On the web site of the Canadian Association of Petroleum Producers, you can still find a chart, last updated in November 2007, that projects the collective requirement for numbers of construction workers in the oilsands.

The wave peaks in the fourth quarter of this year and the first quarter of 2010 at about 35,000 people, mostly working around Fort McMurray, Alta., and in Upgrader Alley, northwest of Edmonton. The chart was also used to tout the future of northern Alberta’s economy and warn of worse labour shortages to come.

That chart is today a work of fiction, as almost all of the projects that would have generated these jobs have been pushed to the right on the scale — to later, unspecified dates. Some may never see a shovel in the ground; the great oilsands rush was called off before most of the latest and largest generation of projects produced a drop of oil.

So, what have we learned? First (or, should I say, again?), getting to pay dirt takes longer than a single business/energy cycle and thus is a game for companies with other sources of cash flow that make them capable of weathering a downturn. Second, the remote and relatively inhospitable location of oilsands projects limits what can be achieved, even when the economics are favourable. And, most important, the demonstration of what I call the “garden party rule”: if you leave cake out on a table, it will get eaten — if not by the invited guests, then by the hired help, passing dogs, crows and ants.

The cake in this case was a series of tax and royalty breaks served up by the federal and Alberta governments in 1996 to stimulate development of the oilsands, even when the economics could not be justified in the planning phase. Oil prices were around US$20 a barrel (almost C$30 at the then-prevailing exchange rates). The consensus estimate at the time was that you needed around US$28 a barrel to make a sufficient internal rate of return on a project of, perhaps, 12%.

Two years later, oil prices reached their modern-day low, then began a march up to the July 2008 high of US$147 a barrel. As oil prices rose, it made the pastures of northern Alberta attractive to energy producers, who envisioned the payout over decades. But the region was even more appealing to construction companies, suppliers and workers who would enjoy the payout right away — right down to the dishwasher at a camp I spoke with this past summer who claimed to be making $70,000 a year, plus room and board.

All the while, the two governments left the cake on the table — until it was too late. The feds opted to phase out the accelerated capital cost allowance, beginning in 2010 (oops). And the provincial government introduced changes, effective this year, that will see oilsands royalties increase to 33% from 25% after their capital costs have been recouped (oops, again).

The fattest slice, the nominal 1% royalty until that threshold is reached, stayed in place, which has hardly encouraged cost discipline. If the cost of a project goes up by $1 billion, that just postpones the date you start paying real royalties. In an isolated economy like Fort McMurray’s, the 1% royalty stoked an inflationary spiral that began stalling projects long before oil prices fell.

Had the 1% royalty increased as oil rose, the attrition of marginal oilsands ventures would have happened sooner and at a lower price point. Instead, the price per barrel that was needed to generate a sufficient return marched upward, from US$40 to US$55 to US$85 a barrel, driven by skyrocketing labour and materials costs and the addition of lower-quality properties. This past autumn, UBS Securities Canada Ltd. pegged oilsands profitability at US$100 a barrel. (In truth, it’s an elusive number because it is an actuarial one; for most oilsands production, especially that from surface mines, the operating costs pale beside the capital costs.)

What remains to be seen — after billions of dollars have been spent on land acquisition, planning, engineering and regulatory approvals — is which oilsands projects will see the light of day once this oil price/financing nightmare passes.

If governments had been a little more attentive to what they had left on the table — and when — this mad rush for the cake would not have happened in the first place. IE