The Oilsands’ Quiet Revival

Overshadowed by the malaise in Alberta’s natural gas industry in recent months has been a quiet revival in the oilsands.

It started with Imperial Oil green-lighting its $8-billion Kearl mine in May and continued through Suncor Energy’s commitment to spend $5.5 billion in 2010 (most of it in the oilsands, including restarting the Firebag in situ project) and the newly created Cenovus Energy’s allocation of $2.3 billion for Foster Creek and Christina Lake. (Cenovus is the former oil-producing arm of EnCana Corp.) Spinning off its Saskatchewan light oil division into PetroBakken Energy, meanwhile, rising star Petrobank Energy and Resources plans to move beyond its pilot Whitesands project and develop the much larger May River deposit near Conklin shortly. Total E&P Canada is even restarting its upgrader project in Fort Saskatchewan. And of course Shell has been expanding its Scotford complex all along.

Just as the price gap between bitumen and light oil has narrowed, Enbridge’s new tank farm in Hardisty is going to take 7.5 million barrels out of the system by the time it fills to capacity, and TransCanada’s Keystone pipeline, another 9.5 million. Together, that’s more than the United States market consumes in a day, or about 12 days’ worth of production from the oilsands!

Far from a ghost town, Fort McMurray continues to bustle, if not quite at the pace of two years ago. At last count there were still 22,000 workers in the various work camps surrounding the city. At a recent event an employee of construction firm North American Energy Partners told me their work was ramping up again.

If the situation persists, we could see a geographical divide in the province’s energy economy, between the depressed, gas-dependent south and the lively, oilsands-fuelled north. Of course, a brutal winter or a policy shift at the Copenhagen climate talks could quickly change that.

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Speaking of which, federal Environment Minister Jim Prentice was in Edmonton Nov. 13 to talk about the upcoming Copenhagen meeting, which he called “the mother of all negotiations.” In his speech he emphasized harmonization between Canadian and United States climate initiatives, the centerpiece of each being a cap-and-trade system. “If we do more than the United States we will suffer economic pain without any environmental gain,” he said. If we do less, we risk trade sanctions.

When I asked him whether, under Canada’s cap-and-trade scheme, the same rules will apply to all emitters on a tonne-for-tonne basis, he sounded like there will be some kind of exemption for the oilsands industry. He noted how the U.S. was moving towards special rules for trade-exposed industrial sectors that might be put at a competitive disadvantage by carbon restrictions.

“Targets will need to be set on a sector-by-sector basis,” Prentice ventured to say.

Still, if I was a beleaguered eastern manufacturer having to scale back my emissions more than was otherwise necessary in order that Alberta could continue to increase its emissions, I wouldn’t be happy. I also wouldn’t be surprised if it sparks a constitutional crisis or an election.

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Bill 50 watch: the CEO of newly created Capital Power Corp., Brian Vaasjo, made his public-speaking debut at an Edmonton Chamber of Commerce luncheon on Nov. 5 to come out strongly in favour of Bill 50, the proposed law that would allow electrical transmission projects to go ahead without public hearings. When it comes down to it, this is a debate over whether Alberta’s power will come from coal (which is concentrated in the north and must be transmitted south) or other sources (which might not require additional transmission). One Capital Power employee at my table expressed the view that anybody (ahem, Enmax) who thinks they can build natural gas-fired plants instead of coal is dreaming. Gas may be cheap now, or even for another 10 years, but you’re at the mercy of market pricing thereafter, and you’re building that plant for 30 to 50 years. At a coal-fired plant like Capital’s Genessee or TransAlta’s Keephills or Atco’s Sheerness, by contrast, the fuel cost is relatively stable, basically whatever it costs you to get it out of the nearby ground, plus a nominal royalty to the government.

The Chamber itself debated the issue and came down on the side of Bill 50 too. Yet the biggest split at the Tory convention in Red Deer on Nov. 7 was over the legislation – not, as expected, over Ed Stelmach’s leadership. This ain’t over.

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Bubble watch: never mind that our investment columnist, Fabrice Taylor, comes away feeling good about Calgary’s Multiplied Media Corp. in the upcoming December issue, or that we’re working on a story about a venture capital fund in Calgary focused on developers of iPhone applications. I’m wary of this rush into phone games and other applications.

Yes, Apple’s iPhone is fast coming to dominate the smart phone market (sorry, BlackBerry) and new networks enable more and more people to buy and use it. But, a couple of caveats. One of the reasons so many people are suddenly developing smart phone apps is the low barriers to entry. The iPhoenix fund plans to invest an average of $7,000 to develop each app and $7,000 to market it. Compare that to the millions spent to develop console games. In other words, a great many more apps will be developed and the same small number will be commercially successful.

Moreover, how big is the market, really? It’s estimated to be US$2.4 billion this year, but that’s worldwide. One Alberta energy company, Suncor, will tally around $50 billion this year on its top line, still only a small sliver of the worldwide energy business. Energy represents around 6% of average household expenditures; housing, close to 30% (the beneficiaries being banks, real estate firms, builders, makers of materials like lumber and concrete). The average family spends, what, 2% on telecommunications, and smart phone applications would be a small fraction of that.

Finally, the iPhone advantage won’t last. One of the reasons Warren Buffett says he won’t invest in technology companies is that they can’t maintain their market position for long (the exception that proves the rule being Microsoft).

I won’t be investing in any iPhone app developers any time soon.

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