Parkland Institute
The Tarsands

Alberta’s number game

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

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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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tagged with: economics, tarsands
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