An Energy and Environment Strategy for Albertas Future

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An Energy and Environment Strategy for Albertas
Future
IRIS Seminar Series Presentation October 18,
2006 Dr. R. Mansell
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Key Points

• Albertas economic future will be largely
  determined by the its energy sector
• We need to worry about the Curse of Natural
  Resources
• Continued growth and prosperity is not a given
  even in a world of high energy prices
• We have the raw material to build a
  sustainable, prosperous and clean future but
  the challenges are huge and increasing
• We need to substantially increase our investments
  in and commitments to intensive (value added) vs
  extensive growth advanced technologies and
  policies related to in situ oil sands, enhanced
  oil recovery and unconventional gas
  polygeneration, integrated and integrating energy
  and environmental technologies, policies and
  market systems for conventional, unconventional,
  alternative and renewable energy and energy
  efficiency, conservation and adaptation.

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Outline

• Historical Perspective
• Curse of Natural Resources
• Albertas Energy and Economic Future
• Issues, implications, strategies

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1. Historical Perspective

• Objective to put our current and future growth
  and development in perspective.

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Long term gain in relative size of the Alberta
economy
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Large variations but long term average population
and employment growth rates for Alberta are
approximately 0.8 and 1.0 percentage points above
the national average
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High variability but long term average real GDP
growth rate for Alberta is about 1.0 percentage
point above the national average. Declining
variability?
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Net Migration accounts for approx half of
population increase on average sensitive to
relative regional income and employment conditions
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Economic performance closely tied to real energy
prices
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Impacts of the oil and gas sector 1971-2004
Source R. Mansell and R. Schlenker. An Overview
of the Impacts of the Oil and Gas Sector on the
Alberta Economy (forthcoming).
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Importance of the energy sector

• The energy sector directly and indirectly
  accounts for approximately half of total Alberta
  output, income, employment government revenues.

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Contributions to other regions
Source R. Mansell, R. Schlenker and J. Anderson.
ISEEE Backgrounder, November 2005.
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Growing impact of the energy sector- provincially
and nationally
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2. The curse of natural resources

• Every boom contains the seeds for a bust
• Is the Alberta economy in a boom?
• What can we learn from the boom in the 1970s and
  early 1980s?
• Is there a curse of natural resources?

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The boom of the 1970s and early 1980s

• Real energy prices at historical highs
• Investment close to 40 of GDP vs average of
  around 25 normally rapid increase in imports as
  a of GDP
• Real GDP growth rates more than double the
  national average
• Unemployment rate consistently at around 4
• Increasing inflation rate, particularly for
  assets (eg housing) not tradable across regions
• High net in-migration rates
• High debt equity ratios
• Extrapolative expectations increase in
  speculation and asset trading vs asset
  development
• Infrastructure shortfalls all previous fiscal
  difficulties began in a period of rapid growth

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The Curse of Natural Resources

• Dissipation / destruction of energy rents through
  inefficient exploitation, policy and regulation
• Impacts on other sectors (de-diversification)
  during periods of rapid growth
• Rent dependency (focus on consuming the rents
  complacency lack of investment in extending
  production and value of the resources, including
  other natural capital)
• Instability

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3. Albertas energy and economic future

• The resource potential and alignment of the
  stars
• The changing structure of the energy sector
• The key challenges

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The Big Picture
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Global energy demand will continue to growbut
declining conventional oil and gas reserves and
ever-increasing environmental constraints from
water restrictions, to resource access, to
greenhouse gas limits-- present huge challenges
for us and the world.
Night view of earth from National Renewable
Energy Laboratory, Golden, Colorado. Chart from
US DOE
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Global Energy Trends

• The global demand for energy will continue to
  grow
• The demand for oil and gas will remain strong,
  and given the supply situation, real prices will,
  on average, be substantially above historical
  averages
• Price volatility will increase
• Natural gas will become a more important
  constraint than oil in both oil and gas supply,
  unconventional supplies will be key
• There will be substantial growth in the use of
  coal
• Growth in alternative and renewable energy will
  be strong but will remain a relatively small
  share of total energy the sorting process will
  take a decade or more before the sustainable
  alternatives are clear
• It will be a challenge just to replace the
  nuclear generation capacity that is coming to the
  end of its useful life

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One of the Worlds Largest Concentrations of
Energy Resources potential source of sustained
comparative advantage

• Almost 50 billion bbls
• of conventional oil, 150 trillion
• cubic feet (tcf) of conventional
• gas and perhaps as much as
• 1,000 tcf of unconventional gas
• remain potentially recoverable.
• Over 170 billion bbls potentially
• recoverable from the oil sands
• and ultimate potential of over
• 600 billion tonnes of coal.
• -Large potential for
• alternate and renewable energy.

We have the potential to become a globally
competitive, clean and secure energy super power.
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Converting Potential into Reality

• There are huge challenges to economically and
  responsibly converting even a modest portion of
  this enormous potential into a sustained, high
  standard of living for current and future
  generations it is definitely not a slam dunk.
• We must invest strategically and wisely we must
  maintain those commitments over the longer term
  and we also need some good luck.

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Increasing costs and declining conventional gas
production has large implications for economic
growth, govt revenues, upgrading of resources
etc.
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General decline in ratio of resource revenues to
total value
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Real Prices Under 2004 and 2005 EUB Forecasts
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Will the future look after itself? Declining
production values for conventional oil and gas
dampen prospects.
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Will unconventional gas reverse the trend?
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Implications for government resource revenues
(note figures for 2007-13 based on expected long
term averages and dont take account of short
term fluctuations in prices)
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Production Values Under 2005 Forecasts
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Leveling of Energy Sector Induced Growth?
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Projected Impacts of the Energy Sector
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4. Issues, Implications and Strategies

• Can we significantly determine Albertas energy,
  environment and economic future?
• What are the key challenges?
• Are we asking the right questions?
• What are the appropriate strategies?

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Defining Our Energy Future

• How much of Albertas energy-based economic
  progress can be attributed to research and
  development, entrepreneurship and smart policy
  and regulation?
• An example Asleep at the Switch Oil Shale vs
  Oil Sands
• Most of the technology that has allowed rapid
  growth of the oil sands industry today was
  developed over more than five decades of research
  effort. Breakthroughs such as SAGD were
  developed over the 1980s and 1990s under the
  AOSTRA program- a joint government and industry
  research initiative. Without such programs, the
  equivalent oil shales industry in the US has not
  developed.

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The Investment Payoff

• The Investment approximately 2 billion in RD
  invested over 20 years
• The Payoff

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Challenges

• Increasing density / intensity of development and
  increasing sensitivities to development greater
  distance between supply and markets
• Resource access and related infrastructure
  development challenges, including the huge costs
  of physical and social infrastructure to support
  growth increasing average age of energy
  infrastructure
• Demographic aging and impacts on supply and
  structure of labour supply increasing difficulty
  in maintaining high net in migration levels
• Climate change and availability of cheap water
  changes in the cost / value ratio of energy and
  environmental resources
• Growing need for integrated solutions and
  sustained, major investments in development and
  implementation of new technologies
• Policy and regulation associated with all of the
  above

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Particular issues

• Labour
• The market will solve it but do we like that
  solution?
• Difficult to sustain net migration above current
  levels
• Drop in labour force participation rate is
  probably a signal
• Productivity growth slowing accelerating
  retirements create major transition issues
• Key issues are sectoral and temporal
  dislocations wages and prices are upwardly
  flexible but downwardly sticky

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Particular Issues contd

• Resource Access
• Social and physical infrastructure constraints
  will remain new investments to make up for
  runnng down of assets and significant growth
  over the last two decades are huge annual govt
  investments averaging less than 10 of business
  investments question of how to finance without
  incurring public debt
• Increasing complexity in dealing with land owners
  and integrated resource management issues energy
  development shifting increasingly to relatively
  undeveloped northern areas
• Affected groups are typically unaware of how the
  benefits of resource development flow to them

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Particular Issues contd

• Environmental
• Lack of clear policy direction, particularly with
  respect to value and allocation of water and
  emissions, especially GHGs
• Growing domestic (and foreign) sensitivity to
  real and perceived environmental issues
• Lack of market based systems to coordinate and
  drive efficient integrated energy and environment
  solutions

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Particular Issues contd

• New Technologies
• Need breakthroughs (like SAGD) in a number of
  areas for greater sustainability but these will
  take greater commitment and time, while
  investments now will lock in current and
  incremental technologies

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Symtoms vs Fundamental Issues?

• Are we asking the right questions?
• What is the long term vision for the province?
• Are we trying to maximize growth and extensive
  development or sustainable / long term prosperity
  (more intensive development)?
• What is the role of government in managing growth?

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Some thoughts on strategies and Albertas future

• Observations
• Long term averages for real energy prices will be
  substantially higher in the future
  transportation fuels will become an increasing
  supply issue there will be considerable
  volatility and some major surprises
• There will be no major breakthroughs that will
  significantly affect the expected dominant role
  of fossil fuels in meeting growing energy demands
• The provincial government (and to an extent other
  governments) will remain addicted to revenues
  generated directly or indirectly by the energy
  sector
• There will be increasingly constraining
  environmental policies affecting the energy
  sector CO2 emissions are the Achilles heel.

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Observations continued

• The energy sector has been a major determinant of
  Albertas economic progress and it will be a
  major determinant of the provinces economic
  future
• The challenges are huge but so are the
  opportunities
• We are at a crossroads complacency will almost
  certainly mean dampened economic prospects while
  strategic commitments, leadership, investments
  and policy can assure a bright long term future
• We need a vision of the future we want and the
  tradeoffs we are prepared to make
• The role of governing and managing growth in this
  environment will be much more challenging than in
  the past
• Ultimately the huge energy potential and the
  dependence of the province on the government
  revenues, investment and value added associated
  with the energy sector will keep the provinces
  focus on the energy sector

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Observations continued

• It will take some time for the fundamental
  changes to this sector to be reflected in
  attitudes and expectations (example the decline
  in non-renewable resource revenue as a percentage
  of energy revenues as basin matures and shift is
  to unconventional oil and gas)
• The tensions around the distribution of income
  and wealth generated by the energy sector will
  grow

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Observations and Strategies

• To be successful we require visionary leadership
  and a long term, sustained commitment of energy
  and resources for research, education and
  innovation (the low hanging fruit has been picked
  and even greater human capital must be invested
  to get at the next tranche).
• There are huge gains to Alberta from greening
  up fossil fuels make this a key focus
• A major component of this should be technology
  and policies to advance next generation in situ
  oil sands technology, enhanced oil recovery and
  unconventional gas

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Observations and Strategies

• Ensure environmental elements (including water
  and carbon) are fully costed and internalized in
  market decisions develop integrated energy and
  environmental market systems (a well functioning
  market can find efficient and sustainable
  solutions in a very complex and dynamic energy
  and environmental system (note that we are
  talking about market systems framed and designed
  to serve the goal of efficient, economic,
  responsible and orderly development and growth).
• Large opportunities will come from integration
  alternatives that are not viable on a stand alone
  basis become viable. Here we include integrated
  energy and environment solutions (eg carbon
  capture, use and sequestration) and
  polygeneration (multiple products,
  diversification and high value added). Ensure
  that policies and regulation do not prevent
  achievement of gains from integration.

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Observations and Strategies

• Do not believe that technology will or can by
  itself solve most of the difficult problems.
  Creating the appropriate incentives and
  environment is extremely important. Most of the
  solutions will involve a multifaceted approach
  for example, see the next slide from an AERI
  presentation.
• Ensure careful technology and policy screening
  and assessments are imbedded (including newer
  tools such as life cycle or full cycle analysis)
  in decision making.
• Standardize as much as possible harness the
  power of markets, for example with regulated
  limits and cap and trade systems.

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Need for a new paradigm for deployment
e.g. climate change
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Thank you !

• Contact Information
• The Institute for Sustainable Energy,
  Environment and Economy
• Room 220, CCIT Bldg.
• University of Calgary
• 2500 University Drive NW, Calgary, AB T2N 1N4
• Ph. 403-220-6100 Fx. 403-210-9770 info_at_iseee.ca
• www.iseee.ca
• (You may also email me directly
  rmansell_at_ucalgary.ca)