Canadian oil-sands fate rests on conservative's plan
CALGARY (Bloomberg) -- Jason Kenney has had it with the passive approach to fighting for Canada’s energy sector. The United Conservative Party leader, likely to become premier of Alberta in elections next week, is promising lawsuits, boycotts and tax cuts to revive an oil industry under siege. Whether he can do much to solve the sector’s intractable problems, many of which are beyond his control, remains to be seen.
Kenney’s bid to reinvigorate Alberta’s oil industry -- which has suffered from a chronic pipeline shortage that’s led to low crude prices and a dearth of international investment -- will have national and global implications. The province churns out about four-fifths of Canada’s oil, an industry that accounts for 10% of the nation’s economy and 20% of its exports. The province’s 3.7 MMbpd put it roughly on par with the United Arab Emirates.
“We mean business -- we’re no longer going to roll over and apologize and accept policies that damage our economy,” Kenney, 50, a former federal cabinet minister who leads the newly formed UCP, told reporters in Calgary on Tuesday. Most polls give Kenney a comfortable lead over Premier Rachel Notley and her New Democratic Party for the April 16 vote.
Pipeline Stalled
Kenney’s biggest challenge will be to get a pipeline built to ensure the increased oil-sands production planned for the next 50 years can get to market. Though he’s lashed out at Notley for failing to make much progress on new lines, the reality is that Canada hasn’t had a major crude oil pipeline built in about a decade. Notley is hardly the only one to blame.
TransCanada’s Keystone XL has been stalled for a decade by environmental protests and lawsuits in the U.S., while its Energy East project to the Atlantic Coast was dropped after opposition in Quebec. Kinder Morgan Inc., meanwhile, abandoned its Trans Mountain pipeline expansion to the Pacific Coast due to protests and legal challenges in British Columbia. Justin Trudeau’s government stepped in to buy it last year, though little progress has been made.
Despite Kenney’s fiery claims to get a pipeline built for Alberta, in the end it requires federal approval through the National Energy Board, not to mention tacit approval from other provinces, cities and indigenous groups.
“The biggest thing is always pipelines, and for that you need the federal government and the provinces to cooperate,” Laura Lau, who helps manage C$1.6 billion ($1.2 billion) in assets at Brompton Corp. in Toronto, said in an interview. “That’s the No. 1 issue, and there’s only so much Alberta can do on its own.”
Kenney is counting on a new pipeline to revive investment in the sector, which plunged by almost half between 2014 and 2017, as Canadian firms curbed spending and foreign operators including Royal Dutch Shell and Marathon Oil pulled out in favor of lower-cost, lower-emissions areas.
The UCP election platform released last week says a Kenney government’s first bill will scrap the C$30-a-ton carbon tax Notley implemented after her surprise victory in 2015. He estimates the repeal will amount to a C$1.4 billion tax cut that will create jobs, save families money and put Alberta’s energy sector on a level playing field with other jurisdictions.
If Trudeau’s federal government imposes a carbon tax on Alberta, as it has in other provinces that haven’t put forth their own plan, Kenney plans to sue to stop the imposition.
Carbon Moves
Even here, Kenney’s power to make changes will be limited. Other provinces in the same situation, including Ontario and Manitoba, have pledged to take the Trudeau government to court. In the meantime, consumers in those regions started paying a carbon tax on April 1.
Kenney’s platform acknowledges energy industry emissions are contributing to climate change and says his party is committed to mitigating greenhouse gas emissions. His solution is to require large emitters to reduce intensity by 10%, purchase credits from other facilities or pay into a fund to develop emissions-reducing technologies.
Provincial Boycott
Kenney -- who served as immigration minister under Stephen Harper’s Conservative government from 2008 to 2013 -- is also threatening to have Alberta cease doing business with banks that boycott energy projects, cut oil shipments to provinces that fight pipeline development, and press Trudeau to kill Bill C-69, which overhauls the approval process for pipelines.
If the bill isn’t scrapped and if there isn’t substantial progress on the construction of a pipeline to the coast, Kenney plans to hold a referendum on removing equalization payments from the Constitution Act. Never mind that so-called equalization payments, in which the government in Ottawa transfers money to poorer provinces, is a federal program.
Kenney’s ire won’t be aimed solely at Trudeau. His C$30 million “war room” will combat misinformation about Alberta’s energy industry, and his government will challenge the charitable status of groups that campaign against the sector.
Crude-by-Rail
While most of those proposals will find easy support in the industry, he may receive push back on one idea: scrapping the current government’s plan to invest C$3.7 billion to add 120,000 bbl of crude-by-rail capacity. Kenney says the private market will invest to solve the problem and that the government shouldn’t risk taxpayer money.
Deloitte analyst Andrew Botterill said last week that scrapping the plan could cause a drop in local heavy crude prices, which have gained almost 90% this year to more than $55/bbl, near the highest in almost a year.
What Bloomberg Intelligence Says
“Wider spreads for Western Canada Select crude and an easing of Alberta production cuts will be needed to drive growth in Canadian crude-by-rail volume in 2019.”- -Lee Klaskow, Adam Roszkowski, transportation analysts Click here to view the piece.
Notley says Kenney’s plan imperils Alberta’s energy industry by isolating it from the rest of the country. She plans to continue pushing for changes to Bill C-69, pressing the federal government to speed construction of the Trans Mountain expansion and encouraging more local refining and upgrading.
“When you are leading a province, when you have an obligation to represent all people in the province, you need to take a determined, informed, strategic, forceful approach to advocating your position,” Notley, 54, said in Calgary on Tuesday.
Beyond the energy industry, Kenney plans to cut the business tax rate to 8% from 12% over four years. Even while cutting taxes and maintaining operating spending at current levels, he plans to balance the budget within his first term. Alberta is projected to run a C$6.93 billion deficit for the fiscal year that just ended.
Lau said most energy industry executives probably would prefer a Kenney victory because he might cut regulations and speed approvals for new oil wells. The Brompton portfolio manager is skeptical either leader can dramatically improve the situation for the sector, which has been battered by forces beyond Alberta’s borders.
“If it appears Alberta is a friendlier place to do business, that should help,” Lau said. “But even if approvals for wells are faster, there’s no point if you can’t put in a pipeline."
