Canada's Oil Sands: It's Time to Awaken the Sleeping Giant

Head Table Guests

Gareth Seltzer, Vice-President, Private Banking, Guardian Capital Advisors and a Director, The Empire Club of Canada; Antoine Waithe, Grade 12 student, Jarvis Collegiate Institute; Daniel J. Cacchio, Senior Vice-President, Finance and Administration, Imperial Oil Ltd.; Donald J. Steadman, Partner, Fasken Campbell Godfrey; Dr. Erdal Yildrim, Chairman, Oil Sands Strategy Task Force and Manager of New Ventures, Canadian Occidental Petroleum Ltd.; Alex Squires, Oil and Gas Consultant, Loewen, Ondaatje McCutcheon and a Director, The Empire Club of Canada; The Rev. Charles Plaskett, Minister Emeritus, Timothy Eaton Church; Donald Johnson, Vice-President, Nesbitt Burns; and Susan Murray, President, SAMCI.

Introduction by John Campion

Rudolph Diesel Pitches a Tent in Libya

Events which took place in or by 1859 and Colonel Muhammed Ghadaffy of Libya have a profound effect upon our society's industrial capacity.

Let me first deal with 1859. By that year, the science of electricity had proceeded at a remarkable pace under the direction and efforts of Faraday, Volta and Ampere and others and was in full development. The fundamentals of artificial fertilizer had been discovered by Liebig. Coal was the main source of energy for and steam power the main tool of the Industrial Revolution which by that time had been in full swing for almost 100 years.

But in that year of 1859, Rudolph Diesel, the German automotive engineer was born and at Titusville, Pennsylvania, the first oil well was drilled. By 1885, Carl Benz had built a single-cylinder engine for a motor car and by 1890, Diesel had patented his internal combustion engine. The fundamentals for the ascendancy of oil as the black gold energy powering the 20th century were in place.

Let me turn to Mr. Ghadaffy. The great post-World War II economic boom was propelled by cheap energy. Between 1951 and 1972, the price of fuel declined consistently against the price of manufactured goods. All of this was made possible by Middle-Eastern oil. The three leading sectors of Western economic development were motors, chemicals and electricity.

The West and Japan were more and more dependent upon oil from the Middle East to energize these sectors. Many Middle-Eastern leaders recognized the increasing dependency of the West and Japan upon Middle-Eastern oil but it took the death of the then-Arab leader Nasser on September 28, 1970 and the rise to power of Mohammed Ghadaffy to tilt the balance.

Ghadaffy not only stressed the importance of oil as a weapon to be used against what he called Western Imperialism for its support of Israel, but he also provided the emotion and passion behind the argument where logic had previously failed to prevail.

The resulting oil price revolution was described by Henry Kissinger as one of the pivotal events in the history of this century. It caused:

(a) 25 million unemployed in America and West Europe;
(b) the banking sector in the world to come under severe strain;
(c) OPEC countries took $80 billion per year out of the world economy;
(d) acute debt problems for countries around the world, including our own;
(e) the decline of American economic pre-dominance.

All of these devastating factors for the West were caused by a 70 per cent increase in price on October 16, 1973 and a 128 per cent increase in price on December 23, 1973.

These price increases had a direct impact upon Canada and its oil resources. In our country, producing conventional oil had started in and around 1917 from Turner Valley, Alberta and Southwestern Ontario. Spectacular discoveries of oil were made at Leduc in 1947 and Redwater in 1948. In the 1970s, the country turned, in part, to the Canadian Oil Sands.

Mr. Newell was appointed Chairman of the Syncrude Board of Directors on May 18, 1994. He has been President and Chief Executive Officer of that company since August, 1989.

Mr. Newell has an extraordinary list of achievements in business and in the community. He is a major advocate of business and educational partnerships and has implemented innovative, continued learning initiatives within his company.

Mr. Newell has a Master of Science degree in Management Studies from the University of Birmingham in England and a Bachelor of Science of Chemical Engineering from the University of British Columbia. He resides in Fort McMurray with his wife Cathy and their three children. Please welcome Mr. Newell.

Eric Newall

It is a pleasure and an honour to be with you today and to have the opportunity to address this distinguished club. I am very much aware of The Empire Club's record of bringing light to the public discussion of important issues and policies of the time. For that reason, I hope my message today about Canada's energy future will be both interesting and stimulating.

It's been my experience that luncheon speakers come in a variety of political and economic persuasions. In one respect, however, they are remarkably consistent: they tend either to "point with pride" or to "view with concern." I'm afraid my remarks fall into the latter category.

In that regard, I can think of no subject more critical to our economic health as a nation or our material prosperity as a people than that which I plan to address today. It is a subject which could help ease the burden of debt which overhangs us, strengthen the economic growth just getting underway, and perhaps provide a better future for all of us and our children.

What is this panacea? It lies in the potential of Canada's oil sands. To me, it is a subject that simultaneously provokes concern, fear and hope.

My concern is that for the last 20 years, production of domestic light conventional crude oil has been declining. My fear is that if this trend continues unarrested, then our nation will lie twisting in the wind, at the mercy of Middle Eastern oil merchants, before this century ends. My hope is that we take advantage of the tremendous opportunity for prosperity and wealth creation that is possible if we can summon the will to unlock the potential of the oil sands. It's time to awaken the sleeping giant.

If all that sounds like an impossible dream, then imagine picking up a business magazine and reading of an industry that in just three decades had seen $20 billion of investment. Imagine an industry which had a production and distribution network spanning a large continent. And finally imagine one which had been profitable from the word "go" and whose economic impact touches communities from coast to coast.

Now, let's move into the realm of reality, because that is no flight of fancy. That is precisely what Canadians have achieved over the past 30 years with the development of the oil sands.

Looked at in total, the growth of this industry is an enormous accomplishment. But what we have achieved in little more than a single generation pales in comparison to what is attainable in the next 30 years. From being what some considered an improbable--if not impossible--feat, tapping the oil sands has become one of the world's best-kept secrets and one of Canada's greatest success stories. And while Canadians express a collective concern for this country's future, the oil sands remain a success we can all share and celebrate.

Yet the industry remains dogged by the myth that it is an expensive research experiment, despite years of profitability, technological achievements, contributions to society, and an ever-increasing impact on Canadian oil production.

Now, I would not be too surprised to find that many of you remain sceptical about the oil sands. I would, too, if I were in your shoes. I've met many people who, if they have heard of Suncor and Syncrude's crude oil operations, Imperial Oil's Cold Lake facility, or Shell's Peace River project, think of huge white elephants born in a time when government had, or thought it had, all sorts of money to invest in uneconomic mega-projects.

So many of you may be surprised to know that Syncrude, for example, has been profitable in every year of its operation. The success of the oil sands has, moreover, just attracted major new investments by Suncor, at its oil sands mine near Fort McMurray, Imperial Oil, at its successful Cold Lake operations, and Amoco, at its Primrose Lake operation.

So why have you not heard of Syncrude, Suncor, and the other oil sands operators? Perhaps because of our remote location, mostly the northeastern part of Alberta. We're out of sight and so perhaps out of mind for most people. But if I tell you that the five largest oil sands operations already supply 25 per cent of Canada's petroleum needs--one out of every four litres you fill your car with, for example--then I hope I've impressed you enough for you to become interested in the oil sands and their potential.

And that is the real reason why I'm speaking to you here today. I want to discuss what is, in my view, the leading development opportunity in Canada--expansion of Canada's oil sands. I know of no equivalent job and wealth creation opportunity of this scope in Canada. Certainly not in the private sector, and with the cancellation of Hydro-Quebec's Great Whale project, not in the public sector either.

Early in 1995, the Alberta Chamber of Resources will release the final report of its Oil Sands Task Force. It will show why the oil sands should become a fundamental part of Canada's economic and energy strategy. I am excited about this report because, if it is received in the way we believe it will be, it will send a strong signal to Canadians that a special focus on the oil sands is in the best public interest.

Just as we are currently at a crossroads over national unity, so we are at a crossroads over oil production. Domestic conventional light crude is declining rapidly, to the point where, by 2010, oil sands production will equal conventional production.

It is basic economic theory that a nation makes the best progress when it specialises in what it knows or what it can do more efficiently than anyone else. We have a clear economic advantage in the form of Canadian technological mastery of the oil sands. Today, our oil sands technology is considerably more proven and advanced than that of gasification or liquefaction, and far more advanced than that developed for such alternate energy sources as solar or geothermal energy. This is not to suggest that other technologies won't prove out in time--just that oil sands technology is tested and proven now.

We also benefit when we back made-in-Canada projects, such as the oil sands, because they generate confidence in future economic growth and are an important symbol of Canadians' pride in themselves.

One hundred and ten years ago, Sir John A. Macdonald had a vision of holding this country together. The CPR became a symbol of pride and a focus of business growth in the last century. And with prosperity came a unity of purpose that kept this country together for a long time. We have a vision that sees the oil sands as having the same potential to play this role in the 21st century. They could demonstrate to others--and to ourselves--what we can do. The Avro Arrow had the potential to be this kind of symbol in the sixties, and to move Canada into the big leagues of aerospace technology. We threw that chance away by thinking small. Do we want to make the same mistake again... to dwell on small dreams and small accomplishments? No. A thousand times, no.

I think it's appropriate that today, in a railroad hotel, I tell you about a new national dream. We want to rekindle the spirit of 1884, when optimism reigned as the last spike was hammered in.

We can use the oil sands as a lever to make Canada a credible option again both for Canadians and for others. We can use the oil sands to rejuvenate and revitalise Canada. We can use the oil sands as part of a master plan economic development. We know we can do it. We have the technology. The projects are expensive, but the ' costs are known.

What stands in the way are a lack of a national strategy and the patience and determination to stick with it until we get results. We need to have a belief and a confidence in ourselves. We need to set long-range economic goals and then have the perseverance to stick to them. We need goals that embody vision, realism and dogged persistence in pursuing them. And we need a national consensus around what we want.

The oil sands, black gold, could be a worthy successor to the last spike. And the strategy that the Oil Sands Task Force unveils next year could provide the road map to get us there.

I believe oil sands development could be one of the key ingredients to Canada's economic future. There are, however, three questions that beg answers. First: What is the current status of our industry? Second: What could it be? Third: What kind of oil sands development do we need?

First, let's discuss the current status of our industry. It's no secret that several oil sands proposals are dead, notably, OLSO, Alsands and Canstar. Between the early seventies and late eighties, seven oil sands projects were proposed, none of which came to fruition.

There are three reasons why these projects failed to proceed. First, the recession of the time reduced consumer demand. Second, high interest rates made several projects uneconomic because of the staggering cost of borrowed money carried for the many years between project start and project completion. And finally, oil sands projects have suffered from fiscal terms which maximised immediate government revenue at the expense of investor pay-back.

There is also one other adverse factor about which we should be frank. I'm talking about that ill-defined state of mind called "investor confidence." None of us is a totally rational being and even the most hard-headed business person bases his or her investment decision not just on complex calculations of future returns, but also on an intuitive feel for the marketplace and the safety of his or her capital.

Investors can live with technological risk. They can live with risk created by fickle consumer tastes. They can even live with an unhealthy load of government regulation of business, as much as it is often unproductive and irritating. What they cannot abide, however, is the gnawing suspicion, reinforced by experience in Canada, that if they invest money wisely and manage to make a profit, the public will call it gouging and government will respond by turning around and appropriating most of that profit.

Take away the rewards and the discipline of the marketplace and you have a civil service economy--an economy where losers aren't allowed to lose and winners aren't allowed to win. When investors lose their confidence that they will be allowed to reap the rewards of their success, then they will be left with no incentive to take risks. And expensive projects, whose risks are high because of their size, lead-time and technological innovation, will be the first to suffer. This, in fact, is exactly what happened in the oil sands.

The majority of the planned projects were derailed. Out of the survivors, however, has emerged a healthy industry which has made steady progress and is now poised to try to move forward again.

Well, now let's examine our second question. What could the oil sands industry become?

My basic proposition to you is that oil sands development should be a fundamental part of Canada's economic development strategy for the rest of this century and into the next. I have four primary reasons for believing this.

First, the oil sands industry is an area where Canada has developed some significant advantage in the form of technology. On the subject of the oil sands, Canadians know as much as any nation in the world.

Second, oil sands development can proceed in logical, staged, and environmentally responsible production increments that build on the existing infrastructure. This infrastructure not only includes the $20 billion worth of operating plants and pipelines, but also community infrastructure, highways, and supporting services. This type of development is far less risky than the original large integrated plants like Syncrude and Suncor, and should not be confused with a series of large-scale stand-alone mega-projects.

Third, oil sands projects are powerful engines for pushing the economy back into overall economic growth. Our economy is in a very fragile state right now and the growth we are seeing could be sustained by oil sands development. This is because oil sands projects generate instant activity in the constructions sector, as well as early orders for manufactured goods in factories across the country (but primarily in central Canada).

Oil sands operations also create an internal market for products and services which have tremendous export potential. Examples include mining equipment, processing units and fabricated vessels and pumps which are needed in other world-scale projects in other countries.

Furthermore, by working on large oil sands projects, Canadian engineering firms gain experience which is very saleable on international markets.

Another argument for oil sands projects is that they produce more output per dollar of capital cost than other large projects. They also generate considerable business prospects for hundreds of small- and medium-size enterprises, where most of the job creation occurs. For example, my own company, Syncrude, had contracts last year with over 2,400 suppliers and vendors who, in turn, subcontracted work to many other small- and medium-size businesses across the country.

The oil sands are, in fact, a tremendous example of value-added resource development right here in Canada. Our already high-quality crude is further refined into various finished products and high-value petrochemicals, which are exported to 36 countries.

At a time when Canadians are being urged to pursue greater productivity, and to become more competitive in a global economy, the oil sands offer a tremendous opportunity for our country. It is an idea whose time has arrived.

Right now, for example, we are talking about an investment opportunity in excess of $21 billion to triple oil sand production from 400,000 barrels to 1.2 million barrels per day. Unit costs per barrel at that kind of volume would be approximately $9 Cdn to $12 Cdn per barrel level--which is less than $10 U.S., and which is very competitive with conventional production, when finding and development costs are included.

At this point, you may wonder: if oil sands projects are such a good idea, and so essential to offset declining domestic production, why aren't major projects being built?

The answer lies not in any fundamental weakness of the oil sands projects that were proposed. It lies in two factors. First, the "double whammy" of high interest rates and declining consumer demand that we saw in the seventies and eighties. And second, fiscal policies that undermined investor confidence and reduced the profitability of those projects.

Oil sands developments could and should be restored to their proper role in our own overall economic scale of things. This would require two basic changes. First, an improvement in the Canadian economy coupled with greater responsibility in government spending. We can have sustained economic growth, provided our governments resolve to live within their means. Second, a stable, generic set of fiscal terms which recognises the nature of the investment required to build oil sands plants and provide a fair share of the value created to the developer.

I understand and support the government's need for revenue. No part of industry should be expected to operate in a tax-free environment. We all have a responsibility to carry our fair share of the tax load. But do you realise that today the oil sands industry is the only manufacturing sector which does not have its own fiscal regime? Each oil sands operator has a different set of tax and royalty terms. As a country, and as an industry, we have to get away from negotiating on a project-by-project basis. We have to get away from government picking the winners and losers, so that we can get on a level playing field and let the free market pick the winners and losers.

The socio-economic benefits of oil sands development are huge. In the case of the vision we have of increasing oil sand production to 1.2 million barrels per day, government revenues from sales, business and income taxes, together with the results of reduced social expenditures, would improve by $122 billion between 1995 and 2025. The size of the debt, which is currently an obligation of government, could be notably reduced. Canada is wedded to social programmes that it cannot afford and to a redistribution of wealth that is increasingly difficult to fund. Development of the oil sands could finance much of our social agenda and help pull the social fabric of the country together.

And that leads me to my next point. Before development can proceed, we need a climate of investor confidence, brought on by government commitment to a sound private sector though long-term rules that will not be broken for political expediency.

Now, let's turn to my third and last question, namely, what kind of oil sands development should we encourage?

I believe that Canada's oil sands could and should play a key role in this country's economic development for the rest of this century and into the next. We don't have to look for our oil; we know it is there. And we also know that once Canada returns to sustained economic growth, our thirst for oil will grow again. Our domestic conventional production is fast declining. The time to restore momentum to oil sands development is now.

We have the technology, much of it developed by Canadians. It can be improved still further. We have enough oil sands to supply Canada for hundreds of years, and have enough left over to expand our exports to the United States and to provide a secure long-term energy supply source for countries on the Pacific Rim. We are the world leaders in oil sands production technology. And we work in partnership with the Aboriginal People of our area who benefit from employment and entrepreneurial opportunities.

Is it expensive oil to produce? Of course. But no more expensive, we think, than the alternatives of depending heavily on off-shore imports and forgoing the opportunities for job and wealth creation in Canada.

And finally, oil sands development delivers a benefit to the national economy unmatched by any other capital project currently proposed. A barrel of oil from the oil sands delivers spin-offs of a high order. A barrel of imported oil brings with it little in the way of domestic employment, manufacturing demand, or government revenue. Construction and operation of new and expanded oil sands plants, on the other hand, would add more than 1.1 million person-years of employment from 1995 to 2025. We would see over 50,000 permanent new jobs created after that. Much of this employment would accrue to small- and medium-size businesses. Canada's Gross Domestic Product would increase by 0.6 per cent-all of which adds up to a very significant impact on the Canadian economy.

What stands in the way of further oil sands development, then?

I have already touched on one important obstacle. We need a reasonable, stable, secure set of ground rules for development. A set of rules that gives the investor some incentive. One that will be put in place by government and left there.

Another thing, just as important, and indeed, perhaps more important, is confidence in ourselves. We Canadians tend to have short memories and too little willingness to set long-term goals and find the confidence to stick to them. Too often, we trim our sails to every change in the wind. To develop our oil sands resources will take a national commitment to long-term goals and a dogged determination to stick to them for many years, much as the Japanese decided in the early fifties to become a world power in steel, automobiles, cameras and electronics--goals that seemed at the time, to outsiders, to be completely unrealistic.

The goal we all seek, of a prosperous and dynamic Canada, is within our grasp. We have the resources. We have the skilled and educated people. What we don't seem to have, yet, is a national consensus around what is needed in the way of public policies to get development moving. In that sense, our biggest economic problem is our state of mind. Oil sands development could play a central role in our economic recovery and ongoing prosperity. We need to gain a common understanding of the tremendous social and economic benefits that are possible. What we need to do is just get on with it. Let's awaken the sleeping giant of the oil sands.

Canada has a choice. We can secure our energy future, and thereby our economic future, by developing our oil sands. Or, we can depend increasingly on Middle East oil, and volatile Middle East politics, and lose the opportunities for a better future that are within our grasp today. To me, the best choice is obvious.

We need a better and more vigorous Canada, better adapted to the challenges of the 21st century. The oil sands represent a key competitive advantage for Canada. Development of this resource could enhance our future prosperity. By not realising the potential of the oil sands, we are weakening ourselves where we most need to be strong. We have a unique window of opportunity, but we must act soon if we are to secure our economic and energy future.

We need to work together and make oil sands development a high priority on Canada's opportunity agenda. If we don't, the vast oil sands resources may go undeveloped and, in the end, we will all lose.

The appreciation of the meeting was expressed by Alex Squires, Oil and Gas Consultant, Loewen, Ondaatje McCutcheon and a Director, The Empire Club of Canada.