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Alberta jitters grow New government makes good on promise to raise income tax, expects to start review of royalties, climate policies later this year Gary Park For Petroleum News
Albertans are getting their first taste of life under a socialist government and many in the province’s backbone industry have decided they won’t stick around for the appetizer to be served, let alone the main course.
Rolling out a shortened legislative agenda on June 15, the administration of Premier Rachel Notley delivered on the campaign promises that gained the New Democratic Party a landslide victory on May 5 by targeting an increase in corporate taxes to 12 percent from 10 percent, hiking taxes on wealthier Albertans to 12 percent for those making more than C$125,000 and 15 percent for those above C$300,000.
The legislative outline also vowed to eliminate political donations from corporations and labor unions.
But the government has delayed until a fall session of the Legislature its plans to review energy royalties and to unveil its first budget, when the revenue impact of the oil and natural gas sector’s slump will be known.
All Notley would disclose was her resolve to move ahead with a study of royalties.
The government’s legislative outline said only that the government will “review how the people of Alberta ... will be rewarded for the development of their own energy resources.”
It also highlighted the need to “demonstrate real leadership on the environment and climate change” and urged a stronger partnership with Canada’s other nine provinces through a national energy strategy.
Push expected The assumption among a wide cross-section of observers is that Alberta will join the push for an expanded carbon tax above the C$15 per metric ton it imposes on large emitters of carbon dioxide.
Notley said it’s important to move carefully on changes to royalties or climate policy, but “we also know that we can’t have it hanging over everyone’s head indefinitely.”
That was an indirect acknowledgement of stirrings that are already resulting in further capital spending cuts by leading explorers and producers, Canadian Natural Resources and France’s Total, and drastically slashing upstream jobs.
The Canadian Association of Oilwell Drilling Contractors announced June 15 that the number of working days in the drilling sector will see jobs shrink to 25,110 this year from 49,950 in 2014, down another 2,500 from its prediction six months ago.
Those estimates are based on an anticipated 43 percent drop to 6,612 in the number of wells drilled, with the average number of rigs working nose-diving to 184 from a fleet of 768.
Royalty review cited CAODC President Mark Scholz linked the downturn in activity to uncertainty surrounding the pending royalty review, along with uncertain natural gas demand for LNG plants in British Columbia and ongoing depressed commodity prices.
However, he said his organization is “very much engaged” in discussions with the Notley government, although “we don’t really know where things are going to be six months from now ... that is leading to additional uncertainty in a market that probably doesn’t need it right now” and spreads a cloud over future investment.
The realities are evident in Alberta government auctions of exploration rights, with non-oil sands bidding raising C$136 million in the first 10 sales compared with C$1.74 billion in the same period of 2011.
Calgary-based investment banker Peters & Co. forecast that drilling activity will fall each quarter this year, reaching a trough in the first quarter of 2016.
For those counting on hope over the longer term, the Canadian Association of Petroleum Producers offered a shred of optimism earlier in May when it forecast Canadian oil production (conventional and from the oil sands) will rise to 5.3 million barrels per day by 2030 from the current 3.7 million bpd, but that trails by 1.1 million bpd the industry lobby group predicted a year ago.
Investor meetings postponed The degree of pain and anxiety within the overall production sector has been swift, with CNR, which operates the Horizon oil sands project and is one of Canada’s top three conventional oil and gas producers, postponing meetings with investors until it can finalize spending plans.
It said that due to uncertainty created by the Alberta government capital will be allocated “prudently in areas in which we operate” until there is greater clarity surrounding the province’s royalty, taxation, environmental and greenhouse gas policies.
Total - the fifth-largest Western oil company and a major investor in two leading oil sands projects - warned the government that raising taxes in the already high-cost oil sands sector could have a dramatic impact on spending.
Total Chief Executive Officer Patrick Pouyanne said the oil sands already rank near to the bottom in terms of return on capital among global oil and gas plays.
He told the Globe and Mail that an increased burden on oil sands operators will “just accelerate the freezing of projects. I would not be inclined to invest more there.”
Total is a partner with operator Suncor Energy and Teck in construction of the Fort Hills mine and phase two of ConocoPhillips’ Surmont steam-injection operation.
Whether these opening salvos will prompt Notley to protect rather than undermine Alberta’s greatest source of wealth-creation will probably generate even more summer heat pending details of her government’s plan to turn election pledges into reality.
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