Industrial Policy in Alberta: Lessons from AOSTRA and the Oil Sands

Abstract

This paper examines Alberta’s record of industrial policy and proposes principles for future innovation-focused provincial policy. I find that the development of the key technology to unlock the majority of the Canadian oilsands — steam-assisted gravity drainage (SAGD) — is an example of industrial policy in Alberta responsible for disruptive innovation and economic development. The incumbent industry preferred incremental innovation in enhanced oil recovery. However, strong political leadership raised the royalties on the conventional oil industry to fund the Alberta Oil Sands Technology and Research Authority (AOSTRA), an extensive project in what was seen as diversification in an alternative industry. The initial $854-million (2019 dollars) government investment was matched by industry funds. However, after this investment failed to demonstrate a breakthrough, the pivotal investment in SAGD was purely government-funded and led, in the face of opposition from industry that viewed the construction of the underground test facility as a boondoggle. Once SAGD was proven, the private sector — made up of personnel trained under AOSTRA, and with continued financial support from government — grew SAGD into a significant industry. Since then, the government’s pivotal role in setting direction, the $1.4 billion (2019 dollars) in government investment and the opposition it faced have been largely forgotten. There is growing interest in the potential for mission-oriented innovation or industrial policy to address major social and environmental challenges and spur economic growth. As the Alberta government seeks to address the dual challenges of diversification and decarbonization, AOSTRA’s success holds important lessons. There should be a clear, disruptive goal that is not overly prescriptive. The goal should be matched to the scale of public and private resources available and supported by strong political leadership and willingness to take on a long-term challenge. The work should be driven by a technically competent organization with freedom to partner and make sole investments. And finally, there needs to be a clear mechanism for knowledge diffusion and recovery of the value of the knowledge created. I explore these lessons and set out an industrial policy approach for the role of government in industry creation. Alberta’s economic development history shows the important role of industrial policy in creating disruptive innovations and generating economic growth. It also shows how careful policy design can minimize rent-seeking as well as the costs of the necessary mistakes in the process — the “losers” that end up picked in the process of finding the “winners”.

Keywords: Innovation, economic development, diversification, industrial policy, Alberta Oil Sands Technology and Research Authority, oilsands