27 September 2005

Fort McMoney, Alberta, Canada

I like Canada.

I subscribed to Maclean's for a year in high school. Some of my favorite bands are Canadian. Poutine is a wonderful food, nee cuisine. Icewine from the Niagara Peninsula rivals Yuengling and scotch for my affections.

I also own shares in the Fidelity Canada mutual fund, which has done extraordinarily well. So you know I'm pleased when I read the following in the most recent Economist:

"The engines of growth in the 1990s-cars and high-tech industries-have
slowed or shrunk. In their place, dowdy perennials, such as mining,
have become the new stars. "The economy has just been flipped on its
head," says Philip Cross, the chief economic analyst at Statistics
Canada."

"The soaring price of oil and other commodities has prompted a surge
in investment. Some C$46 billion ($39 billion) of new investment was
announced earlier in Alberta's oil patch alone. Railway lines are
being built, ports expanded, and oil and gas pipelines laid.
Investment cycles in Canada generally run for seven to ten
years. This one is just beginning.


Purchasing this fund has been the easy way for me to get in on the Canada boom. (I have money in mutual funds; soon I will have saved enough for individual stocks.)But I don't particularly want to keep things simple. I went out onto the frontier of websites ending in ".ca" to search out some stories on Alberta's oil sands.

So I started off with my high school mainstay. Here's an excellent, yet lengthy, overview of what's going on up north, with some choice comments on the political tension between Ottawa and Western Canada:

June 13, 2005
Alberta is about to get wildly rich and powerful
What does that mean for Canada?
STEVE MAICH
At Suncor Energy's Millennium oil sands project, just north of Fort McMurray, Alta., the unmistakable odour of black gold drifts up from the ground and hangs thick in the air. Everywhere around you, water pooled in footprints, tire ruts and potholes carries the telltale rainbow sheen of oil. "The smell of economic progress," jokes Brad Bellows, a spokesman for Suncor, playing host on a damp spring afternoon. But it's much more than that. It's the smell of raw power -- the kind that comes from having plenty of what the rest of the world can't live without.
...
Suncor's extraction plant on the bank of the Athabasca River looks like a science fiction movie set -- hundreds of kilometres of steel pipe twisted into incomprehensible knots around hulking industrial buildings, storage tanks and smokestacks. The whole scene is bathed in a constant haze of steam and exhaust. Two other such plants are now operating within an hour's drive of here, and several more are scheduled to commence operations over the next few years, all to exploit what may be the biggest petroleum deposit anywhere in the world, a sea of oil-saturated soil covering an area the size of New Brunswick.
...
Terrorism, trade, the war in Iraq, nuclear diplomacy -- all of it, on some level, is related to the international preoccupation with energy, and access to affordable oil. So if Canada is to play a more significant global role in the years ahead, experts agree it will be due to the reeking, doughy black soil in northern Alberta, and the rest of the world's keen desire to share it. "The oil sands give Canada one of the single greatest advantages of any state in the Western world," says Paul Chastko, a University of Calgary historian who recently published a book called Developing Alberta's Oil Sands. "It gives Canada the ability to supply all of North America for the next 50 years without touching a drop of imported oil." It is, in short, an economic engine and political lever that any nation would desperately love to have.
...
Now Alberta is poised to reap the biggest bonanza in its history, an economic jackpot giant enough to fundamentally shift the balance of wealth and power westward. The province can control its own destiny more than any other because, in the years to come, Canada will need Alberta far more than Alberta will need the rest of Canada.
...
The locals have taken to calling this northern outpost "Fort McMoney" and it's not hard to see why.
...
And this, clearly, is just the beginning. The region's population is projected to grow by about 43 per cent in the next five years, all because of the oil sands. The National Energy Board estimates there are approximately 1.6 trillion barrels of crude bitumen saturating the ground in northern Alberta. Bitumen -- a form of heavy, thick oil laden with sulphur and deficient in hydrogen -- can be refined into synthetic crude oil to make everything from gasoline to plastics. It is the lifeblood of every industrialized economy. According to the Alberta Energy and Utilities Board, about 178 billion barrels of bitumen are economically recoverable using existing technology -- enough to produce more than 150 billion barrels of crude.
If these estimates are accurate, Canada's oil reserves rank second behind only Saudi Arabia's 260 billion barrels.
...
It's all being driven by a slew of expansions and start-ups scheduled to commence over the next several years, sending an estimated $60 billion in construction and development costs sloshing through the Canadian economy. The Petroleum Human Resources Council of Canada recently estimated that the number of people directly employed in oil sands operations -- currently about 50,000 -- will reach 80,000 by 2008. An additional 70,000 construction, manufacturing and service jobs will also be created -- 40 per cent of them outside Alberta.

Even now, most Canadians still don't fully grasp the significance of the industry, says Rick George, the president and chief executive of Suncor. "There's going to be $6 or $7 billion in new capital put into this business this year," he says. "What other industry is putting that level of capital into the country? There's no comparison that I'm aware of. And you will see that each and every year for the next 10 years, if not the next 20. Obviously that's a huge benefit to the country."
...
Barry Cooper wasn't surprised at Chretien's audacity. A University of Calgary political science professor and staunch critic of the federal Liberals, Cooper fully expects that, as the oil sands continue to develop, they will become a flashpoint in federal-provincial relations. Alberta already pays far more in equalization transfers to other provinces than it receives in federal program spending. And as the gap grows between rich Alberta and the poorer parts of the country, the demands to spread the wealth are sure to follow -- especially if prices for gasoline and heating oil skyrocket, as many predict. It's guaranteed to fan the flames of western discontent, Cooper says. "It's Alberta's oil if you live in Alberta and it's Canada's oil if you live in Ottawa," he says. "Energy has become the basic fault line of federalism."
...
Although producers like Suncor are reducing emissions on a per-barrel basis with better technology, and are researching ways to cut the amount of gas and water used in the extraction process, the total environmental impact of oil sands development is sure to increase substantially over the next decade. That has many convinced Ottawa is on a collision course with industry. "If government decides to clamp down hard on CO2 emitters to meet the Kyoto commitments, or if they use Kyoto and the treaty-making power to confiscate income that belongs to the province, the anger generated by the National Energy Program would pale in comparison," says Cooper.
Paul Chastko agrees, and says the environment is just one of many potential conflicts. What will happen if we're heading for a worldwide oil shortage that will send prices shooting higher? Will the rest of the country, particularly manufacturing-reliant commuter cities like Toronto and Montreal, be content to let Alberta profit while their industries are crushed by higher fuel prices, or will there be renewed calls for government intervention, as there were in the 1970s?
...
To be sure, many skeptics remain, in part because oil sands present a much greater technological challenge than conventional oil fields. In operations like Suncor's Millennium project, raw oil sand must be dug up using massive power shovels, or liquefied using steam so bitumen can be pumped to the surface. Either way, the process is arduous, expensive and consumes vast amounts of natural gas and water. ...
Energy security is not just an American fixation, however. China is in the early stages of an industrial revolution which will vastly increase that country's energy demands over the next decade. And recently Chinese officials have been eyeing the oil sands as a source of precious fuel. In April, a Chinese firm bought a minority stake in MEG Energy Corp., a tiny oil sands developer, and a few days later PetroChina signed a deal with Enbridge Inc. to build a new $2.5-billion oil pipeline between Edmonton and Canada's west coast, to ship up to 200,000 barrels a day to China. And last week, another Chinese energy company, Sinopec Group, bought a 40-per-cent stake in Synenco Energy Inc.'s Northern Lights Project for $105 million, and committed to invest an additional $2 billion to help build the project, aiming for completion by the end of 2010.
...
But Chastko, who can tell you as much about the oil sands as anyone, knows that keeping politics out of the way won't be easy. "The oil sands have tremendous potential, but it also has the whiff of political dynamite about it," he says. "The born-and-bred Albertan in me says I should be shouting from the highest rooftop about how the oil sands are going to pave the way for our future. The historian in me recognizes that rarely are things ever so simple."


So what are the risks in investing in companies exploiting the Albertan oil sands? The price of oil and the expense of procuring refined oil from the earth, Kyoto compliance, and political meddling from Ottawa threatening the profitability and share price of companies like Suncor.

I think the rewards are intriguing. The big question is whether the money soothes tensions or heightens them

Now for a more colorful piece that mixes business with pleasure from Canadian Business:

Alberta Oilsands: Boom Town
by Jeff Sanford
Fort McMurray reaps big money--and big problems--from the oilsands.
2005-09-12

If you drive four hours north of Edmonton along Highway 63, you eventually reach Fort McMurray, a remote mining town of about 61,000 chilly souls. Situated amid thousands of square kilometers of muskeg, it is basically the last bit of significant civilization directly north of Edmonton until you're travelling south again in Russia. Fort McMurray is so isolated that the first car didn't show up here until 1957, and residents watched television for the first time in 1970. In the winter, the temperature can dip to -51C, while the weak sun seems to set far too quickly. For most, all of that suggests this frontier city isn't worth the trip.

So why was Dick Cheney, the vice-president of the United States, planning to come here in early September? To shake hands, of course, and poke around the oilsands. His visit (postponed because of Hurricane Katrina) was to include a tour of one of the major operations that is busy digging up oil-soaked sand trapped between the Alberta boreal forest floor and bedrock--a task that has of late become monumentally important, both economically and politically.
...
No wonder Dick Cheney was planning to visit Fort McMurray. The end of easy oil is generating a one-time and permanent upward shift in the long-term price, as unconventional sources like the oilsands--which are more expensive to mine and develop--come to be relied upon more heavily.
...
Welcome to the last western boom town, riding high on the arc of oil depletion. Like Dawson City during the Yukon gold rush of the late 1890s or Saskatchewan's Uranium City in the Cold War '50s, Fort McMurray, and two of its main oilsand mining and extraction operations run by Syncrude Canada Ltd. and Suncor Energy Inc. (TSX: SU), is attracting people from across the country. Which is important. For years, the big issue was how to dig up the sand and then separate it from the oil and water, a process that requires massive extraction plants, but do it at a price that was competitive. That's largely been taken care of. The challenge now is finding people willing to man the massive expansion that is coming. So far, that doesn't seem to be a problem. Plentiful jobs and high wages--on top of the $30 to $40 an hour skilled tradespeople can command, some firms offer between $100 and $150 for a daily living allowance--have swelled the city's population 8.7% since June 2004. The migration has attracted people from across Canada, and the result is a remarkably vibrant social scene for a city of this size--even though men decidedly outnumber women.

That times are good is obvious on a recent Saturday night. Crowds of twentysomething guys, many of them welders, pipefitters or millwrights who work on the sands and have lots of cash, line up to get into the several bars clustered around the north end of the city's main street. At Diggers, the dance floor is packed, and patrons knock back pitchers of mixed drinks to help them get down to a distinctly Albertan mix of hip hop and country. Next door, at the Oil Can, well-dressed males in cowboy hats and boots twirl their equally spiffy partners around the dance floor to the sounds of a country band. There's a strip club in the same complex, as well as a cheque-cashing operation, while across the street the 7-Eleven, locally acknowledged as the best place to score any sort of illegal substance you might desire, is a hive of activity. Outside, revellers wander along the main street as a never-ending stream of massive, tricked-out pickup trucks drive by. If there is a sign of the wealth being created here, it is the ubiquity of the fully loaded Dodge RAM 2500 Mega Cab four-by-four (MSRP: $50,345)--though there are any number of other examples, too.

The next day I meet up with Jayme, the owner of the town's top escort agency, Paige's Playmates. She's finally found the time (10 p.m. on Sunday--"paperwork night") to talk about what it's like to run an escort service in a boom town overrun by itinerant workers. "You can do all right," she says, understatedly, and goes on to mention that her 2004 Mustang convertible was an impulse buy. She picked it up while at a dealership to purchase a truck to carry her son's quad ATV. "It was nice to be able to buy two cars at once," she says. When isn't it?
...
Biker gangs are reported to be moving into Fort McMurray because of the money. And crack cocaine and crystal meth are becoming quite common downtown; many young revellers have a certain glassy-eyed look about them. "It's getting pretty crazy here," says Jayme, the escort agency owner. "They have to do something about the camps. When you put guys together like that, they take on a new attitude." Indeed, on a recent Saturday night there were reports of a 15-person brawl outside Cowboys, another local watering hole that had three bullets fired into it the weekend before.
...
The big problem for the sands, however, will be keeping needed talent. Just a month after visiting Fort McMurray, I heard from Lovell, one of my hosts, that he has returned to Windsor, Ont., after only four months. "I couldn't take it anymore," he explained. "I needed a life." If Fort McMurray is going to retain tradespeople, it's going to have to do something more than pay good wages.

Perhaps it should look to Paige's Playmates for some suggestions on keeping workers happy. Many Canadians may be tempted to turn their noses up at the type of business she runs, but Jayme considers the services she offers vital in a town where the only two psychiatrists are booked solid. "If we didn't provide the option we do, it would be much worse up here," she says matter-of-factly. She also prides herself on running an "enlightened" business compared to most in the adult entertainment business. "By offering them a better place to work, I attract all the best girls. I've cornered the market here," says Jayme, like the true entrepreneurial Albertan she is. You might even say she's doing her bit to wean the United States off Mideast oil. One wonders what Dick Cheney would think about that.


Well there's some food for thought. In my next post, I'll examine the investible companies (not Paige's Playmates), like Suncor, Enbridge, and Syncrude Canada, a joint venture among many companies, which include Canadian Oil Sands Limited (COS.UN), Imperial Oil Resources (IMO - AMEX), Petro-Canada (PCZ), and Nexen (NXY). I also should take a look at EnCana (ECA).

Yep, Canada's got some fine offerings.

5 comments:

crystal said...

Fort McMurray is known as the center of one of the numerous oil production hubs of Alberta and Canada. The top oil sand mining firms in the town are Suncor Energy and Syncrude. Apart from obtaining oil from the sands, the people of Fort McMurray make a living in bitumen production. Aside from oil sands, Fort McMurray is making money through the production of natural gas that is used in households and in power generation. In addition, the town is visited by numerous tourists because of its astounding spots. In winter, people from various parts of Canada and the globe go to experience the thrill of skiing. The number of drug rehabilitation centers in Fort McMurray is not sufficient compare to the problem of addiction to drugs and alcohol in the area.
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