Heating Up

Posted: Aug. 13, 2014

The oilsands sector has been under siege from environmentalists, some liberal-leaning politicians, aboriginals and others, but there are few who debate the economic benefits flowing to Alberta and Canada from the industry.

The studies about the industry’s macroeconomic impact abound.

For example, there’s a recent study by IHS CERA that concludes that the industry has created 478,000 total jobs in Canada, including all the “spinoff” employment.

In addition, the study points out that the Alberta government’s coffers have swelled since 2012, thanks to the oilsands sector, to the tune of more than $7.7 billion in taxes and $4 billion in royalties. The federal government, meanwhile, has received more than $15 billion in tax revenue since 2012, according to the study.

And IHS CERA predicts economic benefits contributed by the industry could double by 2025.

A study released in 2011 by the Canadian Energy Research Institute (CERI) forecast oilsands activity would lead to total direct investment of more than $2 trillion in new projects in the ensuing 25 years, as production climbed from about two million barrels per day to five million barrels per day.

Those statistics are almost mind-numbing. But what does it mean for areas where that development is taking place?

The Alberta government, in a series of three reports looking at the future of the three main oilsands producing regions—Athabasca, Cold Lake and Peace River—tried to provide a picture of how the areas will grow in the future.

That exercise, called Comprehensive Regional Infrastructure Sustainability Plan (CRISP) was launched five years ago with a forecast of how development in the Athabasca region would unfold.

Based on an estimate that total oilsands production would almost triple to six million barrels per day by 2045, the planning team projected the population of the Athabasca region (the centre of which is Fort McMurray) would more than double to 240,500 by then.

In the Cold Lake region, which includes the City of Cold Lake, Canadian Forces Base Cold Lake, the towns of Bonnyville, Elk Point, St. Paul and Two Hills, and various municipal districts, hamlets and aboriginal communities—14 overall—it used the same formula of bitumen production metrics to project population growth and infrastructure needs, in a report released about a year ago.

Bitumen production in the region is now at about 550,000 barrels per day and the planners see that more than doubling by 2045, with the region’s population almost doubling to about 96,000 by then.

Population climbing

Meanwhile, what are the local impacts of that development?

The CRISP study predicts the number of oilsands related jobs in the area will triple to more than 3,800 by 2045.

It didn’t look at the local financial impacts, along with the benefits for Albertans and Canadians from that development, but it’s possible to gain a picture of what that might be by gathering the information from each of the major players in the area regarding what taxes and royalties they pay, possible total wages paid and other contributions to the area.

Imperial Oil Limited spokesman Pius Rolheiser says the company, the largest producer and employer in the region, paid $422 million in federal and provincial taxes in 2012 (the most recent year for which statistics are available) and $681 million in royalties to the Alberta government. It also paid $21 million in local property taxes to the Municipal District of Bonnyville.

Actual payroll statistics aren’t available (for competitive reasons), but Rolheiser says Imperial Oil employs 425 directly at Cold Lake, while its various contractors provide work for another 1,200 or so, suggesting the total jobs impact from Imperial Oil’s Cold Lake project—which has been ongoing for more than 25 years—is more than 1,600. Assuming each of those workers earns $100,000 per year, on average (and it is probably higher than that), that means the annual payroll for the Cold Lake project alone is $160 million.

The company won’t reveal how much it spends annually at businesses in the Cold Lake region, which it considers to be proprietary information.

However, having spent almost $4 billion in capital on the Cold Lake project so far, along with millions of dollars in operating expenditures, it’s a safe bet much of that has filtered through to local businesses and residents.

Local First Nations have also benefited from those expenditures, Rolheiser says. For instance, Imperial Oil has ongoing well-servicing contracts with Pimee Well Servicing Ltd., which is jointly owned by six regional aboriginal groups, as well as with those groups and Cold Lake First Nations.

It’s likely the Cold Lake project will continue to be the gift that keeps on giving in the area, given estimates the proved and probable reserves on the 780-square-kilometre lease are estimated at 1.7 billion barrels, while the contingent resource there is estimated at 3.3 billion barrels. With an available resource of some five billion barrels, there’s a strong possibility the project, already the largest in situ bitumen recovery project in Alberta, will only get bigger.

Two years ago, Glenn Scott, Imperial Oil’s senior vice-president, resources, talked about the possible development of the Grand Rapids Formation, which lies above the Clearwater Formation, the current source of crude at Cold Lake.

He talked about the potential to develop multiple 35,000-barrel-per-day phases in that formation.

Bruce March, at the time Imperial Oil’s president and chief executive officer, talked in glowing terms about the project.

“Even after 26 years of commercial production, we continue to believe Cold Lake’s best days are still ahead of it,” he said.

Canadian Natural Resources Limited (which operates its Primrose and Wolf Lake projects some 40 kilometres north of Bonnyville), has been dealing with the consequences of four leaks to surface at its Primrose East property. The company plans to convert the wells to steamflood, a lower-pressure process, which it believes will address the problem.

Strong tax base

Meanwhile, Canadian Natural, like Imperial, plays a large role in the Cold Lake area’s economy, according to spokeswoman Julie Woo.

“With over 180,000 barrels daily of crude oil production in the Cold Lake/Bonnyville region, our operations include primary heavy oil and thermal in situ development,” she wrote in an email. “Being a responsible and sustainable energy producer means we take every opportunity to work with the communities where we operate to create shared value. Our activities create value by providing employment, business development opportunities and revenues to governments.”

The company has statistics for 2013 and they show the impact its activities have on the local economy.

Last year it had 545 of its own employees on site, with 216 contract employees. It paid $19.5 million in property taxes to local municipalities and $715 million in royalties to the provincial government (it doesn’t break out taxes it paid to governments).

Woo notes Canadian Natural spent $2 billion in 2013 on goods and services, well servicing, welding, trucking and drilling waste management in the area.

“Aboriginal businesses were awarded more than $233 million in contracts in 2013,” she wrote. “Of that investment, over $95 million in business development opportunities were created with aboriginal communities in the Cold Lake region.”

Highlights of Canadian Natural’s community investments include donations totalling $500,000 since 2006 to support the community event arena in the Cold Lake Energy Centre (the money was spent to improve the arena’s ice surface and the running track), a donation of $100,600 in 2012 for upgrades to the Bonnyville Regional Airport, and another $1 million in 2004 to help build Bonnyville’s multi-purpose sports, recreation and entertainment complex.

“In addition to investments in local infrastructure, we also support many community development initiatives and local organizations, with over $450,000 spent annually,” Woo wrote.

Cenovus Energy Inc. is another of the major oilsands producers in the Cold Lake area, with its Foster Creek project. (Its other large existing project, Christina Lake, is located further north in the Lac La Biche–Conklin area.)

Reg Curren, senior media relations adviser with Cenovus, says the company’s corporate culture includes a pledge to provide benefits to the communities in which it operates.

“One of the commitments we make to all of the communities where our staff lives and the company operates is that they be better off because of our presence there,” he wrote in an email.

“We do this through being a socially and environmentally responsible developer of energy resources, which in this region includes both oilsands and natural gas assets [which it uses mostly at the Foster Creek plant]. We’re committed to supporting local businesses wherever we can, including a significant amount with aboriginal communities in the area.”

Foster Creek is the first commercial steam assisted gravity drainage (SAGD) project in Canada. (Imperial, which invented SAGD, uses cyclic steam stimulation at Cold Lake.) Development of Foster Creek, which is located on the Cold Lake Air Weapons Range, began in 1996 as a pilot operation, and it went commercial in 2001. Foster Creek now produces 120,000 barrels per day, with a current three-phase expansion slated to add 90,000 barrels per day to that. Eventually the company plans to produce 310,000 barrels per day at Foster Creek, making it among the largest producers among oilsands projects.

Because producers don’t pay royalties until projects reach commercial stage, Cenovus only started paying royalties for Foster Creek in 2010-11. However, it has already started to become a major contributor to the government’s coffers, with royalties from Foster Creek having reached $156 million (gross) in 2013. That amount should rise significantly in future years, as the project expands. (Cenovus didn’t release information regarding the taxes it is paying to the federal and provincial governments.)

Foster Creek is a major employer in the region, with 920 Cenovus staffers working there in the first quarter of this year, as well as 490 full-time contract workers. There are about 1,500 construction workers there now.

In 2013, the company spent $370 million on goods and services with businesses based in the Cold Lake–Bonnyville area.

Curren says the company has made a number of significant contributions to community-based organizations. These include a donation of $750,000 toward the first phase of the Cold Lake Energy Centre, another $600,000 toward the addition of an event arena complex there and $500,000 toward the Bonnyville & District Centennial Centre, which is a multi-recreation complex.

The company also donated $350,000 to the Lakeland Centre for Fetal Alcohol Spectrum Disorder, $175,000 for health-care equipment in the Cold Lake area and $75,000 for health-care equipment in the Bonnyville area.

There are a number of smaller oilsands and heavy oil players in the Cold Lake area as well. (South of the oilsands region, the area morphs into the Lloydminster heavy oil trend, where there are a number of primary and secondary heavy oil projects, some serviced by the Bonnyville and Cold lake oilfield service sector and some out of Lloydminster.)

Husky Energy Inc. is the grandfather of heavy oil development in the region, and has been actively producing in the Lloydminster region since the early 1960s. (It also operates a heavy oil upgrader in Lloydminster.)

It’s not a large producer in the Cold Lake area itself, although it has recently ramped up production at its troubled Tucker project, about 30 kilometres from Cold Lake, where it struggled to overcome a bottom water problem. Originally targeted to produce 30,000 barrels per day, Tucker is currently sitting at around 10,000 barrels per day, but with the bottom water issue solved, Husky hopes to ramp production up steadily.

The company also owns a large 56-section lease on the Cold Lake Air Weapons Range, about 53 kilometres from Cold Lake. Husky has conducted “significant delineation drilling and seismic” on the lease, which holds several billion barrels of reserves, and has suggested it will develop a commercial project there in the future.

Since Husky doesn’t yet have a major presence in the Cold Lake area, it’s difficult to pinpoint its contributions to the community.

However, company spokeswoman Kim Guttormson says the company “supports the communities where its employees live and work, with a focus on education, health and wellness and community initiatives.”

This includes a $1-million donation to the power engineering program at Lakeland College (which serves the Lloydminster and Cold Lake areas) and the Saskatchewan Institute of Applied Science and Technology in Saskatoon. It also offers scholarships and employment opportunities to help address the critical shortage of power engineers.

“We also make regional donations, including $10,000 to the Northern Lights School Division for its mobile trades lab,” she says.

There are other emerging producers in the Cold Lake area, all of whom plan to play a major role in the community.

For example, heavy oil producer Baytex Energy Corp., which is developing the Gemini SAGD project, located midway between Cold Lake and Bonnyville, expects to have a growing presence in the area, according to Brian Ector, senior vice-president of capital markets and public affairs for the company, which produced almost 52,000 barrels per day in the first quarter.

“In Alberta (and Saskatchewan) I think the industry is recognized for being a strong contributor to the local economy,” he says. “But we also want to be engaged in the communities in which we’re active.”

In the Cold Lake area, that includes such initiatives as supporting a school lunch program with Cold Lake First Nations, as well as its annual Treaty Days celebration.

“We support sports functions in the communities in which we’re active, including minor ball and hockey,” he says. “We encourage our employees to give back to the communities in which they live.”

Ector says Gemini, which was purchased from Koch Exploration Canada, L.P. in 2012 for $120 million, is slated to become a medium-sized SAGD commercial project. Baytex will spend about $200 million overall this year to lift production there from about 6,000 barrels per day to 10,000 barrels per day by the latter part of 2014.

Baytex already produces about 3,000 barrels per day of heavy oil in the area (most of that in the Elk Point area, south of Bonnyville).

He says the company employs 23 people now in the area, with nine working at Gemini, where staffing will be ramped up as the project achieves larger production targets.

Overall, Baytex now employs 500 people and in 2013 it paid about $250 million in royalties to the governments of Alberta and Saskatchewan.

Rick Walsh, chief operating officer of privately held oilsands junior Osum Oil Sands Corp., destined to become a major producer in the Cold Lake area as a result of the recent $325-million acquisition of the Orion project from Royal Dutch Shell plc, says the company plans to be more than an observer in the community.

“We see engagement in the community as being about more than writing a cheque,” he says. “It’s about getting our employees engaged.”

Even though it was not yet a producer at its Taiga project, which is adjacent to Orion, the company sponsored the 2010 Alberta Winter Games, which was held in Lakeland (the region that includes Cold Lake).

It has also sponsored a program that sees area science teachers sent on knowledge-development opportunities, sponsors field trips for area students, has paid to have solar panels erected on area high schools, sponsors speakers to go to the area and supports area junior hockey teams.

Osum also supports local aboriginal entrepreneurs and is a sponsor of the Bonnyville Oil and Gas Show.

At this time Walsh says the company only has six local employees, but it has maintained an office in Cold Lake for three years.

Over the next two or three years, it plans to expand Orion, now producing about 6,700 barrels per day, to 35,000 barrels per day and expects combined production from Orion and Taiga to eventually reach as much as 60,000 barrels per day, and will eventually have a substantial complement of workers at its plants, which are located about 30 kilometres from Cold Lake. Virtually all of them, he says, will live in Cold Lake.

“Cold Lake is a nice place to live,” he says. “There’s no need for a fly-in-fly-out workforce.”

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