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"The US is now our competitor"

Margaret McCuaig-Boyd has one of the toughest jobs in global oil - reviving Alberta's oil sector in the face of wilting prices and persistent opposition. In an exclusive interview, Shaun Polczer meets the province's energy minister

Nobody was more surprised than the left-leaning New Democratic Party (NDP) when it seized power in Alberta's May 2015 elections. Having toppled a 45-year political dynasty built on petrodollars, newly elected legislators with little or no experience in government faced the daunting task of rebuilding a province reeling from the impact of low oil prices.

Among them, Margaret McCuaig-Boyd suddenly found herself at the helm of Canada's vital energy sector. McCuaig-Boyd, who was previously a school teacher from the small town of Fairview near Peace River, in northern Alberta, had little experience in the oil industry apart from residing in a rural area dotted with pump jacks and drilling rigs.

The minister quips that she is "full of energy" as her primary qualification for the job.

The challenges are immense, a fact not lost on the novice member of Alberta's legislative assembly. She assumed the role at a time when oil prices were halved in less than a year, creating a C$6.13bn ($4.18bn) hole in the public treasury.

"The biggest challenge right now is oil prices. It's something we can't control, we just have to ride it out", she says.

The new government immediately responded with a 20% hike in the corporate tax rate and initiated parallel climate change and royalty reviews that were roundly criticised in Calgary's corporate office towers.

Layoffs have continued to mount, with some estimates saying 100,000 jobs have been lost in the energy sector alone. According to industry groups such as the Canadian Association of Oil Well Drilling Contractors, drilling rates have fallen to the lowest since the 1980s, when the last big oil crash decimated Alberta's energy services sector. By far, the greatest impact of the decline will be felt in the small rural towns and communities such as McCuaig-Boyd's own. These rely on industry workers to support their restaurants, hotels and small businesses.

The single most pressing challenge came in late 2015, with US President Barack Obama's rejection of the Keystone XL (KXL) pipeline, effectively redefining Canada's energy role with its largest trading partner.

Canada - and especially Alberta - have long enjoyed a unique oil relationship with the world's biggest oil consumer. The combination of geography, integrated pipeline networks and similar business cultures have made Canada the largest supplier of oil to the US (see graphic). American oil companies account for roughly half of Canada's oil output. Billions of dollars of investments, particularly in the oil sands, have made Alberta the largest oil-producing region in North America.

Canadian oil exports to the US have continued to rise even as total American imports have fallen in recent years. This is likely to continue over the near term. Yet Obama's KXL rejection has raised alarm bells and forced Canada's energy producers to rethink their long-term strategy and its reliance on a single customer. Alberta's Premier Rachel Notley infamously called the Obama rejection "a kick in the teeth".

It certainly hurt. The rejection of KXL effectively bottles Canadian crude in the US Midwest, where refineries have been the prime destination for Alberta's heavy oil for years, and prevents it from gaining world prices. Alberta's Western Canadian Select (WCS) heavy oil benchmark routinely sells at large differentials to Brent and WTI. On 13 January it fetched just $15.49 a barrel, a discount of 50%.

With the prospect of US oil exports out of the Gulf of Mexico, McCuaig-Boyd agrees that the US has "transformed from being our largest customer into our largest competitor".

Legacy management

Despite the oil-price slump, output from the oil sands will keep rising over the next couple of years, a legacy of decisions on big projects taken during more profitable times. So, to reduce reducing their reliance on the saturated US market, Canadian producers must find new customers. In turn, this means building new pipelines. After initial reticence on the issue, the NDP now supports them. On 12 January, McCuaig-Boyd's boss, Premier Notley, filed a submission to the National Energy Board (NEB), a federal regulator, urging approval of Kinder Morgan's TransMountain expansion to Vancouver. This project would expand existing infrastructure, allowing for shipments to increase from 300,000 barrels a day (b/d) to 890,000 b/d.

McCuaig-Boyd says access to tidewater is the only way for landlocked Alberta to gain full market value for its resources and erase price differentials that are costing the province billions in lost revenue. She also says gaining full value for resources is key to supporting the government's climate-change agenda and reducing emissions of greenhouse gas, especially in the oil sands.

Yet the issue is controversial. Proposed pipelines to both coasts have faced stiff resistance from First Nations and other governments, including British Columbia (BC) and Quebec. Enbridge's Northern Gateway, another pipeline proposal that would have shipped 525,000 b/d to the BC coast, is effectively dead after Canada's new prime minister Justin Trudeau vowed to extend a moratorium on tanker traffic off the coastline. Obama's rejection of KXL has galvanized oil sands pipeline opponents in both countries.

Where the NDP, true to its leftish bent, once empathised with those protests, it now finds itself in the awkward position of aligning itself with Alberta's oil industry, the mainstay of the province's economy. McCuaig-Boyd agrees Alberta is reviled in some quarters, especially in BC, where it wants to open new shipping routes to Asia.

She is hoping her government's plans to cap oil sands emissions will help repair Alberta's tarnished environmental image. After decades of confrontation between Alberta, other provinces, the federal government - and indeed the US on KXL - McCuaig-Boyd is hoping a less combative stance and a "new tone" on issues like climate change will reduce resistance and allow the pipelines to be built.

"Market access is critical. We're going to be working a lot more on climate change and advocating a lot more in the background".

Yet the biggest resistance by far is at home, where industry representatives have been wary of both the government's climate-change policy and a pending review of royalty payments to the government from oil producers.

The royalty review is particularly contentious, coming at a time of low prices. Industry advocates are suspicious that the NDP plans to hike rates at a time when they can least afford it. Even ordinary Albertans working in the oil sector have become wary as the job losses mount. After winning nearly half of the vote in the election, support for the NDP government has plummeted to barely 25%.

Little wonder, the review process is proceeding at a slow pace. On 13 January Premier Notley announced that it has been delayed until early 2017.

According to McCuaig-Boyd, the government is taking the time "to get it right". Unlike a previous review by the former Conservative government in 2008 that proved extremely divisive, the NDP has consulted extensively with industry. Despite a 20% hike in rates at the time, the government collected C$13.5bn less revenue from 2009-2014.

McCuaig-Boyd is reluctant to provide details of the review, insisting that the government doesn't negotiate in the media. But she takes pains to point out that it will be "cost neutral" for oil producers and may even provide incentives to increase activity.

"We've had a lot of meetings with industry representatives. They've been supportive and understand what we're trying to do. They get it."

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