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
EDMONTON — Premier Alison Redford is cutting short her trip to Asia and returning home as a result of the death Thursday of her friend and mentor, former Alberta Premier Peter Lougheed.
The Canadian flag over the legislature has been lowered to half staff and a dozen white roses have been placed by Lougheed's portrait outside the premier's office on the building's third floor.
The premier's spokesman Jay O'Neill said Redford plans to end her travel in Asia three days early.
"Arrangements are being made for her return," he said.
It isn't known whether Lougheed will lay in state at the legislature. The last to be honoured in that fashion was former Lt-Gov. Grant MacEwan.
Tributes have been pouring in for the 84-year-old former premier from all across the nation.
Prime Minister Stephen Harper said Canada had lost a truly great man.
"Peter Lougheed was quite simply one of the most remarkable Canadians of his generation," he said in a statement. "He was a driving force behind the province's economic diversification, of it having more control of its natural resources and their development, of Alberta playing a greater role in federation and of improving the province's health, research and recreational facilities. He was also instrumental in the creation of the Canadian Encyclopedia."
Harper noted Lougheed's legacy will live on in the institutions that he pioneered which continue to generate benefits for the people of Alberta and Canada.
Gov.-Gen. David Johnston said Lougheed never stopped believing in a better, stronger Canada.
"His was a full life, with a record of achievements that will be long remembered," said Johnston. "He was a loving husband, father and grandfather — and a dear friend — and he will be missed."
Premier Alison Redford said Lougheed was a visionary and an inspirational leader who forged for success and prosperity in the province. She expressed condolences to Lougheed's family on behalf of all Albertans.
"Peter Lougheed was a man who made us all so proud to be Albertans and he will be deeply missed," she said.
Colleen Klein expressed sympathy for the Lougheed family on behalf of her ailing husband, former premier Ralph Klein.
"Ralph, like all Albertans, understood how Peter Lougheed put Alberta on the global map, so that others, like Ralph, could follow," she said in a statement. "We are deeply saddened that he has passed away, but grateful for the doors that he opened."
Finance Minister Doug Horner, who grew up around the premier as the son of former Lougheed cabinet minister and right-hand man Hugh Horner, said Lougheed's legacy had a profound effect on Redford's Progressive Conservative government.
"He was a Progressive Conservative," he said. "We do have a social conscience and Peter Lougheed defined that and really did define what Progressive Conservative was all about."
He said everyone recognized that Lougheed always had Alberta's best interests at heart.
"From the right spectrum or the left spectrum, all of his ... political foes respected the fact he was in it for the right reasons, that he was there to do what in his heart was the right thing for his province. I think that's something all politicians should try and emulate."
Accolades have indeed come in from leaders of all political stripes.
"There's an element of grace to everything that he's done," said Roy Romanow, former NDP premier of Saskatchewan. "The hallmark of the man as an individual always will be that he was a gentleman."
Marc Lalonde, the former federal Liberal cabinet minister, there was nothing personal about the political battle between the Trudeau government and Alberta on the National Energy Program in the early 1980s.
He said Lougheed "was an extremely able politician and a very "hardball" player. He had very much at heart the interests of his province ... but nobody could question his strong views about Canada, and his strong support for Canadian unity."
NDP Leader Brian Mason said Lougheed fought for Alberta and was a tremendous builder of the province.
"His work to ensure that Albertans get a fair deal for their resources, to create a more progressive province, to improve our education system and to encourage a fairer society is of unquestionable importance to the province that we have today," he said in a statement. "He stood up for Albertans, but remained a passionate Canadian."
Liberal Leader Raj Sherman said Lougheed helped modernize Alberta.
"His zeal and determination to make our province and nation a better place will not soon be forgotten. He was a visionary Albertan who moved our province forward in the hopes of ensuring a prosperous future for our children and grandchildren."
Gil McGowan, president of the 150,000-member Alberta Federation of Labour, said Lougheed understood the concept of the public interest, and did not confuse what was good for private industry with what is good for the public as a whole.
"He was not a cheerleader for narrow business interests, and he did not engage in gimmicks or short-term thinking. He used our wealth to build a better Alberta."
The board and staff at the Epcor Centre for the Performing Arts expressed sadness at the loss of "a truly exceptional man and consummate statesman."
"Mr. Lougheed was a proud trailblazer for arts and culture in Alberta," the centre said in a statement.
The Calgary Herald, Friday September 14 2012
Byline: Darcy Henton
With files from James Wood and Kelly Cryderman
August 2012: Two-tier minimum wage; AFL 100 years Labour Day; AB govt no longer reports farm fatalities; Harper's low-wage agenda; Bogus labour-shortage figures; Billions lost in royaliti...
Two-Tier Minimum Wage
- lberta's poorly written two-tier minimum wage system is open to abuse by employers who are taking advantage of these laws to rip off the lowest-paid workers in Alberta. West End Swiss Chalet is one example. For more information see Aug 31 AFL release and backgrounder
AFL's 100 Years
- sure to have a look at our insert in the Edmonton Journal on Friday, August 31, 2012 – a special Labour Day message from Gil McGowan and a 10 page special on the past and present struggles of workers in Alberta.
Government trying to erase agricultural workers by no longer reporting farm fatalities
- The Alberta government's decision to stop reporting farm fatalities is an attempt to move the issue to the back burner and off the public radar. Farm workers are already left unprotected under health and safety regulations. For more information see Aug 20 AFL release.
Government documents reveal source of Harper's low-wage agenda
- nternal federal government documents show the source of Harper's low-wage agenda. Last year, a select group of CEOs and other business leaders were invited by the federal Conservatives to an annual closed-doors conference where they urged the Tories to adopt measures to reduce the pay of Canadian workers, limit union power by enacting U.S.-style right-to-work legislation, and allow two-tier health care. For more information...
AFL shows government using bogus labour-shortage figures
- The government is using bizarre calculations to show a catastrophic "labour shortage" even though their own figures show a labour surplus for every year until 2021. The AFL revealed that the government's own figures show the supply of labour exceeding the demand for labour – a labour surplus – well into the future. For more information see July 25 AFL release and backgrounder
New Study shows billions in lost royalty revenue after Northern Gateway
- he Alberta Federation of Labour (AFL) and Parkland Institute released a study showing Albertans will let billions slip through their fingers if the Northern Gateway Pipeline is approved and constructed. If Alberta met royalty targets in place when Lougheed was Premier, the province would have $1 trillion in the Heritage Fund by 2039. For more information... see Aug 9 AFL release and backgrounder
Statement from Gil McGowan on the proposed takeover of Nexen by the China National Offshore Oil Corporation (CNOOC)
- Does it matter who owns the oil sands? You bet it does!" explains AFL president Gil McGowan. "If foreign governments are allowed to expand in Alberta through companies like China National, they'll develop the oil sands in their own best interest, not in the best interest of Canadians." For more information...July 24 AFL release
UFCW 1118 workers on strike for fair wages and working conditions
- FCW 1118 sisters and brothers at Lilydale Foods' North Edmonton shop are on strike for wages comparable to those in other Lilydale plants. The employer refuses to pay wages on par with other Lilydale plants despite the fact that these workers work harder by handling larger and heavier poultry. The employer has cut the number of workers on the floor, meaning those left on the floor have to work harder while their wages have remained the same. Workers are also asking for a guaranteed minimum number of hours per week. There are about 200 workers on strike in shifts of about 75. Support these workers on the picket line at 127 Avenue and 76 Street in Edmonton. Pickets will be going in shifts between Monday and Friday, 6:00 AM and 6:30 PM.
September2:Calgary Pride Parade
September 3: EDLC Labour Day BBQ
September 3: Labour Day
September 5: Official Opening Historical Display, Alberta Provincial Museum
September 7: AFL Education Committee
September 8: World Literacy Day
September 10: AFL Women's Committee
September 11: AFL WOCAW Committee
October 1: AFL Pride and Solidarity Committee
October 2-3: AFL Executive Council
October 8: Thanksgiving
October 14-17: CEP National Convention
October 17: National Day for the Eradication of Poverty
October 18: Persons Day
November 23-25: Parkland Fall Conference
January 14-19, 2013: AFL Weeklong School
A joint study from the Alberta Federation of Labour and the Parkland Institute of Alberta have released a study arguing the province could lose billions in royalty revenue if the proposed Northern Gateway pipeline is built.
The report's authors defend their claim by examining projected royalty payments between 2011 and 2045, using data collected from the Canadian Energy Research Institute. The report's authors compared those numbers to the royalty system that existed under former premier Peter Lougheed, who held office between 1971 and 1985.
Under Lougheed, 35% of Alberta's oil revenue was captured by royalties during the 1980s. The study argues if that system was still in place, the Alberta Heritage Fund could be as large as $1 trillion by 2045, not including any income earned through investments.
Under the current royalty model, secretary-treasurer of the Alberta Federation of Labour Nancy Furlong says Alberta will collect an average of 18% from oilsands revenue between 2012 and 2045.
"That's an extra billion missing," she said. "Under the old system, that means total royalty would be worth $2.2 trillion during that period, based on CERI's numbers."
Furlong acknowledges that lower royalty payouts mean the province would still be missing out on royalties that existed in the 1980s, even if Gateway is not approved. However, she argues the province's economy will still suffer if Enbridge's proposed pipeline is built.
"Gateway will ship thousands of upgrading and refining jobs to the Chinese, taking jobs away from Canadians. It will only leave 104 permanent jobs for Canadians, most of them in B.C. Other jobs surrounding construction of the pipeline will be mostly part-time or temporary labour," she said. "We're not opposed to a pipeline, but any discussion surrounding one has to include getting our fair share."
SunMedia.ca, Thurs Aug 9 2012
Byline: Vincent McDermott
Study Says Albertans won't get their fair share of Royalties
The Alberta Federation of Labour and the Parkland Institute have released a study that says Albertans could lose billions of dollars in royalties if the Northern Gateway pipeline goes ahead.
The study bases that claim by adding up what the province would collect under the current royalty regime by 2045 as compared to the royalty regime under former premier Peter Lougheed.
Alberta collected 35 per cent of oil revenue as royalties during the 1980s.
According to the study, if that percentage was still in place, the Alberta Heritage Fund would be worth $1 trillion dollars by 2045.
The study quotes figures from the Canadian Energy Research Institute which show Alberta will collect an average of 18 per cent of oilsands revenue under the current royalty regime.
The Parkland Institute is a left-leaning think-tank based in Edmonton.
'Fair share' for Albertans
Nancy Furlong is the Secretary-Treasurer of the Alberta Federation of Labour.
"This study shows Albertans are being fleeced on our fair share of royalties," said Furlong on Thursday.
She says in the Lougheed era, the Heritage Fund was used for loans to other provinces.
"There is no reason why, if we collected anything approaching appropriate royalty rates, Alberta could not lead the country toward a greener economy."
Stelmach royalty review
The province last reviewed the royalty regime in 2007 when it released the report titled Our Fair Share.
Ed Stelmach, who was premier at the time, then announced the government would increase royalties to collect an extra $1.4 billion a year.
The announcement created a backlash in the energy industry and was blamed for a downturn in natural gas production in Alberta.
The province eventually backed away from any major royalty changes.
CBC News, August 9, 2012
Industry data shows Alberta should have $1 trillion in Heritage Fund by 2045
Edmonton – The Alberta Federation of Labour (AFL) and Parkland Institute released a joint study today, showing Albertans will let billions slip through their fingers if the Northern Gateway Pipeline is approved and constructed.
The study showed that if Alberta met the royalty targets in place when Peter Lougheed was Premier, the province would have $1 trillion in the Heritage Fund by 2039.
According to oil industry data generated by the Canadian Energy Research Institute (CERI), Alberta will collect an average of only 18 per cent of the revenue generated in the oil sands as royalties.
The data covers the 2012-2045 forecast period and assumes the Northern Gateway pipeline will be constructed and operational.
In the 1980s, Alberta collected 35 per cent of oil industry revenue as royalties. The target was lowered to about 25 per cent during the Klein era.
AFL Secretary-Treasurer Nancy Furlong says any discussion of the Northern Gateway pipeline should involve Albertans getting their fair share first.
“Albertans only get value out of the oil sands in two basic ways – royalties and jobs.” “This study shows Albertans are being fleeced on our fair share of royalties.”
“The Northern Gateway pipeline will also ship thousands of upgrading and refining jobs down the pipeline to Asia, leaving Canadians with only 104 permanent jobs, most of them in B.C. Albertans are not getting their fair share from this pipeline,” adds Furlong. The Alberta Federation of Labour represents 150,000 Albertans, including 25,000 working in the oil sands and energy-related construction.
Furlong adds that Alberta’s oil sands wealth could – and should – be used to build the economy in the rest of the country.
“In the Lougheed era, when the Heritage Fund was growing, it was used for loans to other provinces and for infrastructure projects. There is no reason why – if we collected anything approaching appropriate royalty rates – Alberta could not lead the country toward a greener economy.
“There are certainly ways Alberta could lead a real conversation about a national energy strategy, which would insulate us from demands from other provinces. But instead we’re following oil industry orders for more pipelines, fewer royalties and taxes, and zero plan for how we might transition our economy and protect jobs while we address climate change.”
“What we have now is not an energy strategy. It’s surrender,” concludes Furlong.
MEDIA CONTACT: Nancy Furlong, AFL Secretary-Treasurer, 780-720-8945
New BRIK program too small to turn the tide of raw bitumen being sent south of the border for refining, says AFL
The Alberta government has finally added flesh to the bones of its long-promised Bitumen Royalty In-Kind (BRIK) program - but one of the province's strongest proponents of an Alberta-first oil-sands policy says the program doesn't go nearly far enough to keep value-added energy jobs in the province.
"Since becoming premier, Ed Stelmach has promised new policies that would stop valuable jobs in oil-sands upgrading and refining from being shipped down the pipeline to places like the U.S. Midwest and Gulf Coast," says Gil McGowan, president of the Alberta Federation of Labour.
"Now, after two long years of waiting, we're finally seeing the plan: but frankly, it's deeply disappointing. The government's rhetoric on this issue has been big, but the program they've delivered is shockingly small."
McGowan points out that the 75,000 barrels per day of raw bitumen that will be made available for Alberta-based upgrading under the program is little more than a drop in the bucket compared to total oil-sands production.
"It represents only 6.25 per cent of the 1.2 million barrels per day produced from the Alberta oil sands each year," says McGowan.
"If this is all the Stelmach government has to offer when it comes to policies to promote value-added development in the oils sands, then Albertans should get used to losing refining jobs to the U.S. - because this program is not going to turn the tide. The government is letting Albertans down by setting their sights far to low. Their lack of ambition is truly frustrating and disappointing."
McGowan says the 75,000 barrels per day of bitumen collected under the BRIK program will, at most, provide feedstock for one new upgrader - and a small one at that. Comparisons with the capacity of existing upgrading facilities put the government's promised bitumen reserve in perspective: Syncrude currently processes 300,000 barrels of bitumen per day; Suncor processes 275,000 barrels and Albian Sands-Shell Scotford processes 155,000 barrels.
"The small scale of the BRIK program underlines the weakness of using the royalty system as the government's only tool to address the problem," says McGowan. He says what's really needed are more aggressive policies: like export restrictions, conditional lease agreements for companies working in the oil sands and even the creation of a crown energy corporation to spearhead the construction and operation of Alberta-based upgraders and refineries.
McGowan says these kind of policies are needed to deal with the "new generation" of oil-sands developers (companies like Encana, Conoco-Phillips, Husky and Exxon) who are planning to export most of their raw bitumen to the U.S. for processing, as opposed to the "older generation" of developers (companies like Suncor, Syncrude and Shell) who traditionally have done their upgrading in Alberta.
McGowan says more aggressive policies like the ones he favours are actually nothing new for Alberta. They were used successfully by the Lougheed government in the 70s and 80s to create a value-added petrochemical industry - one that had not existed before and which continues to contribute billions of dollars to the provincial economy every year.
"We were hoping the Stelmach government would learn lessons from the Lougheed era," say McGowan. "But, if this is all that they have up their sleeves, it's clear that this latest version of the Conservative government is a pale imitation of the original."
McGowan concluded by saying that even if the BRIK program is successful in kick-starting one small upgrader, it won't do anything to move the province toward the more ambitious goal of refining a greater proportion of our oil into more valuable products like gasoline, diesel and jet fuel.
"The program sets its sights too low both in terms of volume and in terms of how high the government wants to climb the value ladder," says McGowan. "If this is all the government has to offer, then basically what they're saying is that they're content for Alberta to remain stuck on the bottom few rungs of the value ladder. I think most Albertans aspire for something bigger and better."
For more information call:
Gil McGowan, AFL president @ (780) 218-9888 (cell)