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Uncertainty abounds in Alberta oilpatch amidst NDP election victory

The Alberta oil and gas industry is digesting the seismic shift in provincial politics as the Alberta New Democratic Party proved pre-election polls right by soundly ousting the Jim Prentice-led Progressive Conservative government in the May 6 electi
Alberta, Conference Board of Canada, geography, inflation, mining, B.C. to be third biggest winner from Albertan oilsands: report

The Alberta oil and gas industry is digesting the seismic shift in provincial politics as the Alberta New Democratic Party proved pre-election polls right by soundly ousting the Jim Prentice-led Progressive Conservative government in the May 6 election.

The left-leaning NDP and Premier-elect Rachel Notley ended a 44-year run in office by the Tories, sweeping to victory with a promise to review oversight of the oil and gas sector in the country’s energy heartland.

“Friends, I think that change has finally come to Alberta. New people, new ideas and a fresh start for our great province,” Notley said during her acceptance speech.

“I want to say to Alberta’s job creators, great and small, in the energy sector and in every other sector, our government will be a good partner and we will work with you to grow our economy and to secure a more prosperous future for every Albertan in every community,” she added.

“Together, we need to start now to grow a diversified and resilient economy. We need finally to end the boom-and-bust roller-coaster that we have been riding on for too long. It won’t happen overnight but we must start and we will.”

The NDP victory sparked the immediate resignation of PC Premier Jim Prentice as party leader. He also quit his legislative seat.

“My contribution to public life is now at an end,” he told supporters following the stunning defeat.

The Conservatives had won 12 straight elections in Alberta, but support for the rookie premier plunged during the campaign and right-wing voters split support between the Conservatives and the younger, more conservative Wildrose Party, which will be the official opposition.

Prentice, who left investment banking to become party leader in September, had a 75% approval rating at the beginning of March. A poll this week showed his approval rating had dropped to 31%.

Dissatisfaction over Prentice’s tax-raising budget, the expense of the early election call when the province faces a $5 billion budget deficit and a series of gaffes by the conservatives squandered the party’s lead.

“This will go down as one of the biggest miscalculations in Canadian political history. He did not have to go early,” pollster Bruce Cameron told CBC television.

Official results showed the NDP appeared set to win 54 seats while the Progressive Conservatives were likely to take just 10, behind the even more staunchly conservative Wildrose Party, which was on course for 21.

While on the campaign trail, Notley proposed a review of oil and gas royalties and reduced support for some pipeline projects, such as TransCanada Corporation’s controversial Keystone XL project. The NDP had also promised to hike corporate tax rates by two percentage points to 12%.

She also said Canada needed a national approach to address environmental issues.

All of this leads to the creation of more uncertain and choppy waters for the province’s oil and gas sector, as it struggles to deal with the current fallout of low commodity prices and weak market conditions.

Reaction from industry leaders

Gary Leach, president of the Explorers and Producers Association of Canada (EPAC), said that while Notley made “reassuring statements that they will be ‘good partners’ with the business community,” concerns remain.

“However they also have an electoral base that will push the party to act on key campaign pledges, including raising corporate taxes and royalty rates. The party leader’s statements on selective or qualified support for some pipeline projects is also troubling,” he said.

Leach noted that there is a long list of issues the oil and gas industry was working on with the previous provincial government, from royalty incentive extensions, aboriginal consultation policy, pipeline access, caribou habitat, regulatory approvals processes, municipal taxation, GHG emissions and more. According to Leach, the direction of these discussions is now unclear.

“The uncertainty the election brings is not favourable for investor confidence in the Alberta oil and gas sector and is already being portrayed in U.S. business media as a victory for a ‘left leaning’ government that plans to raise royalties and raise corporate taxes,” he said.

“EPAC will be looking to establish a level of trust and understanding with the new government while making it clear that we oppose government policies that will negatively impact a recovery in the oil and gas sector. Alberta’s economic recovery, and future prosperity, will require a clear road ahead in terms of fiscal, royalty and regulatory policy and we will be urging the government to clarify its intentions in these areas as soon as possible.”

While the Canadian Association for Petroleum Producers (CAPP) has made it clear that it does not think now is the time for a royalty review that will add uncertainty at a time when jobs and capital investment are very much at stake, spokesman Jeff Gaulin said the association is hopeful positive dialogue with the new government will occur.

“First and foremost, Albertans have spoken loud and clear. Secondly, it’s important to recognize that we work with governments of all political stripes … so we’re confident that we will be able to work with Miss Notley and her administration in the days ahead to chart a path forward that does two things: that protects jobs and grows investment in the oil and gas industry,” he said.

“I think her administration, the Alberta government and the people of Alberta recognize the importance of the oil and gas industry to our economy and to our prosperity and to what it means to keeping people working. And that should be our primary focus right now,” Gaulin added.

“I think there’s a big job whenever there’s a change in government … [and] there’s much to focus on in these very volatile times in our industry, and the province as a whole.”

Gaulin said that when CAPP sits down with Notley and her leadership team in the coming days discussions will focus on jobs and attracting investment into the Alberta oilpatch.

“And the two policies that we think can achieve that are increased market access … and how do we keep the industry competitive,” he said.

“We compete globally for technology, for capital and for talent. So how do we keep Alberta attractive for that type of investment because it’s that investment that will put Albertans back to work?”

Mark Salkeld, president and CEO of the Petroleum Services Association of Canada, said that while he doesn’t know “what’s in store for Alberta with the change in government,” he’s confident that the NDP recognizes the importance of the oil and natural gas industry to all Albertans.

“A robust industry means jobs and it means money for infrastructure, health care and education. To that end, we welcome the opportunity to work with Rachel Notley and her team to ensure a smooth transition and continued prosperity for Alberta going forward,” he said.

Other views

“I think the business community is going to be awfully worried here,” said Jeremy McCrea, analyst at AltaCorp Capital Inc. “There are going to be a lot of worried executives on what royalty rates are going to be here going forward.”

In a note, McCrea added that near-term, AltaCorp is cautioning investors that with the NDP win and the likelihood of a royalty review, the uncertainty will have an impact for Alberta-based oil and gas producers.

“Based on our analysis of the 2007 ‘Our Fair Share’ royalty report, capital markets clearly favoured U.S. energy stocks. Longer term, we also caution investors that royalty rates may potentially change and although no specific details have been released by the NDP, we note that the party was previously critical of the original ‘Our Fair Share’ report,” he said.

“Overall, investors will likely weigh investment decisions on the party’s historical messaging that suggests royalty rates should be materially higher, which ultimately will be negative for energy share prices.”

Peter Tertzakian, managing director and chief energy economist at ARC Financial Corp., doesn’t believe the election of a NDP government “is as bad as people think.” Rather, it could be an opportunity to start “thinking about the future with a blank piece of paper.”

“The energy business is in the midst of major disruptions and now we have a major government disruption. [Notley] has already said that she’s going to work with the industry, which is very positive. My advice to the industry is to work with this new government positively and with some creative ideas on how to position the industry for the future realities,” he said.

“The industry needs to have more than just an open mind — I think you have to go with forward thinking and that this is an opportunity to get away from business as usual,” Tertzakian added.

“The notion out there was when oil prices go back up, then it’s business as usual. I’m saying that when oil prices go back up it wasn’t going to be business as usual anyway. So we need to be thinking about creative ways of repositioning this industry in the context of the new realities.”

Tertzakian said it’s vital that government and industry find a way to work together in a proactive manner.

“I hope the industry approaches the government in a positive manner and I hope the government listens, because I think the new government, as well, has the potential to fall back into old-school thinking about how the business operates.”

Michal Moore, an energy economics professor with the University of Calgary’s School of Public Policy, agreed that it’s not all doom and gloom.

“I know that there are other economists in the province who suggested that a tax increase was death for the industry. I’m not one of them,” he said.

“In my opinion, Mr. Prentice made a pretty large tactical error by not acknowledging that the pain that is pretty wide-spread was going to have to be shared by everybody if we are going to, in one way or another, survive this downturn in prices, which of course is currently recovering somewhat, and have a stable industry going forward,” Moore added.

“My guess is one of the new realities that will be acknowledged is that there will be some tax increases, there will likely be a review of the way royalties are assigned and if I had to guess, I would say that one of the higher priorities of the NDP will be to look at the structure — the skeleton — of the royalty scheme.”

Ed Whittingham, executive director of the Pembina Institute, said Albertans voted for change — and that change includes improving Alberta’s environmental record and its approach to climate change.

“We support the Alberta NDP’s commitments to invest in energy efficiency, and to phase out coal-fired electricity and replace it with cleaner sources,” he said in a statement. 

“We also applaud their commitment to take leadership on the issue of climate change — and that includes coming up with a credible plan to manage the growth in greenhouse gas pollution from the oilsands, and meet Alberta’s 2020 climate target.”

Daily Oil Bulletin