Canada's energy industry - especially the oil and gas sector - remains an attractive destination for investment dollars.

However, concerns over issues such as soaring input costs, worker shortages and regulatory red tape are enough to keep financiers on edge, delegates at a national energy conference heard last week.

Prices for crude oil and natural gas are at all-time highs, even when converted into Canadian dollars, said Derek Burleton, a Toronto-based senior economist with the TD Bank Financial Group.

This fact, coupled with strong productivity growth in the sector that creates strong profitability, means the oil and gas extraction sector receives more than its fair share of investment.

"I speak to a lot of people within the (TD) bank who do the lending and work on equity financing, and even these conservative people are looking at higher oil prices," Burleton told around 150 delegates at an Energy Council of Canada-sponsored conference held in Kananaskis Country in southwestern Alberta.

"Certainly over the medium term, while prices may pull back a little bit from the $50 level, you're looking at prices that are well above the five- and 10-year averages, and certainly from an equity and debt-financing standpoint, that's created a lot of interest."

This interest is reflected on Bay Street. Weighting of the energy component in the TSX has shot up in the last three years, climbing from around 13 per cent in mid-2002 to 21 per cent today. Burleton said that when royalty trusts are included in this mix, the weighting rises to around 25 per cent.

It's not just higher commodity prices driving these figures, Burleton noted. Canada's image as an investment centre has also improved dramatically in the last decade. Back to the early 1990s, federal and provincial governments were running enormous deficits, relying on foreign capital. Today, however, it's a different story.

"(High foreign debt) certainly puts you in a vulnerable situation, something that the U.S., with its big international deficits, will be experiencing increasingly," he said. "The fact is, our governments have led the way in turning around the investment climate in this country. In other countries debt is going up, and in our country the debt-to-GDP ratio is falling."

Pierre Alvarez, president and CEO of the Canadian Association of Petroleum Producers (CAPP), said he is pleased by the bullish projections the investment community is giving the energy sector.

But while happy that oil and gas continues to attract both attention and investment dollars, he cautioned that more could be done.

"We are seeing a lot of investment now, but when you adjust to Canadian dollars the investment isn't as high as some people think. Also, we're not seeing investment in certain parts of the country - East Coast Canada and Northern Canada are at record-low levels of investment right now, which is troubling," he said.

Burleton noted that not all is roses and sunshine in the energy industry. The economist raised a number of concerns he and his colleagues harbour that could limit capital investments in the sector.

Finding and development (F&D) costs, for example, continue to grow rapidly as Canada's oil and gas resources mature. Quoting numbers from a J.S. Herold Inc. report, Burleton pointed out that average F&D costs increased from just under $4 per barrel of oil equivalent (boe) in 1997 to almost $12 per boe in 2001.

These costs are being propelled in part by price increases in the inputs such as steel, environmental cleanups and the high cost of bringing on new technologies.

Labour costs - spawned by an ever-growing skilled-worker shortage - are also giving the investment community the willies.

"It's not a problem that will go away five, 10 or 15 years from now. The fact is, even with immigration with what we hope to attract, which is about 300,000 per year ... we're going to see slow growth in our labour force, so it's not like we can look forward down the road," Burleton said in his address.

Cheryl Knight, executive director of the Petroleum Human Resources Council of Canada, agrees that attracting outside workers - either temporary foreign workers or through immigration - will play a big part, but will not alone suffice. Knight told delegates that building a talent pool will also mean increasing women's and Aboriginal participation in the workforce or tinkering with the average retirement age.

Investing in training and development or other "knowledge transfer strategies" is key, she said, which could include plans such as "increasing the use of technologists in business, where technologists do some of those activities that are today done by professional engineers."

Other issues the financial community is keeping its eye on are Aboriginal issues and Canada's burdensome regulatory system, which Burleton calls "complex and overlapping.”

Such issues are placing in jeopardy vital projects such as the Mackenzie Valley pipeline.

"The government has got to continue to do its role and get its house in order, which could throw open the door to private-sector investment. I think the two can be a powerful punch in addressing many of these needs," Burleton said.

Regulators presenting at the conference agree more work must be done to streamline regulatory processes at both the federal and provincial levels.

Peter Watson, deputy minister for Alberta Environment, said he understands industry's frustration with cumbersome and inefficient regulatory policies. As an example, he cited that between his and other government departments that oversee energy regulation, there are at least 700 regulatory documents that govern the oil and gas industry - too many, in his opinion.

"It's a staggering thing when you think about it," he told the conference. "We haven't always integrated (the province's regulatory systems) as we should, and that's our challenge going forward. Do we really need 700 policy documents, or directives, or guidelines? Or can we live with less and provide better integration at the front end to help industry?" The province is already in the process of fixing the problem, he added. Besides better co-ordination between Alberta government departments, the province is looking at other measures to streamline the regulatory process, including harmonizing policies with neighbouring British Columbia.

(John Ludwick can be reached at ludwick@businessedge.ca)