Global economic crunch ends oilsands boom
Gary Lamphier
The Edmonton Journal
Tuesday, November 18, 2008
EDMONTON -- Welcome to the oilsands moratorium.
No one will call it that, of course. Not officially, anyway. There's been no government edict, and no sweeping regulatory ruling requiring a slowdown in the pace of new projects around Fort McMurray.
Still, it's a moratorium just the same. Yesterday's oilsands boom is gone. It's not a bust, but the post-boom era has clearly arrived. Monday's announcement by Petro-Canada and its partners that they'll delay a final decision on whether to proceed with the proposed $24-billion Fort Hills oilsands megaproject pretty much seals the deal.
Whether the pause lasts 12 months, two years or five years, no one knows. Somewhere, Maude Barlow must be celebrating.
Although former Alberta premier Peter Lougheed has lobbied long and hard for such a slowdown -- his campaign was the subject of a recent cover story in one national business magazine -- he can't take credit for this, either.
With oil prices at $55 US -- $92 below July's peak price of $147 -- and financial markets in turmoil as a global recession hits, producers are heading to the exits en masse, putting their expansion plans on hold.
In just a few weeks, the markets have accomplished what Lougheed, the Pembina Institute, and others have demanded for years. Just as the bull market triggered a boom, the bear market has taken it all away.
Let me be clear. I believe this is a good thing, despite the short-term pain that will be inflicted on some as projects are deferred. So do many oil-and-gas industry execs.
As I've said repeatedly, the frenetic pace of expansion in the oilsands over the past five years caused a lot of harm.
Project costs skyrocketed, infrastructure pressures soared, labour shortages were rampant, worker health/safety issues mushroomed, housing costs went through the roof, and overpaid twentysomethings spent like drunken sailors.
Many thought the boom would never end. But booms always end. That's why they're called booms.
Employers outside the oilpatch had to pay big bucks to attract workers, even though they didn't generate the same fat profits as energy firms.
High school kids dropped out of school to earn big bucks in the 'patch. Real estate speculators flipped condos like hamburgers.
None of this was sustainable, or healthy. Melcor CEO Ralph Young has seen many real estate cycles come and go, and this one had all the earmarks of a classic bubble, he says.
"Looking back, 2006 and especially 2007 were years where very, very foolish decisions were being made. We saw it in the real estate market, and we probably got caught up in it as well," he says.
"Prices -- particularly in the residential markets, for raw land and housing, were just rising at too rapid a rate. There was rampant speculation. It became cocktail circuit talk, how much your house price was rising, and how people were (flipping) condos. That was a pretty clear sign that we'd hit an unsustainable level."
Environmental concerns also mounted. The Stelmach government's $2-billion plan to develop an integrated carbon capture and storage network -- while laudable -- came late in the game, and has been largely ignored outside Alberta.
That's just one reason why the noisy "green" lobby has been so successful in demonizing the oilsands, which generate less than 10 per cent of Canada's carbon emissions, and a fraction of one per cent of global emissions.
Petro-Canada's announcement doesn't come as a surprise, mind you. The Calgary-based integrated oil company and its partners at Fort Hills -- mining giant Teck Cominco, of Vancouver, and UTS Energy, of Calgary -- signalled their growing concerns well in advance.
A few weeks ago, the partners indicated a decision on the upgrader portion of the project might have to wait indefinitely, while they pondered whether to proceed with the mine alone, which accounts for more than half the total cost of the project.
The partners previously revealed that cost estimates for the project had ballooned by more than 50 per cent, from $14 billion to roughly $24 billion.
With oil prices down to $55, and most analysts saying Fort Hills requires $90 oil to be viable, the writing was on the wall. Petro-Canada now joins a growing list of key oilsands producers that have announced project delays in recent weeks, including Suncor, Canadian Natural Resources, and Royal Dutch Shell.
The good news? Project costs are already falling rapidly, as costs for steel and other materials sink, and demand for labour eases.
Like other players, Petro-Canada says it will go back to the drawing board and re-examine every aspect of its costs with a fine-tooth comb, before any thumbs-up or thumbs-down decision on Fort Hills is made.
Ironically, the oilsands giants only have themselves to blame for pushing project costs to sky-high levels. With so many producers trying to squeeze through the same narrow entry door at once, the result was entirely predictable.
The wild speculation that drove oil prices to $147 only made the situation worse.
Now, the pendulum has swung the other way. Sanity is slowly returning, and the seeds of the next up cycle in the oilsands are being sown.
