Economic analysis

What might the Alberta NDP government do with energy policy?

On many energy issues, it’s hard to find a lot of daylight between Alberta NDP policies and those of the other two front-running parties

Alberta NDP Leader Rachel Notley - THE CANADIAN PRESS/Jeff McIntosh

Alberta NDP Leader Rachel Notley. (Jeff McIntosh/CP)

Update, May 5: Rachel Notley and the Alberta NDP have won a majority government. In this piece published April 29, Andrew Leach considered what the party’s energy policies would mean to the province: 

With the Alberta NDP running high in the polls, and after leader Rachel Notley’s excellent performance in the only televised leaders’ debate, Albertans are asking themselves a question which, only months ago, would have seemed like an exercise in fantasy: What would Alberta look like under an NDP government or with the NDP holding the balance of power? With that in mind, I sent some questions to the NDP on their energy policies and, with those answers in hand, I can conclude that an NDP government would certainly lead to changes in Alberta, but perhaps not of the radical sort feared by many in the province. In fact, on many issues, it’s hard to find a lot of daylight between NDP policies and those of the other two front-running parties. Their answers give you enough room to believe the worst, if that’s what you want to believe, but also leave room for benefit of the doubt.

Let’s start with the third rail of Alberta politics: the oil and gas royalty system and the way in which we manage development of our most valuable resource. The NDP has pledged to empanel a “Resource Owners’ Rights Commission (the proposed terms of reference for the commission are outlined in Bill 209) that would independently evaluate the issues surrounding the full and fair return to Albertans from the development of our resources.” This is, unquestionably, a good idea if it’s well implemented. The NDP starts with the position that “the resources we have in Alberta belong to all of us, and the return we get on resources needs to be discussed publicly and regularly, openly and transparently,” and I could not agree more. In the most recent budget, the government forecast that bitumen royalties would be less than $1.50 per barrel in this fiscal year, while the same budget forecast the value of bitumen to be about $35 per barrel. If the province believes that collecting four per cent of the value of produced bitumen in royalties is defensible, the government should be able to justify that outcome in a fair and transparent process.

Related: Paul Wells in Alberta: Could Jim Prentice really lose?

Changing royalties would not be a free lunch. Part of the reason we collect such low royalties is that we’ve allowed development to proceed quickly, and this has led to rapid inflation in wages, housing values and other impacts on wealth in Alberta and elsewhere, while, in turn, reducing the value of the resources as they’re more costly to extract. If the government acts to take a larger share of the value in bitumen through royalties, less of that value will be dissipated in other ways, in part, because the pace of development will slow down. Any suggestion that the low royalties have only led to high corporate profits in the oil-sands sector doesn’t stand up to evidence: Oil-sands firms have generally lagged the performance of the Toronto Stock Exchange over the past decade, while the value of property and the wages paid to workers here in Alberta have both grown at rates far exceeding the rest of the country. Union construction wages, for example, using an average of carpenters, electricians and plumbers, have increased by 42 per cent in Edmonton since 2005, compared to 29 per cent on average in Ottawa, Montreal and Toronto. There are plenty of reasons to suggest that we’d be better off, on average, with a slower pace of development here in Alberta, but that doesn’t mean it would make us all equally better off.

An investment in oil production, whether oil sands or conventional, involves significant risks (many companies are finding this out today) and part of what makes companies willing to take on the risk of an oil-price crash is the fact that there is an upside in the event of price appreciation. Changes to royalty policy, which either reduce expected returns or reduce the upside, are going to affect development, and the NDP will need to level with Albertans on that fact. The NDP campaign’s answers to me stated that “Albertans need to have confidence that we are getting a proper return, and that confidence does not exist today because of the lack of accountability and transparency in recent years—people have been kept in the dark.” That’s largely true. For oil sands in particular, where companies are charged a net revenue royalty—the amount they pay to the government is a share of their revenues net of capital and operating costs—more transparency is a start, but maybe not enough. Over the past decade, we’ve seen costs escalate in the industry, and seen projects go well over-budget at significant cost to long-run royalty values of these new developments. The degree to which we share capital and operating cost risk with individual operators seems ripe for review. On this area, however, the NDP is, “not looking at major changes to the arrangement of risk-sharing.”

Related: Prepare for the Alberta election with the latest analysis on our hub

The next area of my Q & A focused on the question of refining, and whether policies should be enacted that encourage more resource processing here in the province. This is an area where all parties agree, and I disagree with all of them. The NDP states that we want more refining in the province because it provides “long-term, sustainable, mortgage-paying refinery jobs, in addition to extraction jobs.” There are two interesting pieces in that answer: the idea that refinery jobs are somehow more long-term or higher-value than oil- extraction jobs, and that we could create refinery jobs, in addition to all the forecast jobs in extraction. Refineries are long-lived assets, just like oil-sands plants—if I showed you a financial model for an oil-sands plant and one for a refinery, you’d have a difficult time finding material differences between the two, except that refineries don’t pay royalties—and I can’t see the difference between someone’s ability to pay his or her mortgage while working as an engineer at an oil-sands plant versus at a refinery, nor can I find evidence in the data to suggest that refinery jobs are higher-value in any systematic way, but perhaps the NDP will fill us in. Beyond that, it’s simply not internally consistent to say that oil-extraction jobs are not long-term, so we should build a fleet of refineries to process the oil we’ll be extracting for the next few decades.

The idea that we can add incremental employment in refining, over and above our extraction sector, also seems like a stretch: The workers employed to build and operate a refinery are very similar to the workers employed to build and operate an oil-sands plant, so it’s hard to see how you would not simply be creating more competition for labour in what is already a tight market. There might be sectors of Alberta’s labour force that are under-employed, and the labour market in general is becoming more slack, so perhaps there will be more unemployment in future in the sectors that would build and operate a refinery. However, if the NDP expects a sustained swoon in oil prices, or a marked decrease in activity in the extraction sector, that should be reflected in their budget projections, which, as far as I can tell, it is not.

Finally on this point, if we want to diversify the economy away from oil, why would we do so by building oil refineries? I’d be curious to ask most NDP supporters, if they had $30 billion to spend, would they rather build a large refinery or see the equivalent spent building and operating schools, hospitals and daycares? I think the latter would win in a landslide. Refining seems like an easy win, when you can imagine you can force someone else to build and operate it at no cost to you and simply reap the benefits, but that’s simply not the case in Alberta. Bill 209 opens the possibility of “the use of public sector resources to facilitate processing,” something which has not gone well so far, while the response to my questions from the NDP campaign floated the possibility of using a royalty credit to make refineries viable. Either way, we’d be effectively paying for refining; it would just be a question of whether we’re paying with the public’s bitumen or the public’s dollars. If we’re “acting like owners of the resource,” we should think carefully about maximizing the value we generate from those resources, and not confound that with spending the resource, or the dollars it generates, to subsidize secondary industries.

Related: Colby Cosh and Paul Wells take your questions on the Alberta election

Having a fleet of refineries under government control would change Alberta’s exposure to oil-price risk, but there is also no need to have those refineries here in Alberta to accomplish that goal. Other than that, there’s not much difference between refining and any other manufacturing industry: If the returns are made high, either by the market or by the government, it will employ people. But, and here’s the point I can never get past, if we’re going to have a make-work project in Alberta financed by oil dollars, why would we focus that work on making refined products for the rest of the world? Furthermore, how it would serve to diversify our economy, given that the sector would only be viable as long as we were producing oil here, and able to offer it at a discount or afford to subsidize a refinery? If refining makes sense financially, it will happen and it should not be discouraged, but, if we’re going to have a make-work project, let’s at least make things we value.

My next question focussed on the topic of greenhouse-gas-emissions policy, an area where I described the NDP platform as vague because it states only that an NDP government “will take leadership on the issue of climate change and make sure Alberta is part of crafting solutions with stakeholders, other provinces and the federal government.” That’s good, as far as it goes, but we still don’t know much about what Alberta would put on the table under Notley’s leadership. In answering my question, a campaign spokesperson wrote that “the NDP agrees with Jim Prentice’s commitment to phase out coal-burning electrical generation,” and confirmed that an NDP policy would offer a “revolving loan fund for home and small-business energy retrofits, a commitment for broad energy-efficiency policies and for a renewable-energy strategy,” as well as re-allocating funds not spent as part of Ed Stelmach’s carbon capture and storage programs to public transit. While an accelerated phase-out of coal-fired electricity likely offers the most potential for low-cost emissions reductions in Alberta, the elephant in the room remains emissions from Alberta’s oil and gas sector and, in particular, the oil sands. As for what the NDP would do in this area, we’re left with a commitment to serious dialogue and a pledge to do better. There’s a lot left to the imagination here, not the least of which is the question of how NDP commitments to reduce emissions square with a pledge to add incremental refining and other industrial sectors in the province.

Finally, I looked at one of my rules of Alberta politics (having rules of politics is a Maclean’s thing, I guess): that all conversations about savings quickly turn to conversations about spending. I was curious to know whether an NDP government would commit to seeing additional savings in the Heritage Fund invested outside of Alberta, or whether we risk seeing the fund used as a flow-through to invest in projects here in Alberta under the guise of economic diversification. I didn’t get a lot of detail about this in the answers I received: The NDP would prefer a focus on building the fund, rather than on where the funds are invested. In their response, the NDP campaign cited Peter Lougheed and the original goals of the fund, which is an interesting reference, since the initial Heritage Savings and Trust Fund Act had three objectives: “to save for the future, to strengthen or diversify the economy, and to improve the quality of life of Albertans.” Having a large savings fund is not really an objective in and of itself; you need to know for what or for whom we’re saving. If the premise is to provide for future consumption, one might ask why we expect future Albertans to be substantially worse off than Albertans of today, which might be sufficient to motivate saving today to finance their consumption. If the premise is simply to save to smooth over downturns like the one we’re currently experiencing, then a much smaller fund would do the job, but so could debt. If the premise is to use resource revenues to provide low-cost capital to otherwise non-viable economic activity in the province today, I’d call that spending and dispense with the need to flow the dollars through a fund.

What should you take away from all this? I think the first take-away is that there’s not a lot of meat on the bones of some of the positions put forward by the NDP. They’ll call a commission on royalties, assess whether or not to stimulate refineries, be a leader on greenhouse-gas emissions, and save more of our resource revenues. The next steps—what royalty changes they’re prepared to consider, and how they’ll trade off royalties versus pace of development; what policies will be used to stimulate refining if the commission determines we’re not doing enough of it; what types of greenhouse-gas-emissions policies the NDP would enact to achieve its objectives; or how a larger Heritage Fund would be managed—are not fully fleshed out. Perhaps that’s what we should expect from a party that has not had the benefit of a large bureaucracy testing potential policies. Overall, it’s hard to find clear motivation for fear or for comfort; those who believe the NDP will do crazy things have more than enough room to make those assumptions, while those who believe they won’t will find comfort from these answers, as well. The question is which way Albertans are leaning, and in whom they’re prepared to have faith.  I guess we’ll find out on Tuesday.

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