By David Yager
Oilfield Services Executive Advisory – Energy Policy Analyst
October 17, 2017
While a few in Alberta’s oilpatch may still support Rachel Notley’s NDP government, they rarely mention it at work. Most oil workers who voted NDP last election are silent or have contracted amnesia. As the countdown to the next election continues, most are trying to figure out how to get there from here while avoiding further damage.
The great hope to undo what the NDP has done since May 2015 is the new United Conservative Party – UCP. It came into existence in July when the Wildrose and Progressive Conservative parties combined. What followed is a leadership race to be settled October 28. The main contenders are Brian Jean (Fort McMurray) and Jason Kenny (Calgary). The third candidate is Doug Schweitzer (Calgary).
Once a leader is elected UCP policy will be formalized. What Albertans have learned from the race is much of what the NDP has introduced will be changed or undone. The shopping list includes carbon taxes, electricity supply changes, corporate and personal tax hikes, and the continued growth of costly new rules and regulations.
In June CAPP publicized how policy changes in Alberta, Canada and the U.S. are clobbering the already struggling oilpatch. “Industry continues to face mounting costs and barriers to growth due to changes in provincial and federal government policies and regulations such as methane emissions, carbon pricing, municipal and corporate tax increases, wetland policy, well liability and closure, and caribou management. Low commodity prices, rapidly changing market dynamics, and new policy directions in the United States have led to negative impacts on oil and gas investment and competitiveness…”
And things have gotten worse. The NDP was elected in B.C. vowing to block the Kinder Morgan Trans Mountain expansion to the Pacific Ocean. This is in court. TransCanada has given up on Energy East to the Atlantic. Federal changes to the NEB process helped kill that pipeline.
Both issues have generated public indignation as all candidates complain about Alberta’s appalling treatment by fellow Canadians. It has become a contest to see who will do the most to “stand up for Alberta”, the perception being that if the future Premier only yelled louder things like the global anti-carbon and anti-oil sands movements would miraculously disappear.
Meanwhile, the biggest and ugliest elephant in the room – the provincial fiscal situation – gets little attention by comparison. All candidates will cut taxes, cut spending and cut the deficit, details to follow. “What” is clear. “How” requires considerable examination.
The NDP response is this can only be accomplished by slashing staff and cutting services in key areas like health and education. Premier Notley and her ministers regularly talk about the UCP taking Alberta back to the “bad old days” of Ralph Klein when the public service and government spending were reduced. But those allegedly terrible times were also accompanied by eliminating deficits, reduced taxes, budget surpluses, low unemployment, higher wages, rising house prices and massive capital inflows.
Thankfully, the NDP is protecting us from that. Small wonder UCP gets so much attention.
All UCP leadership aspirants agree runaway spending in Edmonton must be brought under control and investor confidence returned. But how? Here’s the challenge.
ALBERTA GOVERNMENT FINANCIAL SUMMARY – FISCAL 2015/16 TO 2019/20
Source: Government of Alberta 2017 Budget
- Revenue and operating expenditures not including capital expenditures. Deficit figures do not include capital expenditures.
- Funds required is cash required for deficit plus capital expenditures.
- Total liabilities including direct borrowing; obligations for self-supporting lending organizations; coal-phase out obligations; other debt, accounts and interest payable, accrued liabilities; SUCH sector liabilities (Schools, Universities, Colleges, Health); and pension liabilities
The sorry financial state of Alberta’s public finances by the end of the 2019/20 fiscal year will be staggering if these numbers are correct and the NDP stay in power for the full five-year term, which is legally possible. Combined operating deficits will be $44.4 billion; total debt will balloon 87% from $60 billion to $112 billion; and total interest costs for debt servicing will be $7.3 billion. Interest alone in the 2019/20 fiscal year is estimated at $2.3 billion, up from $1.8 billion in 2018/19 and over three times the figure in 2015/16.
The rapid and proudly-planned deterioration of Alberta’s finances has not gone unnoticed. Ottawa’s Parliamentary Budget Office recently noted, “Current fiscal policy in Alberta is not sustainable over the long term. PBO estimates that permanent tax increases, or spending reductions, amounting to 4.6% of provincial GDP ($14.1 billion in current dollars) would be required to achieve fiscal sustainability.”
In the Calgary Herald October 13 columnist Chris Varcoe noted, “Alberta would need to increase its tax burden by 25 per cent or slash program spending by 20 per cent – or implement a combination of the two to the tune of $14 billion – to become financially sustainable”.
Asked to comment, Premier Notley shrugged it off as alarmist. Folks are getting used to that.
Massive adjustments to dynamic fiscal realities are nothing new to the oil business. According to ARC Energy Research Institute’s weekly financial snapshot of Canada’s upstream petroleum industry, the ‘patch has been through fiscal hell since oil prices collapsed in late 2014.
CANADIAN UPSTREAM OIL AND GAS INDUSTRY 2014 TO 2017 – BILLIONS OF CANADIAN DOLLARS
*Estimates
Source: ARC Energy Research Institute, October 17, 2017
- Value of all the oil, gas and natural gas liquids produced in Canada
- After-tax cash flow after operating costs, royalties, administration, taxes, debt servicing expenses
- Capital expenditures/investment in conventional oil and gas and oil sands
The devastation from the collapse of oil prices and continued low gas prices is well known. While it was gratifying to complain about the stupidity of OPEC and the indifference of federal and provincial governments as they introduced multiple policy changes which made a bad situation worse, 99% of management efforts were focused internally. How to do more with less out of necessity.
And it worked. We’re still here.
The private sector has no sovereign right to tax its fellow citizens or borrow billions with no plan for repayment while operating under a significant negative cash flow. Only governments can do that. Therefore, private sector solutions are internal, not external. And selling less product or withdrawing services while the balance sheet and income statement are under siege is not an option.
Unlike the claims of the NDP, organizations can cut expenses and sustain services. They figure out how to do keep the lights on with whatever revenue comes in the door. They pay their staff less, share jobs, slash benefits and use every means possible to become more efficient. Senior executives take pay cuts to lead by example. Bonuses and expense accounts are reduced or eliminated. Shops and offices are consolidated.
The NDP reaction to the slump has been disheartening. Not only has the province refused to cut spending or review wages, but it has intentionally spent more to act as a “shock absorber” to the economy. Downsizing the Alberta government to reflect the downsized private sector economy was not only unnecessary but declared irresponsible. New Democrats express concern about tough times for the private sector but will not participate themselves, certainly not those who work for the government or public service unions. And for good measure they cap the future recovery with massive borrowing.
But when UCP leadership candidates opine about the injustices being perpetrated by the forces of darkness in B.C., Ontario, Quebec and Ottawa – and Edmonton of course – this is great politics but little progress. Every time Alberta conservatives call Montreal mayor Denis Coderre a jerk he gets more votes at home. “Standing up for Alberta” makes for great headlines and is a proven-voter getter. But in terms of materially impacting the financial future of Albertans in the short or even medium term, it is of little value.
What is desperately needed in Edmonton is a massive operational and administrative restructuring. The single greatest contribution to help industry, the province and future generations is to significantly cut the cost and increase the efficiency of delivering government’s obligations, without cutting essential services. Unlike the behavior of Quebec and B.C. politicians, this is entirely within our grasp. This should be combined with slashing regulations and red tape to reduce barriers to private sector growth and further reduce administration costs.
This is what the private does when times get tough. But the tools the oilpatch employed to survive the oil price collapse are not even under consideration by the NDP.
How could it be done? Not by giving rousing speeches in church basements or at Chamber of Commerce luncheons. As anyone in the private sector knows, implementing major structural changes in organizational behavior and performance takes time, communication and patience. It is thankless, tedious and painful.
Which explains why so few politicians deliver and governments only get larger. Too many politicians talk a good story but accomplish little once elected.
Righting the good ship Alberta is a five-year project, maybe longer. It starts with the mission followed by a plan and completed with action. It is not done by memo, email, business plan, meeting, newspaper column, media interview, Facebook posting or speech. It requires patiently engaging senior management of every department, clearly articulating what success looks like, stripping the organization to the bone in excruciating detail, then putting it back together in a smaller and more efficient structure. With no material interruption in essential services.
Who knows how to do that? Obviously, nobody in government or somebody would have done it by now. Except for rare exceptions, governments only get larger and taxes go up. Material organizational change almost exclusively the purview of the private sector.
Both Jean and Kenney spent years in Ottawa as part of the Stephen Harper-led Conservative Party of Canada, in opposition from 2004 to 2006 and government 2006 to 2015. What did the Harper government accomplish financially as Albertans select which former MP can deliver major improvements in Edmonton? Unfortunately, not enough.
FEDERAL GOVERNMENT FINANCIAL PERFORMANCE UNDER THE CONSERVATIVE PARTY OF CANADA (CPC) – 2006 TO 2015
Source: Fraser Institute 2017
- Deficit as defined as revenue minus expenditures from supplied figures.
- Total debt obligations including borrowings, financial commitments and pension liabilities
While the CPC only had a minority government until 2011, the figures of the ten years under review are not attractive. When the economy and oil prices collapsed in 2008/2009 the Harper administration pursued the same policies as the NDP – borrow and spend. In 2009 the $56 billion deficit was 25% of revenue. The CPC ran up $126 billion in deficits over 10 years in office. Total debt rose from $706 billion in 2006 to $1.1 trillion in 2015, 50% higher than when the CPC assumed office. Annual spending rose 32% from $225 to $297 billion.
Most accept that because of the global financial collapse in 2008 it was important for Ottawa to keep spending until the economy recovered. Every government in the world did the same. And this is not to say the Harper administration was a failure. The GST was cut twice falling from 7% to 5%. The strategy was “incrementalism” whereby many small changes were made without alienating too many voters. As the economy recovered – assisted significantly by high oil prices and massive investment in the energy sector – the CPC eliminated the deficit by 2014. Harper et al were indeed conservatives. The biggest complaint in Alberta was they were not conservative enough.
But by 2019/20, “incrementalism” isn’t going to move the needle in Alberta.
Both Kenney and Jean gained most of their political experience under Stephen Harper. Jason Kenney held numerous positions and portfolios: Parliamentary Secretary to the PM 2006 and 2007; Secretary of State for Multiculturalism and Canadian Identity 2007 and 2008; Minister of Citizenship, Immigration and Multiculturalism 2008 to 2013; Minister of Employment and Social Development 2013 and 2015; and Minister of Defense 2015.
Kenny has spent his entire working life in or near politics. He dabbled in Saskatchewan politics for a few years then became head of the Alberta Taxpayers Association in 1989. A year later he became CEO of the Canadian Taxpayers Federation and a Reform Party MLA in 1979. He served as an MP for 19 years before resigning to run for the Alberta PC leadership in 2016.
Kenney’s supporters claim he has the experience in government Alberta needs, noting Jean was only a “backbencher”. But all of Kenney’s assignments had more to do with spending money than saving it. Meanwhile, his government continued to borrow and spend. None of the radical repairs Alberta will require after the next election were accomplished or even attempted on Harper’s watch.
What did Brian Jean do in Ottawa and before he became an MP in 2004?
Raised in Fort McMurray, Jean is a serial entrepreneur and a successful businessman. He has started, owned and operated numerous businesses, practiced law in Fort McMurray, and has significant real estate investments. He managed to stay in business during the major slump of the 1980s when Fort McMurray went from boom town to ghost town. He knows the oil sands intimately. And like they say in business, Jean has signed the front of a cheque, not just the back.
In Ottawa Jean did a lot of work out of the public eye. He served as Parliamentary Secretary to the Minister of Transport, Infrastructure and Communities from 2006 to 2011. He administered the Green Infrastructure Fund which recommended $1 billion in infrastructure spending. One of his proudest achievements was reducing the grant application to only two pages despite bureaucratic opposition. He was a regular member of the Standing Committee on Finance, Standing Committee on Justice and Human Rights, and Standing Committee on Industry (2011-2014). Of the 35 bills he worked on, 28 were passed into law.
While Jean never had the public profile of Kenney, in his 10 years in Ottawa and nearly 2.5 years as leader of the opposition in Alberta he learned how government works and how to get legislation written and passed while working with opposition party members.
Of the two, who is best qualified to manage what this writer believes is the number one task if the UCP forms government: restructuring the provincial government to make it more efficient, cutting costs, and slashing red tape and regulations? Without compromising public services?
No contest for me. It must be the candidate with the most private sector experience. And that is Brian Jean.
About David Yager – Yager Management Ltd.
Based in Calgary, Alberta, David Yager is a former oilfield services executive and the principal 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.
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David Yager can be reached at Ph: 403.850.6088 Email: yager@telus.net
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