The Rise and Fall of an Oil Giant: How Canada’s Province of Alberta Gained its Oil Prominence and Lost its Lustre

By Gerard Kreeft

 

 

 

 

 

 

Many Africans, who have worked in the  oil and gas industry  encountered Albertans, who inevitably  have been sent abroad to work in  Africa’s oil and gas industry, either in a technical, managerial or training capacity.

Many Africans also have  been invited to the city of Calgary, Canada’s equivalent to Houston, Texas, the world’s oil capital, and participated in technical training sessions. In particular, learning to survive Alberta’s winter cold with temperatures sometimes plunging as low as -50C. Boot camp of a technical nature.

Province of Alberta

Canada is one of the world’s largest oil and gas producers averaging 4.7MMBOPD(millions of barrels oil per day) according to CAPP(Canadian Association of Petroleum Producers). Some 78% of this production comes from Alberta and additional smaller production comes from  the neighbouring province of Saskatchewan and Offshore East Coast Canada.

To understand Alberta’s DNA it is necessary to go back in time and dust off our history books.  In particular re-visiting  Democracy in Alberta: Social Credit and the Party System(1953), the authoritative book by C. B. Macpherson, Professor of Political Science, University of Toronto.

Macpherson takes us back to the early formation of Alberta: an  agrarian co-operative landscape. In 1900 Alberta’s population was 73,000 persons. The common theme was a one-staple economy, based on  a homogeneous farming community with its key emphasis on wheat.  The United Farmers of Alberta (UFA) came to power in 1921 and governed the province until 1935.  The UFA’s sole goal was to promote the interests of Alberta farmers. Central Canada, its business and financial interests, and the Federal Government were seen as the ‘bad guys’.

By 1935 the Social Credit Party swept into power. The new norm had become ‘virtually  a one-party system, cabinet rule, and a revised tradition of direct delegate democracy’.

Times have changed—the UFA and the Social Crediters have passed on but we also have had various Governments —but the common theme is that the province in the past had a one staple economy. The wheat and the farmer may have disappeared but the new commodity became oil and the farmer who Macpherson described as petit bourgeoisie has been superceded by a more urban set of elites- lawyers, engineers, geologists, oilmen, government bureaucrats, wheeler-dealers. Their class or status  can also be described as  ‘petit-bourgeoisie’…but urban as opposed to rural. As oil production increased oil prices surged. The money poured into Alberta. It was party time.

Now Alberta’s population is more than 4Million people. The Calgary- Edmonton corridor is Alberta’s most urbanized area and one of Canada’s four most urban areas.

Macpherson’s assertion that once a quasi-party state (Alberta) has been established in a quasi-colonial and predominantly petit-bourgeois society it may persist indefinitely if growth is assured. That growth is now not assured.

For the last 70+ years, since the founding of Alberta’s oil industry the province has achieved a level of unknown prosperity. Alberta’s per capita GDP, before COVID-19 struck was the highest in the country: C$ 80,000 (US$60,000) compared with C$60,000 (US$45,000) nationally. Yet the present signs are not encouraging:

Due to the impact of the Russia – Saudi Arabia oil price war and COVID-19, Western Canada Select (WCS) the price obtained for many Alberta oil and gas producers, averaged only US$3.50 per barrel in April 2020, more than 90% lower than it was a year earlier. West Texas Intermediate(WTI) averaged US$16.55, 74.1% lower than it was a year earlier.  The differential of WTI over WCS was US$13.05 in April 2020.

Prices of WCS have improved somewhat, in mid-June WCS was up to US$24.60 per barrel but that is still painfully down from oil prices of a year ago.

Although the price of WTI and WCS are extremely low, what is really painful for Canadian producers is the discounted rate that Canadian producers receive. The reason? Alberta is landlocked. It sole access to overseas markets is via the TransMountain Pipeline to Vancouver, British Columbia which has a limited capacity of 300,000BOPD capacity. All other oil not consumed in Canada is shipped to the USA.

Now, the USA is awash in oil, due to the impact of fracking of shales in the Williston Basin, North Dakota as well as the Permian Basin of Texas and New Mexico.

The Americans really do not need Canadian oil. Accordingly, Canadian producers must accept huge discounts if their oil is indeed brought to market.

Despite the low oil price the Provincial Government is predicting in its 2020 April budget a WTI price of US$58 per barrel, increasing to US$63 per barrel by 2022/2023.

Alberta was scheduled to produce 3.81MMBOPD in 2020; based on OPEC’s intervention it is anticipated that Alberta will be forced to cut its production by 1MMBOPD.

Pipeline Politics

Much of Alberta’s oil production to date has been focused on oil sands production, located in Northern Alberta. These are also commonly called “the tar sands”.  The crude bitumen is a thick, sticky form of crude oil so heavy and thick (viscous) that it will not flow unless heated or diluted with lighter hydrocarbons.

Alberta’s oil sand production in 2019 was 2.9MMBOPD.  Alberta also produced 800,000BOPD of conventional crude. In the  past, oil sands production predictions  were as high as 5MMBOPD. CAPP (Canadian Association of Petroleum Producers) is still predicting oil sands production of 4.2MMBOPD by 2035.  This, in my view, is excessively optimistic.

A false optimism also abounds on the pipeline front. The expansion plans for the TransMountain Pipeline, adding an additional capacity of 590,000BOPD has become stuck in regulatory and environmental haggling. The Federal Government chose to step in and purchased the TransMountain Pipeline for C$4.5Billion. The Federal Government now has to deal with judicial reviews and objections and consultations with various indigenous communities who vigorously object to this activity taking place on their ancestral lands.

Cynicism abounds concerning the purchase of the Trans Mountain Pipeline by the Federal Government. Was it to solely placate Alberta’s oil interests? So that the Federal Government could be seen to be in lockstep with the Alberta Government? Knowing full well that such a pipeline will likely never be built, given the  regulatory clamour and environmental protests.

Plans for The Keystone Pipeline, which was to be used to transport oil sands crude to the USA, is also in limbo given that Joe Biden, Democrat Presidential Candidate has expressed his opposition to this project.  Indeed, President Obama and his Secretary of State, John Kerry were much against  the Keystone Pipeline with both declaring Alberta’s tar sands to be the world’s dirtiest  oil.

Business as Usual?

Canada has pledged to respect and implement the Paris  Climate Agreement. Yet all good intentions aside, the road ahead is an uncomfortable journey:

  1. Any pipeline plans are unlikely to be implemented;
  2. Oil sand projects are unlikely to be expanded and perhaps discontinued;
  3. Discounted Western Canadian Select vs West Texas Intermediate Oil is a guarantee that oil prices will continue to bottom out, ensuring a virtual moratorium on oil production.
  4. Are Alberta’s oil and gas resources fast becoming ‘stranded assets’?

Alberta’s Provincial Government has made some feeble efforts to move in the direction of an Energy Transition. For example its C$1.1Billion commitment to the ‘Petroleum Diversification Programme’, providing royalty credits to companies that build large-scale projects to turn ethane, methane and propane feedstocks into products such as plastics, fabrics and fertilizers.

The Government also mentions Canada LNG which will transport LNG to Pacific Rim countries. The Government claims that Alberta natural gas will be sourced; but the lion’s share of the project’s  natural gas will come from Northern British Columbia!

Will there  again  be a populist revolt such as when the UFA were turfed out by the Social Credit Party in 1935, and the Social Crediters in 1971? The present Alberta Government is anxiously looking about in a hope of saving its oil economy. Can the one dimensional characterization of Macpherson’s petit-bourgeois class  become more divergent?

Now that the oil has for all intents and purposes disappeared,  what will be the driving force that Albertans will have to find? The great big party is over, the atmosphere in Alberta is like attending a funeral. Alberta’ Premier, Jason Kenney, announced that due to the impact of COVID-19 and the collapse in oil prices, Alberta may incur this year a deficit of C$20Billion.

For the last 75 years oil has literally been the fuel that has driven the economy. All the talk about diversifying the economy was pious nonsense. Instead it smothered innovation. Perhaps this type of crisis is necessary to stimulate a new generation. Getting back to basics.  Perhaps something as basic as encouraging more tourism in the Rocky Mountains of Banff and Jasper and elsewhere in the province..

Question: How much oil money is beneficiai for an economy? What is the tipping point when a petro-economy fails to encourage innovation and diversification? In that sense  can the lessons of Alberta  also be useful to Africa, where oil  in a number of countries, i.e Algeria, Angola, Congo Brazzaville,  Egypt, Equatorial Guinea, Gabon, Ghana, Mozambique and Nigeria is a prominent factor of economic growth?

Macpherson has made a key assertion: once a quasi-party state has been established in a quasi-colonial and predominantly petit-bourgeoisie society, it may persist indefinitely, if growth is assured. This is not only a lesson directed to a developed economy such as Canada. His assertion could also provide valuable lessons to many of Africa’s emerging economies which are heavily oil dependent.

Gerard Kreeft, MA (Carleton University, Ottawa, Ontario, Canada) Energy Transition Advisor, has more than 30 years experience in the energy sector. He was the founder of EnergyWise.  He has managed and implemented oil and gas conferences in Alaska, Angola, Brazil, Canada, Kazakhstan, Libya and Russia. He is a Canadian/Dutch citizen.



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