The Canadian Oil Sands: Where Economy Meets the Environment – by Paul Stothart

Paul Stothart - Mining Association of CanadaPaul Stothart is vice president, economic affairs of the Mining Association of Canada. He is responsible for advancing the industry’s interests regarding federal tax, trade, investment, transport and energy issues. This article was originally published in May, 2007.

Arguably the single most significant development in the Canadian economy over the past decade has been the emergence of the western oil sands as a creator of jobs, exports, tax revenues, and wealth.

Technological advances since the 1970s have made the recovery and processing of oil sands financially feasible. Increases in world oil prices, from the $20 to $30 level of decades past to the $60 to $70 range today, have further enhanced the economic viability of these projects. Political rhetoric about Canada as “an energy superpower” and talk of “reserves larger than Saudi Arabia’s” speak to the emergence of the oil sands.

It is difficult to over-state the magnitude of this development. On a macro scale, it has served to increase wealth and economic activity in western Canada. On a micro scale, the city of Fort McMurray has grown from a population of some 20,000 two decades ago to 75,000 today. The 200,000 jobs that have been created in the oil sands over the past decade is of similar magnitude to the job losses seen within the central Canadian manufacturing sector— in effect creating a job cushion for the entire country.

From a fiscal perspective, the oil and gas industry as a whole paid over $26 billion to Canadian governments in 2006—in the form of royalties, lease bids, income taxes, and other payments. These flows are a principal reason why the Alberta government can afford to send rebate cheques to each resident and why the Canadian government can increase program spending by eight per cent (as in Budget 2007) without going into deficit. While it is very difficult to distinguish the fiscal flows from oil sands versus conventional oil and gas, it is evident that the oil sands will be contributing an increasing proportion of these total payments over the coming years as more projects reach the postpayout full royalty stage and as the sedimentary basin conventional reserves decline.

In terms of regional economic impact, most of the activity resulting from oil sands investment will flow to Alberta and Saskatchewan. However, as estimated by the Canadian Energy Research Institute, some $102 billion in GDP and 1.1 million person-years of activity will occur in Ontario due to oil sands investment during 2000–2020. This is an average of 50,000 jobs per year in Ontario—in equipment and other supply industries. Lesser benefits will accrue to other regions.

With respect to benefits to aboriginal Canadians, oil sands companies have awarded an estimated $1.5 billion worth of contracts to local aboriginal companies over the past decade. These contracts are increasing each year—in 2005 alone, $315 million in contracts were awarded to local aboriginal companies.

These economic benefits are likely to continue for many years to come, as production from Alberta’s oil sands projects is projected to increase from one million barrels per day in 2006 to 4.7 million in 2025. Most of this output will continue to be directed to export markets in the United States and, perhaps some day, southeast Asia.

As is the case with any economic activity, however, the benefits of the oil sands projects are not without environmental consequence. This general rule is doubly true in the energy sphere, where coal combustion contributes to air pollution, with attendant health consequences, and where nuclear energy presents risks of radioactive waste stored in the midst of populated areas. Even energy technologies presently favoured by governments and environmental lobbyists, such as wind and ethanol, raise serious questions about reliability, space, visual pollution, subsidy costs, and food price shocks. In the case of North American ethanol today, it is unclear whether the fuel is even greenhouse gas positive with respect to gasoline in a life cycle analysis.

In the case of the oil sands, the area of greenhouse gas emissions presently captures the most attention with environmental groups, the media, and politicians. Given the growth pattern and assuming existing technology, it is estimated that GHG emissions from oil sands projects will increase by fivefold during the 2003 to 2020 timeframe. In this scenario, it is evident that a significant investment of resources will be required by the oil sands companies, over a long period of time, if GHG emissions are going to be brought close to stabilization.

During this past period of rapid growth, oil sands companies have been investing in innovative ways to reduce energy use. For example, between 1990 and 2004, Syncrude reduced per barrel GHG emissions by 14 per cent, reflecting investments in new technology and new equipment. Suncor has also posted strong improvements in energy efficiency. As well, the oil sands operations have significantly reduced their total releases of substances such as mercury, sulphur dioxide, lead, arsenic, and cadmium during this period.

While annual improvements in efficiency will presumably continue, these will not bring oil sands operations close to a position of stabilization, let alone reduction of overall GHG emissions.Order-of-magnitude improvements will only be seen if major investments can be made in carbon capture and storage technology and if alternate power and thermal sources such as nuclear energy are brought to the region.

The federal government, for its part, must develop a reasonable and achievable GHG target and timeline for oil sands operations, as part of a broader plan that provides flexibility to the industry and that engages all Canadians in a solution. As well, the government must provide a competitive tax regime and support the technological developments and implementations needed to further improve the GHG performance of our growing industries.

(This article was originally published in June/July 2007)