Canada’s Calgary-based petroleum industry is foaming at the mouth over the stunning election of a left-of-center New Democratic Party government in Alberta, while incoming Premier Rachel Notley is trying to tiptoe between introducing a new style of government and accepting the reality that energy contributes 25 percent of her province’s gross domestic product.
If she is unable to pull off that high-wire act, Alberta could find itself in even deeper economic trouble
Her campaign promise of a royalty review has the industry flailing in all directions, unaccustomed to not getting its way with the Alberta government in the 65 years since the province entered the oil-producing age.
During the 44 years of Progressive Conservative administrations that ended May 5, the industry was able to wield a club over the government, threatening and, occasionally even delivering on those threats, to withdraw billions of dollars in capital investment if it didn’t have its way.
The initial industry reaction to the stunning election outcome is a barely disguised move to lean on the new administration.
Certain tax increase
Typical of the mood in corporate Calgary – which faces a certain increase in its tax rate to 12 percent from 10 percent - Scott Saxberg, chief executive officer of Crescent Point Energy, said a stock market swoon on May 6, the day after the NDP victory and the Conservative party demise, will only be magnified if Notley decides to carry out her pledge to review whether Albertans are getting a “fair share” from the resources they own.
The S&P/TSX energy index, reacting to the election, lost C$13 billion in value on May 6, while companies had already slashed about C$33 billion from their 2015 capital budgets in response to the oil price dive.
“If the NDP create further uncertainty on royalties and change royalties to impact valuations, it will provide an opportunity for companies such as ourselves to step in and buy Alberta-based companies for a discount value,” Saxberg told reporters.
He said potential buyers would be well-positioned for if and when the government was forced to back down from any royalty increases to stem the outflow of investments, as it did five years ago after the only attempt in Alberta government history to raise royalties.
“It’s not hurtful to foreign companies, it’s hurtful to local companies, because they’re all invested here,” he said. “If you drop the valuation of a company because you change the rules and create uncertainty, it creates opportunity and discount value.”
Saxberg earlier noted that Crescent Point collects only 4 percent of its revenue and 2 percent of its cash flow from Alberta government lands and has budgeted to spend only C$40 million in the province this year.
But he was emphatic that Crescent Point is ready to shift that spending to its major operations in Saskatchewan, where he noted the government has left royalties untouched in 30 years, and the Bakken and Uinta plays in the United States.
Lower royalties available
A report by Calgary-based ITG Investment Research noted that Saskatchewan and British Columbia charge lower royalties than Alberta for similar production.
The company said that in a “worst-case scenario” that if Alberta royalty holidays introduced in 2011 to offset the new royalties introduced in 2009, the royalties on a typical liquids-rich gas well would climb to 21 percent from the current 9 percent, slashing the net value of that well to C$400,000 from C$2.3 million.
A report by Dundee Capital Markets identified 21 Calgary-based companies that would be exposed to royalty changes because of their leaseholdings on government land, observing that “capital is extremely mobile and can easily move out of Alberta at the first sign of uncertainty.”
Reaching out
Faced with this early backlash Notley wasted no time reaching out to the industry, to assure producing companies and business leaders they have nothing to fear from her government.
“What I said very clearly during the campaign is that while we may believe there is some new consideration that needs to occur, that it will be done collaboratively and in partnership with our key job creators in this province,” she said.
“I am hopeful that over the course of the next two weeks they will come to realize things are going to be just A-OK here in Alberta.”
Notley said her objective is “getting the best deal for Albertans, protecting our economy and ensuring that we grow jobs - we don’t lose jobs - because we know that’s fundamental to the strength of Alberta. We’re going to be balanced, measured, reasoned.”
In addition to the royalty fears, Bill Andrew, chairman of mid-size producer Long Run Exploration, said that although most of his peers are adopting a “wait and see” approach, he would not be surprised to see interest shift to exploration prospects in British Columbia and Saskatchewan.
Hydraulic fracturing
He expressed concern about NDP signals that a Notley government might also take a fresh look at the environmental impact of hydraulic fracturing.
In that realm, the new premier has been less than clear so far on her plans for climate change measures and tougher environmental controls in the oil sands.
Gary Leach, president of the Explorers and Producers Association of Canada, which speaks for 200 small and medium oil and gas producers, said the election outcome “was not what industry would have preferred, but I think this is a very sophisticated industry that’s prepared to work with politicians of any stripe.”
He said the industry faces a heavy workload to “provide reassurance and clarity on some major policy issues for investors who provide so much of the capital that, when it’s put to work in Alberta, creates jobs for Albertans.”
However, Leach said a royalty review would cause more short-term pain as producers try to recover from a severe oil patch downturn since oil prices went on a skid last summer.
Uncertainty will cause investors “to sit on their wallets and that’s going to delay a resumption of economic growth in Alberta,” noting there were a lot of “unintended consequences” from the mishandled royalty review conducted by former Premier Ed Stelmach.
Investment concern
Tim McMillan, chief executive officer of the Canadian Association of Petroleum Producers, said the energy sector is “fundamental to the economic success of (Alberta and Canada) and as an industry we want to make sure that Alberta continues to be positioned for investment.”
He said CAPP will not give up on the work it started with former Premier Jim Prentice to streamline the regulatory regime, though “not at the expense of compromising our standards.”
On the pipeline front, Notley has put herself at odds with Prime Minister Stephen Harper, who has championed the four multibillion dollar projects to the United States and both Canadian coasts.
While declaring her hope to “build bridges and open markets for Alberta oil without getting a black-eye (in the process),” Notley has interpreted the NDP’s overwhelming election victory as “clear authority to make tough choices.”
No more lobbying
Based on that view, she has decided to put an end to the lobbying by her predecessors in the United States for TransCanada’s Keystone XL project and has effectively suggested that Enbridge’s should give up on its Northern Gateway plans.
Notley said there has been “no realistic objective” to the frequent visits by her predecessors to sway opinion in the U.S. on Keystone XL since the pipeline is bogged down in U.S. domestic politics.
In any event, she wants to see a greater focus on shipping refined crude products from Alberta rather than raw bitumen, despite the reluctance of the petroleum industry to embark on building upgraders or refineries.
Others agree that the selling missions to the U.S. have achieved little or nothing.
“I’m not sure what they accomplished,” said Steven Paget, an analyst at FirstEnergy Capital. “I’m not sure pulling it back is going to change much.”
TransCanada not giving up
TransCanada is not giving up, saying the “value of the energy industry to Canadians is unquestionable.”
“Market access for Alberta’s crude oil remains a top priority and we remain committed to developing projects such as Keystone XL and Energy East to supply U.S. and Canadian refineries,” the company said.
Notley is even more emphatic that the Northern Gateway proposal, to export 525,000 barrels per day of raw bitumen to Asia, which Enbridge says has already cost it C$500 million, is a no-go.
She rates the C$8 billion project as a lost cause, even though it has received conditional approval from the Canadian government, which triggered 17 aboriginal lawsuits.
“Gateway is not the right decision. I think that there’s too much environmental sensitivity there and I think there’s a genuine concern by indigenous communities,” she said.
“Quite frankly, anyone who knows how these things unfold knows nothing is happening there for decades.”
Ed Whittingham, executive director of the Pembina Institute, said the 209 federal conditions attached to Northern Gateway pose a bigger challenge than the new Alberta government’s stance.
“I don’t think having the support (of Alberta) or not is going to make a big difference at this point. It’s really in the hands of the British Columbia government,” he said.
Cutting losses
Coastal First Nations leader Art Sterritt said it is time that Enbridge “cut its losses and put this to bed. It will allow everyone to move on. We’re spending lots and lots of dollars to oppose this. We have court cases going on. We’d really rather get on with building a true diverse economy.”
Enbridge is clinging to hope, saying it “looks forward to sitting down with the new premier to discuss her concerns.”
Although Notley keeps hammering home her pitch for Alberta-based refineries, she has indicated support for the other two proposals to build pipelines out of the province - TransCanada’s Energy East, which is designed to add a portion of Bakken crude in its 1.1 million bpd capacity and Kinder Morgan’s Trans Mountain expansion, which focuses exclusively on moving oil sands production - even though they face the same set of opponents as Keystone XL and Northern Gateway.
