Oil in waters troubling

In the go-go economy of northern Alberta, we hear of infrastructure problems and we hear of social problems. We don't hear about the environmental problems often enough.

Today's New York Times reports that high levels of carcinogens and toxic substances have been found in fish, water and sediment downstream from oil sands projects. The article goes on to say that:

Like Dr. Timoney, scientists who have reviewed his report say further studies are necessary to determine the cause and extent of the problem. But they also expressed concern about what his research had already found. “This could actually be worse, in some respects, than the Exxon Valdez,” said Jeffrey W. Short, a research scientist at the Alaska Fisheries Science Center who has studied the tanker accident that spilled 11 million gallons of oil off the Alaska coast in 1989.

Most disturbing, said Dr. Short, was the finding that from 2001 to 2005, concentrations in sediments of a group of chemicals called polycyclic aromatic hydrocarbons rose.

“These are substantial increases over and above the natural levels,” said Dr. Short, adding that the hydrocarbons “are notorious carcinogens,” found in tar and tarlike materials. In some cases, they were more than four times recommended limits in the United States. (Canada has no guidelines.)

You'll read more about this issue.

Prairie winds of change

In yesterday's Globe and Mail were two interesting articles pointing to political upheaval in two otherwise politically stable provinces: Alberta and Saskatchewan.

In a CTV interview, Preston Manning predicts rocky times ahead for Premier Stelmach. His compromise on royalties may have been a perfect one thus pleasing nobody. Manning expresses doubts that the decades long Progressive Conservative regime will be reelected saying that:

I think it's becoming increasingly unlikely unless, say, the government demonstrates a capacity that it hasn't shown thus far. I don't see votes going to the Liberals or the NDP. I think their biggest danger is another 150,000 people staying home who voted Conservative the last time and then that puts dozens and dozens of seats up for grabs.

Meanwhile, in the adjacent province of Saskatchewan, another longtime government, this time NDP, is also in jeopardy.

In this column, Janice MacKinnon, a former NDP finance minister argues that the Calvert government is out of touch, tapped out of ideas and that it will cost them. She argues:

The lesson to be learned is that when designing future social policies, political parties cannot merely return to the traditional idea of universal social programs. Instead, they must be more imaginative. They should build upon targeted programs, such as the National Child Benefit, which links benefits to income and is affordable in the long-term.

Another point made was the dearth of discussion in the election over Equalization. She notes that:

Equally revealing in the campaign was the role played by equalization - or rather non-role. Saskatchewan Premier Lorne Calvert had been the most outspoken ally of Newfoundland Premier Danny Williams in attacking the federal Conservatives for breaking their promise on equalization. For several months before the campaign, the NDP government focused on how the province had been shortchanged in its equalization entitlements. Yet during the election, equalization was hardly mentioned. Why? In part, the call for $800-million more in equalization funding at a time when the province is booming is at the very least confusing. Just as important, many voters do not understand or care about equalization. It is not a program that affects them directly.

Her final observation has as much to do with this province as it does with Saskatchewan:

The final campaign development of note has been the very transformation of Saskatchewan itself. In the past the province was called "next year country," reflecting the eternal optimism of a province that has seen its share of tough times. But with high commodity prices, an extensive research infrastructure centring on national facilities like the Canadian Light Source synchrotron, and an influx of people from Alberta, there is a feeling the province is on the cusp of a new era. Rather than fighting with federal governments over entitlements rooted in the past, people in Saskatchewan want to take advantage of the tremendous opportunities of the future. They sense what economic forecasters have predicted: Saskatchewan is joining Alberta and British Columbia as a major economic force in Western Canada.

How far are we from that point?

Alberta oil royalties - no pressure

I've noted before the ongoing controversy on the royalty issue in the province in Alberta. Latest estimates indicate that $2billion a year of oil and gas royalty dollars are at stake for the province and the companies.

Now the pressure on Premier Stelmach is ratcheting up on all sides.

Recent polls saying 88 percent of Albertans believe they aren't getting enough from energy production in the province as the rewards from record oil prices flow to companies and their employees, while schools, hospitals and roads are strained.

The opposition Liberals have moved to outflank him by unreservedly backing the royalty review report conclusions saying:

“The oil patch isn't going to love any party who raises their royalties, it's pretty simple,” Alberta Liberal Leader Kevin Taft told reporters Tuesday.

“I didn't take this proposal and shop it around for approval in the oil patch, I can tell you that. We'll find out what their reaction is.

“Good, bad or indifferent, this is our position, this is our line in the sand.”

Mr. Taft called his party's position “non-negotiable.”

Industry, led by Calgary-based EnCana Corp. (TSX:ECA) which said it would cut $1-billion from its planned 2008 spending of $3-billion, has gone on the offensive and hit the panic button predicting widespread layoffs and closures. They have even organised protests of hundreds of oil field workers.

Alberta Federation of Labour president Gil McGowan has responded by applying some pressure of his own saying he believes the premier will institute a “watered-down” version of the review panel's proposal if he doesn't outright reject it. “We're worried the Stelmach government is about to cave in to pressure from Big Oil,” Mr. McGowan said. “I'm worried we're on the verge of a capitulation.”

It's bad enough that Stelmach has already misstepped in looking too close to industry.

George Gosbee, chief executive of Tristone Capital Inc., is going after the governing party's , and Stelmach's, base of support outside Edmonton/Calgary by saying that in accepting the recommendations government would make the most prolific natural-gas wells uneconomic and slash exploration activity in rural areas.

And his polling numbers have tanked since taking office. He's now in very real fear of being the last of this line of Progressive Conservative premiers.

It used to be that the Premier's Office in Alberta was one of the most comfortable spots in the nation.

No more.

Alberta faces royalty choice II

Here's another very good piece on the choices confronting Alberta and Stelmach in modifying Alberta's petroleum royalties. This one is from The Star. The decisions to be made include. . .

"The first and most obvious, expected within days, is whether to hike royalty rates on oil and gas producers by 20 per cent, as recommended by a controversial report Stelmach himself commissioned.

But that's not Stelmach's biggest challenge. While no expert panel is urging him to do so, Stelmach must decide whether to revive Alberta's pitifully small Heritage Fund so that it can one day serve Albertans as a rainy day fund in a way that similar "sovereignty funds" in Norway and Alaska are set to do.

Third, there is the man-made ecological disaster that has become the Athabasca oil sands, prominently featured in An Inconvenient Truth, Al Gore's Oscar-winning documentary about the global warming crisis. With an estimated additional $100 billion (all figures U.S.) in oil-sands projects on the drawing board, the already damaged ecosystem of northeast Alberta will be in still greater peril without political action."

Enjoy.

Alberta faces royalty choice

An impressive article from the Globe and mail this weekend outlines the debate in Alberta on oil and gas royalties and the choices facing Stelmach as he stares into an election. For the sake of posterity, I will reproduce it below. It's worth reading and so are the article's associated comments.

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A deep well of discontent

DAVID EBNER,
From Saturday's Globe and Mail
October 12, 2007 at 11:57 PM EDT

CALGARY — When Ed Stelmach unexpectedly became Premier of Alberta last December, following the long reign of Ralph Klein, a quiet but important shift occurred: Power moved from Mr. Klein's home base in the energy capital of Calgary to Mr. Stelmach's traditional territory, rural Alberta.

Mr. Stelmach has hardscrabble roots on a farm near Edmonton that his grandfather settled in 1898 and in his early 20s he returned to work the homestead instead of heading to law school after an older brother died unexpectedly. That turn back to the farm led him away from corporate power, and even though Mr. Stelmach put grander ambitions on hold, he slowly and surely still managed to rise to the province's highest office, arriving there without years of hanging out at Calgary's Petroleum Club, unlike Mr. Klein and other predecessors.

Today, Mr. Stelmach is poised to make the most important economic decision in the country this year – promising a decision by month's end on what's fair for energy royalties. He is not an eloquent man but is known as a careful leader, a listener – precisely the opposite of Mr. Klein, a shoot-first-ask-questions-later man whom oil executives considered a trustworthy buddy.

Now, the blunt question is whether Mr. Stelmach has the acumen to make the right decision on royalties, and business fears what it calls a potential catastrophe if he makes the wrong move and sinks the country's most robust economy. Billions of dollars, at the very least, are on the line, along with thousands of jobs – in Alberta and across Canada. Mr. Stelmach's government is not particularly popular and there is a strong temptation to play the populist card given the polling numbers that show some support for a landmark report that calls for significantly higher royalties to be implemented in full.

No wonder: The price of oil yesterday rose past $84 (U.S.) a barrel, a record.

Sensing an opportunity for electoral success – the last vote was in November, 2004 – Mr. Stelmach is pondering a snap election this fall if his decision on royalties goes over well. The pressure, with energy companies threatening to pull at least $3-billion (Canadian) out of the province next year, is immense. Where Mr. Stelmach stands is unclear: The farmer has been criticized this month for being too close to industry and possibly cracking under pressure from it.

A spokesman for Mr. Stelmach said yesterday no decisions have been made – the situation is “fluid” – but added: “The status quo is not an option.”

“I think Stelmach's going to make the right decision,” said George Gosbee, chairman of Tristone Capital Inc., a Calgary investment bank that has worked to broker a balance between higher royalties and keeping the province's economic engine running. “It's going to be a big win, for all Albertans.”

The debate shines a light on a maturing Alberta that this year has blossomed beyond the energy monolith many Canadians take it for. Politically, even though the Conservatives have ruled for almost four decades, the public discourse is suddenly far more lively and diverse. Dissent is no longer a synonym for treason.

It is a marked turn away from the era of Ralph Klein's reverence for big business and a re-emergence of the more collective spirit of the 1970s, when then-premier Peter Lougheed launched the Conservative dynasty with a political style that was far more centrist than right wing. The royalty report itself – which was written by a panel that included three economists, a retired forestry executive, a retired oil executive and a technology entrepreneur – was not a staid government tome. It was written for a wide audience and had an almost activist tone, starting with its title: “Our Fair Share.”

“[The royalty report] has tapped into a pocket of malcontent that nobody knew existed,” said David Yager, chief executive officer of HSE Integrated Ltd., a small energy services company, and a columnist for Oilweek magazine. “But when you're premier, you can't take advantage of the province's most important industry for short-term political gain. There are opportunities to take a little more but what I found discouraging was the tone of the report.”

Much of the debate has been vitriolic, with panel members facing accusations of being “uneducated” in the practical business of oil and gas and having “grossly underestimated” key data regarding industry costs. Mr. Yager said “rage” was the predominant emotion, following the initial “shock.” Foreign investors made specious declarations comparing Alberta with Venezuela, with Deutsche Bank Securities Ltd. suggesting there was some sort of socialist revolution under way as it entitled a note to investors: “The Bolivarian Republic of Alberta.” The respected market analyst Don Coxe yesterday referred to it as a “Putinesque abrogation” of the tradition of royalties.

But lost in the shrill and deeply emotional debate are the numerous nuances of a quickly changing business in the province. When the public review began in April to determine whether Alberta was getting a fair share of energy money, all eyes were on the oil sands, where all facts pointed to the obvious conclusion of higher royalties.

In the northern hinterlands of the province lies a huge expanse of boreal forest and the oil sands, billed as the second-biggest reserve of oil on the planet. For decades, the very low-grade resource was considered barely useful until high oil prices, technology and a generous royalty regime ignited a fever, bringing tens of billions of dollars in capital flowing through Calgary and Edmonton to Fort McMurray in a mad building boom.

A decade from now, conventional oil and gas production — and royalties from those sources — will no longer form the foundation of Alberta's treasury, and the province is depending on oil sands to make up the difference, as production in the region is projected to roughly triple over the next decade. Without this, Alberta could actually slowly skid towards the have-not provincial status it held before the discovery of a giant field of conventional oil near Edmonton in 1947.

When the six-member review panel came out with its report on Sept. 18, the surprise was not that it called for higher rates in the oil sands but that the main target for immediate increases was aimed squarely at the struggling natural gas business.

The critical and most controversial issue – natural gas – has underpinned Alberta's economic success and its overflowing treasury. The so-called Calgary oil patch is in fact a gas capital, with a shift only now beginning to swing to the oil sands. Canadian Natural Resources Ltd.(TSX:CNQ), the country's second-largest producer, is the embodiment of this evolution, beginning life in the deep recession of the late 1980s as a scrappy gas producer and growing into a giant gas producer – and now making a big, long-term bet on the oil sands.

But the oil sands remains a tomorrow story, a key source of the province's long-term revenues.

Today, Canadian Natural – and the province – depends on natural gas. There are more than 100,000 producing wells in Alberta, but it's only a very small number that really count, those that dot the rugged Foothills of the Rocky Mountains. Mr. Stelmach's decision this month is absolutely crucial for corporate decisions on winter drilling in those Foothills – the short window lasting a couple of months, when the ground is frozen, to move rigs in and out to hunt for the few remaining big gas targets buried thousands of metres below the surface.

According to Tristone, which has worked closely with Alberta civil servants in Edmonton to produce new work it will present on Monday, these are the 5 per cent of Alberta's gas wells that generate 50 per cent of the province's gas production and provide 63 per cent of gas royalties – which in turn accounts for roughly 40 per cent of all royalties currently collected by the province.

The royalty review panel felt the province wasn't getting its fair share from these big wells, which spit out piles of cash at high prices but also cost millions of dollars to drill (and successful drilling is far from assured). The panel said its recommendations would in fact see royalties on about 80 per cent of gas wells reduced at recent gas prices, aiming to encourage continued production of modest wells – but, stepping back, those tiny wells are a secondary concern in the bigger picture.

Under the recommendations, the prolific gas wells in the Foothills – those that uncover major reserves to heat homes across the country – would see their value slashed to 59 cents per million cubic feet from 98 cents, according to Tristone, as government takes much more money up front.

Pedro van Meurs, a respected international consultant on royalties upon whom the panel relied heavily, indicated in a July report that Alberta had “considerable competitive scope” to get more when gas (or oil) prices are high. But he added that deep wells in the Foothills generally require high initial output to justify drilling them, suggesting that taking more up front “may not deal effectively with deep gas wells” and recommended further investigation of incentive programs to encourage such drilling.

One panel member, speaking off the record yesterday, said if there is good evidence, the government should consider the balance between gas royalties on such wells and economic development. “That's their job,” the person said. “There could be room to move there.”

At current natural gas prices, with the panel recommendations, drilling in the Foothills makes no economic sense, according to Canadian Natural and all other leading explorers in the region. It is why Canadian Natural said it would slash spending by $800-million next year if the recommendations are fully adopted; it's why EnCana Corp. (TSX:ECA) announced its intention to take $1-billion off the table; it's why Talisman Energy Inc. (TSX:TML) is mulling a $500-million cut and ConocoPhillips Co. (TSX:COP) plans to withdraw another $500-million.

The royalty panel envisioned its recommendations quickly adding $2-billion to the provincial treasury, with half of that coming in more money from gas; the potential cuts announced to date already exceed the projected gain.

And if all these wells don't get drilled this winter – beyond the job losses in the field, from the rigs to all the small towns like Edson that support the business – the province's natural gas production will go into freefall. This is already partly in motion, as the National Energy Board this week predicted in a report that showed a possible a decline of 15 per cent in Canadian gas supplies by 2009 because of relatively low prices.

With gas output sliding, the government's royalty take is headed down, not up.

Still, don't cry for the poor natural gas explorer: They are playing a game of big risk and big reward – and the rewards can be fantastic. Natural gas fuelled EnCana's $6.4-billion profit last year, the biggest in Canadian history, not to mention Talisman's $2-billion take, its best ever, and Canadian Natural's $2.5-billion, also the most the company has ever made.

Because Ralph Klein capped gas royalties in the early 1990s at very low levels, wells in the Foothills can produce excellent rates of return of more than 15 per cent at higher prices, such as $9 per thousand cubic feet. The panel's recommendation would cut that to 6.5 per cent, Tristone calculates.

In between is the balance Mr. Stelmach must strike – and executives are ready to deal.

“There's room at higher prices. It's just at what prices that kicks in,” Steve Laut, Canadian Natural president, said in an interview. “By increasing the take, the [review] panel changed how it's collected. The take has shifted to the front end. The government gets their share sooner and that, obviously as a company investing the capital, means we get our returns later. As economics work, it drives the returns down dramatically. And by doing that, they've effectively made large portions of the Alberta basin uneconomic.”

Canadian Natural this week issued the most detailed assessment of what the royalty proposals mean to its business, warning of job losses for 4,000 contractors as it slashes the number of gas wells it might drill in 2008 to just 88 from 253 this year.

“The people that will take the brunt of this royalty proposal will be the people in the field. The guys on the rigs, the pipefitters and welders in the [fabrication] shops in Edmonton, the guys driving the truck, the pipeline crews, the small business person that just bought two new trucks to haul equipment. They will take the brunt.”

Just yesterday, Mullen Group Income Fund (TSX:MTL.UN), a small energy services firm, said it is handing temporary layoff notices to as many as 100 people because of low gas prices and royalties uncertainty.

For Mr. Stelmach, whose core support is in rural Alberta, this is an important part of his balancing act. A poll this month found that almost nine out of 10 Albertans agreed the province isn't getting its “fair share” from oil and gas and two-thirds wanted to see the royalty recommendations adopted in full rather than in part.

“The royalty report has raised the expectations of Albertans tremendously,” said Geoffrey Hale, a political scientist at the University of Lethbridge.

Beyond the headlines were nuanced revelations. About 55 per cent of Albertans want to see higher royalties in the oil sands but roughly the same number believe royalties charged on conventional oil and natural gas wells should stay the same or be cut, which was precisely the sentiment in the air when the public royalty review quietly began in April in an almost empty hotel conference room in Grande Prairie, the hub of 50,000 residents in northwestern Alberta that depends on gas drilling.

Going beyond natural gas – where the price of the commodity is down roughly 20 per cent from a year ago – is the world of oil, where the spotlight shines far brighter and many more people know that riches are being made, given that the price of crude sits at more than $80 (U.S.) a barrel. The panel also called for higher royalties on conventional oil production, which had been capped at about $40 a barrel – leading to an unfair amount of profit going to corporations rather than citizens, who are the owners of the resource, while firms lease the rights to explore and produce.

While corporate Calgary has angrily reacted to the royalty review recommendations, more nuances are revealed in who is standing up and what they are saying – and companies that are quietly not speaking out at all.

Suncor Energy Inc. (TSX:SU), the oldest and second-largest oil sands miner, has not made any public declarations and its stock remains near an all-time high of about $100 (Canadian) a share, just a bit below where it was before the royalty report.

Marcel Coutu, chief executive officer of Canadian Oil Sands Trust (TSX:COS.UN), which holds the biggest stake in the biggest oil sands miner Syncrude Canada Ltd., told The Globe and Mail after the report that there is room for “some form of compromise,” saying: “A burden must be chosen that will optimize the eventual value of this resource.”

Canadian Natural, which is investing $7.6-billion to build an oil sands mine, said it will forge ahead regardless and plans to develop two more phases of its Horizon mine, costing billions more.

Don't be mistaken: The energy companies aren't content with all the royalty ideas for the oil sands. In the 1990s, before the boom, a very generous royalty regime was put in place to encourage development, with a rate of just 1 per cent of gross revenues until a project recouped its capital costs, plus a return similar to a government bond, before the rate jumped to 25 per cent of net revenues, taking out many operating costs before paying the government.

The panel proposed the 25-per-cent rate rise to 33 per cent, which hasn't really been debated, but industry is quite critical of a proposed severance tax to be charged from the first day of production if oil prices are higher than $40 (U.S.) a barrel, a level now considered to be quite low.

This tax, oil companies argue, is punitive to projects that don't mine the oil sands and instead recover it by drilling wells and injecting steam to draw it to the surface. This technique and future variations thereof will be used to recover most of the resource bitumen in the oil sands; mining scrapes off just a fraction of the available bitumen from the surface.

Petro-Canada (TSX:PCZ), which is working on a $14.1-billion (Canadian) mine, didn't complain about higher royalties but said the severance tax means steam injection projects can only work at $100 a barrel. The company said it believed a compromise could be worked out. Canadian Natural said $7-billion of steam-injection projects on the drawing board would have to be shelved. EnCana, which is a steam-injection pioneer, said its existing projects will work but the severance tax puts billions of dollars of future plans in jeopardy.

Like increasing the royalties on deep gas, the tax is criticized for taking too much too soon from multibillion-dollar projects that take years to develop.

But again, unlike earlier this year when oil companies weren't willing to compromise on anything, Tristone suggested a tax that started kicking in at $70 a barrel after a project recovers its capital costs and an increase of the initial nominal royalty rate of 1 per cent to 3 per cent on gross revenues – which would last through an oil sands project's entire life, rather than just the early years. On the 25-per-cent figure, Tristone said it should stay static, saying its plan would get more for the province than the panel's proposals.

Tristone's Mr. Gosbee said his firm's idea of compromise caused private grumbles among Calgary's top executives – but given that the debate has shifted radically from where it stood before the royalty report, the willingness to accept a pragmatic solution has caught on under the threat of something worse. Like comedian Larry David has joked, a successful compromise is when everyone's unhappy.

For Mr. Stelmach, in a job where he is supposed to keep as many people as happy as possible, the challenge is considerable. He is no stranger to struggle but now must deal with the greatest challenge of his life, to be made under the threat of an economic slowdown or worse, and try to shake off an image of economic ineptitude.

The government is completing a technical review of the royalty report and has met privately with a constant stream of industry representatives. This coming week Mr. Stelmach begins to draft his decision and craft his political message. On Oct. 24, he is slated to appear on television to explain at least some of his thinking to Albertans – with a full decision promised by Halloween.

Then, if it goes well, Mr. Stelmach calls an election, to seek a mandate to validate his decision and leadership after almost a year as premier, in a job to which he ascended only by a vote of Conservative Party members.

Keith Brownsey, a political scientist Calgary's Mount Royal College, said Mr. Stelmach has the opportunity to hit the delicate balance between Alberta as a whole and industry.

“Some concessions can certainly be made to the oil and gas industry without appearing to cave to their demands,” Mr. Brownsey said.

“For an election, he could wait until next spring but my inclination would be to strike while the iron is hot, hold up the royalty decision and declare it his platform.”

What goes up must come down

The Telegram column today from Bill Rowe is worth reading. He makes the general argument from recent political history that political parties hit their lowest lows after reaching the highest highs.

For example, after the federal PCs knocking off the biggest majority in Canadian history, they were virtually wiped out just a couple of elections later. He points out the instructive case of the Smallwood Liberals too.

He writes:

There’s an unrestrained impulse among many involved in that all-consuming racket for overwhelming success. Success in moderation is not sufficient. It has to be absolute, over-the-top success even though such total triumph often carries with it the seeds of its own destruction ...

I’m not saying he will destroy his party as Mulroney did. But he could well push his party into the outer darkness for a couple of decades as Joey did. So, while he drives towards massive victory in October, Danny might well remember that leaders as lovable and powerful as he now is, incredible as that now seems, sowed the seeds of ruin by their overweening success.

Is that kind of political devastation a truism? Or is it the selective application of post-facto moral approbation?

Or is Rowe on to something?

The pattern is more subtle than just a party going from great heights to great lows. I think the pattern is closely related to the leadership which took them to the great heights achieved. The difference between the phenomena Rowe talks about and the normal exchange of parties in government comes down to an important factor: the leader style.

There are some successful parties where the success is institutional and party-based. Their leaders are not central of the party's identity and function. The strings of Alberta and Ontario Progressive Conservative dynastic governments provide the answer.

In both cases, the parties were able to select leader after leader who could take over the party and continue an unbroken string of electoral and government success. The successful elements which led them to multiple election wins under multiple leaders were centered in the party. Those parties had the ability to successfully self-renew their leadership without the trauma of electoral loss to force the issue.

The parties remained effective under multiple leaders through continuity of their structures and activists.

Mind you most of those leaders seemed pretty conventional with some exceptions, but that's part of the pattern too. These fairly conventional leaders left the issue of electoral success devolved to the party mechanism without needing to take it into their own hands. That way, the tools were in place for the next leader when they came along.

You would think that's the norm but it's not. When Turner came to power in 1984, he found the federal Liberal Party had virtually hollowed out. The reelection structures had settled do firmly in the Office of the Prime Minister that when Trudeau left, no reelection machine existed.

Under Smallwood, Smallwood was the party in every meaningful sense. Maurice Duplessis comes to mind too.

Under Mulroney, the PC machinery was so closely tied to Mulroney that, just like the Trudeau Liberals, when he retired so did they. Did you see any significant Mulroney era fixers on the Kim Campbell campaign?

So when you have an overwhelming personality occupying the top post, they, well, overwhelm the top post and the party they lead. More and more the independent party structures are populated by persons more loyal to leader than the party. And they operate less and less independently from the leader's office.

You will see the reelection machinery and the leader's office become one and the same.

So when the leader leaves, the machinery collapse because the focus is gone. In some cases in might take a decade or more but it can just as easily take just a term or two.

Strong leaders tend to crowd out strong party mechanisms. In this province, with the popular emphasis on personality over party of ideology, the leaders matter even more than in most places and the parties matter less except as tools of the leader.

Do you think this current Premier doesn't thoroughly and completely dominate his party, caucus and government? Just ask Fabian Manning or Elizabeth Marshall.

It's too simplistic to say these structural reasons are the only ones why the strong personalities leave political devastation in their wake. Sometimes, after a few years of the electorate having to submit to the intensity and heat of "strong leadership", people just want a break. Look at Moores after Smallwood and Wells after Peckford. So there are other factors that come into play too.

But overall, I have to say that Bill Rowe has pretty well nailed it.

$38billion week in the oilpatch

Last week I posted about the $10billion day in the Alberta oilpatch. A pretty remarkably day, all in all.

That is, until you step back and realize that the $10billion day was part of a larger $38billion week according to this Globe and Mail article.

That's more money moving in one week than the NL government will see in revenues from Hibernia, White Rose, Terra Nova and Hebron over their entire project lives *combined*.

And it's not like last week was an unchracteristic peak. There are no signs of decline and, in fact, there will be more peaks to come.

It all kind of makes you wonder when our government will cease the ego-driven hostilities with big oil and just get on with it.

For the sake of posterity, the article is reprinted below.

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Slew of deals shows oil sands fever not breaking
In spite of increasing construction costs, $38-billion worth of agreements and development plans announced last week

JUDY MONCHUK
Canadian Press; Reuters, August 6, 2007

CALGARY -- The bout of oil sands fever sweeping through northern Alberta shows no sign of slowing down.

An eye-popping $38-billion in deals and development plans announced last week show skyrocketing construction costs haven't dampened interest, only that those intrigued have a blueprint for mining and refining the buried energy treasure.

"The size of the prize is very large, so everybody is going hell bent for leather," said Martin Molyneaux, managing director of institutional research with FirstEnergy Capital.

Shell Canada's plan to spend up to $27-billion on Canada's biggest oil sands upgrader, the $6.6-billion friendly takeover bid for Western Oil Sands Inc. by U.S. refiner Marathon Oil Corp., and a $4.4-billion regulatory strategy filed by Suncor Energy for the mining plan of its Voyageur South site all indicate the need to ensure a smooth development path for the tar-like bitumen.

"Securing that midstream upgrading and the downstream refining solution is going to be a challenge that all producers in the oil sands are going to have to overcome," said oil and gas analyst Chris Feltin with Tristone Capital.

"Those that can are going to be able to continue with their development strategy - potentially benefiting from better costs, but I think the key is being able to integrate those strategies," he said. "It's one thing to have these oil sands assets, but it's really important for these developers to have downstream solutions to handle the crude they produce."

Suncor's Voyageur expansion adds the basis to take the company beyond its goal of 550,000 barrels a day by 2012. A cost estimate of upgrading plans and details of the operation's scope and projected capability, is expected to be filed later this fall, but that will likely be in the range of $7-billion to $8-billion.

"This sets the stage for beyond 2012," Mr. Molyneaux said. "It's all about redeploying your cash flow, and the amount of cash you have once you get up to 500,000 barrels a day is enormous."

Suncor has a reputation as the best in the business for keeping oil sands projects on budget.

"It's the surprises that cost you in the oil sands," Mr. Molyneaux said.

Still, adding these extra megaprojects with aggressive timelines to the already overheated Alberta construction plate is sure to push escalating costs even higher.

Alberta has been crying for skilled workers for more than a year to cope with a staggering crush of infrastructure and energy development. Demand for oil sands labour is forecast to rise from 15,000 today to 34,000 by 2010 and that was before the Shell and Suncor plans were announced.

"There are a lot of issues with going that fast," said Justin Bouchard of Raymond James. "You've seen capital costs double or triple in the last six years and a lot of that is the overall boom in the energy sector."

That in turn is pushing margins to what could be an economic wall. When the $14.1-billion first stage of the Fort Hills oil sands development was announced in June, Petro-Canada and its partners projected a rate of return under 10 per cent.

"That's pretty skinny economics," Mr. Bouchard said. "If the continued pace of development causes increased capital costs, if there are more strikes, there will definitely be a point where some players will be delaying projects because it makes no sense to build it now."

That has already happened.

Canadian Natural Resources Ltd. has put its Wolf Lake upgrader on hold, while Synenco Energy Inc. sought "strategic repositioning" and is up for sale after costs of its Northern Lights project ballooned to $10.7-billion.

Alberta Premier Ed Stelmach has signalled he won't change the province's business-knows-best mantra and will impose no regulatory brakes to slow down screaming activity levels. And while an Aug. 1 report from the Conference Board of Canada said labour and material shortages in Alberta were pushing costs of new energy projects to near prohibitive levels, it's becoming clear that the new playing field means it's only who can absorb those long-term costs who can see development through to the payoff.

That means an increased presence of global players such as Royal Dutch Shell PLC, which takes control of Shell Canada on Sept. 4, or European integrated giant Total SA, which has been looking to solidify its place in the oil sands. Both could place a rival bid for Western Oil Sands.

AS COSTS RISE, BIG COMPANIES DRIVE DEALS

Fat wallets and limited opportunities elsewhere may continue to push acquisitions in the oil sands, analysts say, though soaring costs may leave the sector open to only the very biggest companies.

"There isn't much left there for assets," says Kyle Preston, an analyst with Salman Partners.

The massive scale needed to justify an investment in the region means the next wave of buyers of oil sands assets may be large, integrated oil and gas companies, energy bankers said.

With deep pockets and easy access to low-cost capital, the biggest firms are best able to handle the high costs of construction, operations and labour in the region, the bankers said, but they will have to get past some roadblocks.

Finding large, high-quality assets may be difficult because many, such as the Shell-operated Athabasca project in which Western has a 20-per-cent stake, are already controlled and operated by the large integrated companies.

"I think people have pored over the region pretty extensively," one energy banker said.

Valuations are high and the biggest players - like No. 2 producer Suncor Energy Inc., with a stock-market value of more than $44-billion - are likely too expensive for all but the biggest companies to acquire. But while a big-ticket deal is considered unlikely, it's not out of the question.

"Anything can be sold," said Mark Friesen, an analyst with Calgary-based FirstEnergy Capital.

Reuters

Fort McMurray - Exporting social problems

From arguably the most important magazine out there, The Economist has a piece on the social effect of the oil sands boom in Fort McMurray.

It points out that, like any other western frontier boomtown in history, two commodities highly sought-after by young single men with lots of money in their pockets are women and altered state inducing aids (alcohol and drugs).

It's fine for a 21 year old to be taking home $5000 a month, and some are. The tragedy is when those same 21 year olds are saving precisely none of it due to housing, truck payments, women and booze/drugs. It's not all that hard to go through $5000 a month out there - you don't really even have to put your mind to it.

We are already aware of some of the local effects of the Northern Alberta boom: young people heading out for work, provincial shortage of skilled trades, communities left behind surviving on remittances, etc.

Another so far lesser known effect is the impact of those young men when they come back home from their rotation (2-on-2-off or 6-on-2-off or whatever). Not only do they come home with cash in their pockets, they arrive with drug cravings in their system and/or drugs for personal consumption or sale in the community.

If you thought that crystal meth, crack or cocaine were unknown on the Great Northern or Port au Port peninsulas, you would be dead wrong. Just talk to the local constables in the area and they will set you straight on that.

It's easy to think about those kind of boomtown social problems happening far away. And before the age of regular flights from Fort Mac to west coast NL, they were far away.

But now they are in our backyard and we are woefully ill-equipped to deal with them.

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Boomtown on a bender
Jun 28th 2007 | FORT MCMURRAY
From The Economist print edition
The downside of explosive growth in northern Alberta

WITH C$36 billion ($25 billion) invested so far in its oil sands and another C$45 billion expected over the next decade, the Canadian province of Alberta is booming. Workers have flocked in, lured by wages of up to C$120,000 a year. The once sleepy town of Fort McMurray, at the centre of the bonanza, boasts a crowded casino and a busy airport. But big money has brought big problems, including overstretched infrastructure and soaring drug use.

The town's population has grown by 9% a year for the past six years, says Sheldon Germain, the deputy mayor. In all directions, swampy forests are giving way to sprawling rows of clapboard houses that cost more than they would in the suburbs of Toronto.

The local authorities are struggling to cope. They cannot approve any more buildings in the town centre, Mr Germain says, because the sewerage system is overflowing. Doctors at the hospital complain of being overwhelmed; housing costs deter new recruits. The sole road connecting Fort McMurray with the rest of the province is crowded and deadly. The only way for the town to raise revenue to tackle these problems is to increase property taxes. But locals complain that they already suffer from exorbitant local prices, and want the oil companies to foot the bill.

Crime is another problem. Many of the thousands of workers who live in barrack-like accommodation at nearby mines and construction sites come to town at weekends, to drink a beer or ten, brawl, and buy sex and drugs. “This town is awash in cocaine,” says one long-time resident. Marijuana, crack and crystal meth are also widely used. Drug abuse in the northern oil patch is more than four times the provincial average.

According to Harold Hoffman, a specialist in occupational medicine in Edmonton, about 40% of the workers test positive for cocaine or marijuana in job screening or post-accident tests. Companies worry about lower productivity (due to absenteeism or sloppy work) caused by drug abuse, and the safety risk. On drilling rigs and in oil-sands mines a small mistake can easily result in injury or death. Some experts believe Alberta's rising job-site accident rate (up 17% in two years to 180,000 cases in 2006) is partly due to drug abuse.

Most of the biggest companies conduct drug tests before hiring, as well as after any accident. But many workers have learned to get around these with synthetic-urine kits from drug-paraphernalia shops. Many smaller contractors prefer to turn a blind eye for fear of losing workers in such a tight labour market. Lawrence Derry, an addiction expert at the University of Alberta, says that one contractor told him that “if I brought in drug testing, I'd lose half my crew—they'd go right over to my competitor.”

A cautionary tale for NL - Petropolitical Law

This Globe and Mail commentary (see also below) outlines the flip side to oil development and the effects of oil revenues on the province of Alberta.

It is based on the ideas of Thomas Friedman and his article, The First Law of Petropolitics published in the journal, Foreign Policy. Freidman posits that as the price of oil, and therefore revenue for the state, goes up, freedom and the inclination for political and economic reform goes down.

If you prefer, you can listen to a discussion of the article with Mr. Freidman himself.

Why is this a cautionary tale for this province? To start, it's important to look at this in relative terms. The rise of oil prices does not mean we will wake up to the premier's brother driving around in a machine-gun armed jeep shaking down innocent truckers a la Nigeria.

But nonetheless, there are corrosive effects to oil revenues to our political and economic environment that can't be denied. This Globe piece outlines the effects already seen in Alberta; if it can happen in Alberta, it can also happen here.

A good argument can be made that there is already evidence that it has happened here; I'll detail that argument later.

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Is Canada the latest emerging petro-tyranny?
ANDREW NIKIFORUK
From Monday's Globe and Mail, June 11, 2007 at 9:14 AM EDT

Every day, the First Law of Petropolitics quietly insinuates its way into the nation's political blood like a rogue parasite. The law, first coined by New York Times columnist Thomas Friedman, posits that the price of oil and the quality of freedom invariably travel in opposite directions.

As the price of crude oil goes higher in an oil-dominated kingdom, the average citizen will experience, over time, less free speech, fewer free papers and a steady erosion of the rule of law. The reason, argues Mr. Friedman, is simple: Oil and gas regimes don't need to tax their citizens to survive because they can simply tax another tar sands project, so they really don't have to listen to their people either.

According to Mr. Friedman, the First Law astutely explains the emerging petro-tyrannies of Venezuela, Iran, Nigeria and Russia. But should Alberta and Canada be added to the list?

By any conservative definition Alberta is already a poster child for the First Law. The government now derives approximately 40 per cent of its income from oil and gas revenue and has been ruled as a one-party state for 36 years. It's no accident that Kevin Taft, the leader of Alberta's fledging Liberal Party, has just written a book about Canada's oil-soaked kingdom called Democracy Derailed. The derailing has seemingly erased distinctions between business and civic affairs. Within six months of quitting his job as Alberta's No. 1 honcho, Ralph Klein (a.k.a. King Ralph) became a paid, senior business adviser in the oil patch for Borden Ladner Gervais LLP. Meanwhile, his former chief of staff, Peter Elzinga, leapt from the employ of oil-sands giant Suncor only to serve as the executive director of Alberta's Conservative Party months later.

Given their one-sidedness, oil regimes fear transparency. This explains why Alberta operates one of the most secretive governments in Canada. Just last year Alberta's Conservative government made it legal for its petro-tyrants to lock away internal audits for 15 years and for government ministers to keep their briefing binders out of public view for five years.

Making propaganda is also one of oil's many antidemocratic characteristics. The Alberta government currently spends $14-million a year and employs 117 full-time staff in its Public Affairs Bureau to tell Albertans what to think. Not even President George W. Bush employs a propaganda arm this large in the White House.

The tone of government has also become increasingly authoritarian. Alberta Premier Ed Stelmach, for instance, declares that he can't even touch "the brakes" on rapid development in the tar sands any more than his counterparts in Venezuela or Russia can, say, touch the brakes on aggressive nationalization. Alberta has also sacrificed the rule of law. It seems whenever open public debate threatens to challenge another government-sanctioned energy project, the Energy and Utilities Board (EUB), a de facto rubber stamp for disorderly development, shuts down public participation citing "security" reasons. You never know what a disenfranchised 80-year-old citizen might say before regulators beholden to hydrocarbons.

Elected bodies no longer pull much weight in Alberta either. Three times last year the Regional Municipality of Wood Buffalo, a democratically elected body representing the hardworking citizens of Fort McMurray, presented compelling arguments for a slowdown of tar sands development in order to preserve some sense of community. The EUB, an appointed body, overruled the democrats every time with the same authoritarian élan championed by Hugo Chavez or Vladimir Putin.

Meanwhile the democratic gap between rulers and ruled grows wider every day. Polls show that Albertans overwhelming favour absolute reductions for carbon emissions, yet their government champions calculated inaction. Rural Albertans have asked for tough groundwater protection but get more oil and gas drilling in their backyards instead.

Exercising freedom of expression in Alberta can be risky too. When David Swann, the medical officer of health for the Palliser Health Authority, endorsed the Kyoto Protocol in 2002, for medical reasons no less, he got fired with a Venezuelan-like promptness. When Dr. John O'Connor, asked for a proper health study for first nations living downstream from the oil sands, Health Canada and Alberta Health, complained to the College of Physicians and Surgeons that he was "agitating the local population."

Alberta's politics mirror a global phenomenon. In a recent study of 105 oil-rich states between 1971 and 1997, political scientist Michael Ross consistently found that reliance on oil exports made a country less democratic regardless of its size, location or ideology. Oil corrupts and corrupts absolutely. Given that Canada is now ruled by Albertans and claims to be an "emerging energy superpower" as well as a "secure source of almost limitless energy resources" for North America, can Canada defy the axiom of our age?

Politicians serve those first who deliver the most revenue.