Strong & steady: Edmonton's growing share of oilsands action lands city in an economic 'sweet spot'
The Edmonton Journal
Tuesday, March 07, 2006
CREDIT: Shaughn Butts, The Journal
A Clark Builders crew pours concrete for the foundation of the new Grant MacEwan College Health Learning Centre on 104th Avenue and 109th Street
Economic Spark: Fueling Edmonton's engine
Help Wanted: Opportunity knocks loud and often
Burned by Oil: Some firms struggle to keep pace
Industrial Strength: Coming spending spree on our doorstep
Obstacle Course: Gary Lamphier identifies five big challenges to making prosperity last
Ron Chalmers explores causes and effects of edmonton's economic gains
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EDMONTON - Edmonton's economy has accelerated from a deep recession a decade ago to a rush that is almost unrivaled across the country -- and across the city's own history.
High oil prices, low interest rates, good schools and low taxes all have helped, but Edmonton's economic ascent over the past 10 years has been driven by oilsands development.
The transformation began with historic moves by the provincial and federal governments. In 1995, Alberta revised its oilsands royalties to encourage construction of new plants. It announced a single formula of only one per cent of production until a developer recovered its initial investment -- with the royalty then rising to 25 per cent.
Ottawa followed in 1996 with a new tax policy allowing faster write offs of oilsands investments.
Both changes cut the initial capital requirements, reduced uncertainty, and encouraged new investment.
"The new fiscal regimes have had a huge impact," says Brad Anderson, executive director of the Alberta Chamber of Resources.
"They recognized that this is a risky business that is expensive at the front end."
Almost immediately, in 1996 and 1997, $13-billion worth of new or expanded oilsands projects were announced.
Canada was then entering a period of low inflation, low interest rates, reduced federal and provincial government deficits, and lower taxes, all creating a healthy climate in which the new policies could take effect.
Over the next decade, tens of billions of dollars worth of further oilsands projects were announced.
Some were temporarily delayed when the oil price dipped below $20 US per barrel but were reactivated when the price recovered.
Oilsands production always has been expensive, and reducing this expense has been crucial.
Since Suncor began producing in 1967, and Syncrude in 1978, both plants have cut their operating costs by growing and exploiting economies of scale -- and through technological advances.
Massive trucks, with 350-tonne capacity, have enabled a shift from conveyor belts to shovel-and-truck mining.
Other improvements include more efficient separation of oil from sand by cold water and agitation, rather than by hot water and chemicals, the use of slurry pipelines to move product across the Athabasca River, and the capture of byproducts.
These advances have not arrived by accident.
"The Alberta Oil Sands Technology Research Authority spent about $800 million over 25 years," says Eddy Isaacs, managing director of the Alberta Energy Research Institute. "Industry spent about $2.4 billion on research, development and pilot projects."
Suncor and Syncrude have reported that they cut their production costs from more than $25 Cdn per barrel to as little as $16. Isaacs thinks their costs are as low as $10 US.
The oilsands industry has transcended the once-precarious balance of prices and costs.
Every project now planned would be profitable at an oil price as low as $30, an industry spokesman recently told The Journal.
Nobody foresees prices dropping below $45 within five years, says Paul Tsounis, the City of Edmonton's chief economist.
While the pioneering investments by Suncor and Syncrude were historic events for Fort McMurray, they were relatively isolated in their economic impact. For many years, the oilsands were described in terms of "potential" rather than immediate prospect.
In the past 10 years, that has changed. The lineup of major projects has created a new era in the economic history of Edmonton and of Alberta.
"I think in the next three or four years we will see the locus of economic growth in the province moving north of Red Deer," says business dean Mike Percy at the University of Alberta.
When Suncor and Syncrude were built, he says, companies that could have supplied materials or services avoided major commitments to "one-off" projects.
Now, with a long list of planned projects, "you're starting to see firms wanting to be close to the oilsands," he says.
Edmonton companies can target the oilsands market because they aren't just selling to occasional projects; they're selling to a continuing industry. And those companies create business for other companies.
Clark Builders, in Edmonton, earns annual revenues of $300 million, much of it by building fabrication plants, offices and warehouses.
"They're all related to the oilsands," says president Paul Verhesen -- yet most are built in Edmonton.
"As the oilsands go, our clients' confidence goes that much higher," Verhesen says. "We're in a sweet spot."
Jackson von der Ohe, chairman of the Edmonton Chamber of Commerce, says a rising share of oilsands construction actually occurs off-site.
"Because of the shortage of skilled trades in the north, some construction is moving closer to Edmonton," he explains.
"You can be near a larger labour pool with better access to the trades and a less hostile environment."
Rather than building from scratch on-site, he says, large modules can be built in Edmonton, then assembled on-site. "It make more sense to build here."
The fabrication of pressure vessels and other heavy metal modules in Edmonton, for shipment north, forged one important link between Edmonton and the oilsands.
The construction of upgraders, which remain in Edmonton and area, has further integrated the economy or our city with the north.
At oilsands mines, even after the sand is removed, the remaining oil is thick and gooey. It must be chemically upgraded into a lighter liquid -- like conventional crude oil that flows from wells.
Suncor and Syncrude both built upgrading plants on-site. But when Shell built its Athabasca oilsands plant in 2003, it saw an opportunity to reduce costs and raise reliability by shipping the raw product to an upgrader at Scotford, just outside Edmonton near Fort Saskatchewan.
This created access to a large labour pool, both for construction and for ongoing operations. Edmonton's larger housing stock and lower cost of living ensured that the workforce would be more reliable and less costly here than in Fort McMurray.
"The decision to build the upgrader at Scotford was revolutionary," says economist Andre Plourde at the University of Alberta.
It brought the Edmonton area a $2.5-billion construction project, with thousands of construction jobs and hundreds of permanent operating jobs.
The Scotford upgrader has been followed by announcements of four more similar-size Edmonton-area upgraders to be built for new oilsands plants -- with two more under consideration.
In effect, oilsands upgrading is moving from Fort McMurray to Edmonton.
Since 2000, a healthy economic climate has helped our entire country.
But Edmonton has been especially strong.
Over the next 10 years, major oilsands projects will generate $60 billion in direct spending, which will multiply several times in their indirect impact across the province and the country.
Tsounis estimates that every dollar spent on oilsands construction will create at least 80 cents in economic activity in Edmonton. Then every dollar of operations spending will have an economic impact of at least $1.20 in Edmonton.
Despite abundant evidence of growth, Statistics Canada reported that Edmonton actually lost 5,000 jobs in 2005 -- while the labour force grew and unemployment fell. This may reflect the flight of workers from low-wage jobs in Edmonton to higher-paying jobs farther north. But the report's accuracy has been questioned, and the counterintuitive result may have been caused by random error, with Statistics Canada drawing a sample that does not closely represent the entire population.
While oilsands activity has stimulated our city's economy, it also raises concerns that we are too centred on the energy industry.
A DIVERSE CITY
To the contrary, the Conference Board of Canada has described Edmonton as having the country's most diversified economy, based on the distribution of employment among different industries. Its latest Metropolitan Outlook rates our economic structure at 0.94, with a perfect score of 1.0 being defined as "highly diverse," and a zero denoting "not diverse."
This does not prove a balanced economy, for it ignores the dependence of Edmonton's secondary and tertiary industries -- such as construction and manufacturing, banking and retailing -- upon the primary oil and gas industry.
In good times, such dependency may be irrelevant. But how badly would an energy-industry decline damage our city?
Every resource-based economy suffers boom-and-bust cycles to some degree. But as the Alberta oilsands industry has grown, Edmonton's economy has become less volatile.
The Conference Board of Canada has estimated our city's annual economic growth since 1988. For the nine years through 1996, growth averaged 2.5 per cent annually.
The average variability of that figure was plus or minus 1.8 per cent.
For the next nine years, from 1997 through 2005, growth averaged 4.3 per cent -- while variability averaged 1.7 per cent.
So growth has increased substantially while year-to-year variability of growth actually declined.
As Edmonton has become more closely tied to the oilsands, its economy has both grown and stabilized.
On the consumption side of the economy, Edmonton has shown consistent growth over the past decade. Surging home prices and retail spending, especially in the more recent years, reveal that consumers have both the confidence and the financial ability to make major commitments.
Low interest rates on bank loans and mortgages have raised concerns that many consumers could become insolvent if those rates should rise.
In fact, this has not happened during the rise of bank prime rates over the past three years and mortgage rates over the past two years.
During 2005, personal bankruptcies fell by 13.5 per cent in Alberta and by 12.4 per cent in Edmonton. Those were the greatest provincial and municipal improvements in Canada.
Rising home prices, while creating a barrier to entry by first-time buyers, have the upside of building wealth for those who do buy.
Every young couple who bought a $150,000 home three years ago has since enjoyed an unrealized capital gain averaging $40,000 -- reducing their risk of future insolvency.
Edmonton's unemployment rates have dropped faster than national rates for the past decade. And average earnings have risen.
But low-income earners in Edmonton were hurt by low apartment vacancy rates and fast-rising rents through 2002.
Over the past three years, however, new construction of rental housing has forestalled rent increases.
At the bottom end of the economic scale, "the number of low-income people in Edmonton has declined over the past 10 years," says Phil O'Hara, research co-ordinator of the Edmonton Social Planning Council.
Marjorie Bencz, executive director of the Edmonton Food Bank, cautions that gains by low-income earners may have stalled.
The Food Bank distributed an average of 18,038 hampers per month in 1996. That figure fell every year through 2001, when it bottomed-out at 11,877. Since then, it has climbed back to an average monthly distribution of 13,709 hampers in 2005.
Low incomes are especially prevalent among recent immigrants and aboriginal people, O'Hara says.
Recent proposals that address Edmonton's labour shortage suggest those groups could be targeted for skills upgrading -- and that employers could be better sensitized to the making workplaces more friendly to immigrant and Aboriginal workers.
Such reforms might strengthen and deepen our city's economic ascent.
High oil prices obviously have made new oilsands investments more attractive -- as have peaceful labour relations in Alberta and political disruptions abroad.
But a longer-term issue is the sustainability of the resource -- as contrasted with conventional gas and oil.
The long-term importance of the oilsands also reflects their sustainability.
Over the past 10 years, as oilsands activity has accelerated, the production of conventional oil and gas production has peaked and declined.
In Alberta, natural gas production peaked in 2000 and since has declined slowly -- despite rising prices.
Conventional oil well production peaked in 1996 and has since declined substantially.
Oilsands production has risen continuously, surpassing conventional oil in 2002.
The rise and fall of conventional gas and oil production was predictable from the limits of those non-renewable resources.
Oil from the sands also is non-renewable -- but the size of the resource is staggering.
The sands hold 175 billion barrels of oil that is accessible with today's technology.
That's enough for more than 400 years, at current production rates. And technology will advance, enabling exploitation of the far greater resource that is not currently accessible.
With oilsands production expanding for the foreseeable future, continuing economic growth for Edmonton appears inevitable.
As the new plants recover their construction costs, the new royalty arrangements will pay a higher share to the provincial government.
The province will receive an estimated $95 billion over the next 20 years if the oil price averages only $40 -- or $133.5 billion if it averages $50. Higher provincial royalties can only help our municipal economy.
The anticipated wide margin between revenues and costs brings comfort to oilsands investors, business owners, workers and government. It cushions against contingencies such as their rising costs of training, security, and environmental compliance.
The maturing of the Alberta oilsands industry has energized Edmonton's economy.
The future looks prosperous.
© The Edmonton Journal 2006