Future of oilsands is a game
Computer-based simulation called Producers Dilemma delivers 'realistic, dynamic' picture of how industry likely to unfold
Gordon Jaremko
The Edmonton Journal
Monday, December 24, 2007
EDMONTON / Not all of Alberta's industrial officer class was taken by surprise when the province increased oil and gas royalties.
An inner circle saw the writing on the wall early. Eyes were opened by a business counterpart to video games which accounting giant Deloitte & Touche LLP devised.
Brant Sangster, retired Petro-Canada oilsands chief and a director of Syncrude ownership partner Canadian Oil Sands Trust, led the Deloitte initiative. The team included industry executives and Priiva Consulting Corp., a game theory firm in the Ontario university town of Waterloo.
"It communicates a realistic, dynamic picture of how the industry is likely to unfold," Sangster said in describing the exercise in economic, social, political and environmental engineering, titled Producers Dilemma. It could also be called Oilsands Wars.
The program has not yet fully evolved into an automated energy executive simulator akin to the virtual cockpits for training pilots. Users get personal help from Deloitte team of experts.
But by last August the system predicted key elements of the provincial royalty review panel's report and the government response. The result is growing interest in participating in the next stage of developing the program, Sangster said. Research sessions are planned early in the new year.
The approach parts company with financial analysts and conventional managers who did not participate in the royalty review hearings, then howled in startled outrage when political leaders acted on panel recommendations.
"This is a dispassionate tool. It's objective," said Sangster, whose recent roles also included a seat on the province's latest "multi-stakeholder task force" review of oilsands development.
As a starting point, his team accepted there are multiple legitimate interests in economic development besides the stock markets -- and not least Premier Ed Stelmach's regime as trustee of the public share in the wealth under the province's constitutional ownership of four-fifths of Alberta's mineral resources.
Sangster's crew canvassed senior government personnel. Unofficially at least, provincial interest in helping with planned refinements of the economic development simulator appears to be on the rise, he said.
"We chatted with government people," he reported. "They can use this to help understand how industry might unfold if they pull this lever or that lever."
The overhaul of Alberta's energy revenue sharing machinery only made a start on dealing with issues highlighted by Sangster's team.
The group generated about 33 million "scenarios" or possible future events by compiling facets of the oilsands scene from northern aboriginal attitudes to construction costs and labour requirements then translating them into possible interactions described by game theory mathematics.
The combinations and permutations were distilled into two main scenarios rated as most likely to happen: the status quo or "maintaining pace," and a reform regime called "maintaining peace."
The status quo, of 53 projects competing to build more than $100 billion worth of plants within the next 10 years, is in trouble, Deloitte says in a report on results of the oilsands game.
The potential industrial construction boom is only warming up, with 13 projects valued at about $25 billion currently underway.
"Even at this initial stage there is a growing possibility that the current pace of development in the oilsands is approaching the point at which it could potentially become unsustainable," Deloitte warns.
Major unresolved issues include inflating costs, losing half the benefits of development by exporting raw bitumen for "upgrading" elsewhere, growing needs for infrastructure, public services, and managing effects on the land, air, water and wildlife.
"There are a number of significant questions," Deloitte reports. For instance: "Will growth collapse under the burden of the short-term 'gold-rush' mentality? Will projects face serious delays due to severe cost and regulatory pressures?"
Captains of Alberta industry know and confront big issues for society, such as whether to postpone projects until the economy cools down and cost increases moderate, Sangster indicated.
But executives also have to earn their keep by answering big business questions posed by limited global oil supplies, rising demand, high prices and the resulting huge Alberta opportunities, he added. "If you wait, is anything actually going to get better?
"Your investors don't reward delay. They want to see growth. That truly is a dilemma," Sangster said in describing issues faced by oil leaders.
In the oilsands game's alternative future of maintaining peace, government agencies, public interest groups and industry co-operate to evolve workable environment, labour and value-added bitumen upgrading policies.
"Industry players would delay development plans but possibly increase refining and upgrading activities in Alberta," Deloitte says.
The improvement requires clear, fair incentives and policies, the firm adds.
"While this would be a challenging task of fiscal engineering, the (game theory) simulation contends this is increasingly likely as the consequences of unmitigated competition within the industry become ever more difficult for stakeholders to bear," Deloitte says.
gjaremko@thejournal.canwest.com
© The Edmonton Journal 2007
