Friday, August 24, 2007

Optimism and Thinking Ahead on the Rock (and in British Columbia)

The recent announcement of the Hebron deal in Newfoundland made me think of a few things.

First, it is a good day for Newfoundland despite all the shenanigans that preceded the deal. Indeed, the fact that there has been an agreement reached to have a gravity based rig built in Newfoundland makes it particularly noteworthy given the more recent trend to use rigs built elsewhere. This means that for at least the period of construction, rural Newfoundland will see more immediate benefits flowing from the offshore than has been the case since the development of Hibernia. It also means that Alberta's already acute labour shortage will be accentuated as the easy supply of labour from rural Newfoundland is diverted to Bull Arm.

Second, it made me sharply aware of how quickly time passes. When I was a teenager oil had just been discovered off the coast of Newfoundland and its prospects of development seemed fantastical given the technical challenges of developing these fields in the iceberg ridden waters of the Grand Banks. The sinking of the Ocean Ranger in 1982 only reinforced that view that this oil was unlikely ever to be developed. Nevertheless, developed it has been and at a time that could not be better for Newfoundland. The collapse of the cod stocks has been in a very large way mitigated by the development of the offshore.

The third thing that flows from this though is a thought about the future. The Globe report indicates that the Hebron deal will extend the life of the offshore by about twenty five years. This seems like a long time but in fact -- and this is the thing that I am becoming ever more acutely aware of -- it is not. It is about the same length of time that it took to develop offshore oil form its first real discoveries. So what happens then? The time is now for Newfoundland to start developing a vision for the post-offshore future. Newfoundland has been given a reprieve by the offshore and a chance to transform its economy but it will take some real imagination to do it in a way that will keep people there once the easy money of the oil fields ends -- and end it will.

While this last comment is true for Newfoundland it is also true for the other big oil and gas producers in Canada. British Columbia's northeast is facing the exhaustion of the Western Sedimentary Basin as is northern Alberta. Alberta has the Oil Sands to fall back upon but these represent a very different type of development than traditional oil and gas and the economics are more challenging. Furthermore the limiting factor there is increasingly not the oil supply but the limitations on available water needed to mobilize and process the bitumen into crude oil.

Calagary has diversified its economic base in a way that suggests it will likely survive and thrive in the next downcycle of the oil industry in the west (and its eventual demise). St. John's and Vancouver now have to figure out their way.
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