Friday, April 24, 2015

The Alberta Debate 2015 #abvote

I have plenty of thoughts about yesterday's debate between Alberta's major political party leaders but if I were to declare one overall takeaway it would be that regardless what party you look to; Alberta's future has been reduced to math of the present based on (incorrect) assumptions of the past.

I was probably most disappointed in Brian Jean's performance (or the lack there of). I have previously on Twitter voiced my support for Brian Jean (the person due to the events surrounding his resignation as an MP, not the Wildrose party in general) but his inability to stray from party lines in what was possibly the most tightly scripted "debate" I've ever seen has me doubting his capacity  to tell the truth to the Albertan people.

It's very frustrating to watch Albertan debates as no party wants to touch the elephant in the room, the viability of Alberta's oil industry itself. Considering Alberta's entire situation revolves around and is a result of the oil industry it's concerning that nearly no mention of it was made at all. Instead leaders jumped around the topic, such as the brief discussion on a royalty review.

The royalty review portion of the debate perhaps best highlights how Alberta's political parties are attempting to solve symptoms of a problem while trying to avoid the problem itself. Points made by Prentice and Notley are actually both correct, but the reason they are both correct is left un-addressed rather painting the issue as a black and white yes or no type situation.

First I'll discuss the Prentice position, that a royalty review right now will harm the industry and result in job losses based on the experience of the past royalty review.

Those who oppose this view often confuse the product Alberta is producing, called bitumen, for conventional oil. For instance you may have seen this image floating around:
It's not really a truthful comparison as conventional oil has much greater returns than bitumen. Readers of this blog will know that I have been forecasting serious financial issues due directly to Alberta's reliance on oilsands as early as 2011 and in the 4 years since the financial landscape has severely changed, as I said it would. Back in 2011 and 2012 when I was talking about Alberta actually being broke and on a downward spiral of what will become tighter and tighter financials as time goes on, not very many people took me seriously. It was a laughable assertion back then as the "Alberta Advantage" was still fresh in everyone's mind. Now today however I'd hope that Albertans are taking my claims a little more seriously.

The error of this chart, is the lie the Albertan and Canadian governments continue to stand on: that oil is oil and returns are returns. It's an accepted assumption that is never challenged that Alberta's oil industry provides value to Alberta based on a skewed view of the history of the industry, and comparisons to other oil producers. Every single political party makes the claim that it's simply the mismanagement of our "immense wealth" which has created the economic situation Alberta resides in today.

So let's talk about the royalty review: The royalty review occurred back in 2007 before the beginning of the current economic collapse in 2008. This was at the height of oilsands perceived prosperity, oil was at all-time highs and the forecasts were that demand would only make it go higher. At this point in time conditions were the most favorable they could have ever been to extract more value for Albertans out of the industry. It had never been more profitable, it had never been producing more, and the outlook for the future of the industry had never been brighter. Yet still, despite the perfect environment for a royalty review the companies still couldn't stomach it, why?

Some may chalk this up purely to greed, which isn't entirely incorrect: of course companies want to pad their bottom line. However there is more to this story, the risk and investment required to explore and develop the oilsands is immense. Oil companies must redeploy their capital in long term exploration ventures and if a few of those fail a nicely padded margin can quickly turn into a gaping hole.

In fact even today the lie of great returns persists in the reasoning for the claim that despite depressed oil prices the large operations will pull through. They can keep operating supposedly because they have "long term timelines", or at least this is the official story. The reality is they have no choice but to keep operating due to the long term "sunk costs" already invested:
Current projects will continue, especially those that take five to seven years or more to complete. These projects have "sunk costs," or money that's been invested and can't be recovered, he said.

The other projects that haven't been started may start to get pushed back, at least until there's more clarity on where oil prices are headed.
 In other words, it's not that these projects are actually profitable at these oil prices it's that so much investment capital which can not be recovered has already been deployed to get the operation going that the only thing the company can do is hope and pray that returns will, well, return.

This is very important to understand because once you do you will realize Alberta has never had a hope in hell of matching the returns from Norway's conventional oil production and once you realize that you will also realize why it may very well be true that companies would leave Alberta should any additional pressure be put on what are already very thin margins. At today's royalty rates the economics of the oilsands were already coming into question (and before the collapse in price to boot) so I don't believe the industry can actually tolerate any additional pressure on their margins whether in the form of royalties, environmental standards, or safety. From this perspective Prentice is 100% right, adding that pressure to the oilsands industry and corporate Alberta will likely be devastating.

But Notley's position is also valid, Albertan's have not been receiving their fair share of the returns in proportion to the risk they're taking on.

The cost to cleanup abandoned wells is ultimately shouldered by Albertans in the event a company can't afford to do it themselves.
In the past year, the number of so-called orphan wells has more than quadrupled from 162 to 702. At the current rate of reclamation, it will take 20 years to dismantle just this year's supply
It's an expensive process, costing a minimum of $10,000 and millions in special cases. It also takes time. In the first 20 years of the program's operation, it reclaimed a total of 651 wells, around 30 a year. Orphan wells are not new to Alberta. They dot the landscape in the central and southern part of the province. Since 1994, the Alberta Energy Regulator has run a program to take over abandoned wells, pipelines and other facilities and reclaim them.

In the past 12 months alone, 540 wells have been abandoned, almost as many as have been reclaimed in the past 21 years.
The article goes on:
Two years ago, the regulator increased its expected or deemed cost to reclaim a well, which threw many companies out of compliance. 
That's probably for the best, according to Barry Robinson, a lawyer with Eco-Justice in Calgary.

"I think the [Alberta Energy Regulator] has set some more realistic security requirements. A lot of companies that aren't really financially viable were operating wells, and they didn't have the capability to clean up an abandoned well. Marginal companies that don't have the ability to clean up, and abandon a well after they've done operating it, shouldn't really be in the business."
But they were in the business, and many more will quickly be discovering that they too shouldn't be operating wells. This is just one example of what happens when Alberta attempts to add pressure to industry margins for the good of the people. The cleanup of abandoned wells is absolute, it must be done, however whether or not these companies and their financials will be good enough 20 years out to actually perform some of these cleanups is questionable at best and an unreasonable risk to be guaranteed by the government.

Alberta has a lot of undiscovered and hidden liabilities in the form of environmental management which ultimately the people of Alberta will end up paying for. That is, if the technology even exists...

So no, Albertans are not receiving their fair share of the oil wealth in proportion to the risk they are taking on and yes should Albertans attempt to get their fair share or put more of the risk on the industry itself and actually hold them to the standards and guidelines we republish on a regular basis it is very likely the industry as a whole will fail. They're both right, but neither of them will ask the real question that needs to be asked: why does Alberta support an industry which it itself admits can't provide returns adequate even to cover it's own costs let alone provide value to Albertans and sufficiently cover the risk that we as Albertans (as well as our children who will actually be the ones left to deal with the problem) are taking on?

No party will touch that question, and therefore in my mind no party actually stands for real change as Alberta's policy, economic performance and environmental performance are all held hostage to an industry that can barely turn a profit when oil is $100 / barrel and has admittedly already "picked all the low hanging fruit" meaning oilsands developments in the future are even riskier and will provide less than the current.

The situation is so bad that Jim Prentice is actually hoping this downturn will get the industry back on it's feet (at the worker's expense):
Despite the mass layoffs and deep investment cuts under way today, and expectations that oil prices will remain depressed, the premier said many large projects in the oil sands are moving ahead because they are based on a long-term pricing and expectations that revenue will bounce back over time. (RF: As we covered earlier in this post, this narrative is a bold-faced lie)
“The new projects coming on stream over the next few years will amount to some of the most significant spikes in oil production in the world,” he said. (RF: Also a bold-faced lie as the industry itself has admitted all the low hanging fruit has already been picked)
The premier even suggested that there is a silver lining to today’s depressed conditions.
“Unpromising economic conditions are an opportunity,” he told delegates. “Industry will be able to take advantage of favourable labour markets and diminished construction expenses, potentially lowering their break-even costs. The province’s oil production will go on climbing for the foreseeable future.”
Basically what he's saying here is "the downturn provides us an excuse to depress worker wages" which makes sense when you remember that back in 2012 the Albertan government was warned about the unsustainable nature of oilsands development, specifically citing rising labour costs.
A confidential government memorandum obtained by CBC News warns that soaring costs of developing the Alberta oilsands could put the brakes on the massive project, stalling one of the main engines of the Canadian economy. 
The booming oilsands industry supports tens of thousands of Canadian jobs, and pumps billions of dollars a year into the national economy. 
The memo written by Mark Corey, one of the highest-ranking officials in the federal Department of Natural Resources, warns that if the current trend of spiralling labour and other costs continues, investors may start to turn off the tap on the massive amounts of money needed to develop the oilsands. 
"Although current crude prices promote oilsands development, ever-increasing capital and operating costs could make this price insufficient to support oilsands development at forecast levels," Corey writes. 
Cost increases are currently "the biggest risk to investment in the sector," and could jeopardize the viability of some projects, he says. 
Rising labour costs 
The memo estimates that operating and capital costs to extract a barrel of oil from the tar-like sands have both more than doubled over the past decade. 
It blames a chronic shortage of workers and resulting sky-high labour costs as the main cause of increased operating expenses. 
Corey's memo reflects a growing concern inside government over the future of the oilsands, and specifically the massive amount of capital investment that will be needed to fuel their continued development.
All talk of diversification and "getting off the resource revenue roller coaster" by the Prentice government is a flat-out lie. He actually is hoping that the hard times being experienced by Albertans will provide the needed crutch for a cash-strapped industry. Your prosperity be damned. The talk of diversification by the other parties I largely chalk up to either them being ignorant to the reality, or uninformed.

The reality of Alberta's situation is it can't diversify itself from oil revenue and at the same time grow and support oilsands development. Alberta hasn't been able to keep up with adequate service for it's population growth, growth that is required to operate and grow oilsands. Alberta operates a power grid where per capita we consume the most energy of any province and 80% of that consumption comes from industry, not the people. We have to provide and maintain an advanced road network that can sustain heavy freight to areas where the population is so sparse if the industry wasn't there would probably have a dirt road instead.

In short, we operate an infrastructure network many times larger than our population would require and it is because of this that the government needs oil revenue to maintain operations and further expand infrastructure. Its hard for me to see how where most expenses derive from industry development (including services like education, and health, to account for industry driven population growth and industry caused health problems) Alberta can somehow ween itself off oil revenue. You can disagree with me all you want but every gov't that has come to power has made the case Alberta needs to "get off the roller coaster" and none has ever been able to, I'd submit it's because due to the co-dependent nature of our situation it's literally impossible to separate the two.

The claim becomes even more unbelievable when you remember that even if Alberta weened itself off royalty revenue for operating expenses and instead turned to taxes, the amount of taxes Alberta will collect also directly depends on the viability of oilsands developments as so many of the productive industries provide services for oilsands developments, and the other service industries depend on the high wages which if you remember earlier from this post Jim Prentice actually hopes the downturn puts an end to those too. It's simple really, we can't diversify from oilsands revenue and grow them too, it's one or the other and any party that claims different will likely disappoint you when it fails to happen regardless if their intentions are pure or not.

No party in last night's debate has offered any vision of what Alberta could be, all of them instead are trying to offer solutions to return the "Alberta advantage", an idea that Alberta doesn't really have any fundamental problems but rather simply an issue of mismanagement. So long as Albertans hold this belief and faith in the false narrative of oilsands prosperity it doesn't really matter who wins as nothing can possibly change in the grand scheme of the course we're on. The old government will continue to deceive Albertans as to our current situation, and a new government will come into office only to find their hands tied and a closet full of financial skeletons.

That being said, and with Brian Jean's complete failure to bring up any of the points I supported him based on regarding the harm rapid unchecked oilsands growth has done to Alberta the best thing for Alberta is probably an NDP lead minority government with Wildrose as the official opposition and the Liberals or the Alberta Party the swing vote to keep either side in check. The PCs are so corrupt and harmful to Alberta's future they should be destroyed.

The reason I say it should be NDP lead is that barring the real problem of Alberta's main industry providing no returns and ever-growing risk, Alberta's second problem thanks to Ralph Klein's "plan" to dupe Albertans into believing the province is "rich" is a severe lack of services, and infrastructure, and it's very likely that the NDP will actually deliver on those promises and also likely they will come attached to more taxes, and more debt. but that's not the NDP's fault, Alberta needs these services, and Alberta needs this infrastructure if we're not going to change course in regards to the province's growth strategy. Balancing the budget sounds great but even if a party successfully does balance the budget on paper, all they are doing is deferring Alberta's expenses into the future sort of like just paying the minimum monthly amount on your credit card: cheaper now, more expensive later.

If the math of the day is all your concerned about, then it's not the budget that should be your focus but rather Alberta's entire economic model - Albertans will be paying for their unprofitable industry one way or another - so I say bring on the services, because we're already paying the costs. Alberta, frankly, must be the poorest "richest" province around.

Click here to recommend this post on and help other people find this information.

Richard Fantin is a self-taught software developer who has mostly throughout his career focused on financial applications and high frequency trading. He currently works for CenturyLink

Nazayh Zanidean is a Project Coordinator for a mid-sized construction contractor in Calgary, Alberta. He enjoys writing as a hobby on topics that include foreign policy, international human rights, security and systemic media bias.

No comments:

Post a Comment