Getting ready for $70 oil (and what it could mean for Alberta's economy)

When Leo de Bever looks at the risks facing Alberta’s economy—and by extension its public pension system—the possibility of $70-a-barrel oil looms large. Unconventional supplies of oil and gas are increasing around the world, countries like Iran and Mexico are reviving production, and alternative energy sources are becoming more viable. All of these changes could push the West Texas Intermediate benchmark down by as much as 25% over the next five years, he says. It would be a devastating blow to a high-cost basin like Alberta.

That’s why de Bever, CEO of Alberta Investment Management Co. (AIMCo), pledged in December to invest $100 million in innovative technologies in oil, solar, wind, wave, biofuels or other forms. “Basically anything that makes energy more environmentally and economically friendly,” he says.

While some in the oilpatch were quick to dismiss his prediction that oil prices would slide, de Bever remains hugely influential and respected in Canada’s investment community. AIMCo is one of the country’s largest pension fund managers, with $70 billion under management, including the $17-billion Heritage Fund. De Bever says the oilsands industry itself is not doing enough to offset future price declines or reduce the pollution that has disadvantaged its product in key markets.

Like many, he believes that the energy industry is on the cusp of the kind of change not seen since the internal combustion engine poured cold water on the steam era. De Bever’s greatest challenge will be to find where that change is headed and how to participate. The oil and gas industry does not work like Silicon Valley. Most of the new technology that gets widely adopted is developed by producing companies and university-based laboratories, not by startups whose main asset is their intellectual property.

Moreover, the search for breakthroughs has proven a risky gamble for others. Take Petrobank Energy’s once highly touted Toe-to-Heel Air Injection technology. After spending hundreds of millions of dollars developing the process, which promised to liquefy and upgrade bitumen underground without the use of steam or natural gas, Petrobank is now debating whether to develop its oilsands and other heavy oil reserves using tried-and-true methods.

Richard Dixon, executive director of the Centre for Applied Business Research in Energy and the Environment, doesn’t agree with de Bever’s ominous price prediction, but he welcomes the interest in innovation by institutional investors. When de Bever gives lectures at the University of Alberta, “Let me tell you, it’s standing room only for our MBA students,” says Dixon. “With AIMCo saying, ‘Look, we need to look at this,’ then people will pay that much more attention.”

While AIMCo’s promised splurge on energy technology “is peanuts compared to their overall portfolio,” says Leo Kolivakis, publisher of Pension Pulse blog and an independent pension fund analyst, “I think it sends a signal that they are investing in new technologies, that this is important.” Some “smart money” is already doing what AIMCo plans to do, he adds.

The use of public funds to help develop Alberta’s economy, once championed by former premier Peter Lougheed, has since fallen out of favour. AIMCo was initially criticized for its 2009 rescue package for Precision Drilling, Canada’s largest oilfield services firm, though that deal turned out to be hugely profitable. “It’s like Wayne Gretzky saying, ‘I missed 100% of all the shots I didn’t take,’” counters de Bever. “If you take shots, you are going to miss some. But that doesn’t mean it’s not the right thing to do.”