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Stirrings of change in Alberta Government slipping in polls as Klein’s departure nears; royalties get a tweaking; new directions sought to reap more from energy resources Gary Park For Petroleum News
Alberta is entering one of those rare moments in its history, when political change occurs.
For almost three quarters of a century, the province has been governed by only two political parties — Social Credit from 1935 to 1971 and the Conservatives ever since — and six premiers (one of whom lasted a mere two years).
But, now that Ralph Klein, under pressure from within his own party, has agreed to step aside in December after 12 years at the helm, there’s an unusual whiff of something new in the air.
And the Conservatives, accustomed to landslide victories in provincial elections, are more on edge than they ever have been.
The polls suggest their popularity is eroding, although they still hold a comfortable margin over their Liberal and New Democratic rivals.
Both the government and those campaigning to replace Klein are paying close attention to any negative sounds emanating from voters.
Petroleum industry fodder for debate Not surprisingly, given the enormous role oil and gas plays in the economic life of Alberta, the petroleum industry is commanding the most attention and providing endless fodder for debate.
Consider just these issues: The staggering pace of development accompanied by a growing clamor for a moratorium on oil sands projects; the impact on land, water and air; whether Albertans are being cheated out of their fair share of royalties; the need to develop a longer-term answer to training and retaining skilled workers; and the government’s often-expressed determination to capture more from the value chain.
Energy Minister Greg Melchin has shown some of the first stirrings of action, by tweaking some royalty programs and taking a “first step” to encourage public debate on what is labeled an Integrated Energy Vision in a 16-page document released Aug. 25.
By late in September he may have scrapped a handful of drilling incentives and royalty tax credits worth almost C$500 million a year to the industry.
Royalty system a minefield But neither he nor anyone in government seems ready yet to tackle the largest, most controversial issue of oil sands royalties.
The cuts that have been made, valued at C$186 million a year, come a year after government-appointed Auditor General Fred Dunn challenged the validity of putting millions of dollars in the pockets of companies enjoying unprecedented cash flows.
The phasing out or scaling back of obsolete incentives was taken in stride by the industry, which concedes it was fully consulted and expected the changes.
Gary Leach, executive director of the Small Explorers and Producers Association of Canada, representing 450 companies, said his members “understand the government wants to adjust programs that were put in place at a time of low oil prices.”
The industry also seems resigned to losing access to another C$300 million in tax credits, which would be another big hit for small producers.
But, for now, everyone is tip-toeing around the minefield that could be triggered if the government bows to pressure and starts a public review of the entire royalty system, including the oil sands, where producers pay 1 percent of gross revenues until the capital costs have been paid off, then 25 percent of net revenues.
Although the regime was implemented during days when $20 per barrel oil made headlines, both Melchin and the industry have warned that tampering with what exists could drive investors away.
They scorn a study commissioned by three think-tanks which compared Alberta’s average royalties of US$4.30 per barrel against Norway’s US$14.10 and Alaska’s US$11.60.
Province wants more petrochemical investment The energy vision paper, while sweeping in its scope and lacking hard specifics, is built around Melchin’s oft-repeated theme of capturing more of the energy sector’s “value-added” products within Alberta.
To that end, he said the province is open to offering incentives to those who will invest in upgraders and refineries to bolster the petrochemical sector.
The overall objective is an “integrated approach to energy development, efficiency and conservation” so that Alberta can “help the industry reach its full potential and provide enhanced long-term economic benefits and value-added jobs for Albertans.”
It’s not that the government had a drastic change in mind, although it hopes to move the industry beyond the physical integration of oil and gas resources covering commodity production processes, proximity and byproducts, Melchin told a news conference August 25.
He said the vision extends to “broader factors like labor, capital, environmental protection and management, as well as other requirements that are necessary to obtain all of the benefits inherent in developing Alberta’s energy resources. Partnering of the public and private sectors of our economy will be critical to future energy development,” Melchin said.
Currently, the industry accounts for 72 percent of Alberta’s C$80 billion in annual merchandise exports, produced C$14.3 billion in royalties last year and provides direct and indirect jobs for 300,000.
Standalone projects no longer make sense But it no longer makes sense for the province to develop its natural resources through a “series of standalone projects,” he said.
It’s time for a new direction that goes beyond the mere extraction of raw resources.
The government has already given an indication of its thinking by backing a recent study exploring a possible C$9 billion 450,000 barrel-per-day upgrader, refinery and petrochemical complex.
The early findings suggest that undertaking is technically feasible, but the costs of labor and materials are too high to make the venture economic.
But Melchin said he is not ruling out financial incentives for companies willing to make major investments in Alberta.
“I’m not certain what form it would take,” he said. “This government isn’t going to invest in companies for instance.”
The pressure on the government to intervene is building as Imperial Oil, EnCana and Husky Energy contemplate shelving plans for an upgrader in Alberta and turning instead to other options in the United States or overseas.
Projects on the table right now carry a price tag of about C$10 billion and that spending could easily rise to C$25 billion if more planned capacity comes on stream. It’s not an opportunity the government wants to see slip through its fingers.
Against that background, Melchin said it “would be healthy if the leadership candidates (seeking Klein’s job) and the public wanted to get into more of the debate about the future of an energy vision for the province.”
Front runners endorse public review Acknowledging the public concern over whether Albertans are getting their fair share from royalties, most of the front runners in the campaign have endorsed a public review of the current regime.
Without entering that debate, Melchin, in his energy vision, said only that the province has “the opportunity and the responsibility to make the most of our energy inheritance.”
He was not concerned about trying to set long-term policy directions ahead of Alberta choosing a new premier, saying he has never thought of the discussion paper as a “static document … if we can find a better way and a better idea to add to this, we would engage that. As to what the future will hold, we can’t guarantee any of those outcomes.”
With his focus on the value-added aspects of the industry, he laid out six “interrelated innovation challenges” the government hopes will figure in the upcoming discussions:
• More economically and environmentally sustainable methods of extracting oil and gas.
• Developing technologies to create a more diversified mix of fuels and other higher-valued products from bitumen and heavy oil.
• More efficient upgrading to lower capital and operating costs and reduce the environmental impact.
• Using coal and other feedstocks, including waste from oil sands, to produce steam, hydrogen, synthetic gas and chemicals.
• Reducing greenhouse gas and other emissions by capturing, transporting and storing carbon dioxide for use in enhanced oil recovery.
• Putting a greater effort into alternative and renewable energy technologies, such as hydrogen fuel cells, geothermal and bio-energy.
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