Key to Canada’s growth? Recall the role of public money in developing Alberta oil

Emily Smejkal is the geothermal policy lead at the Cascade Institute at Royal Roads University and a fellow collaborating with the Accelerating Community Energy Transformation initiative.
Peter Massie is the director of the Cascade Institute’s Geothermal Energy Office in Ottawa.
Thomas Homer-Dixon is the institute’s executive director.

Canada faces two deep-seated, increasingly debilitating economic weaknesses: chronically low productivity growth and a lagging transition away from carbon-based energy sources. Both arise from our poor performance harnessing technological innovation. And both have a common solution.

If we can fix our underlying innovation problem, we’ll generate more wealth per hour of labour and per dollar of capital. And we’ll have a cleaner, more efficient economy to boot. Huge benefits will then cascade through every facet of our society.

Canada’s oil and gas sector lies at the nexus of this tangled challenge. It’s among our country’s largest industries, supporting more than 70,000 jobs in domestic extraction alone and making us the world’s fourth-largest oil producer. The sector is also one of Canada’s largest funders of energy innovation. But its productivity growth is among the lowest of all sectors, dragging our whole economy’s productivity numbers downward.

Moreover, the oil sector’s innovation is mainly focused on incremental improvements to boost the output, extend the lifespan and reduce the direct carbon emissions of oil-sands facilities. And because oil and gas extraction accounts for a big chunk of Canada’s overall economy – about 5 per cent of GDP – with output rising year after year, it’s powerfully reinforcing our country’s de facto commitment to a fossil-fuel future.

Canada should probably not be betting a big chunk of its economy on such a future. The International Energy Agency forecasts that demand for fossil fuels will need to fall about 80 per cent if the world is to reach net-zero carbon emissions by 2050. Without reinvigorating our vital oil and gas sector, a shift of this magnitude will devastate Canada’s employment, trade balance, currency value and overall economic growth.

Yet the history of the very same industry offers a made-in-Canada solution. Decades ago, the oil and gas sector played a key role in one of Canada’s most notable technology breakthroughs. It’s a story of how, contrary to conventional wisdom, public money can be instrumental in unlocking economic growth. What happened then says much about how we can simultaneously accelerate innovation, diversify our energy mix and boost our country’s overall productivity now.

It’s time to retell the remarkable story of AOSTRA.

By the early 1970s, it had long been known that Alberta possessed vast, untapped heavy oil deposits in its northeast. But the oil and gas industry couldn’t extract and process these resources economically. Unlike conventional oil, heavy oil trapped in bitumen doesn’t flow naturally because its viscosity is too high. So in early projects, companies released this oil by mining and refining the bitumen on the surface.

The financial investments needed to commercialize extraction far below ground – and the risks associated with those investments – far exceeded what the private sector was prepared to bear, leaving 80 per cent of deposits untouched.

To address this challenge, in 1974 the Alberta government set up a Crown corporation called the Alberta Oil Sands Technology and Research Authority (AOSTRA), endowing it with $100-million from the Alberta Heritage Savings Trust Fund. This was a down payment on what ultimately turned out to be a government investment of $1.7-billion in today’s dollars.

AOSTRA had a distinctive approach to accelerating innovation: It collaborated with private oil companies, matching their investments in research and pilot projects and retaining ownership of any patents developed. This public-private model of shared investment helped distribute risk among investors, which encouraged the testing of more and higher-risk technologies. Partner companies that contributed to projects generating intellectual property got licences to use this IP, and any partner could access breakthrough technologies developed by AOSTRA at minimal cost. AOSTRA also worked closely with university scientists and their laboratories to solve key technical problems.

This approach massively de-risked oil sands R&D. The biggest breakthrough was steam-assisted gravity drainage, SAGD (pronounced “sag-dee”).

Initially developed by Roger Butler at Imperial Oil in the 1950s and 1960s, SAGD solves bitumen’s viscosity problem by heating the substance “in situ” – that is, right where it’s found, deep underground.

The key moment in SAGD’s development came in 1983, when Dr. Butler was named AOSTRA’s director of technical programs. AOSTRA began building an underground test facility 200 metres deep, 60 kilometres northwest of Fort McMurray. The facility started operating in 1987 and successfully tested SAGD wells in its first year.

An industrial revolution soon exploded in Alberta. Output from in situ plants exceeded 280,000 barrels per day in 2000 and then tripled to nearly a million barrels by 2012, surpassing output from oil sands mining. By 2022, output approached 1.7 million barrels a day.

The economic returns have been utterly staggering. From 2017 to 2022, SAGD generated nearly $130-billion in gross revenues and $15-billion in royalties for Alberta’s government, a figure that doesn’t include increased revenue from income and sales taxes.

If we use gross revenues as a rough measure of direct economic activity, the technology produced a 100-fold return on investment – and that doesn’t count the vast indirect economic activity that SAGD’s deployment stimulated in Alberta and across Canada.

In other words, Alberta’s investment paid off – big time.

What’s the urgent lesson from this key piece of history? By co-ordinating, aggregating and standardizing research and innovation results, then licensing new technologies to partners, AOSTRA both accelerated technological advances and recovered the initial government investment many times over.

Yet conventional wisdom today says otherwise: Investing public funds in technology R&D invariably leads to boondoggles, and governments are terrible at picking technology winners.

The AOSTRA experience demonstrates that such skepticism isn’t justified if the funding institution is well-designed. Yes, the Alberta government paid much of the bill, but it set up AOSTRA as an independent, self-governing organization. An internal board of industry experts made investment decisions. Most importantly, the Crown corporation explicitly supported potentially disruptive technologies, irrespective of their commercialization timelines, to create an environment that allowed for experimentation and failure, albeit with strict attention to reducing costs when failures did happen. Led by its experts, AOSTRA was able to take informed risks on unproven technologies with potentially enormous rewards.

This approach faced resistance. Alberta’s conventional oil industry saw the oil sands as a competitor and lobbied the government to invest instead in enhanced recovery of conventional oil. But the Alberta government persisted in believing that disruptive innovation would dramatically accelerate economic growth. Although it eventually broadened AOSTRA’s scope to include enhanced oil recovery, AOSTRA’s focus remained oil sands research and development.

Today, pools of public funds in Canada are available to support energy innovation, but AOSTRA’s lessons seem lost in the fog of time. Instead, governments prefer to fund incremental innovation, with industries dictating priorities according to their short-term interests. Large funding bodies such as the Canada Infrastructure Bank and Canada Growth Fund have general focus areas, not concrete targets like those given to AOSTRA.

This risk-averse, incrementalist approach will never generate another technology revolution like SAGD’s in-situ boom. Canada should reinvigorate the AOSTRA model, with its clear and targeted mandate, independence, deep expertise and catalytic IP system. This tried-and-proven approach could supercharge Canadian innovation, at once boosting our productivity and inducing transformative breakthroughs in emerging low-carbon energy technologies, from deep geothermal to small nuclear reactors, hydrogen and tidal power.

Perhaps, when all is said and done, one of our fossil-fuel industry’s most enduring beneficial legacies will be the AOSTRA model. It’s an example of what social scientists call an “institution” – an integrated set of rules and incentives – in this case designed to combine extraordinary minds with large amounts of targeted capital to solve our hardest problems. It is, fundamentally, a blueprint for an innovation engine. It’s time to pull this blueprint out of history’s vault and use it to change Canada and the world.