Feb 23 2015

Canada’s Debt and Government Growth Problem

Today on Zero Hedge, there was a post about how government debts are over 100% of GDP in many countries, and there are even six nations with debt/GDP ratios greater than 300%.   Canada was mid-pack at 221%, just ahead of China (if you called having more debt being ahead).

What caught my attention was the second table:

Screen Shot 2015-02-23 at 6.20.00 PM

which shows for each country how the growth in GDP over the last 8 years is divided (government, corporate, household and financial institution. Note how in Canada only the banks have deleveraged (and only a little, compared to other places).  But government has been the PRIMARY source of economic growth in Canada.    Corporations provided almost no growth over 8 years, and households run about 2% per year (which seems about right).  But why is government growing so fast?  And is it sustainable?  Considering that corporations and households have to pay taxes to support government, and they are growing slower – this can only have been achieved through increasing government debt.  Which we know is happening in almost every province (except Saskatchewan).  Luckily, the federal government is nearly balanced on it’s budget – but Quebec, Ontario, BC and Alberta are bleeding red ink and seemingly unwilling to stop…

This does not bode well.  Our leaders should be looking to Greece.  And recognizing how foolish their new government really is.

Feb 22 2015

Nenshi is wrong on cutting costs

This week, two incidents made me once again question the financial and economic acumen of Calgary’s mayor, Naheed Nenshi.  The first was a brief exchanger he and I had on Twitter after someone else had challenged him about spending at City Hall.  I questioned whether, considering that many Calgarians in the private sector were either losing their jobs or taking pay cuts whether the same thing would be happening in the city bureaucracy.  Nenshi’s response was “Why would we do that? Just to be mean?”

No you fool – to CUT costs.  Some Calgarians may be entering a situation where paychecks are shrinking, if not disappearing, and taxes are harder to pay.  Shouldn’t those governing the city see this and be looking VERY hard at where the City spends money?

I thought it was a one off, until Councillor Demong proposed that the city freeze spending on public art (defined as 1% of capital spending by city by-law) until the economy improves.   Nenshi’s response was to say “The declining price of oil has the square root of zero to do with our public arts budget, there is no relationship whatsoever.”   REALLY?  The declining price of oil has a lot to do with the declining price of houses in Calgary, and with the employment rate, and with real wages in the private sector.  These are things that drive REVENUE for the City of Calgary.  But I guess Nenshi’s attitude is that the taxpayer doesn’t matter.  He just wants more money from the province and the feds to buy more public art (much of which is overpriced, ugly and is primarily a source of jokes).

Perhaps if Nenshi had ever worked in the private sector (i.e. the part of the economy that actual MAKES the money he wants to spend) he would have a better understanding.   But he’d rather worry about whether alcohol is served in City Hall or at City events than worry about taxpayer’s dollars.

Calgarians need City Hall to cut spending, both capital and operating, while we figure out how bad this downturn is going to be.  The province has to do it, and the feds have been controlling some spending.   He needs to do the same and fast.

 

 

 

 

Feb 20 2015

On Cost Pressures in the Oil Sands

In the Globe and Mail:

The president of one of Canada’s biggest oil and gas producers delivered a stern warning to the oil sands industry, telling a room full of Fort McMurray business people that they need to start cutting costs or the industry will fall into a “death spiral.”

The “made in Fort McMurray cost” of doing business has risen too quickly and must end, Steve Laut of Canadian Natural Resources Ltd. told members of the local Chamber of Commerce.

Mr. Laut said oil sands producers were making three times the profit in 2004 when a barrel of oil cost about $40 (U.S.) than it did when the price hit close to $100 in 2013.

Laut is correct, except that he is missing out on a major part of the problem.  I have discussed this before.

One of the problems is that the oil companies have been driving costs up with behaviour that they THINK is driving costs down:

  • Micro-managing capital project execution, and involving far too many people in the effort.   Rather than having a small, but knowledgeable group clearly define what they want to achieve, they build bureaucracies with silos that are not aligned on the same goals.  The bureaucracies then hire contractor firms in different areas of expertise and try to manage the interfaces themselves.  Rather than define WHAT they want, they define cumbersome processes for HOW they think the work should be done.  I have recently worked on projects were the Owner’s Costs during design were higher than the engineering contractor costs.   Owner company personnel with limited experience quote textbooks on project management to contractors with 30+ years of experience successfully managing projects.
  • In doing the above, the management of interfaces is something that is very easy to talk about, but very challenging to perform well.  Failure to contractually ensure all the parties are aligned to the same goals, and not understand the big picture usually leads to disputes, claims, schedule delays and cost overruns.
  • Overwhelmingly trying to avoid the LAST mistake, rather than watching out for the new ones.  In hindsight, many failures are blindingly obvious, yet great effort is spent to ensure they are avoided when in reality those are not the failures that will screw up the NEXT project.   This tunnel vision for past failures usually leads to blindness towards the future.
  • Unwillingness to change, or as I mentioned last year – unwillingness to try something new.  If we want lower costs, perhaps we need to look at some of the most fundamental parts of what we are doing and seeing where the big costs REALLY are.  You can’t realistically expect to build the same thing as last time for 30% less unless the price of materials and labour drop precipitously.  Try new technology, try new approaches.  Stop being afraid of small failures.  Avoiding opportunities will doom you to bigger failures.
  • Cut the bureaucracy.  Look VERY hard at the work processes, procedures, systems and requirements you have for your own teams and your contractors and suppliers.  A lot of this appears to be there to cover someone’s ass so the claim of “it’s not my fault” can be hauled out later.  A lot of the requirements that have been built up over the last decade or two are not improving quality or controlling cost.
  • Push the government of cleanup and streamline the regulatory environment.   The biggest reason the government regulations in Alberta take so long to comply with is that they aren’t clearly defined.  Each project has to ask for specific permissions and get approved.  No two projects are alike – so each one has to flounder around in the dark, spending inordinate time and money to comply with unclear rules, and then react to new requirements and changes from the regulators.  How about just defining the rules for everybody ONCE?

Here are some numbers to give you a sense of why costs are rising and how the suppliers are not the only ones driving costs up:

  • Projects in Alberta today require about 2-3 times as many engineering effort hours as they did in the 1990s. No good reason for this.  Industry has better tools and can do “better engineering”, but are we really?  Or are we just making sure no one can be blamed for “imperfections” later.  And if we can do better design, why are we still using design margins and safety factors from the 1950s when we COULDN’T do as rigorous of calculations?
  • Projects in Alberta take WAY TOO LONG.  This is a combination of the engineering, regulatory, manufacturing and construction timelines, yes, but it mostly has to do with the speed of decision making.  If a decision can’t get made, progress slows or stops.   How is it that the Manhattan Project in the 1940s went from a science project under the stands of the football stadium at the University of Chicago in 1942 to a WORKING nuclear reactor by 1944 and a working nuclear bomb by 1945?  Yes, they had a lot of money, but the will was there to make decisions to make that project happen.  Today, we can’t build a plant to treat water, boil it and separator oil and water in less than 5 years that costs a SMALL fraction of what Manhattan cost.   This extension of schedule drives up costs too because you are paying all of those people for that much longer and giving them more opportunity to change their minds and interfere in the design and execution long after the value of those changes can be justified.
  • Some of the oil companies have identified that the number of people they have on staff for each unit of capital spend has risen dramatically (in some cases by a factor of 10) since the early 2000s.  The problem is that there are many in those firms who think the problem was lack of owner oversight, and the failure to get recent project rights means they need still more.  Doing the same thing over and over again hoping to get different results has been termed insane.

So I would challenge Mr. Laut and all of the other oil sands company executives to take a hard look INSIDE their own organizations to see what they are doing that is driving up project costs.

 

 

Nov 01 2014

On Teacher Retirement Behaviour

At my daughter’s high school this semester, two of her four teachers have chosen to retire in the middle of the term, forcing the students to be handed to another teacher.   The fact one of her other teachers is very pregnant means that by January she will have had seven teachers for four courses.  Now I won’t blame the pregnant teacher for her timing because that isn’t something that cannot be easily planned.  But for the two teachers who suddenly retired, I wonder about the contract we have with the teachers.

In Alberta, the teachers union (the Alberta Teachers Association) has negotiated a defined benefit pension plan with the government whereby teachers can received 70% of their pre-retirement income so long as they retire at either 65 or when their age plus years of service equals 85.  The first one seems ok to me – but the second one seems overly generous and the cause of these mid-term retirements.

If a teacher started working at 25 and worked for 30 years, they would meet the age plus years of service threshold as soon as they turn 55.  A teacher who started at 23 would have to work until 54 (31 years) to hit the threshold for retirement.  This is what these teachers are doing.  They hit the threshold age and they check out – even it is the middle of the term.  There is no benefit to them to keep teaching and no penalty for hanging it up mid-term.  We should revise the contract such that teachers cannot retire mid-term unless they also have medical issues.  I might even make allowances for those who have reached federal pension age of 65 – but few teachers stay that long in any event.

In the private sector, there are no age-plus-years of service pensions.  There never were.  I have an RRSP with money piling up, and a TFSA I fund with post-tax monies – but the question of when I retire is entirely based on how much I can save and whether I think it is enough to live on in my post-working life.  But teachers, and many other public sector workers are guaranteed a very healthy retirement income much earlier than those of us in the private sector.

If you look at the ATA’s pension numbers, their plan looks well funded today.  However, they did increase contribution rates to overcome the losses in the stock market from 2007-09.  Since 2009 the markets have been very good, but that is not sustainable.  Therefore, I fear that these generous pensions will once again trigger financial problems for the taxpayers in the future.  We should switch from defined benefit (which can only be guaranteed by the taxpayer) to defined contribution and individual accounts (which become the responsibility of the individual pension recipient) to manage.  And we should let teachers retire when they think they have enough money and not during the school year.

Nov 01 2014

On Cost Consciousness in Health Care

This week, my family had the misfortune to have to deal with Canada’s health care system.  It was a very mixed experience.  It began on Sunday evening, when my lovely wife tipped the pasta pot and poured boiling water over her hand and forearm.  She was scalded quite severely, and although we quickly got it under cold water, there was some blistering. She was in a lot of pain so we headed to the ER at the new South Calgary Health Centre.  It wasn’t busy at all, and we were very quickly seen by a triage nurse and rushed into treatment.  A nurse and doctor were quickly on the scene and immersed her arm in cold water and then assessed the burn.  They were friendly, helpful and showed genuine concern.  They dressed the injury with some silver-impregnated sponges to prevent infection and wrapped up her hand and arm to protect the injury.  They indicated that due to the extent and severity they wanted us to see the experts at the Burn Unit at the Foothills Hospital.

Monday, the burn unit called and we headed there to get it redressed and to assess the extent of damage and whether she might need physiotherapy to prevent scarring, particularly on the hand.  However, the service at the Burn Unit Rehabilitation section was much less pleasant.  After checking in, we had to wait some time after the appointment time, and a woman came to get us and rather grumpily called my wife’s name.   She then led us back through the rehab clinic at a very slow pace.  Once in a treatment area, she starting cutting the old dressing from my wife’s arm without even telling us who she was.  When asked if she was a nurse or was the person we had the appointment with, she rather rudely said “No, I’m Lidia and we don’t have nurses here”.  My wife looked at me with a face that said “is the janitor changing my dressing?”  We inquired further and she said she was a physiotherapist.  She cleaned my wife’s arm and then said she would get the other therapist we were scheduled to see.   That therapist showed up and did assess and redress the injury – when she placed the silver-laced sponge pad, my wife told her the ER had used more of that material to cover the wound that she was doing – she said “We don’t do that because this stuff is expensive”.  My wife asked where we could buy it if the health care system was going to be cheap.  The therapist then used some cream on my wife’s arm that she said would help it heal.

Two days later, my wife’s arm was sore and red so we went back to the South Calgary ER.  Again, it was quiet – the wait time screen said it was 1:15 to be seen, which seemed reasonable, even though the waiting room was nearly empty.   At a desk as you enter the ER waiting room there were two Alberta Health Services staff – young women dressed in scrubs who may have been nurses – but we didn’t inquire.  They seemed bored and no doing anything.  There is a lot of signage directing visitors to Triage and Admitting, so we went where we needed to be.  We asked the Triage nurse what those women were doing there and were told “that is the information desk”.   It seemed odd to us that in a quiet ER with clear signage that you would need TWO people to sit and answer questions from no one.

To close the medical story, we were quickly seen by a doctor and medical student.  They assessed the injury and thought perhaps it was an allergic reaction.  They washed the arm and gave my wife an antihistamine, and then redressed the wound.  This seemed to work nicely and she is now well on her way to healing.

In both of our visits to the South Calgary ER we were in and out in under an hour.  Best time ever in an ER.  But the Foothills burn unit was unpleasant.  You would think that in a place where many patients are suffering from severe injuries the staff would at least TRY to put on a friendly face rather than being grumpy and unpleasant.

And it is funny to me that someone in the burn unit is worried about spending money on a medical supply than might cost a few dollars while AHS spends money on TWO medical staff sitting at an information desk when there is almost no one around asking questions…  Clearly the message about money isn’t hitting at all levels.

 

 

 

 

 

 

Jun 02 2014

On the EPA CO2 Reduction Target

Today, the EPA and President Obama unveiled a plan to reduce major power plant CO2 emissions by 30% in 16 years (by 2030).  This will basically kill the coal-fired power industry, and subsequently the coal mining industry in America.

There is much discussion on the net about how foolish this is, such as:

  •  The reduction in emissions will have, even by the EPA’s prediction, a negligible impact on so-called global warming, by 2100.  Can you even measure 0.018ºC difference in atmospheric temperature?  Even more, a scientist testified before Congress on Friday 29 May 2014 dismantling the IPCC AR5 report, which is really the basis for the EPA action.
  • The economic impact will be massive.  The U.S. Chamber of Commerce figures the plan could scotch $50 billion a year in GDP and prevent the creation of more than 220,000 jobs per year. The hit to household disposable income would be more than $550 billion a year.   Note how this has ALREADY happened in Germany, Spain and Ontario.  The supposed reduction in “social costs” of health issues are dubious.  Much like in Ontario where the government claimed that green energy would reduce hospitalizations for breathing disorders by greater than 100% (i.e. there weren’t that many such hospitalizations)
  • The reduction in coal-fired power generation will be offset by gas-fired and renewable energy sources.  However, renewable energy isn’t on-demand – it depends on the sun shining and the wind blowing.  And we have seen in Europe and Ontario how high prices for power have to go to justify these renewable projects.  And we see in California and elsewhere the derelict remains of windfarms that didn’t pay out…

There are a few other issues here that I haven’t seen written about today:

  • The so-called shale gas boom may not be going quite as expected.  For a couple of years now, the estimates of recoverable natural gas from shale deposits has been FALLING.  Why?  Because it turns out that shale gas deposits require A LOT of drilling to maintain product rates.  Unlike traditional natural gas deposits, shale gas is labour and capital intensive and the wells have very rapid decline curves.  Therefore, the hope that natural gas can replace coal at similar costs into the future may not actually turn out, and we could in the not too distant future have high gas prices and thus high power prices again.  That said, technological advancements such as those that led to shale gas being possible could continue (given high enough prices).
  • One option could be nuclear power, including thorium cycle reactors such as those India is developing.  However, the regulatory regime in the United States is so dysfunctional and prone to political meddling that nuclear projects are now likely to take 20 years from proposal to startup.  Horrifying when you consider that the first nuclear plant in America (Hanford, WA) was designed and built and started up in under three years (1942-44) without modern technology like computers.    However, to make nuclear power economic will require higher prices and a significant reduction in regulation that doesn’t lead to greater safety.

Obama has set out clearly where he always promised to be – a green, left-leaning socialist who doesn’t understand economics, science or good sense.  This should be a political gift to the Republicans, if only they can figure out how not to screw it up.

For Canadians, there is a great risk that Harper is pushed by the media or bureaucrats to attempt to align to the US policy.  This would be extremely foolish.  We should take this as a clear message that Keystone XL will never be approved under this US Administration, focus on other export options like Northern Gateway, TransMountain Expansion and Energy East (push these through ASAP).  We should adopt the Australian policy of avoiding economic damage due to climate legislation.  We should REFUSE to be held hostage by the socialist in the White House.

The decline of America continues….

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May 20 2014

Hard vs. Soft Science

Today over on WUWT, Steve Burnett writes eloquently and very forcefully on the ridiculous stance and attempts by those in the “soft sciences” like psychology, sociology, economics and similar fields to attempt to play equals with the hard sciences (physics, chemistry, biology, engineering).   The parts I liked the most:

In short philosophers, and sociologists of science, both soft science fields, haven’t been able to confirm the differences {between the hard and soft sciences}. They point to a lack of consensus in the hard sciences, controlled experiments and mathematical models. The analysis is about as meaningful as finding no difference between a peewee and professional basketball game because they both shoot rubberized orange balls at hoops. That is exactly the problem with the soft sciences, they can get the results they want by only evaluating the characteristics they choose.

Unfortunately soft science is spreading into the other domains. In my capstone course we had to watch the thoroughly debunked Gasland documentary. We heard about fracking fluids, well contamination and maybe just possibly earthquakes caused by the process. When I presented three studies that thoroughly destroyed the claims the professor dismissed them with a wave of his hand. We were required to take a course called energy and the environment, which is best described as green masturbation. When you present solar roads, indoor farming, renewables, and local agriculture, as a required engineering course without any sort of cost benefit analysis or numerical pretense what else can you call it?

This one drives me crazy.  My alma mater now offers a graduate program is sustainable development which is heavy on the technology and very light on the economics (or lack thereof).  These programs exist all over the place and industry is starting to absorb people who have been educated and have credentials but don’t understand that a lot of renewables are complete economic fallacies (see Germany or Ontario for consequences of overly aggressive adoption of Green Power).

Examining what makes humans, society or even the climate tick are noble endeavors. The failure to demand reproducible or falsifiable results, reject failed hypothesis, or allow for and defend work that is riddled with personal or political bias is what undermines these fields, it’s what makes them “soft”. More succinctly the problem with these fields isn’t entirely methodological, it’s cultural and it exists at every stage of training.

That sums it up pretty clearly for me.

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Apr 22 2014

On Innovation in the Oil Sands

I don’t often post on the industries in which I work, but I felt this week like I should.  Outgoing Total E&P Canada president Jean-Michel Gires said at the end of 2012:

  • We are still too many mavericks around our own ideas.
  • saying we are the best in the world and we can develop technology by ourselves and we don’t need the other ones to do so, thank you very much.
  • is too much fragmentation and not yet enough of a cluster
  • Engaging smaller innovators is a particular challenge – garage inventors can change the world, but the oil sands, which spends money by the billion, has not traditionally paid enough attention to that potential resource. They could be playing a role if they were given a chance and we could have more appetite to develop further startups

Now I work well down the ladder from Mr. Gires in the industry (I am not with an oil company), but I see some of the things he sees.   First:

  1. There are too many at various levels of organizations who are “wedded” to a given technology or idea and they throw roadblocks at anything that questions their ideas.  Even when reason and logic show that the idea doesn’t make a lot of sense or that other options have better chances of success or improved economics it is nigh impossible to change their direction
  2. The industry lives in fear of failure, at any scale.  The fact is that the oilsands business didn’t get here by being risk averse or fearing new technology.  Successful people and businesses are not those that fail the least – it is those who are least afraid to fail.  If you are 5 for 5, that doesn’t mean you are better than 7 for 10, it means you were too safe and didn’t push your organization far enough.  Just because something “sort of works” or it’s not too bad doesn’t mean you should stick with it because you are afraid the next idea won’t work at all.  Remember that every time something doesn’t work we learn from it – the next technology or execution strategy isn’t invented from whole cloth and it has vast risks of failure.  Each step taken should try to account for all the things we’ve learned don’t work so well.   The tendency to fall back on what we did last time is dangerous and prevents improvements, whether they be technical, economic or environmental.  Yes, big failures are bad and risk needs to be managed carefully at that level – but small risks need not be avoided entirely or else you miss out on the opportunity to improve.
  3. The owner organizations have been bloated with teams who are not focused on the core business of those organizations – which should be operating facilities and learning what works and doesn’t work.  They should be piloting new technologies in their facilities to find the next step change in improving the operations.  They should get out of the business of executing capital projects.  There are firms who have specialized in that for over a century.  They should get out of the business of trying to invent technology themselves.  Let the equipment vendors, universities, and garage inventors do that.  Help fund them, but stop trying to to compete with them and don’t discount them just because you’ve never heard of them or they don’t have the educational or business pedigree.  The one area the oils companies should be involved with R&D is on the subsurface because you have the asset with which to experiment.  Work with the drilling community, downhole equipment suppliers and your own subsurface professionals to identify the best ways to get the oil out of the ground.
  4. Owner organizations also need to cut bureaucracy – they are often as difficult to navigate as the government.  The procedures that these firms have put in place to solve problems have often, like government, created a mess of unintended consequences that drive up manpower demands, costs of capital projects, costs of maintenance and drive down economic returns.  It has been said by many in the industry that many of these companies make money in spite of themselves.  I laugh whenever an environmentalist talks about the conspiracy inside oil companies to make money at the expense of everything else.  They spend a huge amount of time and money on the environmental and social issues (rightfully), but if they really put their minds to it I think they could make more money…

Apr 22 2014

George Brandis – another good thing from Australia!

I’m really starting to like some of the things I’m hearing out of our cousins down-under.  First it was them calling out homeopathy for being a fiction, and now this from their attorney general, George Brandis:

‘Because’, he says, ‘if you are going to defend freedom of speech, you have to defend the right of people to say things you would devote your political life to opposing. Your good faith is tested by whether or not you would defend the right to free speech of people with whom you profoundly disagree. That’s the test.’

Hallelujah!  Finally a western politician who is willing to stand up and defend Free Speech the way it was originally envisioned by Locke, Mill, Jefferson and Voltaire.  In recent weeks there have been numerous examples of those who believe themselves to be on the “right side of history” arguing that restrictions on free speech should be imposed to prevent people from presenting or discussing views they don’t agree with.  Rather than win a debate the old fashioned way, these individuals, would rather stifle dissent and shut down debate.  Whether it be on university campuses such a Brandeis backing down from letting the great Ayaan Hirsi Ali speak because it might make some people “uncomfortable”, or people writing to the the House of Commons at Westminster asking for restrictions on unpalatable speech, it is reprehensible.

One of the comments on the site cited above scared me especially:

There is no utility in having people express views that are false in fact, nor free of consequence. The classic example is freely shouting “fire” in a theatre.

Egads – conflating yelling fire in a crowded theatre with expressing views that are “false in fact” depends on someone being the absolute arbiter of “truth”.  Reminds me of things that were done under Stalin!  Of course, most of the people expressing this view today don’t see themselves as totalitarians – because they are expressing their view out of genuine belief that you can have such limits and control on society without being totalitarian.  Unfortunately that belief is false.  The success of western civilization over the past four hundred years comes from our freedom to think, speak, print and debate.  And to figure out that sometimes we are wrong, whether it be about science, social ills, or economics.

Andrew Coyne expressed this very well in a recent National Post column:

The idea that the state should refrain, as a rule, from regulating speech, the willingness of the public to legislate restraints on the state’s ability to do so, the readiness of those in power to be so restrained, all are born of a climate of opinion that recognizes the intrinsic value of speech, even or perhaps especially where it offends.

So far as we follow the opposite impulses in our private interactions with each other, so far as we attempt not to argue with others but to intimidate them, so far as we indulge the toxic nonsense that there is a right not to be offended, we undermine that consensus, and so in turn weaken our defences — intellectual, political, legal — against the government doing likewise.

As did Mark Steyn from the Spectator:

Free speech and a dynamic, innovative society are intimately connected: a culture that can’t bear a dissenting word on race or religion or gender fluidity or carbon offsets is a society that will cease to innovate, and then stagnate, and then decline, very fast.

But I await such candor and backbone from a Canadian politician, of any stripe.

 

Apr 09 2014

Australia correctly calls homeopathy quackery

Australia’s government has published a report that correctly identifies homeopathy as quackery:

http://m.heraldsun.com.au/lifestyle/health/nhmrc-rule-homeopathic-remedies-useless-for-human-health/story-fni0diac-1226878166107

now if only Health Canada would do the same.

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