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The Alberta government’s ambitious energy strategy is having a continental impact
BY NICK WILSON
Alberta Premier Rachel Notley – CPimages
When Rachel Notley led the New Democratic Party to a shock election victory in 2015, it sent a shudder down the spine of many in the oil industry who saw the new government as indifferent to pipelines, hungry for taxes and royalties, and suspiciously close with environmentalists. Yet the NDP also promised economic diversification and “value-added” job creation through expanded upgrading, refining and petrochemical capacity.
Nearly two years on, the Notley doctrine on energy has taken shape: a comprehensive, rapid overhaul of the entire sector, including the highly controversial carbon tax. It’s an integrated strategy centered on carbon pricing and the use of oil and gas royalties. The royalties support petrochemical investment, boost propane demand, and may eventually support refining. Along with some carbon cash, royalties also help oil firms innovate to cut costs and emissions. Another chunk of carbon pricing is being used to create more demand for natural gas as coal plants close. On the radar are targeting methane emissions and supporting small firms to decommission disused oil and gas wells.
“Lougheed was very interested in the notion of upgrading and adding value in a way that helped Albertans. In that sense we share that view.”
If that’s the plan, then will it work? The opposition accuses the government of hurting the industry with taxes and regulations while subsidizing boondoggles.
First came the royalties review. The NDP’s pre-election call for a “fair share” of royalties for the province was taken by many as a coming squeeze on companies that were already plunging into a recession. It also created uncertainty—a word loathed by investors. In the end, the review got broad approval by the industry. The main change was to incent innovation by rewarding efficiency, favoring companies that produce below the year’s average drilling and completion cost.
Notley says the government worked closely with industry leaders to design a framework that makes Alberta more competitive and provides better returns for everyone—industry, investors and all Albertans. She points to a University of Calgary analysis that determined the reforms have made Alberta more competitive than Saskatchewan, British Columbia and even Texas. “We announced it a year ago,” Notley says. “It only [came] into effect January 1, but under the early access plan we had 145 new wells approved, each creating 135 jobs—that was good news,” she says, citing figures from the Canadian Association of Petroleum Producers.
In December—later than expected—the government announced that two new petrochemical projects in Alberta’s Industrial Heartland (AIH) qualify for up to $500 million in royalty credits under the Petrochemicals Diversity Program (PDP), which aims to trigger $5 billion-plus in investment. Petrochemical producers—which don’t pay royalties—can now sell their royalty credits to oil and gas producers.
Calgary-based Pembina Pipeline, in a joint venture with Kuwait’s Petrochemical Industries Company, aims to build a 22,000 b/d propane conversion plant, producing polypropylene. It will cost about $4 billion and has been selected to receive up to $300 million in royalty credits. Calgary-based Inter Pipeline has qualified for up to $200 million in royalty credits for its similar-sized polypropylene plant. Both could start operating by 2021, but neither firm has yet taken a final investment decision.
A similar petrochemical policy, introduced by Peter Lougheed’s government in the 1970s, made Alberta Canada’s top producer of petrochemicals with four ethylene plants, employing 7,700 people. “Lougheed was very interested in the notion of upgrading and adding value in a way that helped Albertans,” Notley says. “In that sense we share that view. He played a very intelligent leadership role with respect to the industry and was very thoughtful about it.”
The value in “value-added” includes downstream corporate taxes that more than make up for the royalties subsidy. The government applies a similar argument to bitumen upgraders—the poor economics of which have led to the cancellation of a dozen planned new builds and expansions.
But a program similar to the petrochemical incentives could help get them built, Notley says. “The PDP is one model—using royalties will hopefully stimulate more business,” she says. The Economic Diversification Advisory Council’s (EDAC) proposal, expected in the spring, will spell out the government’s options.
Notley’s zeal for rapid change is reflected in how she describes the EDAC’s workload. “We established, not too long ago actually, EDAC, but there are only so many hours in the day, so I’ve got them working this fall.”
One problem, however, is that upgraders and refiners don’t only add value, they also add emissions—big time. Alberta’s Climate Leadership Plan has an additional 10 megaton allowance for refining on top of the 100 megaton oil sands emissions limit. Shell’s Scotford upgrader and the North West Redwater Sturgeon complex both capture carbon dioxide. Sturgeon sends it along the Alberta Carbon Trunk Line for injection into oil fields. The government hasn’t included carbon capture and storage (CCS) in its energy plan, but the escalating carbon levy on big emitters will incent CCS technology in future plants.
The carbon tax on consumers is Notley’s biggest gambit—and central to the Climate Leadership Plan. Two thirds of low- and middle-income households will get cash back, and small businesses will get a corporate tax cut from three percent to two percent as an offset. But the carbon tax creates uncertainty for businesses—until the tax works its way through the economy, no one can predict how much of it will pass on to customers.
On January 1, a $20-per-ton levy was put on heating and transportation fuels, and the levy on big industrial emitters, rose to $30 per ton. Under an Ottawa-imposed plan, those levies rise to $50 per ton by 2022. Alberta expects to collect $9.6 billion over the next five years.
Notley pulled off a major public relations coup when the heads of CNRL, Suncor, Cenovus and Shell stood alongside her as she announced her carbon pricing plan in 2015—her Environment Minister Shannon Phillips has a photo of this seminal moment proudly hanging on her office wall. “The progressive oil producers that really care about the environment were saying, ‘For the love of God give us some rules,’” Notley says. Many small producers, however, are bitterly opposed to the plan and fear that carbon pricing will drive investment to the U.S.
Premier Notley argues that Alberta continues to have, by far, the lowest taxes in Canada. It continues to hold a $7.5 billion tax advantage over the next lowest-taxed province in Canada, Saskatchewan. Alberta has no sales tax, no payroll tax and no health premium, she points out. As for talk of carbon policies driving away investment—a similar prediction was made when the NDP were first elected—Notley says recent investment decisions from oil companies are telling a different story, pointing at recent decisions by CNRL to restart the $1.3 billion Kirby North oil sands project, and Koch and Pengrowth applying to start a new SAGD project. Koch, however, has also cancelled another oil sands project and Statoil has quit altogether.
Notley says that these policies, including the 100 megaton cap on emissions from the oil sands, “got us the pipelines,” referring to Prime Minister Justin Trudeau’s decision to greenlight two key oil pipelines last year. “By putting the cap in place it allows us to move the conversation about pipelines, so it’s not about emissions it’s about getting better results,” Notley says. “Pipelines help the producers.”
Major oil sands players agree that the carbon cap cuts off at the knees the argument that building pipelines will allow unlimited oil sands growth with accompanying emissions. The mechanism, however, has yet to be worked out. Will the cap trigger a race for projects to launch before it is reached, or will it incent producers to reduce their carbon output?
The Climate Leadership Plan will cut methane emissions by 45 percent from 2014 levels by 2025. This policy was cut-and-pasted by Washington, Mexico City and Ottawa, establishing Alberta as a carbon thought leader. However, critics say if U.S. President Donald Trump welches on the deal, it will tilt the playing field away from Canada.
Notley proudly points out that her government and Trudeau’s have achieved something that the previous governments didn’t—a realistic chance of getting crude to tidewater. It’s a strange turnaround for a Premier who came to office saying she wouldn’t actively promote two major pipelines—Keystone XL to the U.S. and Northern Gateway to the Pacific.
Fast forward one year and, at a three-day mountain retreat in Kananaskis, Alberta, Notley was banging home to Trudeau the importance of pipelines to Canada’s economy. Three months later he approved the Trans Mountain Expansion, tripling the 300,000 b/d pipeline’s capacity, and Enbridge’s rebuilding its Line 3 pipeline into the U.S, citing Alberta’s carbon plan as a major factor in his approval.
Notley says she is open to hearing from industry how to resurrect the Northern Gateway on the chance it will be revived under a future federal government. “Generally speaking, it’s always been a question of license, given the opposition that it faced,” Notley says. “That being said, I was of the view that we still need to get our product to tidewater. I think right now with the tanker ban it’s not hopeful.” But, she adds, “you never know for sure.”
At the premiers’ meeting in December, everyone understood the economic importance of oil, Notley says. “We want to develop move our energy, intelligently, sustainably, responsibly. It’s not easy to get everybody on-side with that. When they see you [going green] it gets easier,” she says. In driving home to Trudeau the importance of oil revenue, Notley had an unlikely and unwelcome ally: the Fort McMurray wildfire. She says it also reinforced her understanding of the industry’s social commitment. “I was with the fire service getting briefed on how quickly that fire moved—looking at how we’d get people out of there. People were in camps and those camps could have been even more vulnerable. So we’re talking to the federal government about how we can get a Hercules [helicopter] and evacuate them and then meanwhile oil companies hire a fleet of WestJet [planes]. And they literally evacuated something like 20,000 people in 24 hours—it was absolutely great.”
The orphaned oil well crisis has been one of the few things growing during the recession. The Petroleum Services Association of Canada has asked for $500 million from the federal and provincial governments to abandon some of the province’s suspended oil and gas wells. Notley says of her talks with the feds on decommissioning them: “We are working with the industry and are hoping that we will have some recommendations coming [by April]. We are working with the federal government to help small contractors.” At the same time she stresses the importance of the principle that “the polluter pays.”
Perhaps Notley’s boldest energy ambition is for Alberta to become Canada’s renewable energy capital. “Basically, it’s simple,” Notley says. “Obviously much of [the money] will be invested by companies. Ten billion will be the overall investment by industry between now and 2030. We’ve budgeted for $3.5 billion from the government—that’s a rough estimate—all of that will be paid for the hydrocarbon levy that we put in place.” A lot depends on the bids that renewables firms tender.
“Renewables investors were getting ready to leave Canada, but they now say, ‘You know what, the market in Alberta looks really good. That’s something we can invest in,’” Notley says. She’s adamant that her legacy would hold even under a different future government, as the investment amount and benefits would be too great to lose. “The fact of the matter is renewables are part and parcel of the overall trend—it adds significant value.”
Notley aims to end all coal-fired power emissions—leaving closure or unsubsidized CCS as an option open to plant operators—by 2030 at a cost of $1.1 billion, which will also come from the carbon levy on heavy emitters. Utility companies such as TransAlta support the plan. The details, however, need working out. Such a plan is tough to achieve in a deregulated market—and wind and solar are more expensive than coal—so it may need revenue guarantees to sweeten the deal. The result will be 30 percent of electricity supply coming from renewables by 2030, through an additional 5,000 megawatts of power. The province’s fuel supply will change from about 50 percent coal to 70 percent natural gas, creating demand for an extra 1.5 billion cubic feet of gas per day. “We’re still working on it,” Notley says. “It’s not completed yet.”
One of the reasons for the drastic change to Alberta’s power model, Notley says, is, that “the market was broken—the investors were telling us that they weren’t coming into it.” Critics point to Ontario’s disastrous switch from coal that sent prices soaring. “We can avoid some of the problems faced in other provinces,” Notley says.
About the scope, speed and depth of her total overhaul of the energy industries, Notley says: “When we first got elected, CEOs said they wanted certainty. We created certainty.” The industry will judge the shakeup by the final investment decisions it produces. So far, it’s too early to tell.
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