David Yager – Yager Management Ltd.
Oilfield Service Management Consulting – Oil & Gas Writer – Energy Policy Analyst
March 23, 2017
Two entirely different and opposing events took place within two days of each other in mid-March which will indelibly shape the future of Alberta.
The first was the NDP’s third budget on March 16 when the government announced it was cranking up spending by about $2 billion per year for the next three fiscal years from $53.7 billion for the year ended March 31, 2017 to $58.0 billion in the year ended March 31, 2020. As is the case with all budgets, it was, according to the authors, extraordinarily well-conceived and good for everyone. The high spending would, “make life more affordable for Albertans; creating good jobs and building a diversified economy; and provide stable funding for health, education, income support services and social services”. Albertans are clearly quite fortunate.
However, it was widely criticized by most outside the NDP circle of support. For two years Alberta’s private sector has been cruelly reminded what happens when expenses exceed revenues; tens of thousands of lost jobs and hundreds of insolvent companies. The budget’s projected revenue is, on average, nearly $10 billion per year short of expenses. Therefore, the government will be spending $38 billion more than it collects during the next three years leaving the province exiting the three-year forecast period with total debt of $71 billion. Interest expenses in the 2019/20 fiscal year will reach $2.3 billion or 4% of revenue. The annual cost for interest alone for each Albertan will be $575 or $2,300 for a family of four.
Two days later, on March 18, the Progressive Conservative Association of Alberta (PC Party) elected its fifth leader in nine years when Jason “Unite the Right” Kenney won convincingly on a pledge to bring all conservatives together under one roof before the next election. This would end the vote splitting widely blamed for the NDP winning the May 2015 election.
Kenney told a cheering audience, “This result sends a message to our fellow Albertans who are struggling, to those 200,000 Albertans who are looking for work, we are going to ensure there is a government on your side. Today is the beginning of the end of this disastrous socialist government. You have decided, we have decided, to ensure the defeat of this tax-hiking, job-killing, debt-loving, mean-spirited, incompetent NDP government. We Albertans are going to unite to take our province back.”
Those two events and the messaging surrounding them sets the stage for the next two years of Alberta politics. The government and opposition are unlikely to agree on anything.
Big Debts, Big Spending, Big Oil Price Assumptions
That the NDP will spend, borrow and redistribute income to ensure a greater role for government should surprise no one. That’s what New Democrats do, and why the NDP has never been a political force in Alberta until 2015 when it won 54 of 87 seats. In the 1986 and 1989 elections, the NDP won 16 of 83 seats. In the other 14 elections dating back to 1944 the highest was 4 seats. In four elections the NDP never won a seat. A more common number was 1 or 2 MLAs. Since 1940 and prior to 2005, in 20 elections the average level of NDP support has been 13.9%
The NDP has never been considered a friend of business or the oil and gas industry. Once elected it raised corporate taxes, personal taxes, introduced an oil sands emissions cap, increased large emitter carbon taxes and brought in carbon taxes on everything else. The promised royalty review thankfully left the existing regime largely intact. You’d think this big tax grab might make some progress on narrowing the revenue shortfall. But instead the commitment was to spend more. While spending is forecast to only rise by 2.2% in the 2017/18 fiscal year from the prior period, it will grow 3.3% in 2018/19 and another 3.2 in 2019/20. This is over double the government’s estimated rate of population growth of 1.4%.
Taxes and carbon caps in place, the NDP, like previous governments, is depending on oil and gas to help pay the rent. The budget is forecasting non-renewable resource revenue from royalties and land sales to near triple by 2019/20 from the 2016/17 fiscal year, $6.6 billion from only $2.4 billion. This will be assisted by two things; 800,000 b/d more of the oil the world hates with bitumen production rising from 2.5 million b/d to 3.3 million b/d, plus higher future oil prices than others are forecasting. Bitumen royalties are expected to quadruple as prices rise and more projects emerge from the pre-payout stage.
- Alberta budget for fiscal years ended March 31 2018, March 31 2019 and March 31 2020
- Closing futures price for WTI on the Chicago Mercantile Exchange March 22 for the months of March 2018, March 2019 and March 2020, the last month of each budget year
Alberta has a very aggressive crude oil price forecast for the next three years. The futures market (CME) sees nothing like the NDP numbers but that can change quickly. The columns “bank averages” is the average published WTI forecasts for the 2017, 2018 and 2019 years in February from two dozen banks. EIU is the Economist Intelligence Unit forecasts, followed by the most recent estimates for the International Monetary Fund the World Bank. The yellow line shows how much more optimistic the NDP is about the price of oil than all these other organizations.
This chart compares the Alberta government figures to the yearly averages for the year for the banks, EIU, IMF and World Bank. This average does not include the CME values. The current year is very close and for 2018 Alberta is slightly higher. But for 2019 the government is in a world of its own.
The budget also forecasts a significant increase personal and corporate income taxes. They totaled $14.8 billion for the 2016/17 fiscal year but will be $17.3 billion 2019/20 or 17% higher. Corporate taxes will rise 55% but this can only happen if companies are more profitable. Over the same period the carbon levy will rise from $230 million per year to $1.4 billion, or 600%.
If the forecast oil prices materialize higher corporate taxes may be possible. Producers and suppliers will be profitable and paying taxes. If they don’t the deficits and debt are sure to be considerably higher without a commensurate reduction in spending.
The message to the world is Alberta’s fiscal position will be deteriorating significantly in the next three years making it impossible to cut taxation without higher deficits or major cuts in public spending. After Finance Minister Joe Ceci addressed the Calgary Chamber of Commerce March 20, chamber boss Adam Legge told Ceci and audience the budget was a disappointment and that, “…hope should not be a strategy”.
Consolidating Conservatives to Change Course
The mantra of “unite the right” emerged immediately after the May 2015 election. While the NDP formed a majority government with 40.6% of the popular vote, the Progressive Conservative and Wildrose parties combined got 52%. If the two had been one none of this would have happened. But if the leaders of these two parties hadn’t cooked up a secret backroom detail to eliminate the official Wildrose opposition in late 2014, this probably wouldn’t have happened either. NDP leader Rachel Notley was seen a beacon of honesty and integrity and many who had never voted for the party before went NDP. The meteoric rise in NDP support was not based on the same policies which had caused the party to linger in Alberta’s political wilderness for decades.
Not a day has gone by in the past 22 months without a news story, conversation, or somebody asking somebody for money to support “unite the right” initiatives of some sort. When the PCs started their leadership race former federal cabinet minister Jason Kenney entered the contest and campaigned on gaining control of the PCs as a catalyst to conservative unification. Wildrose Party leader Brian Jean has never expressly said this wasn’t a good idea, only that the outcome of the PCs leadership had to come first and that whatever Wildrose did had to be ratified by the members.
Discussions between Kenney and Jean began March 20 and the progress or setbacks will be in the news extensively for the foreseeable future.
“What” is much simpler than “how”. Kenney has spoken about the need for a new party. This could be the Saskatchewan model where the disgraced PC Party (several MLAs were arrested and jailed for corruption) and the perennially third place Liberal Party chose to abandon their own brands and organizations in 1997 and create something entirely new to remove the NDP from office. It got off to a good start and in the 1999 election it could have formed government except four Liberals MLAs ran on their own. The Saskatchewan and Liberal parties split the vote and the NDP retained power. It would not be until 2007, ten years later, before the Saskatchewan Party finally formed government.
The federal merger between the Canadian Alliance (renamed Reform) and Progressive Conservative parties took years to get started but once both sides got to the table it was concluded rather expeditiously in late 2003. The PCs under Mulroney lost power in 1993 but conservatives did not win a federal election under the Conservative Party of Canada flag until 2006. Federal legislation anticipated a combination among political parties so there were no legal obstacles. Alberta legislation is less clear. However, because PC and Wildrose leaders are already talking they have knocked 10 years off the federal timeline.
Wildrose Leader Brian Jean has proposed a strategy of “come on over” where all conservatives in the PC party would be welcome and encouraged to join Wildrose. The party would then select a new name and conduct a leadership race in which presumably Kenney and Jean would run, as might others. This has the advantage of an existing party structure that holds 22 seat in the legislature, official opposition status, and has been leading in many public opinion polls. This would leave the non-participating PCs and their party legally intact but would indeed consolidate conservatives. Wildrose has a hammerlock on rural Alberta and presumably the PC support in Calgary will follow Kenney. It has been stated by Elections Alberta one party cannot transfer assets to another nor can one party assume the other party’s debts. A look at the balance sheets of the two will reveal some attractions to Jean’s proposal.
It has been written extensively that the parties cannot merge but a dissenting opinion emerged on March 20 when a group of lawyers calling itself Alberta Conservative Consolidation Committee (ACCC) studied the law extensively and concluded two organizations like the PCs and Wildrose could amalgamate their underlying legal structures under Alberta law, providing they were the same. Elections Alberta, an oft-quoted source of what can and cannot be done, exists to monitor and regulate the behavior of organizations acting as political parties including candidates, donations and constituency associations. But the lawyers concluded Elections Alberta had no authority to control the legal structure of an organization choosing to conduct itself as a political party.
ACCC revealed the legally incorporated unit of PC party is a corporate entity called the Progressive Conservative Association of Alberta Foundation, or PCAAF. The original Progressive Conservative Association of Alberta, the common name, was deregistered years ago. Wildrose is an association under the Societies Act. Should the PCAAF/PCAA become an association like Wildrose, ACCC concluded their existed no legal barrier to the two amalgamating into a single entity under Alberta law. This would combine everything including members, assets and liabilities.
ACCC also envisages another scenario where the two could combine in their existing structures using the Canada Not-For-Profit Corporations Act. Both would reincorporate under this act and the ACCC sees no reason why this would not work.
The challenge is more political then legal; the devil is in the details. In each case the majority of members on each side are going to want to do it and take the internal steps necessary to ensure it happens. But in politics the constitution, leadership selection rules, candidate nomination procedures and constituency association by-laws become very important to those keenly involved. And then there’s the matter of two sets of 87 constituency associations, boards, volunteers and bank accounts.
To work through this myriad of issues takes a massive commitment on both sides. In the commercial world mergers get done by paying those no longer required to leave with at least a severance package. In politics, the currency is power and influence. Volunteers, the backbone of politics, lose both if not accommodated. If the negotiators can find a way to keep the vast majority of participants from both sides engaged, it might work.
If the NDP budget has done anything it has given Alberta conservatives a compelling reason to find a way to work together and take Alberta in an entirely different direction. Kenney and Jean are already talking. Here’s hoping common sense and the greater good of the economy carries the day.
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.