Albertas Oil Industry - Case Study Example

Alberta’s Oil Industry of the Contents Background of the industry 3 Unique features of the oil industry 4 Canadian Constitution and oil industry 7 Conclusions and Recommendations 8 10 References 11 Background of the industry Alberta’s oil sands are the biggest strength of Canada. It has been estimated that there are 1.7 – 2.5 trillion barrels in the country which means that there will be no problems for the country to meet its energy requirements (Alberta Oil & Gas Industry, 2014). Alberta’s oil industry is composed of three main parts namely the upstream sector, mid-stream sector and the downstream sector. The upstream sector is responsible for exploring new avenues of oil and producing oil. The mid-stream sector is responsible for transportation of the oil and the downstream sector is responsible for refining the oil and improving the marketing strategies. The origin of the industry can be traced to the discovery of Leduc in Canada in 1949 (Black, 2011). The main products of the industry are crude oil, natural gas, bitumen, synthetic crude oil and the natural gas liquids. The following table shows the major oil industries in Western Canada Figure 1: Drilling Statistics of Alberta (Source: Alberta Oil & Gas Industry, 2014) It can be clearly seen that Alberta is the leader in terms of both drilling activities and natural wells. Figure 2: Production of Alberta (Source: Alberta Oil & Gas Industry, 2014) The above graph shows the energy production in Alberta in the past ten years. It also has the projected oil production of the future. It can be seen that estimated levels of production in the country are expected to face a continuous rise in the future. The oil industry of Alberta is largely responsible for securing leases from foreign companies operating in Canada. The growth in the oil energy of Alberta has been supplemented with a rise in the population. Unique features of the oil industry There are a number of factors which makes the oil industry of Alberta unique compared to that of the competitors. Geology and demography of the country are two main factors behind the development of this industry and the third is the constitutional provision. Extent of Reserve The uneven distribution of natural reserves is the primary factor that has driven the wedge between the provinces of Canada. The Western provinces of Canada have been found to hold maximum reserves and Alberta has the highest concentration of the mineral reserves. Canada stands second to Saudi Arabia in terms of reserves. The Albertan government has made considerable investment for improving the technology of oil extraction and refinement and currently Alberta has 176 billion barrels of proven reserves with crude bitumen accounting for 174 billion barrels. 140200 sq km of oil lies under Alberta, a feature which is not shared by other provinces (Chastko, 2004). Royalties of oil sand This is a feature that was developed particularly for the advancement of the oil industry in Albertan province. This system accounts for the technological risks and the risk of capital that is faced by the oil producers. According to the present system, the base rate of royalty is at 1% for oil barrels priced at CAD 55 per barrel and this is expected to rise as high as 9% when the barrels cross the mark of CAD 120 per barrel. This framework introduced by the government has constantly resulted in the high growth of the province (Finch, 2005). Geopolitical advantage Another major factor which has created a significant advantage for Alberta is its unique geopolitical feature. The paradiplomacy of the province has been largely regulated by the economic agenda. The physical proximity of Alberta with the United States has allowed the province to become the largest trade partner of the U.S.A. fuelling its growth. The rising trade between the two nations has been supported by trade agreements like Canada-United States free trade agreement. These advantages have provided Alberta to develop a robust oil industry that could not be matched by its closest competitors (Ethier & Simard, 1986). Positive externality to the economy of Alberta The energy sector is the most important source of employment and prosperity in Alberta. This has allowed Alberta to have one of the strongest growth rates among the Canadian provinces. In the time period from 1993 to 2003 Alberta had an average annual growth of 3.7% which was higher than any other provinces in Canada (Harris & Khare, 2002). The rapid economic growth of Alberta has been coupled with an equivalent increase of the population in the country. This has caused an agglomeration effect on the economy causing multiple industries to develop around the energy sector. The oil and the natural gas industry are responsible for the high employment in the province and the upstream segment of the industry employs 121,500 people of Albertans. The large amount of growth in the exports from the energy sector in the economy is also largely responsible for the growth of Alberta. Statistics indicate that the value of exports rose by $95billion from 2002 to 2012 and the contribution of the energy sector in this was $68 billion. Negative Externality on the economy Despite the plethora of advantages that has been obtained by the economy from its energy sector, the major challenge for the sustainable development of the industry remains in the form of negative externalities it generates. The negative externality impacts both the environment and the life of the people living around the oil companies. Over extraction of bitumen in Alberta causes the environmental degradation mainly through excessive emission of greenhouse gases and high wastage of water reserves used in the process of production. The producers of bitumen do not pay sufficient environmental tax. As Alberta has the highest concentration of mineral reserves so it is generally the largest emitter of toxic gases. Though other provinces of the Canadian economy has been able to lower their standard of carbon emissions, Alberta has failed to do so and continues to be the largest pollutant (Klassen, 1999) This has significantly caused climate change in Canada over the decades. The provincial government in Alberta has imposed only a limited amount of tax on the carbon emitters. When the federal government had tried to impose taxation on the province then it was viewed as an intrusion and a ploy to transfer the wealth of the province to the entire country and the idea was dropped. The negative externalities on the health of the public are largely caused by the pollutants that are contaminating the environment. It has been argued that the practice of strip mining in the province is one of the main negative externalities that are being caused by the oil producers. There has been increasing evidences that the health risks of the population in the country are on a rise and this is particularly bad for the long-term economic development of nation. Physically weak people in the population are mostly less productive and rising proportion of unfit people in the population lowers the efficacy of production. One of the primary arguments that are advanced by economists behind this excessive negative externality in Alberta is the division of power by the constitution. However, in practice the autonomy of the provincial government exacerbates the problem (Levy & Kolk, 2002). Additionally, the costs of cleanup also need to be borne mostly by the federal agency which is a major factor behind the irresponsible activities by the provincial governments. Canadian Constitution and oil industry The government legislations regarding the oil industry of Alberta is quite unique when compared to others. The government of the country is structured to serve at individual provinces and for the federation as a whole. Three main factors can be identified which has led to the unique development of the oil industry in Alberta. The constitution of Canada allows the ownership of natural resources to the provinces in which they belong. When Alberta and Saskatchewan, two provinces of Canada were created in 1905 the right to owning of natural resources had remained with the federal government. Only in 1930 the rights were transferred to provinces (Clarke, 2009). However, it was not until 1985 that the provincial governments could fully enjoy the profits earned from the oil production until the oil market was deregulated. 80% of Canada’s natural oil reserve lay with three of the main province namely British Columbia, Alberta, and Saskatchewan (Clarke, 2009). This is how Alberta had gained its strength because the province owns 97% of the reserves. The remaining 3% of the reserves are owned jointly by the federal government. As the ownership of the oil reserves are largely non-uniform, provinces have greatly used their jurisdiction power by establishing multiple agencies. These agencies are responsible to regulate activities related to the production of oil (Douglas & MacMillan, 1982). The initial system of rationing that was implemented by the government was removed during this period which led to the unperturbed growth of Alberta. The initial problem of Alberta which was marked by a higher production capacity that could not be met with demand was also solved after the market liberalization. The cumulative result of this division of power enabled by the constitution has allowed the provincial governments in the country to control the non-economic benefits arising from the profits generated from the oil sector. Alberta’s provincial government has stated that it not only has the power to develop the projects but also to determine the price at which the products are to be sold. These specifications of the constitution have greatly constrained the power of the federal government to control the interprovincial trade. Critiques have often argued that the constitution of Canada is poorly designed as it has never attempted to change the status quo of the Western provinces (Clarke, 2009). This defensive stance of the provincial governments has largely caused uneven distribution of wealth. Furthermore, there is an issue relating to environmental concerns that have the potentiality to create negative externality on the adjoining areas. This is mainly because the Canadian constitution does not define actual jurisdiction regarding the environmental impact of the projects. This implies that if a project taken up by the Albertans have a negative impact on the surrounding district then the federal agency will have to bear the costs for environmental damage even if it is solely the province which is responsible for such a loss. The Canadian constitution has also crippled the role of the federal government in overlooking matters pertaining to the regulation of major oil projects. Legislations regarding the exploration and production regimes of organization also give significant power to the provincial government. This is because development of onshore oil production is largely determined by the competitive allotment of the production rights (Hunt and Lucas, 1981). However, the most powerful provinces inevitably win the bid. Therefore, Alberta’s provincial government and the policies framed by it have contributed in the meteoric rise of the province. The growth of the province has also been fuelled by the rising oil prices in the decade of the 90’s. The oil companies had made huge profits and the ownership rights of the constitution had confined the wealth within the geography of the province (Kelly, 2009). Conclusions and Recommendations It can be said that the government of Canada has largely created a division between the provinces which have produced significant negative externalities for certain provinces. There are both positive and negative externalities of the oil industry. The oil industry in Alberta has caused economic agglomeration of a number of economic activities which have generated multiple jobs and contributed to the prosperity of the economy. While Alberta have successfully managed to maintain a high level of economic growth yet there has been certain criticisms regarding the high level of environmental waste that is generated during the process and the potential impact it has on the health and safety of the general population. The following recommendations can be suggested in order to remove the difficulties that are associated with removing the negative externalities of Alberta. Firstly, the role of the Alberta heritage fund can be crucial to develop the non-renewable energy sector of the province which will help in reducing the pressure on the environment. However, this purpose is unlikely to be realized if the allocation rules of the resource revenues in the province are not modified. The payments made by the oil companies to the fund are not fixed. This means that discretionary payments are made and the pace of fund growth is slower. Therefore, the government should formulate policies to increase the extent of savings to the heritage fund. Secondly, investing in superior technology will also be very important in regulating the pollution that is being caused by Alberta. Investment in superior technology is bound to reduce the carbon emission of the oil companies and this will eventually benefit both the companies and the local. Thirdly, a convenient option of the provincial government would be to impose a higher level of carbon tax on its oil sands industry. This effort is likely to reduce the excess production on the part of the producers and make them produce at the equilibrium level. Setting the level of tax will be a major decision as imposing a very high level of tax may affect the competitiveness of the economy adversely. Finally, there should be modifications in the constitution to balance the cleanup costs of major projects. Provincial governments should be provided with greater responsibility for the negative externalities they create. Enhancing the responsibility of the provinces can combat the negative externality effectively and make the production process sustainable. References Alberta Oil & Gas Industry. (2014). Alberta oil & gas industry. Retrieved from http://albertacanada.com/files/albertacanada/OilGas_QuarterlyUpdate_Fall2014.pdf. Black, B. (2011). Petropolis: Aerial Perspectives on the Alberta Tar Sands. Environmental History, 16(3), 542-543. Chastko, P.A. (2004). Developing Albertas oil sands: from Karl Clark to Kyoto. Calgary: University of Calgary Press. Clarke, T. (2009). Tar sands showdown: Canada and the new politics of oil in an age of climate change. London: J. Lorimer. Douglas, G.W. & MacMillan, J.A. (1982). Interregional economic impacts of the Alberta Alsands project. Canadian Energy Research Institute. Retreived from http://192.75.12.3/uhtbin/cgisirsi.exe/?ps=Ss4igueRNN/BATA/49140006/2/1000. Ethier, M. & Simard, D., (1986). Marginal effective tax rates for the oil industry in Alberta, 1965-84. Economic Council of Canada, 39-64. Finch, D., 2005. Hells Half Acre: Early Days in the Great Alberta Oil Patch. London: Heritage House Publishing Co. Harris, R. & Khare, A. (2002). Sustainable development issues and strategies for Albertas oil industry. Technovation, 22(9), 571-583. Hunt, C. and Lucas, A.R. (1981). Environmental Regulation: Its impact on major oil and gas projects: oil sands and arctic. Canada: Canadian Institute of Resources Law. Kelly, G. (2009). The Oil Sands: Canadas Path to Clean Energy? London: Kingsley Publications. Klassen, H.C. (1999). A business history of Alberta. Calgary: University of Calgary Press. Levy, D. L. & Kolk, A. (2002). Strategic responses to global climate change: Conflicting pressures on multinationals in the oil industry. 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