OPINION | It worked for the oilsands: In defence of government picking winners

The role of government in economic development is the subject of much debate in Alberta today.

At the heart of the debate is the choice between incremental and disruptive innovation: Should we stretch the economic opportunities of existing industry? Or help build the next industry?

The challenging economic circumstances we face raise the stakes to get this right.

It may help to look to the past, as this is not the first time Alberta has faced a threat to the long-term viability of one of its incumbent industries. Previous experience provides lessons we would be wise to heed today — one where government "picked winners," directing the wealth generated from the existing industry into disruptive innovation to unlock significant economic growth by looking at Alberta's resources in a new way.

I'm talking about the oilsands.

Government 'picked winners'

In 1974, premier Peter Lougheed gave a speech at the Calgary Chamber of Commerce to business leaders from the conventional oil industry. At the time, it was believed the industry was facing a crisis.

"Basic facts simply cannot be ignored," Lougheed told the crowd. "The conventional crude oil resources and reserves in Alberta are estimated to last only another 12 years."

Responding to this risk, his government acted, increasing royalties from existing conventional oil operations and investing the revenue in industrial development to create the in-situ oilsands industry.

The Government of Alberta invested over $1.4 billion (in 2019 dollars) in disruptive innovation, and in so doing acted against the wishes of the incumbent industry that preferred a focus on incremental innovation. From the research stage, through the proving and piloting of technology at scale, the government "picked winners," directing economic growth in Alberta.

Industry then took the technology developed by the province and, with continued support in the form of preferential tax and royalty treatment, grew the industry into what we know today.

Today, the critical role of government (and the opposition it faced) has been largely forgotten, but the lessons are increasingly relevant to the situation we now face in Alberta.

The main mechanism for this investment was the Alberta Oil Sands Technology and Research Authority (AOSTRA), set up in 1974 and tasked with developing technology to economically extract the oilsands resource that was too deep for existing mining methods.

While there was significant joint investment from industry in many of AOSTRA's projects, the details about spending on specific projects paint a more nuanced picture.

AOSTRA made sole investments to create an underground test facility and test the steam-assisted gravity drainage (SAGD) approach as a method for in-situ oilsands production.

Many doubted the potential for SAGD, and predicted relatively low recovery rates, but the technology significantly surpassed expectations and would go on to be a cornerstone of the in-situ oilsands industry, responsible for the majority of production of in-situ reserves today.

The critical investments in the facility and testing of SAGD were 100-per-cent government led and funded, as there was no industry support given for this "silly idea."

Following the successful technology demonstration, in order for AOSTRA to meet its mandate of partnering with industry, a number of players were allowed to retroactively buy in to the technology at a reduced cost.

On top of the technology, government's investments in AOSTRA produced other critical elements for the industry, including highly qualified experts.

Opposition to the approach

At the time, the government faced significant pushback to these innovation efforts.

The existing conventional oil industry advocated for a focus on enhanced oil recovery (EOR) technology — a set of methods that can be used to increase the recovery of oil from a reservoir. Closer to the incumbents' business concerns, it was more limited in scope in its ultimate potential impact, but had more ability to increase profits in the short term by increasing existing production, extending the commercial viability of existing investments.

This preference reflected the fact that disruptive innovation is often beyond immediate, commercial interests. 

Hindsight and the ultimate success of the oilsands effort tempts one to conclude that the goal of unlocking the in-situ resource was obvious at the time. But that was not the case.

While we might define the word differently today, Allan Warrack, the minister of lands and forests in the Lougheed government, noted that oilsands development at the time was, in fact, viewed as diversification.

The resource itself was an "other," referred to by industry as "alternative energy," with the majority harbouring serious doubts about the ability to develop technology to economically produce the resource. 

Applying these lessons today

Lessons from Alberta's past can guide our next steps in different ways.

First, we can recognize that government has a critical role to play in diversification and building new industries. This doesn't mean investments will never fail — no investor, public or private, has a 100-per-cent success rate — but rather that history shows many examples of the critical role of government.

With the clear need for government to act, the question is then: Toward what goal? And how?

I believe the goal should be one that is truly disruptive, as opposed to incremental.

This isn't to dismiss the important role of incremental innovation. For example, efforts to lower the footprint of our fossil fuel production are critical as we move through the transition, but government investments to build industries must have a disruptive focus to be successful.

The work can and should be guided by industry expertise, but it must address challenges beyond the scope of near-term commercial interests.

Setting goals

Setting the goals for disruptive innovation requires us to look at the resources and skills in the province in new ways, asking questions like: How can Alberta continue to provide power and mobility to a world that is looking to reduce its consumption of fossil fuels?

Demand for power and mobility will undoubtedly grow, but will be provided by different resources — from metals and minerals, such as the rare earths in motors and the lithium in batteries, to new energy carriers like hydrogen. Alberta remains a resource-rich province with many of these critical resources found within our borders. 

Voices cautioning that these resources will be impossible to extract economically, pushing for a focus instead only on incremental improvements, are echoes of those in Lougheed's time who opposed taking a chance on the oilsands.

This is no easy task. It requires leadership, starting with a willingness to articulate difficult truths and act for the long-term — investing royalties from the current activities into innovation that goes beyond near-term commercial interests. The Lougheed government's actions in the face of a similar threat, and the economic prosperity they generated for Alberta, provide lessons we can learn from today. 

But we should aim to do even better this time, listening to those who express regret that the environmental impact wasn't given more consideration in AOSTRA, while ensuring the type of orderly build-out of the industry that Lougheed himself advocated for.

If we are successful, future generations may look back at the decisions made today in Alberta as obvious, just as it is tempting for us to imagine the previous choices that underpin Alberta's economic success today were simple ones.

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