By David Yager, January 11, 2017
Oilfield Service Management Consulting – Oil & Gas Writer – Energy Policy Analyst
Alberta enters 2017 pulled in two directions by diametrically opposing forces. One is the private sector, supported by rising oil and gas prices and the other is the public sector and the heavily-advertised genius of the Climate Leadership Plan. The former is putting people back to work and causing industry to invest. The latter is a $3 billion revenue sweep justified on TV by cash rebates, new jobs in renewable energy that don’t exist, and approvals for pipelines that won’t create a single job for some time.
If you’re unemployed with your savings gone and the value of your house sinking like a rock, the only good news is coming from the oilpatch. You’d think that when things are this awful the government might be responsive and perhaps even change course. But never in the history of Alberta have the needs and aspirations of the voters and the direction of the government been so utterly divergent.
Joe Public cries, “I need a job” while the NDP carbon tax propaganda machine flogs cash rebates insufficient to buy groceries for a family for a few weeks. While people have no money because of the collapsed economy, the government raises taxes and levies on everything. When the private sector warns about Alberta policies creating an investment chill reversing decades of massive capital inflows that created jobs and new tax revenue, there has never been a crop of MLAs in Alberta history that have less private sector, business, investment and financial experience than the ones we have right now. Not only do none of them understand what this means, but in their personal social lives they don’t know or hang out with anybody who does.
The signs Alberta is still going in the wrong direction are obvious if you’re paying attention or even interested. Another two major international oil sands investors have announced they are leaving. Saskatchewan is forecast to drill more new wells in Alberta for the first time ever in 2017 despite Alberta’s share of the WCSB being massive by comparison. Downtown Calgary’s office vacancy rate is approaching 30%, clobbering the city’s property tax base. Real estate values province-wide continue to fall, wiping out billions in corporate and personal wealth, often the primary source of retirement savings for most individuals and families. Much-touted federal pipeline approvals, thanking the wisdom and foresight of the NDP’s carbon tax, are interesting but make for pretty thin soup for the unemployed.
I’m told by people close to the government that Rachel Notley is a fair, thoughtful and well-intentioned person who is not proud of Calgary having the highest unemployment rate of any major city in the country. The damage is from high paying but now non-existent oil and gas management and technical jobs. But others are noticing her face betrays the stress. The extended family of doctrinaire New Democrats surrounding and advising Notley either don’t care, don’t know any of these unemployed people, or both. If you spend your life in and around the public sector at a time when this is the only part of the economy where wages and jobs are growing, then the pain so many are experiencing is a statistic, not a problem. They must be saying, “Stay the course Rachel. We’re doing God’s work”.
The carbon tax is opposed by 2/3 of Albertans but the relentless advertising (even in movie theaters, the place people pay to retreat from reality), claim it’s the best thing that ever happened to Albertans. Who are these people? Who do they talk to? What are they thinking? What is the plan?
On January 9th, Finance Minister Joe Ceci announced public consultations across Alberta about the upcoming budget, although most of the meetings won’t actually be open to the public. By invitation of your NDP MLA only. Who will they invite? What will they talk about? Why are these not open to the public or something in place where all Albertans can weigh in?
Oil and gas prices have recovered somewhat but even if current prices hold for a year, increased royalties and payroll deductions from people going back to work are unlikely to move the needle on the projected $10.3 billion deficit for the fiscal year ended March 31, 2017. With less than 2.5 years before the next scheduled provincial election surely somebody in the NDP caucus and their imported brain trust of fellow big-government, central-planning soulmates from across Canada must spent at least a few moments each week thinking about their political mortality and their legacy.
The only reason to go on about this is because it doesn’t have to be this way. Often the answer lies in the past. So, let’s turn back the clock to 1986 and review how the conservative government of that era reacted to the same mess Alberta’s economy is in today.
Oil prices collapsed in 1985 when the Saudi’s refused to support OPEC because they had already shut in half their production to sustain the price. Alberta had been on a 12-year roll since OPEC first started raising crude prices in 1973. That’s similar to the run the province had from 2002 to 2014. Alberta was different then in that it didn’t have as much indigenous wealth nor was there the massive global capital inflows that have characterized oil and gas most of this century until the past two years.
But there was a big problem. Real estate values had crashed. The province was running growing deficits. Unemployment and despair were high. The government of the day was populated by conservatives with strong connections in the business community. The solution? Stimulate the economy through enhanced private sector investment.
So, in 1986, Alberta invented the Junior Capital Pool (“JCP”) and the Alberta Stock Savings Plan (“ASSP”) to attract capital and persuade people to open their wallets and bank accounts to create new corporate entities with enough money to go out into the marketplace, start businesses, invest, create wealth and put some people to work.
JCPs were very controversial. Administered by the Alberta Stock Exchange and Alberta Securities Commission, a JCP or “blind pool company” allowed promoters to list a shell company with no business plan and no assets by raising as little as $50,000. But at some point they would have to do a “major transaction” or a later “qualifying transaction” which meant the founders had to buy or invest in a real business, subject to regulatory review and approval. The escrow provisions restricting when founders could trade their shares were significant.
But to the capital markets establishment in central Canada (the same people who had called a great number of their bank loans in the west in the first half of the 1980s), publicly traded shares not backed up by mortar, bricks, cash flow and earnings, verged on reckless. Dianne Francis, the then editor of the Financial Post, routinely fulminated about the indignity of this intentional aberration of the principles and foundations of the central Canadian definition of public capital markets.
But as Bob Dylan sang decades ago, “when you got nothing you’ve got nothing to lose”, so Alberta moved forward. JCPs were accompanies by the ASSP which provided a 30% tax credit for people who bought treasury shares in appropriate listed companies. The ASSP existed until December 31, 1989.
As history would prove, the JCP was the rocket and ASSP the fuel. In one retrospective article in the Financial Post in 2011, the 25th anniversary of the JCP, Barry Critchley wrote, “Any program that has been around for 25 years deserves some recognition”. When the ASE merged with the Vancouver Stock Exchange in 1999 to create the TSX Venture Exchange, the program was grandfathered but renamed the Capital Pool Program, or CPC. Critchley wrote, “Over the period, 2,249 CPCs were listed on an exchange, of which 90% completed a so-called qualifying transaction. Over the past decade 180 companies originally listed as CPCs have graduated from the TSX Venture Exchange to the Toronto Stock Exchange”.
Another historical review of JCPs in Alberta Oil in 2015 listed some major success stories. Celtic Exploration, which sold to Exxon-Mobil for $3.1 billion in 2013, started out as a CPC called Desco Exploration in 2002. According to the article, other home runs on the E&P side emerging from this wild idea from a conservative government plugged into and understanding of the private sector and business community during the ugly recession of 1986, included Whitecap Resources, Peyto Exploration and Development and Vermillion Energy. These are currently three of Alberta’s most successful intermediate operators.
Who knew? Me! In my corporate career we turned Forewest Industries (JCP number 22 in 1987) into a chunk of Tesco Corporation, the top drive pioneer that trades on NASDAQ with a market valuation of US$439 million; OTATCO Inc. which became a building block of Complete Production Services on the NYSE that sold to Superior Energy Services in 2011 for US2.7 billion; and High Five Oilfield Services which became HSE Integrated and is now part of DXPE Enterprise which trades on NASDAQ with a market cap of US$610 million.
So, when a government is confronted with a major economic downturn and is looking for options on what the economy could do next or methods of improving the situation in the short, medium and long term, what you do next depends on who you talk to and who you listen to. If Joe Ceci were, for example, to truly consult with Albertans prior to the next budget he would be visiting Chambers of Commerce, investment bankers, industry trade associations, and lobby groups like the Business Counsel of Canada.
Without speaking to any of them, this writer is confident they would recommend cutting taxes, reducing spending, rebuilding investor confidence and finding ways for investors in Alberta and the rest of the world to open their wallets and put capital and people back to work in the province.
Instead the NDP regime has people hiding their wallets and looking at opportunities in other parts of the world.
To be fair, the NDP did pass Bill 30 last year titled the, “Investing in a Diversified Alberta Economy”. It includes tax incentives for investing in startup companies. But the program is capped at about $165 million “to drive innovation, diversification, and job creation” for many industries besides oil and gas which is the most obvious and lowest risk place to generate a quick return. A tax credit of up to 30% will be available on eligible investments. Exactly how these funds will be released is still being studied. This bill was supported by the opposition because it encourages private sector activity and might actually put somebody back to work.
The government figures this may attract $700 million in investment over the next two years. While this sounds like a big number it is about the same amount as the annual capital program of a single senior independent E&P company. In 2017 Seven Generations and Tourmaline will spend twice that amount, ARC Resources very close and Painted Pony almost half.
Conversely, the 1986 slump JCP/ASSP combo was more concerned with results than cost. That government didn’t care who invested in what and had confidence that in the long run the jobs, taxes and economic activity generated would exceed the cost. That the JCP/CPC lives on 31 years later is proof that Alberta capital markets innovation from the 1980s was leading the world. While nobody has run the numbers, Alberta got its money back many times over and is still yielding results.
Meanwhile, the NDP is also leading the world by being the only major oil and gas producing region in the world that chose to respond to the price collapse by increasing taxes, capping growth and chasing away capital.
The NDP has convinced itself a massive private sector correction caused by the collapse of oil prices is either unsolvable or can be mitigated by increased corporate taxes, personal taxes, carbon taxes, minimum wage increases, rebates to lower income Albertans and as-yet unknown investments in non-carbon energy sources. The budget consultation process would certainly reveal ways to stimulate the private sector but only if the government asks, listens and responds.
Thanks to a modest recovery in the ‘patch’ and, if oil and gas prices hold for the year, a commodity-driven private sector recovery may outweigh the negative impacts of a new future of Alberta defined by a group of MLAs and their advisors who – whatever their attributes, sincerity and intentions – have little or no business experience compared to the hundreds of MLAs who have preceded them.
In 2017 or until oil returns to $100 a barrel, this remains a problem.
About David Yager – Yager Management Ltd.
Based in Calgary, Alberta, David Yager is a former oilfield services executive and the principle of Yager Management Ltd. Yager Management provides management consultancy services to the oilfield services industry in a number of areas including M&A, Strategic Planning, Restructuring and Marketing. He has been writing about the upstream oil and gas industry and energy policy and issues since 1979.