Sept/Oct 2009

MAC Economic Commentary

The oil sands and climate change — some important considerations

By P. Stothart

The development of the western oil sands constitutes one of the world’s most significant economic stories of recent decades. Technological advances and increases in crude oil prices from $20 per barrel in the 1990s to to $140 in mid-2008 together reinforced the oil sands’ economic viability and, through hundreds of billions of dollars of investment, sustained its production growth from test-well quantities to volumes exceeding one million barrels per day.

As with any source of energy, the process of extracting oil from oil sands raises a range of environmental issues. Its rapid development has served to position this sector as target number one among some environmental groups. In this respect, it is important that NGOs and public policy stakeholders not ignore some key realities.

Economic contribution

Oil sands development has increased wealth and economic activity in western Canada during the past decade, creating 200,000 jobs, including many in central Canada that helped to offset job losses in the manufacturing sector. It is also estimated that each direct job translates to nine additional jobs among suppliers and indirect beneficiaries. While the ongoing recession may extend these timelines, Alberta’s oil sands production is projected to increase from around 1.3 million barrels per day at present to 4.7 million in 2025 and potentially 6.3 million barrels by 2035, depending on longer term economic growth and oil price trends.

The Canadian mining industry, including oil sands mining, paid an estimated $11.5 billion to federal and provincial/territorial governments in 2008 in the form of taxes and royalties. Around $3 billion of this total relates directly to oil sands mining, with additional amounts linked to in situ production. The provincial share of revenues has increased in recent years — in the oil sands, many projects have repaid investors’ initial capital spending and thus have entered a higher royalty bracket. The oil sands industry pays large sums — as high as $2 billion in some years — to the Alberta government in the form of land sales payments. It is estimated that oil sands developments between 2000 and 2020 could generate over $120 billion in royalty and tax revenues for governments. In an age of mounting government deficits, this important source of revenue cannot simply be wished away by those opposed to the oil sands.

Aboriginal dimension

The Canadian mining industry is the largest private employer of Aboriginal Canadians. As of 2007, over 1,500 Aboriginal employees worked in permanent oil sands operations jobs, representing a 90 per cent increase over 1998 levels. Companies such as Syncrude and Suncor have important benefit-sharing agreements in place with Aboriginal groups.

Oil sands companies have also awarded an estimated $1.5 billion worth of contracts to local Aboriginal companies over the past decade. These contracts are increasing each year. In 2007 alone, $606 million in contracts were awarded to local Aboriginal companies.

The growth rate of the Aboriginal population is double that of the non-Aboriginal Canadian population and many communities are located near mining operations. There remains potential in the coming years to fill anticipated worker shortages through the training and skills enhancement of Aboriginal Canadians.

Environmental and trade considerations

Some NGOs in the United States and Canada have argued that carbon-intensive fuels such as oil from oil sands should be disadvantaged, trade-wise, for environmental reasons. Whether this sentiment evolves into a significant trade issue remains to be seen — particularly given the U.S. energy dependency on Canada and the fact that under long-term plans, some 90 per cent of oil refined in the U.S. Midwest is projected to come from Canada. As well, all sources of energy production, including fossil, hydro, nuclear, solar and wind, could conceivably raise trade-actionable environmental questions relating to materials, noise, land use, safety, climate, air or water impacts.

The scale of the challenge of oil sands GHG emissions faced by Alberta and Canada, while significant, is placed in context through noting that it is comparable to the coal emissions challenge faced individually by 15 U.S. states and smaller than the GHG challenge faced by each of Texas, Missouri, Illinois, Indiana, Ohio, Kentucky, Tennessee, Alabama, Georgia, Florida, Ohio, Michigan, West Virginia, Pennsylvania and North Carolina. This places the emerging debate over “trade barriers against GHG-intensive oil” in a more realistic context. The U.S. faces comparable or greater challenges in 30 of its own states drawing electricity from coal combustion. This calculation would obviously become relevant in any conceivable environmental trade dispute.

Paul Stothart
Paul Stothart is vice-president, economic affairs, at the Mining Association of Canada. He is responsible for advancing the industry’s interests regarding federal tax, trade, investment, transport and energy issues.

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