Canada's Gifts Pose Challenge

Canada stores up problems at its booming energy frontier

By Bernard Simon

Alberta’s blue-eyed sheikhs offered a plaintive prayer in the early 1990s as sliding oil prices plunged the energy-rich Canadian province into recession. “Dear God,” ran their plea, featured on a popular bumper sticker. “Let there be another oil boom and I promise not to piss it away this time.”

Their wish has been granted in spades. Huge investment in bitumen-like oilsands in Alberta has unleashed one of north America’s most frenzied resource booms since the Klondike gold rush of 1897.

But with prices sagging for oil and natural gas, which it also produces, there is anxiety that Alberta has again failed to keep its side of the bargain. “What we’ve been seeing is the current generation drawing the benefit and not leaving anything for the next generation,” says Casey Vander Ploeg, senior policy analyst at the Canada West Foundation, a think-tank based in Calgary, Alberta’s biggest city.

Alberta’s oil and gas riches have not only showered prosperity on its 3.2m residents but are also causing a tectonic shift in Canada’s economic and political landscape.

According to the Canadian Association of Petroleum Producers, oilsands extraction and processing projects valued at C$60bn ($53bn, £27bn, €40bn) are on the way over the next five years. The rush has produced an economic bonanza: Alberta’s growth rate, adjusted for inflation, is expected to reach 7 per cent this year. That is far above the 1.7 per cent projected for Ontario, the industrial heartland where manufacturers have been hit by bad times in the Detroit-based automotive industry and a strong Canadian dollar – itself buoyed by the oilsands boom.

Unemployment in Alberta has fallen to 3 per cent; jobs are available for just about everyone able and willing to work. So many from Newfoundland have been moving west in search of jobs that Air Canada operates a “Newfie Express” linking Fort McMurray, the centre of oilsands activity, to St John’s, almost 4,000km to the east.

Alberta’s clout in Ottawa is also growing. Stephen Harper, Canada’s prime minister, and many close advisers come from the western province. The population of Alberta and neighbouring British Columbia has overtaken that of Quebec for the first time. Together, the two will be entitled to more members of parliament than the French-speaking province.

The oilsands have boosted Canada’s profile in the US and abroad. McKinsey plans to hold its next global energy conference in Calgary. “It’s fantastic to have a piece of the economy that is so focused on improving productivity,” says Bruce Simpson, the company’s managing partner in Canada.

Yet, for all the benefits, a frisson of nervousness has recently emerged that short-term growth may be taking precedence over long-term prudence. Mr Vander Ploeg estimates that the province’s Progressive Conservative government has saved just 8.6 per cent of the C$120bn it has collected in non-renewable resource royalties over the past 30 years.

By contrast, Alaska has set aside about one-quarter of its resource revenues in “permanent” and “reserve” funds. Norway has tucked almost two-thirds of its North Sea riches into a rainy-day petroleum fund.

Alberta restarted contributions to its Heritage Savings Trust Fund two years ago, after suspending them in 1987 when oil prices dived. The Conservatives have also set up special-purpose funds to finance medical research and energy innovation among other projects. But the bulk of oil and gas revenues has been spent or returned in the form of tax cuts.

Alone among the country’s 10 provinces, Alberta has no retail sales tax. It paid off the last of its debt three years ago. Ralph Klein, the province’s avuncular premier, this year handed out a C$400 “prosperity bonus” to each resident. The government said this month it would spend another C$930m of its sizeable budget surplus on projects ranging from new schools and roads to an expansion of the Calgary Stampede showgrounds. Even the oil industry, generally supportive of Mr Klein, has pressed for a more coherent fiscal plan.

The oilsands investment has created such a dire labour shortage that one coffee-shop chain prints a “now hiring” message on its paper cups. But soaring accommodation costs have expanded the ranks of the working poor. The Mustard Seed, a church-based community group, serves 14,000 meals a month in the capital Edmonton. Tim Seefeldt, its chairman, says: “The impression people have that a boom makes all problems go away is not true.”

The impact of oil and gas development and urban sprawl on the environment has also come under scrutiny. Dave Poulton, executive director of the Canadian Parks and Wilderness Society in Calgary, cites a shrinking caribou population, an “unproven but perceived” fall in grizzly bear numbers and extensive damage by off-road vehicles to the slopes of the Rockies. Among the worries is the oilsands projects’ appetite for water: about four barrels of water are required to extract a single barrel of oil.

Oil and gas projects “could have been developed at a much more planned and moderate rate”, Mr Poulton adds. “Instead we’ve seen pressure to develop a lot of resources simultaneously. There’s been a political strategy of marginalising anyone who pointed out the costs of the strategy they were following.”

One surprising critic is Peter Lougheed, Alberta’s premier from 1971 to 1985 and now a respected elder statesman. He says his eyes were opened by a recent helicopter trip over the oilsands projects. “I felt it was just really bad,” he says. “It was the opposite of orderly.”
Although he belongs to Mr Klein’s party, Mr Lougheed puts much of the blame on the laisser-faire approach to oilsands development. “The thing that’s being completely missed,” he says, “is: what is the benefit to the citizens from the overheating of the economy?”

Such concerns are dismissed by Shirley McClellan, provincial finance minister. She notes that Albertans overwhelmingly supported paying down the debt and that it would be hard to find anyone favouring a return of the sales tax. Mr Klein has held office since 1993, winning four consecutive elections. “For all the people who say we’re spending too much, we have far more who say we’re not spending enough,” Ms McClellan adds.

Now market forces are starting to take the economy off the boil, as some companies delay or trim projects in response to labour shortages and fast-rising costs as well as recently softer crude prices. The debate about whether Alberta is squandering its energy riches is set to intensify, especially if that recent fall in oil prices continues. Ms McClellan acknowledges that revenues in the year to March are unlikely to match the 2004-05 record.

But a change in direction is in the offing. Under growing pressure from fellow Conservatives, Mr Klein has announced his retirement from politics. Members of the ruling party will decide on his successor next Saturday. All the leading candidates have suggested setting aside a far higher proportion of oil and gas revenues for future generations.

Alberta’s new leader might need to act fast. Mr Vander Ploeg warns: “If the price of oil drops by 50 per cent, it won’t be pretty. We’ll be back to the 1980s again.”

Bernard Simon is a journalist with The Financial Times; this article appeared on 26 November 2006