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February 2007

Vol. 12, No. 8 Week of February 25, 2007

It’s catch-up time in Alberta

Action needed if energy-based economy to remain source of prosperity; technology could create energy superpower

Gary Park

For Petroleum News

The Alberta cash cow is drying up after decades of accounting for 40 percent of total investment in the province, posing a challenge for the government to do what it has long neglected — start figuring out how to convert its energy resources into sustained, long-term prosperity.

More than at any stage in its recent history, Alberta is at a crossroads and must take urgent steps to deal with its future risks and opportunities, say two University of Calgary researchers.

The paper, by Robert Mansell, managing director of the university’s Institute for Sustainable Energy, Environment and Economy, and research associate Ron Schlenker, warns that energy royalties collected by the government could fall by as much as 50 percent by 2013.

The underlying reason is tied to the conventional oil and gas sector, which Mansell said has peaked after 15 years as the major driving force in Alberta’s growth and has accounted for two-thirds of the royalties paid to the government.

If commodity prices stay in the range of C$4-$5 per thousand cubic feet for gas and US$40 per barrel oil that would be enough to see the province’s non-renewable resource revenues cut in half to C$5 billion.

The report said that from 1971 to 2004, the petroleum industry contributed C$1.5 trillion to Alberta’s Gross Domestic Product, at an average of C$45 billion a year.

The industry also contributed C$280 billion in government revenues, C$600 billion in labor income and 12 million person-years of employment, at an annual average of 375,000 person-years.

Removing oil and gas revenues from the question, the Alberta GDP over the same period would have been 42 percent smaller.

Although non-renewable resource revenues are projected to fall sharply over the 2005-2013 period, the industry’s average annual contribution to GDP is forecast to be about C$87 billion, or 40 percent of overall provincial GDP compared to the historic 42 percent.

But the report said there is no doubt the oil and gas industry will be the main engine of Alberta’s economic growth and prosperity for many decades because, in both size and impact, it is “difficult to imagine the possibility of another sector with the prerequisite comparative advantage and size to significantly replace energy as the key driver of the economy.”

However, the researchers emphasize that there are major hurdles to clear if Alberta is to extend its prosperity.

That will require longer-term social and physical infrastructure planning and funding commitments — such as copying the investments and commitments in the 1980s that led to the development of in-situ technology which will support 90 percent of future bitumen extraction in the oil sands.

But Mansell suggests that work should have started 15 years ago to deal with the water consumption and greenhouse gas emissions problems that represent a risk to oil sands expansion.

To achieve the goal of long-term prosperity, the challenges include overcoming: Labor and skills shortages, rising costs, access to resources and landscape impacts, lack of infrastructure, managing water use and greenhouse gas emissions, the authors said.

They recommended that the Alberta government should adopt a longer-term strategy that incorporates more of an “asset and risk management” framework for energy and environmental policy and regulation.

That framework would place greater emphasis on preserving, developing and preparing for future options and on minimizing the likelihood of irreversible or very damaging outcomes.

On the upside, the researchers said there is no shortage of opportunities for energy-based sustainable growth and prosperity, given the expected growth in energy demand.

“With its huge concentration of energy resources, there is the potential (for Alberta) to become a leader in clean, competitive and secure energy.

“The one thing we can be certain about is that meeting the challenges and unlocking the opportunities will require a clear vision and long-term commitments to that vision.

“It will require major, sustained investments in the development of people, infrastructure, technologies and policies focused on cleaner and more efficient ways of recovering, using and upgrading our large fossil fuel base, systematic integration of energy and environmental systems and, in general, a shift in policy and regulatory frameworks to better embody asset and risk management strategies appropriate in an environment of risk and uncertainty.”

Although the oil sands are grabbing most of the attention in terms of Alberta’s future energy potential, the study said conventional oil and gas should not be overlooked.

With long-term commitment to research, development and deployment of new technologies, conventional recovery rates could be raised to 41 percent from 27 percent for oil and to 72 percent from 59 percent for gas.

At those levels, an additional 8.4 billion barrels of oil could be recovered generating more than C$30 billion in royalties and C$550 billion in GDP, while the increased gas recovery would translate into an additional 32.5 trillion cubic feet, adding C$16 billion to royalties and C$250 billion to GDP.

With most of the physical infrastructure already in place, “very little additional public expenditure” would be needed, the study said.

Success in converting “even a modest portion of the ultimate potential into clean, secure and competitive energy supplies translates into a huge prize,” the authors said.

“Given the size and location of this resource base, it would seem that energy represents one of the clearest and most significant examples of comparative advantage for Alberta and Canada in an increasingly competitive global economy,” they said. “Put simply we have the potential to become an energy superpower in a world with an ever-growing appetite for energy.”






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