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Alberta shifts ground with new report In rolling out new energy strategy, government indicates royalty changes possible; promises to be ‘solid environmental citizen’ Gary Park For Petroleum News
Out of favor with its own petroleum industry and scorned by environmentalists on a global scale, the Alberta government may have had a Road-to-Damascus conversion.
In releasing a long-promised provincial energy strategy, the administration of Premier Ed Stelmach has hinted that reviewing its controversial royalty structure is not out of the question.
At the same time, it is portraying itself as a caring steward of the planet by, among other steps, making a sweeping commitment to shrink the environmental footprint of its hydrocarbon industry, promote renewable energy and review greenhouse gas emission targets and carbon charges for large industrial facilities.
The 51-page report, entitled Launching Alberta’s Energy Future, is described by Energy Minister Mel Knight as a comprehensive plan that supports the government’s resolve to develop its energy resources — using the phrase of the times — “in an environmentally sustainable way.”
He says Alberta — with estimated recoverable reserves of 315 billion barrels of crude bitumen, 124 billion barrels of crude oil and 223 trillion cubic feet of natural gas — wants to be recognized as a “responsible world-class energy supplier, an energy technology champion, a sophisticated energy consumer and a solid global environmental citizen.”
Achieving that vision requires immediate action, Knight said.
Stelmach told a news conference that Alberta “must inspire the next generation of cleaner energy technology and more efficient energy use if we want to maintain our province’s economic advantage.”
Some hope of change For an industry, still seething over the impact of royalty changes, Knight dangled a shred of hope that the new royalty framework is open to change.
“If we have lost our edge with respect to competition, I think it’s time we did an in-depth analysis,” he said.
“We understand that the industry at the moment, in Alberta and globally, is under a tremendous amount of pressure.
“Let’s face it — the marginal barrel of oil (which prevails in Alberta) won’t be produced at US$40 per barrel. Competition is what this is all about.”
Stelmach echoed that thought, suggesting the energy industry is “truly at the crossroads, not only in Alberta, but around the world. Despite its many successes, the (Alberta industry) is clearly not immune from global economic pressures.”
“Energy development remains the economic engine of this province and of this country,” he said.
“The strategy acknowledges that hydrocarbons will continue to fuel both our economy and the global economy for many years to come. It also recognizes the urgent need to lessen the environmental impact of developing these resources.”
Gord Currie, an oil and gas analyst at Wolverine Capital, said the strategy seems aimed at two groups: Environmental critics, both domestic and international, and Albertans who are looking for a greater share of the returns from their resource industry.
Scott Vail, vice president at Signature Global Advisors, said the government has made a “good start” in pinpointing the key questions and concerns.
Now it faces the tougher job of answering those challenges in an economically viable manner, he said.
EnCana, Petro-Canada cuts
Without expanding on how far the government might go in rethinking its royalty regime, Stelmach and Knight held their news conference about the same time that EnCana and Petro-Canada were driving home the damaging impact of higher royalties as they unveiled 2009 capital budgets that added to spending cuts they have already made this year.
EnCana said its Alberta capital program will be trimmed by 14 percent next year to US$2.3 billion, while Petro-Canada is lowering its overall budget to C$3.96 billion from C$6.16 billion, partly because high costs in Alberta have forced it to slow progress on its Fort Hills oil sands project.
Dave Collyer, president of the Canadian Association of Petroleum Producers, told reporters he was encouraged to hear Stelmach taking a second look at Alberta’s competitiveness.
“That involves the fiscal structure; that involves the regulatory framework; it involves greenhouse gas policy and that’s a key competitiveness indicator for us as a province and as an industry,” he said.
While endorsing the general concept of the strategy, Collyer said Alberta must demonstrate a “sense of urgency” to ensure the province remains economic against other jurisdictions, both in conventional oil and gas production and development of the oil sands.
Against a backdrop of industry decisions to shelve new bitumen upgrader projects and more than C$40 billion of investment, Collyer also said Alberta will be “challenged to build significant new refining and upgrading capacity relative to expanding facilities that exist elsewhere.
“Part of what the policy is going to have to address as (the government) gets more specific is how do you overcome that potential disadvantage?” he said, referring to oil sands producers who are opting to drop plans for facilities in Alberta and, in most cases, look for alternatives in the United States, where construction costs are cheaper.
But the government is still clinging to its belief that “carefully planning upgrading and refining capacity (for Alberta) provides options for realistically adding value to fossil fuels while contributing to cleaner energy.
“This provides even greater reason to encourage additional investments that will see more of Alberta’s products advance up the energy value chain,” the strategy said.
Details missing from plan Petro-Canada Chief Executive Officer Ron Brenneman credited the government with setting a “pretty responsible direction” with its new policy.
“But there’s a lot of details missing,” he said. “I’m always hesitant to comment until I see some of the details, because the devil is often there.”
In the wake of delays and cancellations of upgraders, refineries and petrochemical plants, accompanied by fears that jobs and investment will flow to the United States, Brenneman urged the government to give immediate priority to tackling the reasons why Alberta has become less competitive in the last couple of years.
Petro-Canada, as operator of the proposed C$24 billion Fort Hills oil sands project, is setting its own example by renegotiating contract and supply agreements.
In just a few weeks it has seen a “pretty good response” as costs start to move down, Brenneman said.
“I don’t know where it will end up or whether it’s enough to make a difference in the overall project economics,” he said. “But the thing that is changing for us is that we are moving off the schedule of the project on to a cost-driven project.”
If the decision is made to resume work “we are going to accept whatever schedule gives us the minimum cost,” Brenneman said.
However, he emphasized that Petro-Canada will not start looking for refining capacity in the United States until it is close to proceeding with the mine.
That leaves some faint hope for the Alberta government that the Fort Hills upgrader could still be built in Alberta. At least, for now, Petro-Canada is not choosing to follow the lead of oil sands producers EnCana and Husky Energy, which have formed joint-ventures with U.S. refiners.
Bitumen-in-kind In its determination to increase the amount of bitumen upgrading and refining in Alberta, the government is working on a ploy that would see it take bitumen-in-kind rather than cash royalties to control 25 percent or more of the market.
It has set a target of locally upgrading 70 percent of the heavy oil produced in the province, up from the current 65 percent.
While the government ponders exactly how to implement this policy, existing oil sands producers working on expansion phases are unsure how much upgrading capacity to build.
On the environmental front, the strategy recommends: Encouraging the development of renewable energy; investing in gasification technology and carbon capture and storage; changing energy consumption behavior by industry and Albertans; and greater investment in research, development, demonstration and deployment of energy technology.
“The key question for Alberta, in a world that is going to be counting on energy from all sources, is how we can begin to produce and consume fossil fuels in a far cleaner way,” the report said.
Cap-and-trade rejected To that end, Stelmach flatly rejects cap-and-trade plans that would impose charges on carbon emissions, saying “we are not going to allow others to determine Alberta’s future.”
He said investing in education, research and technology will “help us deal with the environmental impact, not moving money around from one country to another.”
Instead, Alberta has its own mechanism that targets the largest industrial emitters of greenhouse gases, who, when they fail to meet intensity reduction goals, can pay C$15 per metric ton into a technology development fund.
University of Alberta business professor Michael Percy, chairman of the energy strategy advisory committee, concedes the proposals are wide-ranging.
He said they are designed to serve as a guideline for the next 20 or 30 years by “setting up goalposts along the way … you can’t be that precise in setting timelines.”
On the action front, the strategy recommends Alberta require gasoline to contain 5 percent ethanol and diesel to contain 2 percent renewable content by 2010 to remove about 1 million metric tons a year of carbon dioxide from the atmosphere.
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