The True West, Strong and Free

Just before the Tory meeting, David McColl, the president of the Young Albertans’ PC Association, brashly asserted that Klein had “absolutely no vision” for Alberta. The premier’s sin was rooted not in his past record or in his sometimes erratic behaviour, but in his lacking the urgency and wherewithal to transform Alberta’s “advantage” into something more meaningful than riches and good fortune. According to Tory insider Ken Hughes, the rebuke Klein experienced on March 31 had far less to do with the naked ambition of leadership hopefuls wanting an early convention than with a profound sense that if Alberta stood pat its future was in peril.

hile most Canadians are aware of Alberta’s resource wealth, few appreciate the complications created by a large and regular annual surplus. Alberta is blessed with two-thirds of the country’s reserves of conventional oil, over 80 percent of its natural gas, and the bulk of its coal supply. Historically, this resource richness has been a mixed blessing. As prices fluctuated, Alberta experienced untenable booms and busts. Today, with crude-oil prices set high and likely to remain so, the industry’s success is generating repercussions that are proving difficult for the rest of the economy to absorb. Rapid growth in the energy sector has led to rising labour costs across the province, soaring real-estate prices, and other inflationary pressures. These fiscal realities make it difficult for small- and medium-sized businesses (outside of the resource sector) to compete. With employees constantly seeking better pay and better conditions, staffs and work crews are anything but stable. Welders snapped up by high-paying oil companies are not available for work elsewhere, and a good number of companies cannot meet their orders or production quotas. A surprising number are losing business to outside competitors, and some are closing their doors.

Other problems—such as “virtual residents” filing tax returns using Alberta addresses—are evident, but the big issues remain the labour shortages and runaway costs that are driving up prices and might result in hyperinflation. While the mood was joyous at the Calgary Stampede in July, the weather did not co-operate, and a certain pall was cast on the festivities when energy stocks took a hit after news that cost overruns could stall oil-sands expansion projects.

Such worries aside, a growing economy is a demanding one, and simply saving for the future is not an option. Alberta must do something with its surplus cash, and, according to the Canada West Foundation, a Calgary-based think tank, that something will generate “the most important debate that Albertans will face for a generation. It is also one that will ripple across the West and across the country.”

Beyond the headlines and a wave of high-profile energy-sector promotions—including displays of the gigantic oil-sands trucks for US senators and investors in Washington—Alberta has actually done a remarkable job insulating itself from a dependency on natural resources. The energy sector’s contribution to Alberta’s gdp dropped from 36 percent in 1985 to 23 percent in 2002, and despite growing pains the province’s triple “A” credit rating (the only such rating granted to a Can­adian province by the major investors’ services) is based largely on its diversified economy. The question, says Roger Gibbins, president and ceo of the Canada West Foundation, is whether Alberta’s current fiscal position is sustainable. “My suspicion is that it is,” he told me last spring, his optimism resting on demand for Alberta crude from the United States and the emerging markets of China and India.

The US is “addicted to oil,” as President Bush put it—bad news for climate change, perhaps, but great news for Alberta—and Gibbins believes that the province is “relatively immune to any downturn in the US economy and to the border-security issues that pose risks to [Ontario’s] manufacturing base.” Indeed, with the supply chain from the Middle East, Venezuela, and Russia uncertain, cibc predicts that Alberta’s reserves “will be the most important source of new oil in the world by 2010.”

Echoing the point, in mid-July at the G8 summit, with the Middle East erupting in war and Russia sounding the wrong notes about foreign direct investment, Prime Minister Harper boldly declared Canada an emergent “global energy superpower” with secure supplies and a commitment to open markets. He was clearly thinking of Alberta.

lberta’s rise to economic prominence coincided with the implementation of the North American Free Trade Agreement and, more specifically, to stipulations in nafta that assure the US a steady supply of oil. Alberta’s pipelines tilt decidedly north-south, and almost two-thirds of its oil and gas exports flow south of the border—compared to 14 percent of its oil and 24 percent of its gas shipped to sister provinces—helping to make Canada the largest supplier of energy to the United States. Some Canadians may bristle at this sweetheart arrangement, but given Harper’s views about provincial rights and positive relations with the US, the situation is unlikely to change.

The oil sands cover 140,800 square kilometres, an area the size of New York State, and contain roughly one trillion barrels of bitumen, from which 176 billion barrels of oil is considered recoverable. Buried in muck and muskeg, the northern-Alberta reserves weren’t economically viable for decades as low energy prices discouraged investment in research and development. When prices reached $30 per barrel, the tide shifted, and extraction looked considerably more promising. The chief difficulty was the enormous capital costs required. To address this, in a move that now seems either clairvoyant or foolhardy—polls indicate that a plurality of Albertans believe they are receiving “less than they deserve” from the oil sands, and many want the deal reopened—the Alberta government stepped in with a very generous royalty arrangement. Rates were set at a mere 1 percent of production and would increase only when the participating companies recouped their development costs.

That moment is fast approaching. With oil prices hitting $78 (US) a barrel and likely to remain high, and production scheduled to double to over four million barrels a day by 2015, a financial bonanza is on the horizon. Whereas in 2005 Alberta generated $14.3 billion in non-renewable resource revenue and the government received $950 million in oil-sands royalties, in ten years total revenues will likely be off the charts. Oil-sands royalty cheques are projected to top $5 billion annually.