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Mining trucks operate at the Albian Sands oils sands project near Fort McMurray, Alta.


The federal government has ratcheted back its support for industrial research and development just as oil sands companies are gearing up their effort to find innovative ways to cut costs and improve environmental performance.

In his March budget, Finance Minister Jim Flaherty announced a major shift in the way Ottawa encourages business R&D – with more grants and fewer tax breaks – amid criticism that the existing system was largely ineffective.

But in a report to be released Thursday, Deloitte & Touche LLP says the federal moves "risk putting Canada out of favour with multinationals trying to attract and deploy investment capital in our industries."

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And the changes come at a critical time for Canada's oil sands industry, which produces some of the highest-cost crude in the world and has been criticized for its environmental impacts where even supporters acknowledge companies must improve.

The oil and gas industry spent an estimated $1-billion a year on research, development and technology demonstration in 2009, Natural Resources Canada said. Figures are often imprecise and debatable because much of the effort involves engineers making improvements in the field.

But the image of a low-tech operation that just drills a hole and extracts crude, or scoops up shovels full of bitumen for processing, is long out of date, said Geoff Hill, Deloitte's national oil and gas leader in Calgary.

"The industry is very focused on innovation – both to substantially reduce their operating costs and to mitigate environmental issues," Mr. Hill said in an interview.

He said increased innovation will bear fruit not only by reducing operating costs, but in creating export potential for Canadian-based companies that forge solutions to problems that are common in the oil and gas industry around the world.

But critics maintain the industry has not spent enough on innovation, arguing that there have been relatively few breakthroughs in extraction techniques since steam-assisted, gravity-drainage (SAGD) methods were pioneered 20 years ago.

The oil industry has typically lagged other sectors – like aerospace, chemicals and pharmaceuticals – in spending on research as a percentage of revenue, said Steve Larter, a University of Calgary scientist.

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"There is however evidence of movement in the right direction," he said.

In his report, Mr. Hill argues that Ottawa needs to play a greater leadership role in bringing industry, academic and government researchers together to focus on specific problems, and in addressing shortfalls in the tax credit system to provide better incentives for companies to spend on R&D.

The Deloitte consultant said there are encouraging signs that industry is stepping up its effort, including the recent formation of the Canada's Oil Sands Innovation Alliance, an industry consortium that will finance joint projects aimed at reducing the industry's environmental footprint.

Companies like Cenovus Energy Inc. are experimenting with solvents to assist in the extraction of bitumen from in situ projects, where the oil is recovered from deep underground as opposed to being mined.

Already, the industry has made great strides in reducing its water consumption, in partnership with university laboratories and companies like General Electric Co., which is marketing its water membrane filtration technology to oil sands companies.

On Wednesday, GE unveiled an innovation centre on the 34th floor of a new high-rise in downtown Calgary. It's meant to be a place that can help bring together ideas, and where problems can knock heads with solutions.

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While GE intends to focus its innovation efforts broadly – on delivering remote health care, for example, or boosting the reliability of rail service – it's clear the oil and gas sector, and the oil sands in particular, will be an important focus.

GE defended the energy industry's record on innovation, pointing to the volume of dollars spent on engineering and commercializing improved technologies. But the very existence of the innovation centre makes clear the company thinks more can be done.

"It's always fun sport for people to criticize an industry for not going fast enough," said GE vice-chairman John Rice, who attended the centre's opening. "Personally, my focus is on the future, so we do something like this because we think we're going to stir it up and create some ideas."

The innovation challenges for the oil sands may also be shifting to existing operations rather than new projects, particularly as the sector confronts a period of rising costs and constrained commodity prices.

"They've got a lot of the mines and SAGD sites up – how do we optimize the performance of what they've got," said Elyse Allan, chief executive officer of GE Canada. "Maybe if capital to new projects starts to slow down, they'll want to optimize what they've got on the ground."

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