Change as Alberta election swings to the left
The stunning victory for the NDP in the Canadian province's election will probably be less significant for the oil patch than many in the industry fear
An email was doing the rounds in Calgary this week after the left-leaning New Democrat Party's (NDP) shocking victory on 5 May in Alberta's provincial legislative elections. "Roof of the Petroleum Club this morning," was in the subject line. Then the punchline: the famous 1975 picture of a helicopter atop the CIA station in Saigon, where a stream of Americans rushed to flee the nightmare on the ground.
Alberta's Progressive Conservative Association has held power without interruption since 1971, giving the impression that the traditionally conservative province, dominated by energy and agriculture, would ever remain under one-party rule. Now the Conservatives, handicapped at this week's election by the rise on the right of the Wildrose Party, have been reduced to just 10 seats in the 87 seat legislature; the Wildrose, with 21, become the official opposition; and the NDP rule with a commanding majority of 53.
Jim Prentice, the former Conservative leader and premier, was considered in the oil industry to be a safe pair of hands, capable of steering the province through the oil-price downturn. In Calgary, his electoral humiliation and replacement by Rachel Notley, the new NDP premier, has already prompted predictions of a meltdown in Alberta's energy sector.
Changes are inevitable, not least in Alberta's strategy to find new markets for its oil. Notley said before her election that she would withdraw provincial support for Enbridge's proposed Northern Gateway pipeline, which would ship bitumen from the oil sands to Kitimat, on the Pacific coast. Indigenous groups in British Columbia (BC), through which the pipeline would pass, oppose the project. Notley will end the gung-ho provincial backing of Keystone XL, TransCanada's proposed pipeline expansion to ship bitumen to the US Gulf coast.
"If I were Notley, I'd chill out for a few days, talk to people in the industry, and then put a Calgary guy in"
But her position is more red than green on that project: the NDP, with strong links to labour unions, sees raw bitumen exports as depriving Alberta of jobs that could be kept in the province if refineries were built locally, probably in industrial zones around Edmonton, heartland of NDP support. On climate change, Notley can be expected to take a more aggressive emissions stance. Environmentalists have already backed her premiership to improve Alberta's image, both abroad and among other provinces. She has pledged to end Alberta's reliance on coal, which supplies about two-fifths of its electricity. Notley also promises both to lift corporation tax from 10% to 12% and create a panel to review royalties. Alberta's royalty regime is complex, with a sliding scale depending on the oil price.
The collapse in crude markets in recent months has been punishing for the province's exchequer, which will collect about C$7bn ($5.8bn) less this year, as royalties fall by about C$3.3bn to C$5.8bn, according to Sarah Dobson, of the University of Calgary. Inevitably, politicians fingered a too-generous tax regime for the drop. All of this prompted a sharp sell-off in energy company stocks on 6 May, as investors and analysts outdid one another with predictions of the Alberta Advantage giving way to Alberta Armageddon. An index of energy stocks on the Toronto Stock Exchange showed an immediate drop of around 4%, with Calgary giants from Suncor to Enbridge and Husky all falling. But no one should get carried away. So far, the NDP's pledges are too vague to rely on. Many of them aren't quite as radical as the headlines suggest. Economic reality - and the oil price - will dominate Notley's surprising premiership.
"They're not going to stab us when we're on the floor," said one oil patch executive.On pipelines, Notley picked wisely. Northern Gateway is moribund - outside Enbridge, it's hard to find an executive in Calgary who would say otherwise. With or without Alberta's official backing, it stood little chance of ever opening Canadian oil to the Pacific. Notley, like most everyone in Alberta's oil sector, supports the more viable expansion of Kinder Morgan's existing network to Vancouver.
The chances of Alberta's oil reaching the Pacific through BC have not changed with the NDP's election. The urgency for Keystone XL has faded in recent years thanks to the surge in rail capacity which is finding ways to get bitumen to the US Gulf, easing worries in the oil sands that new output would be landlocked, forcing down its price. A change in tone from Alberta might help in Washington, DC. The aggressive lobbying for the project has not worked so far. The pipeline was years off, whoever ran Alberta.
Meanwhile, Energy East - a much more plausible project to ship Alberta's oil to Canada's eastern provinces - has Notley's endorsement. More reassuring still is that the NDP, a fringe party in previous elections, will now face the reality of governing - and financing - Alberta's economy. That means keeping the oil patch onside. Notley says she wants to be a 'good partner' to Alberta's energy industry. The rise in corporation tax, low by international standards, will hurt, making drilling in the province more expensive. But unless the NDP is willing to kill the goose that lays its bituminous eggs, that will probably give the industry some clout in seeing off a major new royalty hike. Still, the uncertainty is unhelpful. The oil patch is already shuddering at the prospect of another royalty review - especially after the last one, in 2007, left the industry feeling excluded. But no one knows, yet, how this one will pan out. "Everything depends on who is on the panel," says one Calgary executive. That's just one of many unknowns about the NDP government, which doesn't yet have a Cabinet, let alone an energy minister.The falling oil price has revealed some of the idiosyncracies in the Alberta royalty regime, which, like corporation tax, is low by international standards.
So there are grounds for adjusting it. In conventional oil, for example, the price collapse has left the government collecting royalties on just a fraction of output. But the NDP can't raise them with abandon, especially at a time when capital investment in the oil sands is already plummeting. Unlike in 2007, there are now too many alternative destinations for upstream spending, and companies obsessed with capital discipline have every reason to hunt for the choicest terms elsewhere. A dramatic tax grab would be self-defeating for a new government that wants to maintain inward investment.
Tighter environmental oversight of the oil sands might be in store, though the NDP didn't make that a noisy campaign position. But on emissions, Notley's policy barely differs from the defeated Conservatives' proposals, which also targeted the province's coal sector. That's sensible. Despite the oil sands' reputation, there are few low-hanging fruits to be plucked in terms of emissions on the production side. Phasing out coal, by contrast, be bring much quicker gains. It accounts for about a fifth of the province's emissions. If Alberta's overall emissions can be curbed through the phase-out, it will help the province's position on the oil sands, too.The bigger dispute between the NDP and the oil industry may arise around plans to build new refinery capacity in the province. The producers don't like this idea, preferring to capture the value closer to the end-markets in the US. If they wanted refineries in Alberta, they would have built more of them.
So if the province is going to push those projects, it will have to subsidise them. That hasn't turned out well with the Northwest Upgrader Project, described by one former Conservative minister as an 'economic boondoggle'. Alberta financed the project with cheap loans and tolling agreements in the name of economic diversification. Future projects would need the same costly commitment - and Albertans would wonder why those billions couldn't be better spent elsewhere. Economic reality will determine whether those kinds of plans actually take shape. If oil prices stay low, the NDP will have to govern persuasively, keeping the energy industry keen and the money flowing in. Experience of the oil patch among Notley's elected assembly members is not strong.
So her Cabinet appointments will be telling. One oil executive pin-pointed Joe Ceci, a Calgary member, as the safest pair of hands for the energy portfolio. But nerves are still jangled. "If I were Notley, I'd chill out for a few days, talk to people in the industry, and then put a Calgary guy in," he said.