Talk about getting kicked while you're down. The Alberta energy industry and all those who depend on it for their livelihoods woke up to a frightening new reality last week. After 43 years of being ruled by the business-friendly Progressive Conservative Party, the PC dynasty suddenly collapsed, steamrolled by the left-leaning New Democratic Party in a landslide and historic election victory last Tuesday night.
While most pundits had predicted the PCs - hobbled by cronyism and mistrust after four decades in power in the oil and gas-rich province - would lose their majority, few placed bets on the New Democrats sweeping to power for the first time ever in such dramatic fashion, capturing 53 seats to the PC's 10. Turns out the polls, so wrong in the last Alberta election, were correct this time.
Over the last week, Canadian media has been full of comments from oil and gas executives, most of whom have expressed fear and uncertainty over what the NDP win means for the Alberta oil patch. Why does it matter? Because for Canada, the world's fifth largest oil producer, about 80 percent of its oil is produced in Alberta. Increases in Alberta oil sands production, like U.S. shale, were a significant factor in pushing down global oil prices. The province pumps about 2.5 million barrels a day. As Vox Media wryly observed, the NDP seizing control of Alberta is equivalent to the Democrats suddenly taking over the Texas state legislature with a supermajority. It's a big deal. Related: Oil Price Recovery May Be Too Much Too Soon
Prima facie, the industry certainly has cause for concern. The NDP, under premier-elect Rachel Notley, has promised to raise corporate taxes by two percent, conduct a review of oil and gas royalties which are some of the lowest among producing jurisdictions, and implement tougher environmental regulations, all of which will mean higher costs for an industry grappling with a 40 percent drop in oil prices.
But how much room will the new government actually have to make dramatic changes to the oil and gas industry, which is the backbone of the provincial economy and a major contributor to Canadian GDP? As it turns out, not that much. Let's take a look at the three main areas the NDP is proposing to reform.
Royalties
The Alberta NDP is promising to form a Resource Owner's Rights Commission that would determine whether Albertans are getting a fair return for developing their natural resources. Part and parcel of the commission's mandate is reviewing the province's royalty regime. The NDP government knows that when former PC Premier Ed Stelmach tried to increase royalties in 2007, the industry backlash was so great that he had to reverse nearly all the increases after a herd of investors fled the province. Royalties were later revised in 2010, and now stand at around eight percent for mid-cap producers, quite a bit less than the 21 to 23 percent in the U.S. Marcellus shale region. Related: Saudis Snub Obama Over Iran Deal
Andrew Leach, an energy professor at the University of Alberta, was recently asked to assess the impact of the NDP win on the Alberta oil industry, and he came up with an interesting observation regarding royalties. According to Leach, an increase in royalties would probably crimp some oil sands production, but it's difficult to determine how much. Companies that cancel future projects for example will likely do so because of low oil prices, not government policies. Also, as Leach points out, “changing royalties will not be a free lunch.” Increasing the rate would likely slow production, meaning the government may actually see less revenue, not more. Alberta is facing a $7 billion deficit this year, so the incoming government had better be careful about tinkering with oil revenues as a way to plug it.
Pipelines
The oil industry had a friend in the PC government when it came to supporting more pipelines to get landlocked Canadian crude to tidewater. Now that friend is gone, replaced by a premier that has said she will quit lobbying U.S. President Obama on Keystone XL. But if Obama fails to pass Keystone XL, will it really be the fault of the Alberta NDP? The reality is, there are much larger U.S. political dynamics at play in whether Keystone eventually passes, including the inevitable horse-trading that goes on in Washington. Moreover, Canadian crude is actually finding its way to Gulf Coast refineries without Keystone XL approval. As the Financial Post pointed out recently, pipelines that have been built or expanded to ease bottlenecks include TransCanada's “base” Keystone line, its Marketlink project from Cushing, Oklahoma to Port Arthur, and Enbridge's Seaway pipeline from Cushing to Freeport, Texas. Related: How Much Longer Can The Oil Age Last?
Keystone aside, Premier Notley has said her party supports other pipelines in the works, including Kinder Morgan's proposed expansion from Alberta to Vancouver, and the Energy East pipeline to the Atlantic. The one pipeline that Notley doesn't support, the Northern Gateway pipeline proposed by Enbridge, has little chance of going ahead anyway due to widespread opposition from local First Nations tribes. The bottom line? The NDP's impact on future pipeline policy is expected to be minimal.
Emissions reductions
Notley also campaigned on a promise to work with the federal government to come up with a national climate policy, and thus help to reverse Canada's reputation under its current Conservative Party leadership as a climate laggard. While the NDP has not yet enunciated what that means for the oil industry, some fear it could mean a broader carbon tax similar to what is now law in neighboring B.C. But, as Leach has pointed out, if green advocates are looking at the oil sands as the place to cut emissions, they may be looking in the wrong direction. That's because in-situ oil production, where the bitumen is literally melted to flow using steam, is already quite efficient. Instead, the more obvious target for emissions reductions is the province's coal-fired power plants, which still supply nearly half of its electricity. The NDP has got to think that phasing out coal use is a much easier path to reducing emissions than going after the oil industry for increased efficiencies.
Orange is the new red
A few days after the NDP win, Kevin O'Leary of Dragon's Den fame said, with characteristic aplomb, “It’s a horror movie unfolding... Until we understand what the [oil and gas] royalties and taxes are there won’t be any material fund flows – it’s a disaster.” The Canadian business icon said he hoped the NDP's performance will serve as a cautionary tale for the rest of the country, similar to the NDP government under Bob Rae in the 1990s that left the province of Ontario mired in debt.
But the Alberta NDP isn't the Ontario NDP, and the differences between it and the party of the same name in British Columbia are also strikingly different. Moreover, NDP governments in the Canadian Prairie Provinces tend to be a lot more centrist than in other parts of the country. Consider the current NDP in Manitoba. The Winnipeg Free Press published a blog on Sunday indicating a certain jealousy that it too would like to “throw out the bums,” only the bums in Manitoba are NDPers. The gist of the blog post though, is not that the NDP is too far left, but rather, that they, like the PCs in Alberta, are just too long in the tooth:
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“Many of the problems we have here in Manitoba have more to do with poor leadership than with the NDP’s ideology, and certainly the NDP does not have a monopoly on poor leadership,” writes Derick Young.
The Alberta NDP may well wreck the oil industry, with the seeds of its demise quite possibly sown by its coterie of rookie MLAs that are, right now, ripe for political gaffes. The province of Alberta is playing a waiting game until it finds out just what the NDP has up its sleeve. But the reality is that the province has little room to maneuver when it comes to padding its treasury, which depends so heavily on oil revenues, meaning it is quite unlikely to bite down very hard on the hand that feeds them.
By Andrew Topf of Oilprice.com
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