The Parkland Institute

The Tarsands

Alberta’s number game

Despite parliamentary debate on the oil sands elsewhere, Alberta sticks to its crude 'magic number' approach

Finally, a long-awaited parliamentary debate has taken place, and a vote has been held on whether or not oil development in the Alberta tar sands is worth its large environmental footprint… in Norway. That’s right, the Norwegian parliament had the debate, not our Canadian parliament (nor our Alberta legislature, for that matter).

You see, the Scandinavian country owns two-thirds of StatoilHydro, which in turn owns some 250,000-plus acres of bitumen-soaked sand in Northern Alberta, and the Norwegian government held a vote over the summer that could have potentially seen the partially nationalized oil company get out of the business of dirty oil.

While the Norwegian public decides the fate of a great Canadian resource through parliamentary debate, our provincial and federal governments on this side of the Atlantic have opted for a different approach. The decision has already been made for us here, and that decision was clearly articulated by one Lloyd Snelgrove, who happens to serve as both the president of the Alberta Treasury Board and the minister responsible for the Oil Sands Sustainable Development Secretariat (no conflict of interest there!). Earlier this year, he told the Oilsands Review: “The oil sands are going to be developed, they’re going to be developed for a long-time and they’re going to be developed in an environmentally responsible way. So, the discussion isn't anymore are they going to be closed, are they going to be scaled down. They're going to be developed.” Discussion over. Case closed. No parliamentary debate needed, right?

Of course, you might counter, ‘Don’t Albertans – who technically own the resource on a constitutional level – want the oil sands to be developed? Didn’t they re-elect the Progressive Conservatives just last year, thereby transferring decision-making authority on all matters to do with oil development to the Stelmach government?’

It depends on how you read the statistics: One poll conducted by the Pembina Institute in 2007 found that 71 per cent of Albertans supported a moratorium on new projects in the tar sands until environmental management issues were addressed. As for the question of political representation, let us remember that the 2008 election in Alberta saw the lowest voter turnout on record, with only 41 per cent of eligible voters submitting a ballot. When we take into account the Progressive Conservative’s thin majority (at 52.66 per cent of the vote share) it means that less than 22 per cent of eligible voters in Alberta voted for the Stelmach government.

And so we need to ask ourselves, ‘If public opinion and representative democracy don’t serve as the deciding factor of whether or not to develop the oil sands here in Alberta, what does?’

The answer is – drum roll, please – the ‘magic number.’ This refers to the price that one barrel of synthetic crude oil must fetch on the international market in order to make operations in the tar sands profitable. Last summer, when the international market price for oil reached record highs, we didn’t hear much talk about the magic number – the oil companies and the tax collecting governments were basking in the glory of unprecedented profits. Even the Alberta government was making big money off of its notoriously low 1 per cent royalty rate – that’s how much money was going around when the real price of oil was more than double the magic number.

But now, half a year into a deep recession, there appears to be great concern (and debate) about what the magic number really is. Panic has set in as the price of oil lingers around $60 per barrel, and we repeatedly hear experts claim that the magic number is somewhere above this mark. Total SA, the French oil giant that recently went on a buying spree in the tar sands, claimed that it needed $80 per barrel to make a profit. Indeed, in recent months the oil lobby has used the low price of oil on the international market to create the image of a suffering industry that is no longer profitable. Thus, oil companies in the tar sands have been cutting costs, which means widespread layoffs and project postponements. But what we are not often told is that when companies lower their operating costs in this way it has the overall effect of pushing that threshold price – that magic number – downwards.

Relying on the magic number approach presents a host of problems. For one, the number is not static – it varies over time, by company and even by project. Also, it is usually the case that the longer a company has been around in the tar sands, the cheaper it is for them to produce a barrel of oil (which in turns brings down their respective magic number). One economist at the University of Alberta, Dr. Andrew J. Leach, told the New York Times in January that older oil sands companies like Syncrude and Suncor can produce a barrel of oil with as little as $30. Meanwhile, the oil companies that bought their leases at a higher price or that have less infrastructure available to them end up quoting an excessively high magic number.

This means that whenever you hear some expert suggest in the media that the oil companies in the tar sands are losing money because their operations are not profitable under a low market price for oil, you need to take this information with a grain of salt (or maybe even with a whole salt shaker). We’re talking about some of the most profitable corporations in the world here. Many tar sands companies are subsidiaries of global oil giants (like BP, Total SA, Royal Dutch Shell, Exxon Mobil – the list goes on), which in turn have larger coffers than most countries in the world.

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Further, we need to remember that the magic number is not a “break-even” point – even though it is often painted as such – but a preferred profitability mark over the entire length of the project. In other words, it’s not as if the synthetic oil industry has come to a complete halt with the price dipping down below $50. We might ask ourselves, if things are so bad why has no company packed up their things and left Fort McMurray (though many have certainly sent their former workers packing). Rather, many oil companies are playing the waiting game. The theory is that the price of oil will climb again one day, soaring above the magic number; and when it does, extreme profitability will return.

Equally, it is assumed that technological advances can bring the magic number down, but history would seem to refute this claim. In 1950, the Government of Alberta commissioned Sydney Martin Blair to write a report on the bituminous sands, to find out if developing this unconventional oil source was technologically feasible and profitable. Estimating that it would cost $3.10 to produce one barrel of the synthetic crude oil from bitumen, and that said barrel could fetch up to $3.50 on the market, the Blair Report responded in the affirmative. Efforts should be taken to develop the tar sands, he recommended, given an expected profit margin of 5.5 per cent (once all other post-production costs were paid off). Of course, many things have changed in the last 60 years, including the fact that the magic number has increased, contrary to the modernization theories of free marketers (and this is taking inflation into account).

But aside from inflated costs of production and sale prices, one thing that has remained consistent has been the overwhelming power of the market price for a barrel of oil in deciding the fate (and pace) of tar sands development. It may seem obvious that something as innocuous as the market price of oil would be a crucial element to factor-in when deciding whether to develop a natural resource – after all, if the market price is higher than the production cost, the resource would not be worth developing.

Or would it? It’s hard to say, and here’s the rub: It all depends on how we define “worth.” Is it worth the dead ducks, contaminated rivers, carbon emissions and defiled landscapes that are a result of heavy industrial development? Is it worth the elevated cancer rates in communities downstream? Is it worth it to have thousands of workers migrating in and out of Northern Alberta, and worth the job insecurity most of those workers face? Is it worth the volatile royalty and tax yields impacting government coffers? Is it worth the highs and lows of the boom and bust cycle that has characterized Alberta’s economic situation for the last number of decades?

Maybe it is worth it. Maybe not. Clearly I have my own opinion, but the fact is, neither the people of Alberta nor the Canadian public have made a decision on whether developing the tar sands is worth the above-mentioned ‘externalities.’ We don’t know because we haven’t had an open, public, parliamentary debate on the oil sands – Scandinavian style – either at the provincial or the national level. Sure, personal opinions and flying mud have come from all sides – from environmental organizations, from the unions, from indigenous communities, from the oil lobby, from elected officials, and even religious authorities – every person and every group has a unique take on the issue. But as of yet, there has been no parliamentary vote nor referendum on the matter. And so, as we have no consensus on the real worthiness or unworthiness of development in the oil sands, our society has fallen back on a far less democratic deciding factor: the magic number approach.

Such is the story of how something as volatile as the international market price of oil has come to be the deciding factor in developing the tar sands. Thus the current mentality in Alberta’s oil patch: “We better slow down operations and cut costs, because the international price of oil is down,” or last summer’s messianic glee: “Let’s pump as much of this stuff out there as possible – the price of oil is at record highs!” The magic number has become the main point of discussion. Forget the externalities; forget the social and environmental impacts; just follow the market price of oil and make sure it’s higher than the magic number!

It does not have to be this way. The magic number approach has been rejected by many oil-blessed (oil-cursed?) countries like ours. But to change approaches here in Alberta would be to change the rules of our political economy. This can be done in a radical fashion (as was done by the Chavez government in Venezuela) or in a more measured way (as currently practiced by the Norwegian government). However we get there, the goal of such a political and economic transformation would need to be a clearer title of public ownership over the resource. With citizen ownership would come decision-making power, and with decision-making power, we would be forced to have a public debate, in parliament, or maybe even a referendum. And then, just maybe, we won’t end up in an absurd situation where a government on the other side of the ocean is making decisions about a resource owned by the people of Alberta.

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