Several years back it became fashionable in Alberta to agonize about the rapid growth of the oilsands.

A respected former premier and a former national party leader scolded the energy industry essentially for succeeding, suggesting the oilsands growth model was innately flawed and musing about whether governments should step in and basically outlaw new projects. I always thought they were way off-base. You can’t “bottle” a boom, put it on the shelf and save it for later. You have to make the most of it while it’s happening.

Although the dirty-tarsands brigade is yelling louder than ever, we haven’t heard much lately from those who objected to the oilsands boom on technocratic grounds. The agonistes have gotten their wish: the oilsands are reeling in the face of plunging commodities prices and an ill-timed increase to provincial royalties.

Last autumn, you almost needed a real- time feed to keep track of the cancelled, scaled-back or “deferred” oilsands projects, as billions evaporated seemingly by the hour. Accurately tallying up anything in the oilsands is a fickle undertaking. Even in the best of times, not every project conceived gets to “first oil,” while those that go ahead are subject to innumerable upward cost revisions. One project, Fort Hills, reached an estimated cost of $24 billion before it was shelved.

The foregone projects represent vast amounts of production that won’t happen for years, decades or ever. The Canadian Energy Research Institute recently calculated the lost investments at $97 billion-$241 billion over the next 12 years. That will knock between 500,000 and 1.5 million barrels per day out of combined oilsands productive capacity as of 2020, from a previously projected 3.4 million barrels a day. By 2030, oilsands production will be as much as 2.3 million barrels a day lower than those forecasts. By my calculations, foregone revenues could reach $1 trillion over two decades.

The Canadian Association of Petroleum Producers notes that the reduced investments will particularly hit bitumen upgrading capacity. That represents a massive decline in future wealth creation, as far more raw bitumen (heavy-grade, unrefined oilsands) will be exported without upgrading.

Of course, in a place in which the ramp-up was so fast and rough that some wanted to outlaw it, a mere slowdown isn’t that painful at first. To date, far more have lost the prospect of future work than have been laid-off outright. Those let go are mostly temporary workers who have headed back home to Atlantic Canada. As with anything foregone and not yet in being, assessing the opportunity cost — the “might have beens” — requires imagination. The impact of an oilsands project not built is far less direct than the feelings of loss and regret at the sight of a once-thriving factory idled and emptied.

Still, the energy industry’s approach has been tougher, more rational and, I think, will prove more effective than attempts to “rescue” industries that have proven their inability to succeed over multiple decades. Alberta’s oilsands produce among the world’s highest-cost oil on both an installed capital and operating basis. Many of the familiar terms used to describe what ails the U.S. economy — asset inflation, overleveraged, bubble, irrational exuberance — could apply to the oilsands.

But while governments and many industries remain in panicked denial about what has to be done, Western Canada’s energy sector is acting: downsizing, deleveraging, shutting surplus capacity, cutting costs, surviving on less and, if necessary, going bankrupt. Above all, this industry is focused on lowering its costs. That’s what should be getting done in other industries, particularly the U.S. financial services, housing and automotive sectors. But that’s what those multi-trillion-dollar government interventions are preventing.



George Koch’s articles are archived at the weblog www.drjandmrk.com. IE