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Study: No value in project subsidies University report says government backing for refineries distorts allocation of capital, lowers GDP; Alberta may play larger role Gary Park For Petroleum News
Using public money to help finance privately owned infrastructure, such as energy upgraders and refineries, in an attempt to keep more investment, jobs and revenues closer to resource extraction makes no sense, says a study by the University of Calgary School of Public Policy.
The report, which was released just as the Alberta government is engaged in a frantic search for diversification of its energy industry, noted that public policy “often favors supposedly high-value industries at the expense of others through subsidies or other supports.”
But, instead of creating value, when governments favor one sector over another, these subsidies “invariably hurt the economy by distorting the allocation of capital and labor,” which results in a lowering of Gross Domestic Product.
The study author Trevor Tombe said the subsidies destroy rather than add value when the costs on other sectors are factored in.
Pressure on government However, the pressure on governments to support job- and revenue-creating projects is reflected in a mid-2014 public opinion poll by the university which found that 90 percent of respondents endorsed “value added strategy” and 70 percent believed raw bitumen from the oil sands should be upgraded to synthetic crude for refining into fuels within Alberta.
Tombe said politicians who bandy about the term “value-added” are playing with the emotions of their constituents to gain support for bad policy.
He argued that the true value-added aspect of the oil sands sector is the extraction, not the upgrading and refining of bitumen.
Labor at forefront The Alberta Federation of Labor has been in the forefront of those organizations making the case for keeping upgrading in the province rather than exporting synthetic crude to refineries in the United States.
The AFL has urged the government to take an ownership position in refineries to “further maximize its profitability for all Albertans.”
Despite Alberta governments efforts to entice the private sector to take advantage of subsidies to build upgraders and refineries in the province, few major oil companies have shown any interest in participating and some of the few that have explored opportunities or taken equity positions in projects have opted out.
While about a dozen ventures have been scrapped or shelved by companies such as Suncor Energy, Total, China National Offshore Oil, Syncrude Canada, Royal Dutch Shell, Statoil and Husky Energy, the lone survivor has been the Northwest Upgrading joint venture by North West Upgrading and Canadian Natural Resources Ltd.
Northwest costs soaring Despite a series of delays in the startup date, which is now set for fall 2017, and costs that have soared since 2012 to C$8.5 billion from C$5.7 billion, the Alberta government has held fast to its pledge to provide feedstock for the refinery along with CNRL to achieve 50,000 barrels per day of bitumen conversion capacity in Alberta.
The partners have insisted the refinery will provide a competitive return on investment and reduce pricing volatility on all Western Canadian heavy crude.
“The project will provide a local market for Alberta oil sands production that is not reliant on export pipelines, and a low carbon solution that will ensure the carbon dioxide footprint of the products produced by the refinery will be among the lowest in the world,” they said.
More government participation? But Alberta Premier Jim Prentice may be on the verge of opening the door to government participation in more downstream elements of the industry when the province releases its 2015-16 budget on March 26.
Prentice said he will unveil a 10-year financial plan that “fundamentally restructures” how the province will spend its money.
The heat on the government became more evident March 13 when the impact of collapsed oil prices on unemployment in Canada’s producing regions registered its first obvious results.
Alberta saw its jobless rate climb to 5.3 percent from 4.5 percent in February, posting the loss of 14,000 jobs.
That puts a fresh gloss on the Northwest Upgrader, which is about to enter its peak construction period, offering 5,000 jobs over 18 months.
Newfoundland unemployment jumped to 12.6 percent from 11.4 percent with the loss of 3,000 energy-related jobs, while Saskatchewan posted a moderate increase to 5 percent from 4.5 percent.
The total job loss in the three provinces was 18,000 and Sebastien Lavoie of Laurentian Bank Securities, said the fallout from low oil prices is undeniable in the oil-dependent provinces, predicting that the jobless rate will “increase even further this spring.”
Robert Kavcic, an analyst with BMO Nesbitt Burns, said the job losses are likely to penetrate the non-resource employment sector.
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