Chastko, Paul. Developing Alberta’s Oil Sands: From Karl Clark to Kyoto. Calgary: University of Calgary Press, 2004.
Author response for H-Energy, Paul Chastko, Department of History, University of Calgary.
I would like to thank the editors of H-Net for providing this forum for discussion. I should also like to take the opportunity to thank the three reviewers – for taking the time to read and comment thoughtfully on the book. Before turning to their comments, I’d like to briefly outline what I think the book offers to readers.
Developing Alberta’s Oil Sands: From Karl Clark to Kyotofocuses on the development of Alberta’s oil sands industry through the twentieth century and frames its discussion of the oil sand industry within the overall context of the North American and world petroleum industry. It examines how an industry, whose only commercially viable product in the 1920s was the production of a road-top asphalt, transformed itself into a multi-billion dollar industry capable of producing one million barrels of oil today. Because of the capital-intensive nature of oil sands development, it was the private sector – not government – that assumed a leading role. To be sure, government, at the federal and provincial levels, established taxation, royalty, and regulatory frameworks, but it was the private sector, specifically the multinational oil companies with their access to investment capital, research and development, and, above all else, marketing and distribution networks, that ultimately transformed this small-scale research project into a commercial industry.
One of the recurring themes I’ve come across in my research is how the industry often perceives itself as being fundamentally misunderstood by government officials and politicians as well as the public at large on a variety of issues, ranging from the importance of private capital to finance projects to the time required for a project to come to fruition. The challenge for business is to overcome the gap between the conditions the private sector needed to make oil sands development a viable investment and government’s understanding of those needs based on their experience with the conventional industry. The problem is that it is too easy to succumb to the temptation of treating the oil industry as a homogenous entity because it isn’t. The trade-offs implicit in the development of the oil sands industry were not limited to those generally associated with public policy – the challenge of pursuing energy development at the expense of the environment, for example – but also included trade-offs within the overall oil industry for access to investment capital as well as market share.
Given the capital-intensive nature of oil sands development, the long-lead times required for project payout, and the Alberta government’s long-standing pursuit of oil sands development, Alberta’s independent producers feared that the growth of this industry would be harmful to their interests in a myriad of ways. It is important to note that nothing distinguishes oil sand oil from conventional oil – except its higher costs. The oil sands are international price takers, not price setters for a variety of reasons: the industry depends on markets of scale for its profit margin, oil sands development more closely resembles mining operations than it does conventional oil drilling, and oil sands facilities cannot tailor their production to suit market demand. Indeed, it is important to remember that, regardless of fluctuations in demand, an oil sand plant will produce the same number of barrels of oil. This was a particular problem pointed out by the Independent Oil Association of Canada (IPAC) in the 1960s when it objected strenuously to allocating any portion of the Province’s prorationed production to the oil sands. Charles S. Lee, IPAC’s president in the mid-1960s, noted that if demand for Alberta crude dropped, the burden of making subsequent cuts in production would probably fall on the conventional side of the industry because oil sands plants physically couldn’t ramp down production. Furthermore, Lee and the other members of IPAC believed that it would be the independents who bore the brunt of any such reductions; the majors, he reasoned, would have investments in the oil sands and would be able to appeal to the province to keep their production quota high in order to offset losses from oil sands investments. Thus, one of the more delicate balancing acts that confronted the Manning government was to satisfy the demands of both the majors and independents while trying to ensure the health of the conventional industry against the future of the unconventional industry.
The oil sands compete for market share within the broader confines of an international system where, very often, the same Multinational Oil Companies (MNOCs) with oil sands investments have a stake as well. Thus, not only were the oil sands in competition with conventional wells in Alberta, they also competed against oil from West Texas, Oklahoma, Saudi Arabia, Venezuela and Iran. For this reason, I think that a proper understanding of the oil sands must be contextualized within the parameters of a competitive international oil industry, and I believe the internecine struggles within the oil industry over oil sands development are a crucial element.
There are a few specific issues raised in one of the reviews that I would like to briefly clarify before moving to a more general discussion of the book’s conclusions. The first concerns a point raised by Dr. Nemeth regarding the “paths not taken” in terms of the book’s research. While it certainly is true that more governmental archives could have been consulted – I think all three members of our roundtable could agree that there remains a great deal of scholarly work to be done on Canadian energy issues in general and the history of the Alberta oil patch in particular – I would also argue that historians have to be careful not to ignore the very substantial role played by the private sector in natural resource development. While government provides the framework, in this instance, the private sector provided the capital, expertise, and access to markets that drove the overall industry’s development. Given the interplay between majors and independents, the trade-offs between the conventional and unconventional sectors, and the complexities of a competitive international market, I believe this aspect of the story is sometimes overlooked and needs to be incorporated into our understanding of energy policy and policymaking.
I would also like to address two points raised by Professor McDougall’s review. The first regarding the proposal put forward by Deputy Minister for Energy and Natural Resources, Jack Austin, as part of bilateral negotiations in 1970-1971 between Canada and the United States regarding a continental energy policy. These discussions were detailed on pages 82-83 of J.L. Granatstein and Robert Bothwell’s Pirouette: Pierre Trudeau and Canadian Foreign Policy (1990). Given the stature and reputation of these two eminent scholars, I had then – and still have today – no reason to doubt the accuracy of their research on this matter.
The second set of issues relates more generally to the interventionist slant adopted by Pierre Trudeau in the mid-1970s. McDougall writes that the book’s discussion of the nationalist bent of the Trudeau years, specifically the policies adopted in 1972-1974, “completely overlooks the domestic political pressures bearing down on Trudeau at the time” also merits some careful consideration. McDougall’s review claims that the statist impulses of Trudeau’s government stemmed not from a sense of personal conviction but rather because his “government was in a minority position in the House of Commons and owed its political survival to the New Democratic Party (NDP) … Most of Trudeau’s dirigisme of the 1972-1974 period stems from this threat and carried some momentum through the rest of the decade.” Pierre Trudeau, however, dismissed such arguments in his 1993 Memoirs, choosing instead to depict this political marriage as one of passion rather than convenience. Instead of pandering to the NDP simply to remain in power, Trudeau argued that the partnership liberated him from the stifling confines of the right-wing of the Liberal Party and enabled him to pursue an agenda to which he was personally committed. “Being in a minority government allowed us to engage in a new form of politics that attracted me greatly,” wrote Mr. Trudeau.
From that point of view, the minority government allowed me to put forward more advanced “left-wing” projects. I knew that the NDP, under David Lewis, would back me up – in fact, the NDP supported me when some of the more conservative members of my own party did not. I was thus able to institute policies I had been dreaming about for a long time, and the social-democratic faction of the Opposition was forced to support them, or else deny their own social program. What was more, the constant threat of a negative vote in the House reminded me of the advice of an old friend in Paris, the great medievalist Paul Vignaux: “If you have to fall,” he said, “be sure to fall to the left.” I was much more inclined to heed his advice than was the rest of my party, which, at the provincial level, had for years tended to fall to the right. (Trudeau, Memoirs, pp. 164-165)
Indeed, it is worth remembering that Trudeau could have sought support from Robert Stanfield’s Conservatives but decided instead to turn to Lewis’ NDP. If his government were to fall in parliament, Trudeau was determined that he would do so in defense of policies and plans to which he was personally committed, and not as the NDP’s toady. Ultimately, historians have to consider the Prime Minister’s own conclusions about this period. The minority government, he wrote,
had been an exciting time for me, because we were fighting for our lives every day of the year. We were looking for a result not somewhere in the distant future, but here and now. Every day over our heads hung the Damoclean question: will we still be the government tomorrow morning? That sort of existence “concentrates the mind wonderfully” and excites the imagination. (Trudeau, Memoirs, p. 175)
Of course, Trudeau was not in a minority government status after 1974, nor was he in such a position when he introduced the National Energy Program (NEP) in October 1980. What is, perhaps, ironic is that, along with the so-called “Canada Lands,” the oil sands were supposed to be one of the privileged sources of petroleum at the center of the NEP – a program designed to help reduce “foreign” (read: American) ownership of the Canadian oil industry, establish fair prices for consumers and to help the country achieve energy self-sufficiency by the 1990s. But there were a number of problems with the NEP’s assumptions and implementation that could best be summarized as being related to a lack of understanding about the dynamics of oil sands development and, at best, an imperfect sense of where they fit into a global oil market. These errors would cripple not only oil sands development, but also the Canadian oil industry as a whole as the entire thrust of the program was designed to separate Canada’s oil industry from the world market. In sum, within the parameters of a closed internal petroleum market, the NEP tried to treat the oil sands as an independent entity. This ignored the point that, for the bulk of its history, the oil sands were a marginal energy source existing on the fringes of the world oil industry. Furthermore, it was a difficult, if not impossible task, to separate the conventional side of the oil industry from the synthetic side. As overall earnings in the Canadian conventional industry contracted – they would fall 34 percent in 1981 over the previous year – and as American investment capital found other venues, the NEP prompted a counter-cyclical swing, drying up spending for exploration and oil sands operations. From the point of view of the MNOCs, who were still expected to provide the bulk of investment capital and technological expertise to develop the sands, there was little incentive to pursue investments in unconventional sources. As world oil prices dropped, making the profitability of oil sands dubious, it no longer made fiscal sense for the private sector to invest billions to produce a marginal source of oil in a hostile investment climate when production from conventional wells outside Canada were imminently more profitable.
For a historian of the petroleum industry generally and the oil sands in particular, studying the NEP is like watching a lumberjack and his chainsaw perform an operation to separate conjoined twins. Lacking both a working knowledge of anatomy and a surgeon’s delicate touch, the patients – the conventional and unconventional oil industries – didn’t even have a fighting chance and were left for dead on the table. Economists estimate that the NEP was directly responsible for a 22 percent drop in drilling activity, a 25 percent decrease in exploration budgets, the loss of 15,000 jobs and cost Alberta’s economy roughly $97 billion. Consider, too, that as world oil prices cooled and Canadian consumption dropped by 6 percent, Canadian petroleum prices actually doubled. Instead of achieving Canadian self-sufficiency, Trudeau’s policies resulted in increased reliance on imported fuel.
Even though Prime Minister Trudeau might have begun to “back away” from “key components” of the NEP as early as 1982 as McDougall asserts, this remains a far cry from a wholesale dismantling of a ruinous economic policy or addressing the royalty and taxation provisions and restrictions on crude exports that oil sands producers objected so mightily to. The September 1981 pricing agreement between the Federal government and the Province of Alberta set the New Oil Reference Price – which determined the cost of oil sands oil – at $38/bbl and tied subsequent increases to the Consumer Price Index. It is a testament to how badly misunderstood the oil sands industry remained – despite its “privileged” status under the NEP – and how poorly the pricing, taxation, and royalty provisions of the NEP were conceived and executed that there was very little that could be done to make sure oil sands development proceeded. This was amply illustrated with the collapse of the Alsands Project Group in 1982. As it became clear that the Alsands project was on the verge of failing, both the federal and provincial government staged a last-ditch attempt to salvage the situation, cobbling together a “Final Offer” to try and keep the project alive. The details of the Final Offer are worth considering in light of the discussion of the NEP, and included a loan guarantee equal to 20 percent of project costs, a reduction of the federal PGRT to 0 percent until project payout, the postponement of all federal and provincial taxes and royalties until project payout, and the offer of two levels of government to acquire a 50 percent stake in the project. Nevertheless, the Final Offer still wasn’t enough to convince the project’s private sector partners that the Alsands project was viable. Costs for producing a barrel of crude from the oil sands were between $37 and $48/bbl the price structure imposed by the federal government made it likely that the Alsands Project Group would have lost $2 on every barrel they produced! Despite being a cornerstone of the NEP, no additional oil sands plants were built until the 1990s.
As it turns out, this last development may have been a blessing in disguise. It is clear that the construction of Alsands – or even the OSLO project of the late 1980s – would not have employed any significant changes in excavation and separation technology employed by the first two commercial oil sands facilities. As Professor Emery notes, the environmental “footprint” of the mining-based oil sands facilities is quite large and for those who have never seen Fort McMurray, the scale of mining operations is difficult to convey with words. Nonetheless, these were the first plants that Great Canadian Oil Sands – now Suncor – and Syncrude developed in the 1960s and 1970s; in situ methods – Steam Assisted Gravity Drainage (SAGD) most prominently among them – have a smaller footprint but consume a great deal of energy and water to produce a barrel of oil.
Ultimately, I think the book provides the context for future discussions of oil sands-related issues, like environmental protection, taxation and royalty provisions, and, what appears in retrospect to be a perennial problem with oil sands development, the socio-economic repercussions of a “hot” natural resource sector on a local/provincial economy. To illustrate the point, and an important issue mentioned by all three reviewers, is that of the environment.
Concern for the environment is a relatively recent phenomenon in the development of the oil sands and all three reviewers raised the question of the environmental costs associated with oil sands projects. As Chapter Six notes, the province didn’t even possess the most basic data about the environment of the Athabasca area until 1973 and it was only later that year that Alberta Environment and Environment Canada belatedly recognized the need to produce a comprehensive environmental research program – after, of course, two oil spills and the full-time operation of the GCOS plant since 1967. Even as both levels of government were putting in place environmental safeguards, it was clear that the environment would lose out. The inherent dilemma of oil sands production – that profit margins are dependent on economies of scale – means that ramping production down isn’t a viable option.
Is it possible that the same conclusion would be reached today? My own sense is that, after some hand-wringing, it probably would. Barring some catastrophic change, dependence on petroleum is not likely to be slaked anytime soon. For those that point to technological advances as the silver bullet to our problems, I think the book serves as a cautionary tale. Since the 1920s, scientists, industry and government officials have attempted to solve the riddle of the oil sands and questions still remain about the project’s overall viability and sustainability in light of contemporary environmental concerns.