Calgary & Alberta Economy

[googspecial]

Just my unprofessional (and possibly unwarranted) opinion, but this seems like a great time to divest from oilsands expansion instead of doubling/tripling down. I have yet to see any argument that convinces me we will ever go back to the level of fossil fuel use of the past decade in this new one, or certainly at least not the price of oil. The promise of a steady $50/barrel has not materialized in the past 5 or so years, what is suddenly going to change now to make that happen in the next 5 years?
People are waking up and seeing what changes can happen in just one month of global behavioural changes. Money is pouring out of governments at a level never seen before. While productivity is down all over; seems like a great opportunity to move to a greener energy future. There's also absolutely no reason why Alberta still can't be a leader in that. But alas, some folk here will never remove their oil-tinted glasses.

 

[Chinook Arch]

Just my unprofessional (and possibly unwarranted) opinion, but this seems like a great time to divest from oilsands expansion instead of doubling/tripling down. I have yet to see any argument that convinces me we will ever go back to the level of fossil fuel use of the past decade in this new one, or certainly at least not the price of oil. The promise of a steady $50/barrel has not materialized in the past 5 or so years, what is suddenly going to change now to make that happen in the next 5 years?
People are waking up and seeing what changes can happen in just one month of global behavioural changes. Money is pouring out of governments at a level never seen before. While productivity is down all over; seems like a great opportunity to move to a greener energy future. There's also absolutely no reason why Alberta still can't be a leader in that. But alas, some folk here will never remove their oil-tinted glasses.

Long term we'll have no choice but to get away from O&G.That said I disagree that fossil fuels are done for. It's true there's nothing in the past five years gives reason to believe the prices will be up there again, but one could have said the same thing back in 2002 after 4 years of low oil prices.
We still need to finish the pipelines that are underway so that once oil bounces back to a reasonable level - which it will - we can get a reasonable price from it, and not the low balled American price.Do we need to invest more in Oil Sands? Maybe not, but we need to at least get the pipelines finished.I realize it looks like oil prices and demand will never come back but they will. Maybe not to crazy boom levels, but they'll eventually come back. My hope is oil comes back to a comfortable $50-60 a barrel, enough to get companies back at least functioning and to quell any more layoffs, but low enough that the provinces keeps thinking about diversification.

 

[darwink]

While productivity is down all over; seems like a great opportunity to move to a greener energy future. There's also absolutely no reason why Alberta still can't be a leader in that.

We can be, but it is important to be mindful of scale. Supplying green energy to the Alberta grid, Alberta electric cars, even electrification of heat as the century stretches on will not even come close to 'replacing' oil and gas. The electricity sector's contribution to Alberta's GDP is about 1/10 of oil and gas--and a lot of that electricity goes to producing oil and gas!

Comparing Alberta to Ontario, in Alberta industry consumes 75% of all energy in the province, in Ontario it is 37%. As Alberta transitions to a more typical economy, our electricity demand even if electricity is displacing other fuels, will likely stay flat or drop.

We can do very interesting things with energy, like hydrogen (harder to transport long distances to earn export earnings), and petrochemicals--producing things that come from oil and gas feedstock at a net-zero basis.

But unlike other places in the country, a 1 to 1 displacement within energy isn't going to happen. We need other things to partially replace the export earnings of O&G, and maybe it is impossible but industries which require substantial new facility investment since a large part of the economy was scaled up to support new facility investment.

 

[googspecial]

These counter arguments feel to me rooted in the reality of the state of the world up until this year. Which is completely fair. I guess what I'm saying is maybe this large-scale global event can be the catalyst for real big changes on how we operate. To those say "eventually we'll have to get off O&G" or "we've known forever we need to diversify", I'm asking why not now? I'm not not saying we need to abandon these industries completely or at the drop of a hat, but lets seriously start changing how these industries function now, this is the chance. Why spend the next 5-10-20 years waiting for the price of oil to get to a "comfortable level" when we can be using that time to get away from it as much as we can instead?

 

[Silence&Motion]

I'm not expert in the oil industry, but there are several factors that seem to spell huge trouble for Alberta's (maybe North America's) oil sector:
1. Even before covid, people were talking about 30-40 years before the end of widespread oil use, and only a fraction of this period will actually see growth in oil consumption.
2. There is a very realistic possibility that we will be living with covid for YEARS - not months. There is a worse case scenario here where a vaccine takes 4-5 years to be created and mass produced, during which time travel and economic activity continues to be suppressed. On top of that, there is no telling how long it would take for the economy to recover. We may be looking at the better part of a decade before people are travelling and consuming more than they were prior to the pandemic.
3. A prolonged slump in demand for oil and gas is going to eventually force major reductions in production. What would the costs be in having to stop and restart oil production - especially if production facilities were left unused for years?

All of this to say, what are the chances that oil sands projects get shut down during the pandemic, how viable will it be to restart them after the pandemic - especially if it takes years for oil demand to recover - and what does this mean if we are only a few years away from entering a permanent decline in oil demand associated with decarbonization?

Again, I'm not an expert on the O&G sector. These are legitimate questions I have (not predictions).

 

[CBBarnett]

I'm not expert in the oil industry, but there are several factors that seem to spell huge trouble for Alberta's (maybe North America's) oil sector:
1. Even before covid, people were talking about 30-40 years before the end of widespread oil use, and only a fraction of this period will actually see growth in oil consumption.
2. There is a very realistic possibility that we will be living with covid for YEARS - not months. There is a worse case scenario here where a vaccine takes 4-5 years to be created and mass produced, during which time travel and economic activity continues to be suppressed. On top of that, there is no telling how long it would take for the economy to recover. We may be looking at the better part of a decade before people are travelling and consuming more than they were prior to the pandemic.
3. A prolonged slump in demand for oil and gas is going to eventually force major reductions in production. What would the costs be in having to stop and restart oil production - especially if production facilities were left unused for years?

All of this to say, what are the chances that oil sands projects get shut down during the pandemic, how viable will it be to restart them after the pandemic - especially if it takes years for oil demand to recover - and what does this mean if we are only a few years away from entering a permanent decline in oil demand associated with decarbonization?

Again, I'm not an expert on the O&G sector. These are legitimate questions I have (not predictions).

I also have some questions for those that know more:

Oil & Gas production in Alberta and it's benefits aren't exactly a stable, linear relationship to Alberta. That is to say, the more oil we produce (as a function of our market competitiveness) doesn't result in proportionally equal benefit to the province in taxes or jobs. From my understanding: currently we pump more oil than ever, with fewer jobs and less royalties per barrel than ever thanks to automation for cost control of labour and ongoing decline in royalty rates and corporate taxes. The jobs to continue to produce at current levels are a fraction of development and construction jobs used to bring new mega-projects online. If we aren't always working on tens of billions of dollars of new things, we don't get many those construction jobs.

So regardless of what happens, even in good projections (which there aren't any) assuming we don't have higher royalty rates/tax rates or another large construction boom - we probably won't see much net job growth in the O&G sector and we aren't likely to see very much more government revenue from the O&G economy. Granted it's a large sector, but it's relative value has likely peaked (or peaked a while ago when we were even less diversified).

If this is true, managing and maintaining the sector is a good goal but at the expense of diversification efforts that seems like a doubling down on an investment where even in good scenarios you only lose less badly. Is that a fair assessment?

 

[darwink]

Royalties and corporate taxes from the oil sands aren’t low because of low rates - the rates are based on both a percentage of profit and on absolute prices. This is because we need to account for how expensive it is to build the infrastructure to extract, and how expensive it is to extract the resource. When oil prices are high the Alberta royalty+tax rate converges with Norway’s energy extraction tax rate (which is still based on profit, not % of total price).

As for diversification I am not arguing against it. I am just saying that it won’t be easy, or nearly as lucrative as we would like in comparison to energy natural resource extraction, and that simplistic transition arguments that imply we could just replace our current energy industry with a renewable energy industry and be just as rich and employed as a society is quite wrong--for Alberta.

 

[JonnyCanuck]

The transition to renewable energy has to be lockstep around the globe to diminish the demand for fossil fuels significantly. The world is still years away from peak oil. If Canada makes that transition before most other countries do, then we forfeit our ability to participate in that economy. The anti-fossil fuel types would say "so what … we will be the leaders and become self sufficient; we won't need to rely on oil & gas consumption. Let other countries do that"
The 'so what' is that oil & gas is exportable around the world and as such, is a source of revenue for this country. Revenue that helps pay for social programs, infrastructure etc. To my knowledge renewable energy (i.e wind and solar) is not exportable unless perhaps you are a neighbouring country. Does anyone think we will be exporting wind and solar to the U.S in a way that would replace current O&G exports? Not a chance!
We still have to pay for things in this country and renewables will not do that short to medium term.
I agree with a previous post. Canada needs to do both in parallel. Plan for the eventual transition yet maximize revenues while the world continues to consume oil and gas. That is the vision and leadership I want to see from both business and government.

 

[Social Justice]

Just my unprofessional (and possibly unwarranted) opinion, but this seems like a great time to divest from oilsands expansion instead of doubling/tripling down. I have yet to see any argument that convinces me we will ever go back to the level of fossil fuel use of the past decade in this new one, or certainly at least not the price of oil. The promise of a steady $50/barrel has not materialized in the past 5 or so years, what is suddenly going to change now to make that happen in the next 5 years?
People are waking up and seeing what changes can happen in just one month of global behavioural changes. Money is pouring out of governments at a level never seen before. While productivity is down all over; seems like a great opportunity to move to a greener energy future. There's also absolutely no reason why Alberta still can't be a leader in that. But alas, some folk here will never remove their oil-tinted glasses.

You're not wrong. Alberta's economy was built on a commodity which has experience sharp price fluctuations over the past 20 years. The results are telling as we've experienced boom and bust.

Here's the problem. We need to do something, or produce something of value and export it. As Darwink mentioned, I'm not against diversification or investing the alternative energy. However, I don't think selling 'Green Energy' at 7cents/kwh is going to cut it in the long run. Plus...there isn't a large population center close by where we can sell electricity to. We're not in the same position as Hydro Quebec, where they sell electricity to New York.

 

[CBBarnett]

Royalties and corporate taxes from the oil sands aren’t low because of low rates - the rates are based on both a percentage of profit and on absolute prices. This is because we need to account for how expensive it is to build the infrastructure to extract, and how expensive it is to extract the resource. When oil prices are high the Alberta royalty+tax rate converges with Norway’s energy extraction tax rate.

As for diversification I am not arguing against it. I am just saying that it won’t be easy, or nearly as lucrative as we would like in comparison to energy natural resource extraction, and that simplistic transition arguments that imply we could just replace our current energy industry with a renewable energy industry and be just as rich and employed as a society is quite wrong--for Alberta.

A good point. While we maximize the value of O&G, the toughest part mentally for this province will be accepting that replacements are not likely to be as lucrative. Whatever we do, over time Calgary and Alberta will transition to a more "normal" economy which is far less wealthy (at least relatively to others) than what we have seen. It's hard to be 40% above the national average income forever.

The good news: many, many successful cities and places have way less wealth than us and thrive just fine. Boom and busts happen everywhere, the places that come back reinvent themselves over and over again. Of course, having more wealth in our economy is better, but a decline isn't the end of the world - the way that many pundits and politicians talk. Being a good place that is attractive for immigration and migrants will matter far more in the end, with super-high paying jobs being only one part of the formula that attracts people and grow our population and economy.

This is what I fear most from what we see provincially from our leaders these days: a seemingly blind devotion to oil and gas as some sort of ideology rather than one really important engine in a multi-engine economy, within a multi-faceted, diverse society. I get that lots of it is hype about how these guys talk - but it sure sounds like we care about nothing except O&G and their policies haven't suggested otherwise. These guys bend over backwards for a single industry while simultaneously not even paying lip service - let alone effective policy choices - for any of the other pillars that make us an attractive place to live (cities, tech, tourism, universities, schools etc.)

 

[CBBarnett]

You're not wrong. Alberta's economy was built on a commodity which has experience sharp price fluctuations over the past 20 years. The results are telling as we've experienced boom and bust.

Here's the problem. We need to do something, or produce something of value and export it. As Darwink mentioned, I'm not against diversification or investing the alternative energy. However, I don't think selling 'Green Energy' at 7cents/kwh is going to cut it in the long run. Plus...there isn't a large population center close by where we can sell electricity to. We're not in the same position as Hydro Quebec, where they sell electricity to New York.

Good thoughts. I am curious about if we took this the other way. What are things we can do locally that don't currently? Our mega export volumes hid the huge deficit of wealth that leaves this province in pretty much every other category. Wealthy Calgarians don't tend to retire in Alberta and keep their wealth here that they accumulating from our resource extraction industry. We probably have the highest % of vacations outside the province. We probably produce the least amount of our own vegetables. We probably buy the most boats, RVs and other toys produced per capita than most places anywhere etc.

The reason for these is two-fold: (1) it's not cost-effective for us to capture more of that business and (2) so much of our population is so wealthy they don't bat an eye at expensive real estate, vacations or purchases anywhere else. Perhaps there is room for self-sustainment and capturing more of the wealth we generate provincially (or at least within Canada). How?

Partly the story may be that folks with less wealth will be forced to cut back on their international trips and houses (more camping, less Cancun). Another part might be an enlightened policy environment that encourages a bunch of growth in industries to increase their cost-effectiveness so that we can generate new exports or at least capture more of the wealth that typically flees this province. A similar approach was done in the provincial favourite, the oil sands. It made no sense without federal investment for decades in the technology and research to make it cost-effective (until now at least). Smaller industries that are bit players today can be scaled up and we could end up with a more diverse and more self-sustaining economy.

Perhaps the future economy is one that is more local focused and self-sustaining, regardless of what level of wealth we find ourselves at.

 

[Silence&Motion]

I keep hearing the argument "we'll never find anything to replace O&G, it's our biggest export, it's the source of Canada's wealth." But my concern is that this decision has already been made for us. Even if peak oil is "years" away (maybe 10-15 years?) the pandemic has already taken away a big chunk of those years. What are the chances that oil prices rise and stay high enough to make major investments in the oil sands economical? Add on top of that the additional costs of having to restart production that was shut down during the pandemic.

The oil sands were already struggling to attract private sector investment prior to COVID. My concern is that the government plunges more and more public money into the industry for ideological reasons rather than trying to put us on better footing to recover from whatever the global economy looks like after this.

 

[darwink]

Oil sands growth in response to high prices? Zero. High prices will just lead to a shale based crash again and the oil sands project will still be 3 years out from first production.

The public money is fortunately not going to production growth (yet..). Thank god.

 

[JonnyCanuck]

Oil sands growth in response to high prices? Zero. High prices will just lead to a shale based crash again and the oil sands project will still be 3 years out from first production.

The public money is fortunately not going to production growth (yet..). Thank god.

I don't think anyone of note (that I know of) is advocating for public investment in oil sands expansion. Investment (whether it be private or public) in infrastructure ... i.e. pipelines, LNG plants etc ... to increase our exports to countries other than the U.S .... YES, ABSOLUTELY!!!
Never mind expanding, Canada has resources readily available now. After this COVID crisis is over, demand for oil & gas will increase. If we don't capitalize on it, then other countries will. Canada will be the poorer for it. A decade from now, we will all wonder why we are stuck with huge debt, and did not have the political or social will to do something about it sooner.

 

[darwink]

I don't think anyone of note (that I know of) is advocating for public investment in oil sands expansion. Investment (whether it be private or public) in infrastructure ... i.e. pipelines, LNG plants etc ... to increase our exports to countries other than the U.S .... YES, ABSOLUTELY!!!
Never mind expanding, Canada has resources readily available now. After this COVID crisis is over, demand for oil & gas will increase. If we don't capitalize on it, then other countries will. Canada will be the poorer for it. A decade from now, we will all wonder why we are stuck with huge debt, and did not have the political or social will to do something about it sooner.

Agree 100%. Oil pipelines, at least 2 of the 3 major projects are proceeding right now (plus the sleeper debottlenecking projects). Propane export started last May from Prince Rupert. One big LNG project. The oil projects effect Alberta far more directly of course, LNG and propane projects whether in Quebec, on the Gulf Coast or in BC are more akin to someone building a huge NG power plant in a market Alberta supplies, rather than Alberta reaching a new market and fixing our local market which has been in market failure for almost a decade.