How to ensure Alberta’s oilsands keep paying off

Todd Hirsch and Rob Roach point to cost vigilance, new markets and green thinking.

In the opening sequence of The Beverly Hillbillies, Jed Clampett is out “shootin’ at some food” when “up through the ground come a bubblin’ crude.”

A little more effort and ingenuity was required, but Albertans also hit the crude oil jackpot.

We still produce a fair amount of “bubblin’ crude” in the form of conventional oil but it’s the bitumen from our oilsands deposits that now accounts for both the majority of our oil reserves and annual production.

On the one hand, this is fantastic news because our ability to extract crude from the oilsands means we have the third-largest oil reserves in the world. With the global demand for oil likely going up rather than down in the decades ahead, the potential economic benefits to Albertans of the oilsands are enormous.

On the other hand, the oilsands present us with a number of challenges.

First, squeezing oil from the oilsands is not as straightforward as, for example, drilling a well in Saudi Arabia, where Jed Clampett’s method of shooting at the ground and watching oil squirt out is not too far off. It’s expensive oil to produce. As a result, the viability of oilsands operations are more sensitive to the price of oil than many others around the world.

There is still work to be done, but the application of new technology and techniques on the extraction side are paying off. This is bringing costs down and will help our producers stay profitable even when prices are somewhat soft.

Second, our options are limited when it comes to the customers for our oil. Without major new pipelines to the West Coast, we’re unable to take advantage of Asia’s growing demand for oil. Federal approval of the Trans Mountain expansion project that will transport more oil from Alberta to the British Columbia coast is a step in the right direction, but its completion is still not a sure thing.

At the same time, the United States has been enjoying a shale oil boom that has the potential to crowd out imports from Alberta. Although predictions about the U.S. becoming selfsufficient in oil may have been premature, our American friends certainly have a lot more of it than they did just a few years ago.

Fortunately, some U.S. refineries actually require Alberta’s heavy oil and bitumen because they invested in facilities designed to refine heavy crude. The problem is that if enough U.S. crude keeps flowing, and the economics of the refineries change, our only customer might eventually need a lot less of what we have to sell.

Third, the oilsands have been singled out by many as “dirty” oil that, some argue, should be left in the ground. Hence, even though the U.S. built lots of new pipelines and massively expanded the use of hydraulic fracturing to extract oil under his watch, President Barack Obama cited Alberta’s “extraordinarily dirty oil” as the reason for not approving the Keystone XL pipeline that would have brought more Alberta oil into the U.S. market.

Here at home, environmental opposition and other roadblocks to pipelines highlight the ongoing resistance to the expansion of oilsands activity.

We’ve made improvements on the environmental side, and Alberta has some of the world’s strictest environmental standards. Still, we have to do even better. We’ve made solid strides in terms of improving cost structures and efficiency, but we have to do even more. We’ve built strong relationships with our American cousins, but we have to work even harder to ensure we are the go-to supplier south of the border. And we have to crack the nut and find a way to tap into the growing Asian market.

Having plenty of oil used to set us apart and it still does, but now this has to be combined with even greater amounts of creative thinking, expert diplomacy and environmental acumen. Anything less and we will not be able to keep enjoying the enormous benefits our black gold brings.

(We have to work harder) to ensure we are the go-to supplier south of the border.

Todd Hirsch is chief economist for ATB Financial. Rob Roach is director of Insight for ATB Financial.