Wildrose's wild idea

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Appeared in the National Post
In an early February announcement with a local candidate near Edmonton, Wildrose leader Danielle Smith added her voice to those who want  to offer “incentives” to attract investment for more refineries in Alberta. Smith said if elected Premier, she would “make it more attractive for the private sector to invest in locally upgrading our bitumen product.”  Shannon Stubbs, the Wildrose candidate in Fort Saskatchewan-Vegreville who accompanied Smith, urged the province to consider spearheading new upgrading technology—this as if companies are not already doing just that.

Amazingly, the Wildrose Party now apparently sings the same misguided tune as the Alberta Federation of Labour, New Democrats, and members of the Alberta Progressive Conservative party who, in a 2010 policy vote, urged the government to use incentives to ensure more bitumen produced in Alberta is upgraded here. 

According to the Energy Resources Conservation Board (ERCB) and using 2010 statistics, about 58 per cent of the bitumen produced in Alberta every day is already upgraded to synthetic crude oil here. The remainder is exported to upgrading and refinery facilities closer to where the refined products (gasoline and diesel and heating fuel, for example) will ultimately be consumed.

The ERCB expects that the proportion of bitumen that is upgraded in Alberta will decline.  This is largely because most of the increase in bitumen production will come from in situ (well) operations which in most cases are too small to justify investments in on-site upgraders). Instead, bitumen from various sites is collected and transported by pipeline to facilities capable of handling larger volumes. 

By securing long-term sales agreements with companies with U.S. upgrading/refining complexes the producers avoid investing in upgraders but gain reliable cash flows with which to finance further oil sands development.  Their preference for this approach signals that they regard investing in upgraders in Alberta as way too expensive.

Ms. Smith seems to have reversed her earlier position regarding subsidies for refining.  On the North West Upgrader, last November, she remarked that “there’s no need to expose taxpayers to this kind of risk…. Billions of dollars could [instead] be spent on high priority items for taxpayers”.   Rather suddenly, it seems, she has conveniently forgotten that taxpayer funds for subsidies to entice risky investment must come from somewhere. 

In so doing, the would-be premier and her advisers ignore this basic economic principle:  extracting money from taxpayers to support projects that are not commercially viable usually results in a misallocation of resources.  To make it clear, the proposal would rob “Martha and Henry” (as former premier Ralph Klein liked to describe average Albertans) to fund special incentives for obviously reluctant investors in one sector of the economy. 

The capital cost of a stand-alone 100,000 barrel-a-day upgrader (i.e. not in conjunction with bitumen mining operations) is estimated at $5 billion or even higher because of high construction costs in a province that already has a tight labour market. To ensure that the percentage of bitumen upgraded to refinery-ready synthetic crude here in Alberta does not decline would be a very costly venture.

The Wildrose Party and others who argue for refining subsidies fail to appreciate the economic loss that the provincial economy would have to bear as a consequence.  This is because those of us who would have to pay for the subsidies through provincial taxes would have less money to spend on other goods and services. Moreover, with skilled labour already in tight supply because of oil sands project construction, wages would ratchet higher, thereby fueling inflation and making some projects too costly to proceed.

If bitumen producers determine that it makes more economic sense to build upgraders in Illinois, Ontario or some other location than in Alberta there must be good reasons.  These likely include factors such the availability of skilled workers, lower wages, lower materials costs, lower state and local taxes, scale economies, and the regulatory climate.

There are issues facing the energy sector in Alberta: Non-market barriers such as regulatory processes and procedures that are unnecessarily time consuming and costly for starters. Smith, the NDP and the Alberta Federation of Labour should concentrate on those and not artificially-created issues followed by artificial ‘incentives’—subsidies—just to entice more bitumen upgrading refining in Alberta.

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