Amid uncertainty over the future of royalties in Alberta, which incoming Premier Rachel Notley has promised will be fully debated, the new leader seems to have slammed the door on anyone who hopes to sway her government on Keystone XL.
On one hand she has declared her hope to “build bridges and open markets for Alberta oil without getting a black eye (in the process).” She has also said the election of the left-center New Democratic Party on May 5 has given her the “clear authority to make tough choices.”
But, consistent with her campaign positions, Notley has left no doubt that opening routes to new markets for landlocked oil sands bitumen and even some light crude from the Bakken will not include lobbying for Keystone XL.
Years of aggressive arm twisting in Washington, D.C., by a succession of Alberta premiers are over.
Notley said there has been “no realistic objective” to the frequent visits since the pipeline is bogged down in U.S. domestic politics.
In any event, she wants to see a greater focus on shipping refined crude products from Alberta rather than raw bitumen, despite the reluctance of the petroleum industry to embark on building upgraders or refineries.
Others agree that the selling missions in the U.S. have accomplished little or nothing.
“I’m not sure what they accomplished,” said Steven Paget, an analyst at FirstEnergy Capital. “I’m not sure pulling it back is going to change much.”
TransCanada is not giving up, saying the “value of the energy industry to Canadians is unquestionable.”
“Market access for Alberta’s crude oil remains a top priority and we remain committed to developing projects such as Keystone XL and Energy East to supply U.S. and Canadian refineries.”
Keystone isn’t alone
Notley is even more emphatic that the Northern Gateway proposal, to export 525,000 barrels per day of raw bitumen to Asia, which Enbridge says has already cost it C$500 million, is a no-go.
She rates the C$8 billion project as a lost cause, even though it has received conditional approval from the Canadian government, which triggered 17 aboriginal lawsuits.
“Gateway is not the right decision. I think that there’s too much environmental sensitivity there and I think there’s a genuine concern by indigenous communities,” she said. “Quite frankly, anyone who knows how these things unfold knows nothing is happening there for decades.”
Ed Whittingham, executive director of the Pembina Institute, said the 209 federal conditions attached to Northern Gateway pose a bigger challenge than the new Alberta government’s stance.
“I don’t think having the support (of Alberta) or not is going to make a big difference at this point. It’s really in the hands of the British Columbia government,” he said.
Coastal First Nations leader Art Sterritt said it is time that Enbridge “cut its losses and put this to bed. It will allow everyone to move on. We’re spending lots and lots of dollars to oppose this. We have court cases going on. We’d really rather get on with building a true diverse economy.”
Enbridge is clinging to hope, saying it “looks forward to sitting down with the new premier to discuss her concerns.”
Two lose, two win
Although Notley keeps hammering home her pitch for Alberta-based refineries, she has indicated support for the other two proposals to build pipelines out of the province, even though they face the same set of opponents as Keystone XL and Northern Gateway.
TransCanada’s Energy East is designed to add a portion of Bakken crude in its 1.1 million barrel per day capacity, and Kinder Morgan’s Trans Mountain expansion focuses exclusively on moving oil sands production.
Royalty ripples
On the royalty front, Notley is already engaged in a high-wire act to balance a dose of new reality with a pragmatic viewpoint.
Her campaign promise of a royalty review has the industry in turmoil after 65 years of having open access to the Alberta government.
Typical of the mood in corporate Calgary, Scott Saxberg, chief executive officer of Crescent Point Energy, said a stock market swoon on May 6, the day after the NDP victory and the end of almost 44 years of Progressive Conservative party rule, will only be magnified if Notley decides to carry out her pledge to review whether Albertans are getting a “fair share” from the resources they own.
The S&P/TSX energy index, reacting to the election, lost C$13 billion in value on May 6, while companies had already slashed about C$33 billion from their 2015 capital budgets in response to the oil price dive.
“If the NDP create further uncertainty on royalties and change royalties to impact valuations, it will provide an opportunity for companies such as ourselves to step in and buy Alberta-based companies for a discount value,” Saxberg told reporters.
He said potential buyers would be well-positioned for if and when the government was forced to back down from any royalty increases to stem the outflow of investments, as it did five years ago after the only attempt in Alberta government history to raise royalties ended in pain and embarrassment.
“It’s not hurtful to foreign companies, it’s hurtful to local companies, because they’re all invested here,” Saxberg said.
“If you drop the valuation of a company because you change the rules and create uncertainty, it creates opportunity and discount value,” he said.
Saxberg earlier noted that Crescent Point collects only 4 percent of its revenue and 2 percent of its cash flow from Alberta government lands and has budgeted to spend only C$40 million in the province this year.
But he was emphatic that Crescent Point is ready to shift that spending to its major operations in Saskatchewan ― where he noted the government has left royalties untouched in 30 years ― and its Bakken and Uinta plays in the United States.
A report by Calgary-based ITG Investment Research noted that Saskatchewan and British Columbia charge lower royalties than Alberta for similar production.
ITG said that in a “worst-case scenario” where royalty holidays introduced in Alberta in 2011 to offset a new royalty regime imposed in 2009 are removed, the royalties on a typical liquids-rich gas well would climb to 21 percent from the current 9 percent, slashing the net value of that well to C$400,000 from C$2.3 million.
A report by Dundee Capital Markets identified 21 Calgary-based companies that would be exposed to royalty changes because of their leaseholdings on government land, observing that “capital is extremely mobile and can easily move out of Alberta at the first sign of uncertainty.”
What’s best for Alberta
Notley, even before being sworn in as premier, wasted no time reaching out to the industry, to assure producing companies and business leaders they have nothing to fear from her government.
“What I said very clearly during the campaign is that while we may believe there is some new consideration that needs to occur, that it will be done collaboratively and in partnership with our key job creators in this province,” she said.
“I am hopeful that over the course of the next two weeks they will come to realize things are going to be just A-OK here in Alberta.”
Notley said her objective is “getting the best deal for Albertans, protecting our economy and ensuring that we grow jobs ― we don’t lose jobs ― because we know that’s fundamental to the strength of Alberta. We’re going to be balanced, measured, reasoned.”
Uncertainty effects
In addition to the royalty fears, Bill Andrew, chairman of mid-size producer Long Run Exploration, said most of his peers are adopting a “wait and see” approach, although he would not be surprised to see interest shift to exploration prospects in British Columbia and Saskatchewan.
He expressed concern about NDP signals that a Notley government might also take a fresh look at the environmental impact of hydraulic fracturing.
Gary Leach, president of the Explorers and Producers Association of Canada, which speaks for 200 small and medium oil and gas producers, said the election outcome “was not what industry would have preferred, but I think this is a very sophisticated industry that’s prepared to work with politicians of any stripe.”
He said the industry faces a heavy workload to “provide reassurance and clarity on some major policy issues for investors who provide so much of the capital that, when it’s put to work in Alberta, creates jobs for Albertans.”
However, Leach said a royalty review would cause more short-term pain as producers try to recover from a severe oil patch downturn since oil prices went on a skid last summer.
Uncertainty will cause investors “to sit on their wallets and that’s going to delay a resumption of economic growth in Alberta,” noting there were a lot of “unintended consequences” from the mishandled royalty review conducted by former Premier Ed Stelmach.
Tim McMillan, chief executive officer of the Canadian Association of Petroleum Producers, said the energy sector is “fundamental to the economic success of (Alberta and Canada) and as an industry we want to make sure that Alberta continues to be positioned for investment.”
