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THE NEW YORK TIMES: Riding High on a Tide of Oil

March 28, 2006
By CLIFFORD KRAUSS
FORT McMURRAY, Alberta — Canada's wild west is going corporate.
In the last big energy boom in this province, during the 1970's, the card room at the Calgary Petroleum Club was so full of Texas oilmen that seats at the poker table were rarely freed up until well into the early morning hours.
With oil prices high again, Alberta is hopping once more — but with a twist. The skyline of Calgary, the business center of the province, is about to be altered by a large real estate project, and a big new jet runway to handle the influx of oil workers is already in place. While poker is still popular, conspicuous consumption these days includes such costly indulgences as white truffles and Mercedes-Benz convertibles.
The change is reflected in the very nature of the oil business here: once built around conventional drilling, in which independents played a major role, oil is now extracted through a heavy industrial process requiring huge capital investments.
Some of the biggest international oil companies plan to sink 100 billion Canadian dollars ($85.5 billion) over the next decade into developing the gooey oil sands that are at the heart of Alberta's growing wealth and political influence. The oil sands have transformed Alberta into the epicenter of a new energy-based Canadian economy that promises to be even more crucial to the United States.
The region is also taking a page from the Texas playbook.
Stephen Harper from Calgary was elected in January as Canadian prime minister; his free-enterprise, tax-cutting political philosophy is closer to Houston's than Toronto's.
As more oil flows, economic power and population are shifting westward from the traditional manufacturing centers of Ontario and Quebec, which are lagging in comparison. The rising west is splitting the national economy, forcing industries back east to retool and reorient manufacturing to supply the growing oil economy.
Here in Alberta, every week seems to turn up an announcement of a new refinery, a pipeline project or a land bid. To a lesser extent, the same is happening in neighboring British Columbia and Saskatchewan.
“It's a seesaw effect,” said Todd Hirsch, chief economist for the Canada West Foundation, a research group based in Calgary. “What's driving Alberta, western Canada and resources up are what's driving Ontario and Quebec down: the emerging Asian strength and the strength of the Canadian dollar.”
The energy companies say their investments in oil sands fields are just the beginning. The fields hold estimated reserves equivalent to as much as 175 billion barrels of oil, or more potential energy content than the oil fields of Iran and Libya combined. Oil sands production has risen to just over one million barrels a day today, from 400,000 barrels in 1995; it is projected to rise to 2.7 million barrels in 2015.
Alberta has long been cowboy country, a cattle center in the heart of the Canadian Bible Belt. But in recent years oil has given it the fastest-growing population of any province, with people lured from elsewhere in the country and even outside Canada because salaries are growing faster than anywhere else.
“We're a big laboratory in how to absorb so much investment,” said Gwyn Morgan, executive vice chairman of EnCana, a Canadian energy company based in Calgary. “None of us could have dreamed this would happen this quickly.”
In Fort McMurray, the town closest to the oil sands, truck and bulldozer drivers come from as far away as Newfoundland and Labrador to earn six-figure salaries. They are buying up expensive pickup trucks as if they were toys.
The town's population has increased to 61,000, from 33,000 in 1996, and housing is in such short supply that the average mobile home now sells for $277,000 Canadian dollars ($237,000) and couches are renting for about 500 Canadian dollars a month ($428).
The crowding and labor shortages persuaded Canadian Natural Resources Ltd. to build a jet runway long enough to accommodate Boeing 737's to allow workers to commute to its giant new Horizon project. In Calgary, EnCana is about to build a new corporate headquarters over two square blocks that will be the biggest real estate development project in Canada in two decades.
Restaurants, wine stores, art galleries and luxury car dealers are doing frenzied business. At a benefit auction earlier this month, one bidder paid more than 13,000 Canadian dollars ($11,120) to go fly-fishing on a local river with Ron A. Brenneman, president and chief executive of Petro-Canada. “I don't see any black clouds on the horizon,” Mr. Brenneman said with a smile.
The same might be said for much of Canada. Unemployment is at a 30-year low, the Toronto stock market reached a historical high this month and real estate is booming virtually everywhere. Oilmen here are now calling the Canadian dollar, which has climbed more than 35 percent against the American dollar since early 2002, a new petrocurrency.
The high cost of extracting oil from oil sands is no longer a major impediment to production, now that oil prices are at $60 a barrel or more and most experts expect them to remain relatively high for years. There were only a dozen oil sands projects in Alberta a decade ago. Today there are about 60, and 55 more have been announced for the future.
But Canada also has some losers amid the boom. Eastern manufacturers have had to retool, consolidate and shed 180,000 jobs in the last two years, as cheaper products enabled China to replace Canada as the top exporter of nonenergy products to the American market. Capital investment among manufacturers has decreased since 2000, although now it is recovering.
“There's no doubt we have a mild case of Dutch disease running in Canada,” said Don Drummond, senior vice president and chief economist at TD Bank, referring to the deindustrialization of the Netherlands after the discovery of North Sea gas in the 1970's.
Particularly hurt have been companies manufacturing household appliances, electrical equipment, plastic and rubber products, textiles and paper.
At Edson Packaging Machinery Ltd. of Hamilton, Ontario, one-third of the 85 workers were laid off in 2003. By switching to American suppliers, changing its product mix and putting more emphasis on service, Edson has rebounded somewhat and increased its payroll again.
“It's a tale of two economies,” said Robert Hattin, Edson's president. “The resource-based economy is hot and manufacturing right now is facing challenges we haven't seen before.”
Alberta has 10 percent of the population, but directly produces 15 percent of Canada's gross domestic product. Both numbers are likely to rise in the coming years, economists say.
“This is pretty close to the hub of Canada right now,” said Kevin Ellsworth, a 42-year-old Shell truck operator from eastern Canada who moved here nearly four years ago. “Every time you turn around there's another plant project coming to town.”
Mr. Ellsworth's enthusiasm is typical of many workers here and fits neatly with the dimensions of his job. His dump truck carries 400 tons of oil sands and reaches seven stories high when its box is lifted on its hydraulic cylinder. With overtime, he can make more than 100,000 Canadian dollars a year.
Shell's oil sands venture contains enough pipe to stretch from Calgary to San Francisco and its mile-long conveyor belt has the largest capacity in the world. But the venture is only going to become bigger.
After several stalled oil sands efforts, Shell was faced in 1996 with the prospect of losing a lease on land north of Fort McMurray that it now believes holds more than five billion barrels of oil. With a barrel of oil worth under $20 a barrel at the time, development of the oil sands did not seem worth the investment.
But Shell brought in Chevron and another partner and went ahead with a project three years later, just as the price of oil was poised to climb. In less than four years and with an investment of 5.7 billion Canadian dollars ($4.9 billion) its project is already producing 155,000 barrels a day.
That was only the beginning. New land acquisitions and at least two more mines are planned over the next decade. A 7.3 billion-Canadian-dollar ($6.2 billion) expansion will add another 100,000 barrels a day by 2009. Shell hopes to reach 500,000 barrels a day by 2015, equivalent to half the current daily production in all of Texas.
“It's the 'holy cow,' ” said Craig Simpson, a Shell mining engineer. “What people don't realize is how big this is.”

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