Provincial Election in Alberta – “Complicated”

By: Dan Cronin and John Auers

After an extremely cold February (even by Albertian standards), many in the Province are happy that spring is on the way and with it comes a provincial election.  An election in Alberta used to be a relatively straight forward event as everyone knew who was going to win; however, in the last election, things got “Complicated” as Canadian pop star Avril Lavigne famously stated in her 1996 smash hit song of the same title.

The last provincial election in Alberta took place on May 5, 2015, and a unique set of circumstances allowed the left leaning New Democrat Party (NDP) to take majority control and form the government of a traditionally right-leaning Province.  The electorate was unhappy with the right-leaning Progressive Conservative Party (PCs) that had held power since 1971 and wanted a change.  The general consensus was that the PCs had taken on an aura of entitlement because they had been in power too long.  This sense of entitlement combined with a viable right-wing alternative in the Wildrose Party (WRP) (which led to vote-splitting) allowed the NDP to take control of the Province.

The upcoming election in Alberta will pit the incumbent NDP against the United Conservative Party (UCP) which was the result of a merger between the PCs and the WRP.  A recent poll of decided voters administered by Lethbridge College and published on March 6th had the NDP polling at ~23% and the UCP at polling ~58%.  In a traditionally right-leaning Province, it appears that the UCP is well on its way to rule Alberta once an election is held and the votes are tabulated; however, as the 2016 U.S. Presidential election has shown us, anything is possible.

Alberta is oil country.  Try as the Province might to diversify the economy away from oil – the provincial coffers are intimately linked to the price of crude.  With such a strong relationship between the price of oil and the Alberta economy, it is hard for the government to resist the temptation to “manage” this industry.  So, with an election looming in Alberta (one must be held before May 31st), the oil industry is paying very close attention. Let us now look at the similarities/differences between the two main parties in Alberta, and we promise it won’t get too “Complicated.”

Carbon Tax – Cause life’s like this

Once elected to power, the NDP imposed a carbon tax on the Province which came into effect January 1, 2017, at $C20-per-tonne for carbon dioxide emissions – this tax then increased to $C30-per-tonne on January 1, 2018.  The rationale behind the NDP carbon tax was to obtain the necessary “social license” required to get pipelines built; however, so far it has been all stick and no carrot as Enbridge Line 3, TransCanada Keystone XL, and the Federal Government’s Trans Mountain Pipeline Expansion continue to be bogged down in regulatory red tape.  Premier Rachel Notley, leader of the NDP, has cancelled planned increases to the carbon tax with further increases linked to the status of the Trans Mountain Pipeline. Jason Kenney, the leader of the UCP, has vowed to scrap the carbon tax if he wins the election.  The UCP has an alternative plan to reduce emissions; however, details have yet to be revealed.

It is notable to mention that the current left leaning federal Liberal government has mandated a country wide carbon tax of $50-per-tonne to be in place by 2022.  Obviously, a carbon tax impacts a Province like Alberta far more than any other Province in Canada and only increases the feelings of Western Alienation; however, this is perhaps a blog topic for the fall when a federal election is expected to be called.

Pipelines – Honesty – Promise me I’m never gonna find you fake it

Pipelines that span more than one Province or span an international boundary are under federal jurisdiction in Canada.  Both the NDP and the UCP are in favor of more pipelines out of Alberta; however, the NDP has a closer relationship with the current federal government than the UCP would have if it were in power.  The NDP appears to be more willing to work with the existing federal government, while the UCP is expected to have a more combative relationship and to apply more pressure to the federal government to get pipelines built if elected.  One key point of leverage that the Province of Alberta holds with the federal government is equalization payments.  Taxes collected on a federal level are redistributed to the Provinces.  Provinces that put in more money than they take out are called “have provinces”; Provinces that take out more money than they put in are called “have not provinces.”  Alberta has the highest GDP per capita of any Province in Canada by a long shot and is classified as a “have province.”  The UCP has stated it will try and utilize the financial muscle of Alberta to try and get pipelines built.

It is notable to mention that the largest recipient of equalization payments is Quebec, a Province that blocked the TransCanada Energy East Pipeline.  While Quebec doesn’t want the Energy East Pipeline, it has no qualms about taking Alberta’s equalization payments – have we mentioned the concept of Western Alienation yet?

Production Cuts – And you take, what you get

As with the need for more pipelines, both the NDP and UCP see eye-to-eye on mandated production cuts.  Record-setting light/heavy differentials in October of last year pushed the governing NDP into an OPEC style across the board production cut.  The justification for the move was to shore up provincial coffers that are highly dependent on higher crude prices in order to generate the necessary royalty revenue stream upon which the provincial government is so dependent.  The move by the NDP government was a bit of a surprise; however, the real surprise came from the UCP who had actually been calling for this move.  The philosophy of the NDP is to generally have a more “hands-on” approach to the economy and the UCP has a philosophy that leans generally more toward the “invisible hand.”  While the two parties have these general differences in economic philosophy, one thing they can both agree upon is protecting the government’s revenue stream.

Rail – Why do you have to go and make things so complicated?

Rail is an issue where the NDP and UCP differ dramatically.  In keeping with the “hands-on” approach, the NDP has invested in a three-year, $C3.7 billion rail program.  The government anticipates that the rail investment will generate $C5.9 billion in revenue netting $C2.2 billion in profit.  The program will involve the provincial government buying crude from Alberta producers and selling that crude at various high netback destinations.  The provincial government will lease 4,400 rail cars, and it expects to be moving 20 KBPD by this July and reach the full capacity of 120 KBPD by mid-2020.   The one-year delay in the Enbridge Line 3 Replacement Program that was discussed in last week’s blog is somewhat fortuitous to the NDP rail program as the delay should push more crude to rail.  UCP leader, Jason Kenney, came out against the rail program when it was first announced by the NDP government and continues to hold this opinion even after the Line 3 delay was announced.

Upgrading/Refining – Lay back, it’s all been done before

The current NDP government has embarked on a program to encourage upgrading and refining in the Province of Alberta.  The Partial Upgrading Program was discussed at length in a previous blog where the government would put up $C1 billion ($C800 million in loan guarantees and $C200 million in grants) to help two-five industry players develop their respective partially upgrading bitumen projects.  The NDP government is also trying to incentivize new or incremental refinery capacity in the Province in another valued added push.  The specifics of how the provincial government would be involved in a refinery project are not yet known; however, the NDP has indicated that it has met with approximately 12 companies about this concept.  It is not clear how the UCP views the government incentivizing partial upgrading and/or incremental refining capacity in Alberta.  While Jason Kenney has commented with a negative tone on the Partial Upgrading Program deal signed by the NDP, he has not come out as strongly against it as he has with the government’s rail program or carbon tax.  One would think the right- leaning UCP would take a laissez-faire approach for incremental upgrading/refining; however, this was not their view when the UCP backed the mandated production cuts imposed by the NDP government and it was also not the view of the right-leaning PCs (one of the precursors to the UCP) when it invested in the North West Redwater Sturgeon Refinery (discussed in a previous blog), an investment that has not gone smoothly.

Conclusion

It will be an interesting provincial election in Alberta.  Right now, there is a lot of jawboning from both parties on how best to manage the oil industry.  Many promises will be made – some will be kept and many will be broken.  Both parties agree on the need for more pipeline access to markets and mandated production cuts.  The parties disagree on the carbon tax and the government rail initiative.  It is unclear how far the parties are apart on government assistance for value added processes such at partial upgrading and new or expanded refining capacity in the Province.

If the NDP is able to catch lightning in a bottle and pull out an upset victory to hold power, one can generally expect a more “hands-on” approach to the economy and a more collaborative working relationship with the federal Liberal government.  Whereas, if the UCP is able to maintain their substantial lead in the polls and carry that through election day, expect a more “hands-off” approach and for the relationship with the federal government to be far more combative.  In fact, the leader of the UCP, Jason Kenney, has already indicated that he would cut off oil shipments to Provinces that are against crude pipelines, boycott banks that snub fossil fuels, and cut the purse strings on equalization payments.  While a hardline approach by the UCP might play well on the campaign trail, implementing such measures are easier said than done.

The upcoming Alberta provincial election will no doubt be followed closely by industry; however, it is the hope of TM&C that whoever is elected is able to provide the necessary support to the one key issue that is critically hurting the Canadian oil patch and that is new pipeline capacity.  New pipelines are absolutely necessary to help get the Alberta oil industry back on its feet; however, such an issue, at least in Canada is – “Complicated.”

Our policy analysis, combined with similar examination of developments in market conditions, the overall global economic environment, and other relevant events will inform our forecasts on what the future holds for producers, midstream players and refiners.   These forecasts of supply and demand for both crude oil and products, as well as resulting market prices, will be included in the next edition of our biannual Crude and Refined Products Outlook.  We also use this analysis in our other studies and in ongoing work supporting industry participants.   For more information about this publication or studies and other consulting services TM&C can provide, please visit our website or give us a call.