Lucky Guy

Ralph Klein had a knack for being in the right place at the right time – especially for the oilsands 

This article appears in the June issue of Oilsands Review  

By Peter McKenzie-Brown

Former Premier Ralph Klein’s death at the end of March was greeted quite differently from that of Peter Lougheed, who had also been premier and had died six months earlier. Lougheed was seen as an elder statesman, and his passing was mourned across Canada. The mourning that followed Klein’s death – caused by a rare lung disease, and complicated by an uncommon early-onset dementia – was shorter in duration and more provincial in scope.

It seemed as though everyone in Alberta had a great “Ralph story” to tell, and as often as not people would refer to him affectionately as Ralph or, reflecting his political style, sometimes King Ralph. A man celebrated for his common touch who on occasion tearfully acknowledged that he drank too much, he was well known at favourite watering holes like the bar at the run-down King Edward Hotel in Calgary. He was a political fixture in Alberta for a quarter century, beginning with his election as the mayor of Calgary in 1980. His illnesses prevented him from experiencing much retirement; they were diagnosed soon after he left office. Klein was 70 years of age.

Klein was not a good planner or a gifted thinker. However, during his term he was endowed with good luck – especially in respect to the oilsands.  Three of Alberta’s 14 premiers have played major roles in oilsands development. The other two were Ernest Manning (1943-68) and Peter Lougheed (1971-1985). On Premier Klein’s watch (1992-2006), however, the industry grew into an economic giant. One reason is that government and the oilsands industry prepared for growth. The other is that during the reign of King Ralph, as he was also known, oil and gas prices tripled.

The early part of the Klein era was just awful for Canada’s petroleum industry in general and the oilsands business in particular. Shortly after Klein took office both the federal and Alberta governments withdrew financial support from the OSLO oil sands plant, which would have relied on loan guarantees and tax and royalty concessions to become profitable. Klein famously described his government as being “out of the business of business” – an early indicator of what the Klein era would look like.

The Surge

When he took over from Premier Don Getty, Klein inherited “a bloated bureaucracy and an angry electorate,” as one commentator put it.. Alberta faced large and growing deficits and was desperate for a more balanced budget. Desperate for more jobs across Canada, Prime Minister Jean Chretien (1993-2003) had just handily won an election in Ottawa. The major plank in his election platform? Economic opportunity. Oil prices were in the tank and the industry was desperate for investment opportunities.

Thus was the stage set for the industry’s great surge forward.

Klein had barely moved into his new office when the Edmonton-based Alberta Chamber of Resources formed a Task Force on National Oil Sands Strategies in 1993. Eighteen months later the multi-stakeholder task force issued a report titled “The Oil Sands: A New Energy Vision for Canada.” In clear and compelling prose, the report outlined eight areas where players in the emerging oil sands industry could help the industry grow – by developing new markets and more, for example, a pipeline system that better served areas where bitumen was being produced.

However, the key to growth was a better fiscal regime. According to the task force, “The Federal and Alberta governments…should develop a generic set of harmonized tax and royalty measures based on economic profits. Such a system will provide a consistent fiscal framework for all oil sands projects and result in a balanced sharing of profits. These common fiscal terms are necessary for the future development of Canada’s oil sands.”

After the release of the task force report, Klein’s government immediately began looking for ways to implement its suggestions, and in September approved a generic oilsands royalty and tax regime that would apply to all new projects. New projects would pay the province a 1% royalty on production until net project revenue had paid out all start-up costs. At that point, the royalty would rise to 25%, although all capital costs, including operating, research and development, were fully deductible in the year they were incurred. This was radical, and the free-market Klein government deserves credit for stepping up to the plate without hesitation.

Historian William Wylie once described how the key players in the oilsands have changed over time. “The federal government was the principal actor between 1875 and 1918,” he said, “at first from a sense of responsibility for regional development, and near the end of the period from strategic considerations.”

In the 1920s, though, “the government of Alberta became the major force, in part in order to assert its claim to control provincial resources. In the 1930s, two private companies showed signs of promise and the two governments pulled back in deference to private development and in order to cut costs. The 1940s were years of increased involvement on the part of both levels of government due partially to strategic considerations, and to the power struggle between them. In the 1950s, the conventional oil boom in the province took attention away from the oil sands and delayed their development until the 60s and 70s when the long run decline of the conventional reserves was finally anticipated. When commercial development occurred, private industry was the major agency, but with considerable governmental backing as well.”

Then, the industry morphed into another phase. In 1992 the industry began to enter a new era of oil sands policy – one that is now two decades in duration. Call it the Klein legacy; it is a period in which financial responsibility for oil sands development lies entirely with the private sector. It has already been the longest-lasting of the major periods of oilsands policy, and in the near future seems unlikely to change.

What has made this new era so solid is that during the Klein era conventional oil prices rose from about $19 when he began his term to $63.43 on the day he retired. Gas prices also more than tripled, from $2 to $7. To a large extent driven by the US-led invasion of Iraq, these surges pulled bitumen prices along.

The outcome was a flood of oilsands spending in the province. Suncor began a series of mining and in situ expansions that made it Canada’s largest petroleum company. Syncrude also announced large expansions. Both companies introduced technologies and operations that led to huge reductions in the cost of production.

In 1999, a Shell-led consortium began its Muskeg River Mine oilsands development – better known as the Athabasca Oil Sands Project. The project went on stream in 2003. Construction of Canadian Natural Resources Limited’s Horizon project began toward the end of Klein’s term, with the first phase completed in 2009.

The Klein Legacy…

Oddly enough, as he completed his term as one of the most popular premiers in Alberta’s history, Klein held a news conference in which he essentially proclaimed himself a failure. On the matter of oilsands development, he was partly responding to general criticism by Peter Lougheed, who had called for more limited oilsands development. “What’s the hurry?” Lougheed had asked. He was concerned about the environmental and social impacts of oilsands development. “Why not build one plant at a time? I hope the new government in Alberta will reassess this and come to the conclusion that the mess, and I call it a mess, that is Fort McMurray and the tar sands will be revisited.”

In his sometimes tearful farewell, Klein said he couldn’t have imagined how forcefully the industry would respond to the royalty and tax changes of the mid-1990s. Thus, his government didn’t have a plan for how to deal with the spectacular growth that followed. Of course, any other premier would have basked in the glow of leaving behind an economic boom.

That Klein didn’t have a plan more or less characterizes the man himself. According to one biographer, his government was anything but ideological. It tended “to act first and think later, impulsively adopting elements of the neo-conservative agenda without having an overall strategy.”

Maybe that’s the best we can say about the man most Albertans still think of as Ralph. He was not a planner, but a pragmatist and an instinctive free-market conservative who happened to be in the right place at the right time – just as the oilsands sector reached maturity.   

"We Were Canadians First"

With the news of former premier Peter Lougheed’s death on September 13, aged 84, an outpouring of grief began throughout Alberta – indeed, throughout Canada. Rarely has a politician ranked so high in the esteem of the people he or she has been chosen to lead. 

This article appears in the November issue of Oilsands Review 

By Peter McKenzie-Brown

The tributes and commentaries ranged from reflections by ordinary citizens to formal commentaries from the great and the good. One of Lougheed’s biographers, Alan Hustak, observed that he was “the architect of modern Alberta” who, among many other achievements, helped turn the province’s petroleum industry into a global powerhouse. Nothing you can say about this great man seems over the top.

Lougheed’s career in the provincial Legislature began in 1967 – coincidentally, the year the Great Canadian Oil Sands (Suncor) plant was commissioned. The convergence is compelling, since several of his greatest achievements were oilsands-related. Energy issues dominated his years in power (1971 to 1985), and he was a decisive figure in what became known as Canada’s energy wars.

Among governmental issues, oilsands remained a core interest to the end of his long life. As he said in an Oil Sands Oral History Project interview 18 months ago, “After I left government in ’85 I said to my successor, Don Getty, ‘Don, I will stay out of most things you’re doing… but the one thing I am going to stay involved in is the oilsands, because I am very interested in its evolution and its development.…’ Things happened so quickly [under] Premier Klein. I have stayed involved in the oilsands in a more public way and I have discussed it frequently with Premier Stelmach as well. Perhaps more than any other, that’s the one subject I have stayed involved in since I left government.”

The Energy Wars: Lougheed’s early political battles began with a shot across the bow from Prime Minister Pierre Trudeau.

Inflation had become a national problem, oil prices were rising, and on September 4, 1973, Trudeau asked the western provinces to agree to a voluntary freeze on oil prices. Nine days later, his government imposed a 40-cent tax on every barrel of exported Canadian oil. The tax equalled the difference between domestic and international oil prices, and the revenues were used to subsidize imports for eastern refiners. At a stroke, Ottawa began subsidizing eastern consumers while reducing the revenues available to producing provinces (mostly Alberta) and the petroleum industry.

This outraged Premier Lougheed, who understood how long and hard the province had fought for control of its natural resources; resource ownership had not been conferred upon the province until 1930. In response, Lougheed announced that his government would revise its royalty policy in favour of a system linked to international oil prices.

His timing was impeccable. Two days later, on October 6, 1973, the Yom Kippur War broke out – a nail-biting affair between Israel and its Arab neighbours. OPEC used the conflict to double the posted price for a barrel of Saudi Arabian light oil to US$5.14. The Saudis and the other Arab states then imposed embargoes on countries supporting Israel, and oil prices rose quickly to $12. These events aggravated tensions among provincial, federal and industry leaders.

The rest of the 1970s were marked by rapid-fire, escalating moves and counter-moves by Ottawa, the western provinces and even Newfoundland. From 1974 to 1985, Ottawa imposed an export tax on conventional crude oil – a move Lougheed called “the most discriminatory action taken by a federal government against a particular province in the entire history of Confederation.”

Lougheed strongly asserted and ultimately resolved, beyond question, Alberta’s ownership of most hydrocarbon and other mineral resources within its provincial borders, and he made it clear to industry itself that the government was in charge. “It was obvious that the oilsands were owned by the people of Alberta,” he explained in the Oral History interview. “We consistently and constantly made sure that the industry understood that the Government of Alberta was the owner, and we weren’t just there in a supervisory or regulatory way. We were extensively involved because we were the owners.”

Canada’s political conflicts over energy climaxed with the introduction of the National Energy Program (NEP) in 1980. Lougheed led negotiations on significant modifications a year later, mainly exempting “new oil,” but the contentious policy was not fully removed until 1986. As the policy collapsed due to severe recession and wrong assumptions about global oil prices, Lougheed played a key role in negotiating a new constitutional agreement for Canada, then retired from office.

Syncrude: One of the positive developments of the energy wars era was the rescue of Syncrude in 1975. The oilsands project’s costs had soared, and one of its partners had pulled out. To a certain extent, that rescue involved a different way of looking at royalties. Lougheed’s interest in petroleum royalties began early in his years in power, before the events of the early 1970s embargo drove oil prices to historically high levels. “We were in a fairly experimental period with the oilsands,” he said, “we had the Great Canadian Oil Sands [project] which was struggling. When Syncrude came along and we got into the negotiations, it was clear we could not approach [the owner’s share] from the perspective of gross revenue….We had inherited from [Ernest Manning’s] Social Credit Government, a good system of royalties for the conventional oil and gas system, which was a percentage of gross revenue. We modified it from time to time in government, but the conventional oil and gas business was based on a percentage of the gross revenue.”

The oilsands were a different kettle of fish. Lougheed continued, “Right from the start it was clear that it wasn’t really fair because of the risk element that came with being involved in such a new process. You know, a lot of people wondered, was it going to work? Would it be economic?” All of those questions led to a discussion between the owner – the Government of Alberta – and Syncrude. ‘What kind of royalty scheme should we have?’ [The discussion] evolved into the whole question of a net profits approach. It was completely different than [the policy used for] the conventional oil and gas industry.”

The 1975 Winnipeg Agreement, which saved the Syncrude project, was one of the few moments of cooperation among governments during the energy wars. Always a savvy negotiator, during those 12 hours of meetings on February 1st, Lougheed committed the province to take a 10 per cent interest in the project for the then-mind-numbing sum of $200 million (about $1 billion in 2012 dollars). Alberta would provide loans that the province could convert into equity, would construct no-risk utilities for the project, and would purchase an ownership interest for cash. This proved to be an extraordinary investment for the people of Alberta, “the owners of the resource.”

AOSTRA: Through the formation of a government agency, Peter Lougheed created a scientific and technical environment that unlocked the secrets of producing bitumen from the deposits too deep for mining, and fundamentally transformed the industry itself.

At the time, work on the deeply buried oilsands reservoirs, which represent about 90 per cent of the resource, had stalled. Imperial had made progress on the Cold Lake deposit, but there were no demonstrated technologies that could commercially unlock deep oil from the Peace River, Athabasca or Wabasca (now seen as an extension of Athabasca) deposits. At the time, there was little likelihood things would improve. Few companies were actively developing oilsands leases outside the mineable area.

Originally called “Project Energy Breakthrough,” the idea was to speed up the development of new in situ oilsands technologies. When legislated into existence in June 1974, the Alberta Oil Sands Technology Research Agency (AOSTRA) became one of the largest research and development programs ever launched in Canada. The act originally limited AOSTRA’s activities to oilsands, but an amendment to the legislation soon gave the agency the authority to fund heavy crude oil research. In 1979, the Crown corporation’s mandate was expanded again to include enhanced recovery of conventional crude. Over its lifetime, AOSTRA funded about $1 billion (1980 currency) in oilsands extraction research.

Initially, the Alberta government agreed to invest $100 million in this technology development fund. During the active life of the corporation, however, AOSTRA spurred the petroleum industry to undertake numerous demonstration projects, representing some $2 billion of research and development spending. In most cases, the authority essentially agreed to match the amount of money a company or industry partnership was willing to invest in oilsands projects.

During the AOSTRA years, the industry launched in-situ demonstration projects in all the major oilsands deposits. These included cyclic steam stimulation (CSS); steam flooding; forward combustion; reverse combustion; and combined forward combustion and water injection (COFCAW). However, AOSTRA’s crowning achievement occurred 25 years ago, when its Underground Test Facility proved the effectiveness of steam-assisted gravity drainage (SAGD.)

Premier Lougheed got excited when he talked about SAGD.  “I think SAGD…should be encouraged by the owner and is being encouraged by the owner. It’s the longer-term asset for the province. Surface mining has its limitations, and involves more environmental and water concerns. So, there is a clear and important distinction when you get into oilsands and that’s what the Alberta Oil Sands Technology and Research Authority had been focusing on….Throughout all of our discussions here, let’s make sure that we are drawing a distinction between SAGD and in situ [those words can be used interchangeably] and surface mining.” Lougheed served on the board of MEG Energy, which was one of the first companies to develop a commercial SAGD operation.

Ideal Model: AOSTRA spurred oilsands experimentation and development, although prospects for further development diminished in early 1986 when a precipitous collapse in oil prices, once again, threatened commercial development. While AOSTRA did not have a mandate to undertake projects on its own, in the 1980s it took a significant risk by constructing the now-legendary Underground Test Facility. The UTF proved steam-assisted gravity drainage (SAGD), which has since emerged as the most important system for developing deep underground oilsands reservoirs.

A noteworthy footnote to this discussion is that the 2009 Summit of the Americas held AOSTRA up as an ideal model for energy development. According to the Centre of International Governance Innovation (CIGI), which sponsored the summit, AOSTRA “engaged the private sector and the university research community in developing technology related to the oilsands, while the government retained the rights to the technology.” A government endowment allowed the organization “to function independently of the electoral cycle. A dedicated expert and respected seven-member board of directors helped secure the private sector’s buy-in.” In addition, “control by the government helped maintain continuity over downturns in the economic cycle.”

CIGI also noted with approval that, before AOSTRA determined its goals, “it conducted two years of extensive consultations with many stakeholders. Only after determining exactly where the technology gaps existed did AOSTRA put out a call for proposals.” Furthermore, “aside from successfully developing new technology, AOSTRA fostered and financed a new generation of academic and scholarly expertise in many aspects of oilsands development. The investment in human resources is often discounted, but has been fundamental for the sector’s success in Alberta.”

Afterword: Much has been said about Lougheed’s impact on the province of Alberta. However, out of the seemingly endless stream of tributes that followed his death came this from former Prime Minister Brian Mulroney, whose government finally dismantled the National Energy Program. “Peter built the modern Alberta: schools, universities, hospitals, highways and whole communities [like modern Fort McMurray]. He always defended Alberta’s interests brilliantly around the federal-provincial table. At the same time, he would be the first to say…‘We were Canadians first.’”