NDP Premier Rachel Notley lives the bitumen bust

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The NDP promised to review royalties paid by Alberta natural gas and oil producers. Last Friday Premier Rachel Notley released the report and reacted to its findings.

It is well known that Alberta revenues from natural gas and oil have been a bargain for producers, and the four-member review panel pointed this out in its report.

It is also clear that company profits from today's prices of less than $30-a-barrel oil hardly represent pre-slump gains from more than $100 oil. Premier Notley acknowledged as much. Nothing in her announcement suggested the NDP was looking for increased government revenues from lower oil and gas prices.

"No appreciable changes to royalties" was the headline, but the important news is found inside the report. The bitumen boom in Alberta has gone bust.

A dramatic increase in already-high capital investment in bitumen sands occurred after 2004. Over a recent three-year period, bitumen sands yearly investments totalled above $50 billion, about the same yearly amount as the Alberta government revenue budget.

Of the 37 major bitumen investments, only 10 are expected to eventually recoup their initial investments. That means 27 bitumen sands projects are dead write-offs at current prices, offering no prospects for a return on capital invested.

Bitumen sands royalties start contributing to public revenues at a serious level (up to 40 per cent of profit) once the start-up investments have been recovered. With nothing but losses ahead for so many new companies so long as oil prices remain depressed, there will be depressed royalty income for the foreseeable future. 

For Alberta, the federal government, and the future of the Canadian economy, more than royalties are at stake.

The fall in oil prices occurred in a world response to the rise in U.S. fracked oil and gas production. Long the largest national producer of oil, the U.S. market for imports grew as conventional oil resources became depleted.

However, unexpectedly, over a short time, highly controversial fracking technology has transformed the U.S. from an oil importer to an exporter through shale oil and gas production.

The U.S. represents the main market for Alberta production, and the U.S. does not need additional oil and gas from Alberta. As the review panel reported, "Alberta's biggest customer is now our biggest competitor." What this means for Canada has yet to register in Ottawa.

When, over 35 years ago, U.S. President Ronald Reagan called for a free trade deal with Canada, the Houston-based oil majors saw an opportunity to create an integrated North American oil and gas market, incorporating bitumen sands production as part of the "upstream" that included off-shore resources and conventional supplies.

The reality was the "mid-stream" of Canadian oil and gas transportation and the "downstream" of refined oil and sale of petroleum products were going to be controlled by the U.S. majors, not by Canadians.

Oil and gas production subsidies were written into the Canada-U.S. free trade deal, and export taxes on oil and gas were forbidden. This meant that Canadians were free to subsidize exports to the U.S., but not to recoup the cost of these subsidies through taxes on U.S. consumers of Canadian oil and gas.

Eventually this victory for the U.S.-based industry led to massive increases in Alberta oil production. From 2000 to 2015 the supply of Alberta oil increased by 400 per cent. Now with fracked oil flowing, the bitumen sands investments are being mothballed.

In a dramatic reversal of the integrated North American model, the U.S. administration killed the north-south Keystone pipeline project in response to domestic concerns over climate change.

Alberta industry have pushed mid-stream options, shipping bitumen by pipe (or rail) west or east, for refining and export to third markets. These private-interest proposals are under siege from Indigenous peoples and environmentalists, and are unlikely to receive a social licence.

The Alberta government needs a public interest mid-stream option on the table. A new pipeline carrying bitumen upgraded in Alberta to refineries in Montreal would make sense if it were limited to serving domestic markets and not designed to increase the rate of exploitation of the bitumen sands. It would make even more sense if it were partially owned by the provinces on its route: Saskatchewan, Manitoba, Ontario and Quebec, as well as Alberta; and if the federal government were to join the process.

With financial support from the federal government such a proposal would put new pipelines for the oil and gas industry into the public sector where they belong for security and safety reasons.

Worldwide oil and gas is in public hands except in the U.S. and Canada. The public sector can be made accountable for environmental safety and sustainability. Its calculations of return on investment are broader than private returns to shareholders. No surer way exists for controlling greenhouse gas emissions than through public control over oil and gas.

Canadian policy has assumed the Houston-based oil majors were more capable of planning the future of Canadian oil and gas than Canadian governments.

The bitumen bust should force Albertans and Canadians to re-think how to control oil and gas production, this time in the public interest.

Duncan Cameron is the president of rabble.ca and writes a weekly column on politics and current affairs.

Photo: Premier of Alberta/flickr

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