. There is another public policy goal that is of no interest to private companies: the energy security of our nation.
Seen through this lens, how is Canada doing? Abysmally, by four measures:
1. Dependency. Even with our vast oil wealth, Canada currently relies on other countries for about 50 per cent of our supply -- so-called "unethical oil" from the volatile Middle East. Proposals to pipe unrefined bitumen from western Canada to Asia will increase this dangerous dependence since Alberta will have to import vast amounts of condensate from the Middle East to dilute thick bitumen enough for pipeline transport.
2. Staying in the red. Alberta has been unable to balance the books since 2007, burning through $17.7 billion of past oil wealth, with another $3 billion deficit forecast for the coming budget.
3. Draining at full tilt. Labour and production costs are through the roof, at least until the next employment bust. Both the Alberta Federation of Labour and the late premier Peter Lougheed have both called for slower the pace of oil sands growth. Ten proposed upgraders have been cancelled since the 2007 recession, replaced instead with pipeline proposals for unprocessed diluted bitumen. With resource values rising relative to global currencies, what's the rush?
4. Getting global black eye. The oil sands have such a credibility problem the Alberta government spends $25 million a year countering "baseless" criticism from environmental groups.
Robyn Allan's prescriptions
Robyn Allan thinks we can do better. She is a British Columbia economist, former CEO of the provincial insurance corporation and outspoken critic of the Northern Gateway proposal to pipe diluted bitumen to Kitimat. She also believes the recent retreat from value-added processing in Alberta is not only a threat to the B.C. coastline, but to the entire Canadian economy. In an interview for this series she told The Tyee:
"Canada has an energy strategy, but it is being developed in a handful of boardrooms of multinational oil companies and national oil companies of foreign governments. And that strategy seems to be to extract oil sands bitumen as quickly as possible, mix it with distillate imported in increasing amounts from the Middle East, and move it down pipelines to Asia and the U.S. Gulf Coast. And that strategy is going to hollow out Canada's oil sector, move us away from creating jobs and value-added refining, and increase pressures on our exchange rate and the non-oil sectors of our economy. And when the boom becomes a bust, we won't have a strong economic fabric to fall back on."
So why does she feel so many state-owned oil companies now clamouring for a piece of the oil sands?
"More than 80 per cent of global oil reserves are controlled by state own oil companies, and there's good reason for that. Canada is the only major oil-exporting country in the world without a national oil company. Of the remaining global oil resources open for private sector investment, Canada has the majority. That's why national oil companies from China, Korea and Norway, and now maybe Kuwait and India, are coming here to buy up our resources -- it's the last big game in town."
Allan believes our country is becoming dangerously exposed in a world increasingly short of energy, especially as we allow state-owned interests from other nations to snap up our globally-strategic resources.
"Canada is being outplayed. We are losing control of our natural resources. We're losing control of our environmental standards. And we're losing the ability to upgrade and add value in Canada. We're not even beginning to use the leverage in this country that we have to control and manage the pace of our development and ensure that oil resource returns come to the people of Canada."
So what can we do about it? Allan feels one of the key problems is that our petroleum continues to be sold in American, not Canadian currency.
"When the price of oil goes up, the value of our dollar goes up and this creates problems not only for the manufacturing sector but for our oil industry as well. Because we trade our oil in U.S. dollars, any Canadian oil producer finds that their profits fall when they sell their product in U.S. dollars and have to repatriate those revenues into Canadian dollars. The ability of the oil industry to expand and grow is hamstrung by an appreciation of the Canadian dollar. The oil sector itself hurts, it not just manufacturing, tourism, forestry and other sectors."
She also sees a linkage between our inflated currency and the cancelled upgrading facilities in Alberta.
"We need to address the issue that maybe because our currency has appreciated in value, it's not as economic to build upgraders in Canada. We have a natural resource in Canada that's traded in U.S. dollars. Why? When Russia decided to trade their oil with China they elected not to do it in U.S. dollars, but their own currencies. We have to start thinking about what is in the long-term interest of Canada, not what is in the best interests of a handful of oil companies."
Upgrade here first, then ship
By choosing Canada instead of China, Allan believes Albertans would benefit from higher prices and greater economic stability. Nation building through such mutually profitable arrangements might prove far more productive than past interprovincial posturing.
"One of reasons that bitumen is not capturing the value that western producers want is that its not good enough quality. So if we upgraded it in Alberta into a product that North America wants, we might solve so many problems. Everybody in Canada could win if less expensive western Canadian crude got to eastern Canada.
"At the recent Northern Gateway Hearings in Edmonton, the Joint Review Panel was told by Enbridge's expert witnesses that right now Eastern Canada is buying imported crude at $20 to $30 more than the price of western Canadian crude. If that's the case, that works out to about 15 cents a litre at the pump. Western producers could get a price premium of five cents a litre over what they are getting now, the refiners in eastern Canada could save five cents a litre on their crude supply and consumers could save five cents a litre when they fill up at the pump.
"So if that happened, producers and refiners would make more money and consumers would spend less money. That's got to have a stimulative effect on our Canadian economy."
Allan points out that shipping upgraded crude rather than bitumen would also require half as much pipeline capacity since we would not need to build supply lines for imported condensate. And most importantly, upgraded Alberta crude should be moving east rather than unrefined bitumen moving west.
"TransCanada Pipelines have said they are looking at converting one of their natural gas pipelines to ship Western Canadian crude to eastern Canada. That could be up to 800,000 barrels a day and would be a tremendous boost to the Canadian economy. We should be focusing everything we can to get that to happen. And the way to get that to happen is to say no to the Northern Gateway pipeline. The best thing that British Columbia could do is restrict bitumen from coming into this province, period. That would essentially be a little bit of tough love to Alberta."
The late premier Peter Lougheed urged Albertans to "think like an owner." That determination to do what's in the interest of Canadians rather than companies is what Allan seems to be championing as well.
"I would hope that the real issue here is what can we do to support and develop the future health and long-term growth of the Canadian economy. We need to stop responding to the preferences of corporations that don't have the Canadian national interest at heart. They don't. They're not meant to.
"Every single time issues are raised such as energy security in Canada, value-added and upgrading, concerns over the appreciation of our dollar -- the oil industry goes crazy. And the reason they do is because these are serious issues that need to be addressed and they could be addressed relatively easily for our long-term benefit. What the oil industry doesn't yet understand is that many of these changes would be for their long-term benefit as well."
A challenging question
The Enbridge and Kinder Morgan pipelines will obviously benefit China and the shareholders of private oil companies, but what is in Canada's interest? Are we even asking that question?
At the end of this series I'm left reflecting on the blunt advice of Norwegian petroleum engineer Rolf Wiborg: "You have to leave the feudal thinking and leave the idea that people coming to exploit you have the right to tell you what to do.... It can be done, but do the Canadian people have the power and the will? Do they have the collectiveness and guts to do it?"
How about it Canada? Do we?
The Tyee, 3 Oct 2012
Byline: Mitchell Anderson
Alberta's evidence contains multi-billion-dollar inflation of Northern Gateway benefits
Government consultant admits upgrading would solve market access problem
Edmonton - The Alberta Federation of Labour has identified a multi-billion-dollar error in the Government of Alberta evidence, showing the government's consultants are massively overstating the benefits of the pipeline to producers.
While the Government of Alberta analysis shows $8 billion/year impact if we do not have Northern Gateway access to Asian markets. That figure has been widely cited (see below). Under cross-examination, the government's consultant indicated the $8 billion-dollar impact was only for one year, not every year.
"Canadian producers not having sufficient access to premium heavy crude refining markets could lose about US $8 a barrel for every Canadian heavy crude barrel, with a revenue impact averaging $8 billion per year from 2017 to 2025," said the report, completed for the province by Wood Mackenzie.
Under cross-examination, the Government of Alberta consultant conceded to AFL counsel that pacing development and upgrading bitumen to synthetic crude oil – creating thousands of jobs – would also alleviate the problem of "market access," but that these alternatives were not explored in his report.
"The bottom line is Alberta is selling the wrong product," says Gil McGowan, President of the Alberta Federation of Labour.
"The glut of bitumen on the market is a result of bitumen looking for appropriate refineries. If the product was SCO, we could be selling the product to any refinery in North America."
Canadian Press, Dean Bennett, September 4, 2012.
MEDIA CONTACT: Gil McGowan, President Alberta Federation of Labour at 780-218-9888 (cell) or 780-483-3021 (office)
EDMONTON - Enbridge insists estimates of environment damage from construction of the Northern Gateway pipeline have been overestimated, because sections of the line will be built in areas already disturbed by a new natural gas pipeline, the federal review panel heard Thursday.
Enbridge lawyer Bernard Roth also questioned the expertise of economist Matthius Ruth, whose report for the Haisla Nation estimates the cost of environmental damage at between $254 million and $775 million for construction along the 1,700 kilometre route from Bruderheim northeast of Edmonton to Kitimat on the British Columbia coast.
That estimate includes cutting trees on the kilometre-wide corridor, crossing rivers and habitat damage, the Joint Review Panel was told.
The proposed $6-billion pipeline will carry 525,000 barrels of Alberta bitumen a day to Kitimat.
Enbridge proposes to use already disturbed land for about 80 per cent of the route, including areas already logged, old roads and along part of the 463-kilometre Pacific Trail Pipeline route, now under construction from the Prince George area to Kitimat.
"Through the entire Haisla territory, the PT pipeline is in the same corridor as the Northern Gateway," said Roth. Any environment impacts there have already occurred and should not be attributed to Enbridge, he said.
"If a road and power line is already constructed and we use the same right of way," how does Enbridge's pipeline cause additional damage? asked Roth.
But Ruth said the environmental costs might be higher because of the "cumulative effects" of two pipelines running through fragile ecosystems.
"Any new project will put additional stress on the environment," he said.
The Haisla Nation is a partner in a proposed liquefied natural gas facility that will ship natural gas from northeast B.C. to China. But they oppose the Enbridge bitumen pipeline because of fears that spills of the sticky product would pollute the water along the coast.
Roth said it's unfair to attach to a pipeline project the additional cost of greenhouse gases emitted in producing the bitumen, shipping it to Asia and burning the resulting gasoline in cars — a total calculation of $206 million in the Matthius report.
"These are indirect costs," he said.
Earlier in the day, a witness for the provincial government told the panel that building the Northern Gateway is just one way to handle the increased bitumen production underway in the oilsands.
Other solutions include upgrading the bitumen to synthetic crude oil, expanding refining capacity in Alberta or slowing the pace of development, said Harold York, author of the Wood Mackenzie report done for the Alberta government.
Oil producers will need other ways, besides the Gateway pipeline, to handle the increased amount of bitumen, he said.
In response to questions from the Alberta Federation of Labour, York noted that to get the price increase producers want, Alberta bitumen must be sold into "coking" refineries that can first upgrade it.
If it is sold to conventional refineries, it could only be used to make lower value fuel oil. That could lower the selling price of the bitumen, he said.
Montreal Gazette, Thurs Sept 27 2012
Byline: Sheila Pratt, The Edmonton Journal
The battle over upgrading oilsands bitumen in Alberta dominated Northern Gateway pipeline hearings Wednesday, with a government consultant arguing local upgrading is not economically viable given the high cost of construction.
But the Alberta Federation of Labour pointed to a 2009 Alberta government report that set a goal of upgrading two-thirds of bitumen in Alberta. Upgrader Alley would have involved $314 billion in capital investment, created two million jobs across the country over 20 years and added $5 trillion to the national GDP.
Harold York, a witness for the province and author of the Wood Gundy report commissioned by Alberta Energy, predicted oilsands producers would lose $8 billion a year if the pipeline does not go ahead, because they would not get access to world prices for bitumen. The proposed pipeline will carry 525,000 barrels a day of bitumen to the West Coast for shipment to refineries in Asia.
York told the Joint Review Panel his analysis was focused on the benefit to oil producers and did not consider other government policy goals.
In response to questions, York said he was unaware of a provincial government goal of upgrading two-thirds of the bitumen in Alberta - though the government did mention to him, without providing details, that it wanted to encourage value-added resource development, he said.
Asked if upgrading the bitumen locally is a viable alternative to exporting, York said no, because building costs are high.
"The capital cost in northern Alberta is large - up to $15 billion for a large upgrader capable of handling 200,000 barrels a day," he said.
Leanne Chahley, a lawyer for the AFL, asked York if he had seen the report of the 2009 hydro-carbon upgrader task force produced by the energy department. York said he had not.
That report outlines a vision of "world-scale industrial complexes" northeast of Edmonton, known as "Upgrader Alley," that would produce higher value products such as synthetic crude oil and petrochemicals.
If the Northern Gateway pipeline goes ahead, experts have told the panel the amount of upgrading here will decline to 26 per cent by 2025, Chahley pointed out.
Earlier in the day, energy department official Christopher Holly, the only other government witness, confirmed the province will not present any other information to the panel. Holly rejected the suggestion that the energy department should have considered new pollution regulations set out in the recently approved Lower Athabasca Regional Development Plan when calculating the economic benefits for the oil industry.
Barry Robinson, lawyer for a coalition of B.C. environmental groups, told the panel that documents filed for Shell's proposed Jackpine oilsands mine expansion show that air quality limits (set out in LARP) will be breached if all planned oilsands projects go ahead.
The levels of sulphur dioxide and nitrogen dioxide will exceed the limits set out in the LARP, according to the documents.
The Edmonton Journal, Thurs Sept 27 2012
Byline: Sheila Pratt
Government of Alberta does not consider jobs, taxes, royalties, or the public interest in their evidence at Northern Gateway hearings
Government of Alberta does not consider jobs, taxes, royalties, or the public interest in their evidence at Northern Gateway hearings
Edmonton – AFL President Gil McGowan will be available to the media throughout today as the Federation quizzes the Government of Alberta on their evidence before the Northern Gateway panel.
“We are very troubled by what we’ve heard so far today. The Government of Alberta did not put any evidence before the Board about jobs, taxes, or royalties, says McGowan, President of the Alberta Federation of Labour, representing over 145,000 unionized workers.”
“The Government’s evidence confuses what’s good for foreign-owned oil companies with what’s good for Albertans. Their evidence at Northern Gateway looks exclusively at industry profits, without considering jobs or royalties for Albertans.”
The province is “blurring the lines between profits for the world’s largest corporations and the public interest,” says McGowan.
“Oil companies are capable of advocating for themselves, they shouldn’t need the government’s help. It’s the government’s job to advocate for Albertans. They are failing to do that job at the Northern Gateway hearings.”
McGowan says the Government of Alberta’s evidence – though technical in nature and written by high-priced energy consultants – really tells a very simple story.
“The government allowed a stampede of development in the oil sands, without making good on their commitment to have 2/3 of our bitumen upgraded here,” says McGowan, adding that the province’s evidence predicts only 26% of Alberta’s bitumen will be upgraded in Alberta by 2025.
The result is a flooded market of an inferior product.
The Government’s evidence shows oil companies are getting a lower price for bitumen because Alberta doesn’t force them to upgrade it before it leaves Alberta.
“We are selling the wrong product,” explains McGowan.
“If we were selling upgraded synthetic crude oil, we would be getting better prices, and higher royalties as a result,” says McGowan.
Raw bitumen can only be turned into gasoline or diesel by a small number of refineries in North America. The rapid pace of development means there is too much bitumen on the market. The choice is simple: bitumen could be upgraded to synthetic crude before it leaves Alberta, creating thousands of jobs. It could then be refined at a large number of refineries around the world. Or, it could be shipped raw to China, and take thousands of jobs with it.
“There is not one word in the Government of Alberta’s evidence about the public interest. We are left to wonder if they care about jobs and royalties for Albertans, or if the priority is profits for oil companies backing the Northern Gateway pipeline – none of which are majority-owned by Canadians,” says McGowan.-30-
MEDIA CONTACT: Gil McGowan, President at 780-218-9888 (cell) or 780-483-3021 (office) Alberta Federation of Labour
Reality Check: Profits, Prices, and Access to Markets
Alberta is producing too much of the wrong product; no mystery why oil companies are getting a low price.
The Government of Alberta’s evidence filed with the Joint Review Panel for the Northern Gateway pipeline shows Alberta’s failure to upgrade bitumen is what is causing lower prices for bitumen and what is driving the alleged need for the Northern Gateway pipeline.
The Government of Alberta hired energy consultant firm Wood Mackenzie to do an analysis on the need for “new markets” for Alberta’s bitumen. The analysis is designed to support the Northern Gateway pipeline.
The report is technical in nature.
The GoA evidence says oil sands producers “could” lose up to $8/barrel because bitumen is flooding North American refineries incapable of handling it. Chinese refineries can handle bitumen, and it makes sense for oil sands operators deeply involved with Chinese state-owned oil companies to ship raw bitumen to Chinese refineries, who rely on lower labour and environmental laws.
There is plenty of North American refinery space for synthetic crude oil, which is upgraded bitumen. But the Government of Alberta hasn’t forced companies to build upgraders, and has allowed a stampede of development without any regard for keeping jobs in Alberta.
The Government of Alberta is responsible for the problems they describe in their evidence. We are pulling bitumen – a lower-quality product – out of the ground, shipping it out as fast as we can, flooding the market with a low-quality product, and wondering why we are losing money.
The Wood MacKenzie report before the NEB might be complicated and technical, but the explanation is quite simple. Upgrade the resource before it leaves Alberta, keep the good jobs here, earn more tax and royalty revenues for Albertans, and the economic case for the Northern Gateway pipeline evaporates.
Technical Backgrounder on the Wood MacKenzie Report
Wood MacKenzie’s $8/barrel “discount”
WMK’s $8/barrel discount prediction is a figure based on the concept of “refining value.”
The discount of value is driven by the fuel oil yield in the cracking configuration, which sells at a discount to the gasoline and diesel produced in a coking configuration.
“The Refining Value, which is the value of refined petroleum products produced from a given crude oil, falls as a refinery configuration becomes more ‘simple’ because the simpler configuration has less capability to convert the lower-value heavy end of the crude assay to higher-value products, such as transportation fuels.”
The $8/barrel “discount” is attributable to:
- A glut of supply for coking refineries
- Too much non-upgraded bitumen looking for a home. It is finding its home in cracking refineries, thus simply producing fuel oil rather than diesel or gasoline
Prediction of losses of refining value are further attributable to:
- Not enough pipeline capacity to “premium heavy crude markets,” aka refineries that can process bitumen straight into gasoline or diesel
- Runaway growth in bitumen supply and a glut on the market
The Wood Mackenzie analysis relies on the following assumptions:
- A lack of upgraders in Alberta. If bitumen is upgraded to SCO in greater amounts, higher refining values can be achieved
- A prediction of just 26% of Alberta bitumen being upgraded by 2025, far below the Government of Alberta’s stated policy goal of 2/3 bitumen upgraded in Alberta
- A growth in supply due to ERCB approving every project, without associated upgrading capability
- A total lack of pacing by the GoA Department of Energy
- Ignoring the use of rail entirely, which is not only being used right now but also contained in Enbridge’s analysis
Heavy Crude Refining Predicted to Fall in Western Canada With Northern Gateway
According to Enbridge’s evidence before the National Energy Board, Western Canadian “heavy crude” – aka bitumen coming from the oil sands - will be increasingly refined in China, where state-owned companies are building massive refining complexes capable of handling bitumen.
2011 Refinery Throughput – Reported to CAPP
2018 Forecast By Enbridge – With Northern Gateway Pipeline
Heavy Crude, All Grades
Total Throughput – Western Canada
About the AFL Northern Gateway Reality Check Series
The Alberta Federation of Labour is a full intervener in the Northern Gateway Pipeline.
The debate around the Northern Gateway pipeline is heated, and we hear governments and industry saying all kinds of things to justify locking Canada in to being a raw resource producer, but never move up the value chain with our natural resource wealth.
“The Northern Gateway pipeline hollows out our value-added industries, imposes higher oil prices on consumers, and rewrites the rules of Canada’s oil industry. Gateway will reduce the amount of oil sands upgraded in Alberta and ship thousands of jobs to China,” Gil McGowan, President, Alberta Federation of Labour.
Page 1 of 12, A Netback-Impact Analysis of West Coast Export Capacity, Addendum Report for Alberta Department of Energy by Wood Mackenzie Inc, Appendix A, The Government of Alberta Responses to Information Request No 1, to Gitga’at First Nation.
 All 2018 Forecast figures for Western Canada and Ontario are taken from Enbridge Northern Gateway, “Market Prospects and Benefits Analysis For the Northern Gateway Project,” July 2012. Attachment 1 to Northern Gateway Reply Evidence. Prepared by Muse, Stancil & Co for Enbridge. Table A-9: Disposition of Canadian Synthetic and Light/Medium Conventional, Northern Gateway Case; Table A-10: Disposition of Canadian Synthetic and Light/Medium Conventional Base Case (No Northern Gateway); Table A-12: Disposition of Canadian Heavy Northern Gateway Case, All Heavy Grades.
Spooked by '80s recession, it sped up extraction of crude worth way more today. Eighth in a series.
There was a time when it made good sense to convert hard assets like pork bellies or iron ore into convenient and liquid cash. But with today's global currency crises quietly draining value from millions of people's savings, the commodity tide is now flowing rapidly the other way. Many financial advisors now promote an "end times" investment strategy focused on raw resources that, among other things, is leading to a gold-rush on fertile farmland around the globe.
This has serious implications for Canada as a nation rich in non-renewable resources. Our nation's business plan since confederation has largely been to liquidate these resources as cheaply and quickly as possible. A focus on volume-based extraction with minimal value-added processing plays out most recently in the Alberta oil sands, where pell-mell development is preoccupied with piping unrefined bitumen to outside markets. If globally scarce and strategic resources are rising in value compared to paper money, what's the rush to convert it to cash? Would Canadians benefit more from a go-slow approach to resource development?
This series has so far focused on seeking lessons from Norway regarding Canada's petroleum policies (or lack thereof). Norway's $600-billion oil fund is often seen as symbol of disciplined success managing their petroleum resources. However, this vast investment fund is in fact the result of a fundamental shift away from some of the fiercely independent policies instituted in the 1970s. These choices around the pace of Norwegian oil development hold important and cautionary lessons for us here in Canada.
One of the founding documents of Norwegian oil policy from 1974 stated, "...After a comprehensive evaluation of its social aspects, the Government has concluded that Norway should take a moderate pace in the extraction of petroleum resources."
These words represented a bold ambition on the part of the small Nordic country: to intentionally go slow with oil development to protect the non-oil aspects of their economy, and their society as a whole.
This "moderate pace" of extraction was defined as 90 million tonnes of oil equivalent per year -- a level that was not reached until the late 1980s. In 1988, the Norwegian parliament also agreed that annual oil investments should be limited to 25 billion Norwegian kroner (about $4.2 billion).
But in politics as in life, nothing is permanent. Norway experienced a stinging recession in the late 1980s when oil prices collapsed and the jobless rate reached six per cent -- mild by North American standards but a shock for a country accustomed to full employment. These political pressures led to a quiet but dramatic increase in Norwegian oil production in the 1990s with wide-ranging consequences now being felt by the Nordic nation.
Race to bank wealth
A detailed history of Norway's oil industry by Dr. Helge Ryggvik at the University of Oslo showed that by 1993, oil investments had blown past the ceiling set by parliament, reaching 53 billion kroner. Oil production doubled over 1988 levels, reaching 2.3 million barrels per day.
A government white paper at the time seemed to abandon any attempt to maintain a moderate pace of production, stating "Activity levels in the petroleum industry are to a considerable extent dependent on conditions we cannot control" -- a major departure from the steely determination of 20 years earlier.
This decision to open the oil production floodgates also led directly to the formation of the Norwegian oil fund. The rationale was that oil wealth could be converted into cash and stored in the bank instead of underground. Economists argued that revenues invested in securities would yield interest immediately and dilute the risk of fluctuating oil prices. Between 1986 and 2001, oil production increased almost four-fold and has been declining ever since.
But economists are not always right. Compared to today, oil prices in the 1990s were in the toilet -- not rising above $45 per barrel until 2004. So what would have happened had Norway stuck to their guiding principles and maintained a moderate pace of petroleum development?
In 1986, Norway was producing 841,000 barrels per day. If they recovered 70 per cent of these revenues through taxation of oil sales based on yearly prices to present day, they would still have about $229 billion in the bank in 2011. They would also have an additional 14.2 billion barrels of reserves more than they do now, worth about $1.5 trillion at today's price of $110 per barrel for Brent crude.
Assuming that 70 per cent of that wealth was converted to revenues for the benefit of the Norwegian taxpayer, this would amount to about $1.1 trillion. In addition to the $229 billion in the bank, Norway would therefore have approximately $1.3 trillion in investments and extractable reserves -- about $700 billion ahead of where they are now.
This rush to production has also created many of the same problems faced in Alberta by ballooning costs and labour shortages. A strike by oil workers this year cut production by 15 per cent, and another looming strike by oil service workers is heading to arbitration next month.
Oil professionals in Norway make more than $180,000 per year – double the global average. Drilling costs are 40 per cent higher than in the U.K. Statoil is considering cutting 1,000 jobs or 30 per cent of their workforce in an effort to reduce costs.
Annual oil investments will reach a record 204 billion kroner next year, almost 10 times the ceiling proclaimed by Norwegian parliament in 1988. Norway's Oil Minister Ola Borten Moe defends rising industry wages but acknowledges, "We have a responsibility, together, to make sure we don't build bubble tendencies in this part of the economy."
The oil fund has become so large that even minor withdrawals into general revenue are overheating the Norwegian economy. By law, the government is allowed to utilize four per cent of the fund annually but observers predict the budget this year will only access 2.5 per cent of this mountain of money for fear of further driving up domestic wages.
Norwegian industry leaders are predictably cool on calls to slow petroleum production. "In other countries, a discussion about how we should restrict the (oil and gas) activity would sound like a joke," said Statoil CEO Helge Lund. "If the critics get what they want, the Norwegian shelf will lose its competitiveness and the entire development of Norway's oil industry, with hundreds of thousands of jobs at stake, would be put at risk."
Meanwhile Norway's remaining oil reserves have dwindled under the vastly ramped-up extraction that peaked in 2001. Production is less than half of what it was 10 years ago. While a major new discovery was made recently on the Norwegian shelf, questions remain about how much longer Norway will remain a major oil exporter. The 2012 Statistical Review of World Energy by BP showed that in 2011 Norway had less than 10 years of reserves left at current levels of production.
Cut the boom and bust
What does this mean for Canada? The mantra here seems to be to maximize investment and production at all costs. Investments in the Alberta oil sands have topped $10 billion every year since 2006. The Alberta government predicts that production will double by 2020 to 3.5 million barrels per day.
Yet this frantic pace of development has created numerous boom/bust cycles, and calls from both the Alberta Federation of Labour and the late premier Peter Lougheed to slow the pace of oil sands growth.
Even with the massive distortion created by the oil sands in the Alberta workforce, the province has been unable to balance the books since 2007. In that time the province has so far spent $17.1 billion of past oil wealth, with another $3 billion deficit forecast for the coming budget. Clearly the legacy of Peter Lougheed to "think like an owner" has been forgotten.
Sitting on such a massive investment fund, Norway has obviously fared much better. However, they are also dealing with their own challenges resulting from their rush to development and declining oil reserves. If there is a lesson and advantage for Canada from the Norwegian oil experience, it is the importance (and profitability) of going slow.
Next Wednesday, the final instalment of this series: What if Canada had a national petroleum policy?
TheTyee.ca, Wedn Sep 26, 2012
Byline: Mitchell Anderson
CALGARY, Alberta, Sept 24 (Reuters) - A lawyer for Enbridge Inc said on Monday that a prominent economist opposed to its Northern Gateway oil pipeline to Canada's West Coast is wrong in her contention that the project will raise costs for refiners, regardless of where their crude comes from.
At public hearings into the C$6 billion ($6.1 billion) project, Enbridge attorney Rick Neufeld told British Columbia economist Robyn Allan the company's market experts have shown that Northern Gateway will not restrict crude supplies in other markets on the continent, as she has concluded.
Allan, former chief executive of the Insurance Corp of British Columbia, provided an economic assessment of Northern Gateway early this year for the Alberta Federation of Labour, which opposes the 525,000 barrel a day pipeline from Alberta to Kitimat, British Columbia, for crude oil shipment to Asia.
Neufeld took issue with Allan's evidence that the export pipeline would result in $2-$3 per barrel annual increases in oil prices across the country between 2016 and 2046, including for Eastern refineries now supplied almost exclusively with imported oil priced against international benchmark Brent oil.
"Indeed that's what you've told people around the country, and I'm suggesting to you, Ms Allan, that that's not the evidence of these witnesses," Neufeld said at the proceedings in Edmonton. "They did not suggest that Northern Gateway would increase the price of Brent crude, and you were here for that."
The exchange was part of the first opportunity Enbridge has had to cross-examine its opponents. Most of the testimony in hearings before a federal Joint Review Panel into the contentious Northern Gateway project has so far been about environmental issues, but the Edmonton proceedings are delving solely into economic impacts and benefits.
One aim of the project is to remove a price discount on Canadian oil that currently exists due to an oversupply of oil in traditional markets such as the U.S. Midwest. Enbridge said Canadian producers would benefit by diversifying their markets to include Asia, where prices are higher.
The Alberta Federation of Labour opposes the pipeline because, the group says, it would mean the loss of oil processing and refining jobs in Canada as the raw material gets shipped across the Rockies to the Pacific.
Neufeld said Enbridge's evidence, prepared by consultants Muse Stancil and Wright Mansell Research, did not show that the pipeline would restrict oil supplies in North America, push up gasoline prices for consumers, or have any impact on oil prices in other parts of the world, as Allan has concluded.
Allan has argued that restricted supply in North American markets as a result of oil being redirected to Asia on Northern Gateway, and the international determination of crude prices, will push up prices for all supply bought by Canadian refiners.
"In your view then, if Northern Gateway was to improve the price - or reduce the discounting of Canadian crude, put it that way - by $2 a barrel, the price of crude delivered by OPEC would increase by $2 a barrel. That's your evidence?," Neufeld said.
Allan did not argue that point, saying she derived her contentions by taking numbers and assumptions in Enbridge's expert reports to their "logical conclusion."
"Based on the analysis that was provided in both the Muse and the Wright Mansell reports, the redirection of supply takes oil out of markets and when the supply goes down, the price goes up," she said. "With the ... fact that the oil is going to be redirected from Ontario and Quebec, that is going to affect the Eastern Canadian market."
However, her written evidence criticizes Enbridge's reports, saying they leave out a number of aspects that raise questions about their reliability. Those include analysis of sensitivities to prices, currency exchange rates, changes to supply as well as other risks to the forecasts.
"All of those are standard business practice that would be undertaken if the proponent's analysis was delivered to an investor or a lender. In any of the other places where it needs to prove its case, those standards would have been delivered," she said.
Rueters, Tues Sept 25 2012
Byline: Jeffrey Jones
The late Peter Lougheed's enduring legacy in Alberta's oil industry was evident Monday as the former Alberta premier was cited by both proponents and opponents of the contentious Northern Gateway pipeline during regulatory hearings in Edmonton.
Both sides claimed support from the widely respected Lougheed, who died Sept. 13.
"In one of his last interviews, didn't he say the (Northern Gateway) pipeline was essential for Alberta?" Enbridge lawyer Rick Neufeld asked at one point during his cross-examination of Alberta Federation of Labour president Gil McGowan.
McGowan responded that Lougheed shared the federation's concerns about the pace of oilsands development, that too many oilsands projects exported raw bitumen and there are not enough benefits to Alberta from upgrading and refining the bitumen into consumer products locally.
"Lougheed took an activist approach to ensure we had a value-added industry," he said, according to a story from The Canadian Press. "It (the oilsands industry) wouldn't have been here without government policy and intervention."
Here's a thought: both sides should cease and desist with the Lougheed references.
Lougheed was a champion of oilsands development but he was also concerned about the rapid pace of development. He has been widely lauded since his passing as one of Canada's greatest politicians and statesmen. His family and friends continue to mourn his passing even as his name is being bandied about the hearing room for one of the most contentious public policy debates in Canada in years.
To be clear, it's as far from speaking ill of the dead as possible. There's presumably nothing but respect for the former premier from everyone involved in these exchanges, but it still comes off as ill-timed at a minimum.
The allure of an "endorsement" from Lougheed for either side is obvious.
Third-party endorsement - especially from a credible and respected source - is invaluable to any communication campaign. Make no mistake, every word uttered during the hearings is part of a broader communications strategy by all sides in the campaigns for or against regulatory approval and public support for any pipeline.
Regardless, it seems inappropriate to cite, or even imply, support from Lougheed as if it was some sort of message from on high or death-bed confession simply be-cause it serves your political or commercial endeavour.
It's not as if the current premiers - from Alberta's Alison Redford, among the proponents, and B.C.'s Christy Clark, for the opponents - haven't provided enough commentary on the $6-billion pipeline project. Both have offered up more than enough observations to provide fodder for lawyers at the Joint Review Panel for weeks.
They can also explain or defend their positions and not leave it to others to interpret and infer what may, or may not, be relevant.
The references to Lougheed came as Enbridge and some oil producers that have secured ship-ping on the 525,000 barrel a day pipeline got to cross examine witnesses before the Joint Review Panel for the first time in the hearing process.
The Edmonton portion of the hearings, which addresses economic issues, are scheduled to conclude this week. The hearings will resume in October in Prince George, B.C., to address concerns about the environment and First Nations along the 1,172 kilometre route. Finally the panel moves on to Prince Rupert, B.C. to address maritime issues once bitumen is moved onto ocean-going tankers.
A decision from the Joint Re-view Panel is expected in 2013.
The federation has said the pipeline taking bitumen from the Edmonton area to the B.C. coast at Kitimat for export to Pacific Rim markets will make it harder to create upgrading and refining jobs in Alberta and increase fuel prices throughout Canada. Enbridge contends that isn't the case.
Neufeld noted there is plenty of bitumen available in Alberta and Enbridge has never said it would restrict bitumen for refineries or upgraders.
McGowan also said export pipelines would add to an already overheated economy with higher labour and material costs.
Neufeld challenged economist Robyn Allan over her statements the 550,000-barrel-per-day pipe-line would push up the price of crude oil by $2 to $3 a barrel annually in Canada. Enbridge said Northern Gateway would create a one-time boost of $2 to $3 per barrel if it comes on stream at the end of this decade.
Allan responded: "When you take oil out of North America and take it to Asia the price increase is going to affect all markets in the long run."
And that is exactly the difference.
Allan, McGowan, Neufeld and the others can all speak for themselves. Lougheed cannot and, as a sign of respect, he should be left out of these hearings.
Calgary Herald, Tues Sept 25 2012
Byline: Stephen Ewart
AFL on witness stand at Northern Gateway hearings; President available to speak to media after testimony ends
Edmonton – AFL President Gil McGowan resumes his time on the witness stand today at the National Energy Board hearings in Edmonton, at the Westwood Conference Centre, 18035 Stony Plain Road.
McGowan is expected to deliver evidence until this afternoon and will be available to the media when he is finished.
The AFL opposes the Northern Gateway pipeline because it is designed to ship unrefined bitumen to China. Thousands of good jobs in refining and upgrading will be lost down the pipeline; the project is therefore not in Canada's public interest.
"Northern Gateway is not Canadian infrastructure. It is Chinese infrastructure," says McGowan.
"Enbridge compared this pipeline to the Canada Pacific Railway. It is certainly a nation-building project; it is certainly designed to guarantee energy security, but it will do those things for China, not Canadians," adds McGowan.
Northern Gateway will connect Chinese-owned oil sands production in Northern Alberta with refineries in China via the pipeline and oil tankers through Kitimat, BC. The National Energy Board must assess whether the project is in the public interest, and is empowered to reject the proposal under the broad definition of the "public interest" contained in Section 52 of the National Energy Board Act.
"The oil industry has told us this pipeline is about chasing a higher price for bitumen in Asia.
"The benefits are only for big, foreign-owned oil companies. Canadians lose the jobs and the industry. Northern Gateway makes northern Alberta into China's gas tank," says McGowan. McGowan adds that federal and provincial governments ought to cooperate to create refining jobs across Canada, and support pipelines that reach "our east, not the Far East."
The Northern Gateway pipeline creates only 224 permanent jobs and about 1,850 short-term construction jobs. Upgrading and refining those resources in Canada would create tens of thousands of permanent jobs.
"Evidence submitted to the NEB shows that if this pipeline is built, in addition to all the other bitumen pipelines that have already been approved, Alberta will only be upgrading 26 percent of its bitumen in 2025, down from about 60 percent today," says McGowan.
"That means that tens of thousands of quality jobs will be lost down the pipeline to places like China. Oil companies and the Chinese government may be happy with this situation. But this is clearly not in the best interest of ordinary working Canadians."
For more information or to arrange for an interview with AFL President Gil McGowan, after he is finished delivering evidence, contact:
Shannon Phillips at 403-330-9878