U. S. needs Alberta's oil sands?

National Post ·

Russia behaves like a goon toward its European energy customers; Saudi Arabia, Iran and others export terrorism; Nigeria is unstable and Venezuela's Hugo Chavez spews hatred. All of which means there is little choice for the United States and the world but to embrace, and possibly finance, Alberta's oil sands.

If Washington does not get it, then Japan, India, China, South Korea and other energy-starved nations will. They should be encouraged to finance the oil sands megaprojects that have been put on ice or axed because of the bank crisis and price collapse.

Canada's governments should also consider getting into the cleaning up and financing of oil sands projects, given their importance to the overall economy, labour force and balance of payments. The sands could replace Saudi Arabia in output.

And yet this is not happening. Projects slow and the first oil patch bankruptcy was announced this week. This will set the world up for oil price spikes when the recovery comes.

Alberta and the industry have a business model that will not work. They should have also been tapping Asia for oil sands financing and, to do so, should have built a pipeline to the Pacific coast. Instead, they have left the future up to the fickle "invisible hand" of the so-called marketplace, as well as up to the beneficence of the United States' fickle political system, which may, as a result of environmental pressure, reject future oil sands exploitation.

Today, Alberta and Saskatchewan oil exports are exclusively headed for the lower 48 states, while the industry quakes in its boots, hit by the double whammy of the U. S. credit meltdown plus fears about growing anti-oil sands environmentalism.

Canada's oil industry must recalibrate. The old paradigm -- that energy needs were best met by private-sector companies and their bankers/ shareholders willing to take the risk in order to finance long-term energy projects --no longer works.

Instead, the new paradigm should be: Energy needs will be met only by government-backed private-sector companies because banks and shareholders won't take the risk on a long-term basis. And if the Americans aren't going to help, then the Asians will be happy to do so.

In the recent heady days of soaring oil prices and easy credit, it was assumed that long-term projects would be embraced by the marketplace. What was forgotten was that Canada's energy megaprojects have always been built with government help; they simply would not have happened otherwise.

This was the template for Alberta's own massive oil sands industry, which was kick-started into scale as a result of controversial investments by three Canadian governments in the 1970s in Syncrude. Similarly, taxpayer involvement brought about exploitation of Newfoundland's massive Hibernia oil field, along with many power-generation projects.

Remembering this history is more important than ever now as the slowdown and bankruptcies loom in Canada's oil patch. Policy-makers and industry strategists must recognize that the only way forward is to tap deep-pocketed, oil-poor governments in Washington, Asia or anywhere. They are the only ones that will be willing to guarantee financing in return for future supplies of oil.

For an investment of at least US$200-billion, the Americans, Asians or both could underpin projects that would guarantee the production of about four million barrels a day of non-OPEC oil from the oil sands.

dfrancis@nationalpost.com - Diane Francis blogs at financialpost.com/dianefrancis