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The Toronto Star: Alberta’s inconvenient truths

Rookie premier Ed Stelmach faces three crucial decisions that will define his future – and the oil-rich province’s

Oct 14, 2007 04:30 AM
David Olive
Business Reporter

In office less than a year, Alberta Premier Ed Stelmach is confronted with three of the toughest decisions any premier of Canada’s most prosperous province has ever had to make.

The first and most obvious, expected within days, is whether to hike royalty rates on oil and gas producers by 20 per cent, as recommended by a controversial report Stelmach himself commissioned.

But that’s not Stelmach’s biggest challenge. While no expert panel is urging him to do so, Stelmach must decide whether to revive Alberta’s pitifully small Heritage Fund so that it can one day serve Albertans as a rainy day fund in a way that similar “sovereignty funds” in Norway and Alaska are set to do.

Third, there is the man-made ecological disaster that has become the Athabasca oil sands, prominently featured in An Inconvenient Truth, Al Gore’s Oscar-winning documentary about the global warming crisis. With an estimated additional $100 billion (all figures U.S.) in oil-sands projects on the drawing board, the already damaged ecosystem of northeast Alberta will be in still greater peril without political action.

Much depends on the character of Stelmach, 56, who enjoys little of the popularity that came so easily to predecessor Ralph Klein at the height of his acclaim. A compromise winner in last December’s Progressive Conservative leadership contest, Stelmach suffers the same lack of legitimacy as fellow Albertan Joe Clark after the latter’s 1976 fourth-ballet victory over much better-known rivals.

Clark never overcame the constant infighting that followed. And Stelmach, a farmer who represents Fort Saskatchewan-Vegreville in the legislature, is a rural, conservative politician in a province that is increasingly urban and, if not liberal, than centrist. Stelmach’s popularity has nose-dived almost from the moment he became premier, and his job prospects appear bleak in the general election anticipated next spring.

Yet while there’s little in the former school trustee’s record to suggest a proclivity for bold initiatives, it’s simplistic to regard Stelmach as the helpless victim of events beyond his control, as the current depiction often has it.

Stelmach actually has the potential to be Alberta’s best premier since Peter Lougheed, securing Alberta’s future prosperity and global technological leadership decades into the future, if he embraces the most innovative options before him.

Already it appears Albertans are eager to give Stelmach that chance. He has gained in popularity since the six-person expert panel on oil and gas royalties issued its damning report in September. “Albertans do not receive their fair share of energy development and they have not been receiving their fair share for some time,” panel chairman Bill Hunter said last month in insisting that Alberta has been forfeiting an annual $2 billion or so in revenues by chronically failing to adjust its royalty regime to reflect rising world commodity prices and the royalty regimes of other oil-producing jurisdictions.

Stelmach’s response was to show some spine, in contrast to a Klein government that set oil-sands royalty rates absurdly low to attract investment when oil prices were in a slump in the 1990s, and clung to that giveaway approach long after oil prices skyrocketed. “You’re in for a surprise,” Stelmach told reporters last month, expecting they had guessed he too would favour a status quo agreeable to the industry.

“I won’t be intimidated by any position taken by either the oil industry or others that may take an opposing position,” the premier said.

And the intimidation has been widespread and fierce. Industry giants Imperial Oil Ltd., controlled by Exxon Mobil Corp., ConocoPhillips Canada, EnCana Corp. and others quickly demonized the royalty report, questioning its methodology and threatening economic deprivation for Albertans if the report was adopted without amendment.

The Stelmach government even entertained a visiting coalition of Canadian institutional investors, including the Ontario Teachers’ Pension Plan, begging Alberta to leave well enough alone. And Klein, who in truth had worn out his welcome with Albertans by the time he agreed to step down last year, has weighed in with an assault that equates the report’s recommendations with regimes like Venezuela, where outright expropriation of corporate holdings has lately been the norm.

But Stelmach is playing a strong hand. Alberta currently has the 11th-lowest royalty take of 100 world oil-producing countries, which would rise to just 44th if the report was fully implemented. If the provisions were fully adopted, which is unlikely, Alberta’s royalty regime would be on par with those of India, South Africa and Nigeria.

A fortuitously timed report by Alberta’s auditor general early this month said Edmonton had repeatedly been advised by its own energy officials to revise its royalty regime upward since 2004. Auditor-General Fred Dunn said, “I don’t know why they chose not to act,” and that the province’s own department of energy estimated Alberta could have collected at least $1 billion more a year in royalties “without stifling industry profitability.”

Polls show a majority of Albertans support a proposed increase on oil-sands royalties, to the panel’s recommended 33 per cent from 25 per cent, but wisely reject the report’s proposed hikes on conventional oil and gas production, which is in decline, and provides a livelihood for the small- to medium-sized players who make up the vast majority of the oilpatch.

The heavy-handed threats of the big oil producers – Canadian Natural Resources Ltd. alone said last week it will shelve $20 billion worth of future projects, at a cost of some 4,000 contractor jobs – have played into Stelmach’s hands.

Global oil firms are desperate for reserves, and Alberta’s oil sands represent more than 50 per cent of the world’s reserves available for non-state investment. Threats to move to other jurisdictions are almost laughable. Where will the producers go in search of a similarly giant reserve base that also boasts a politically stable regime – Russia, Kazakhstan, Iraq, Venezuela, Sudan?

With a current world oil price above $80, up about one-third since last year, the industry is poised to reap a second consecutive year of record profits. And with oil headed for $100 a barrel by the reckoning of most forecasters, it’s simply unthinkable that oil majors like Exxon Mobil, ConocoPhillips and Royal Dutch Shell PLC will abandon the tens of billions of dollars already sunk into oil-sands upgraders, refineries and pipelines. Neither will they shelve expansion plans, since the existing infrastructure ensures a lower cost per barrel as each sprawling project expands.

Alienating the oilpatch, Alberta’s largest industry, is a political slam-dunk but it will mean bucking the Petroleum Club establishment, and that won’t be without some pain for Stelmach’s caucus. A more difficult challenge, though, is tackling the Heritage Fund, whose paltry assets have prompted Lougheed to describe his successors as poor managers of Alberta’s resource birthright (see “Whither” bottom left).

Finally there is the environmental crisis of Athabasca, North America’s largest source of CO{-2} emissions. The region, to the northeast of Edmonton, has become a moonscape of strip mines. (Heavy oil lies close to the surface and is mined, not drilled.) The Athabasca River is suffering rapid depletion given that huge amounts of water are required to process heavy oil. And the oil-sands operators have created some of Alberta’s largest lakes, consisting of post-production toxic water.

A portion of that same incremental revenue – from increased royalties, a sales tax and a carbon tax – could be deployed through subsidies on a 50-50 basis with oil producers to accelerate producers’ work on developing new technologies to cut CO{-2} emissions and begin the job of remediation of Athabasca’s despoiled landscape.

Alberta already is the global leader in oil-sands extraction and processing technology, dating from the launch of Great Canadian Oil Sands (now Suncor Energy Inc.) in 1967. The prospect now lies on the near horizon for Alberta to become the leading exporter of state-of-the-art environmental technology in oil sands exploitation to the globe’s other sizable, and largely undeveloped, oil-sands reserves, notably those of Venezuela.

Jeffrey Immelt, CEO of General Electric Co., was in Alberta late last month to exhort his audiences at the Petroleum Club and the Calgary Chamber of Commerce to ramp up the development of environmental technologies in order to diversify the economy. GE itself has identified 30 per cent of its portfolio of appliances, jet-aircraft engines and lighting products as goods that can be profitably redesigned as ecologically friendly.

For the policy wonks at Alberta’s Pembina Institute, Parkland Institute and Canada West Foundation, many of the innovations within Stelmach’s grasp are old news they have been urging Edmonton policymakers to embrace for years. Immelt put a bottom-line spin on them.

“You do things for the long-term health of your company and your investors,” said Immelt, elaborating on GE’s “Ecoimagination” strategy. “I don’t think you can do things because you saw An Inconvenient Truth and had an epiphany.”

http://www.thestar.com/columnists/article/266580

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