Alberta Premier Danielle Smith speaks at the Global Energy Show in Calgary on June 9.Amir Salehi/The Globe and Mail
Alberta Premier Danielle Smith has thrown away her best cards in a high-stakes showdown with the province’s biggest energy companies by promising a quickly-forgotten $100 payout to provincial residents.
Alberta, the federal government and five major oil sands producers are fleshing out a grand bargain struck in May, with no less a goal than making Canada an energy superpower.
The negotiations between the governments and the producers – Canadian Natural Resouces Ltd., Suncor Energy, Cenovus Energy, Imperial Oil and ConocoPhillips Canada – are expected to result in a second bitumen pipeline to the B.C. coast. That would be a huge win for the Premier. Alberta is scheduled to submit an application to the Major Projects Office by July 1.
The grand bargain also features a plan to reduce carbon emissions by building a massive carbon capture and storage or CCS facility in Alberta, a project seen as necessary to winning social license for the pipeline and oil sands expansion.
That’s where a poker game is playing out.
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Oil sands producers, some of the canniest negotiators in business, are balking at the prospect of paying for the Pathways Project, which is expected to cost up to $20-billion. One of their arguments is Pathways will spend a great deal of money to make a minimal reduction to global carbon emissions.
Going into negotiations on how to split the bill for Pathways, Alberta had a strong hand. The province could credibly plead poverty after announcing an anticipated $9.4-billion deficit in February. The Premier could argue every dollar spent on Pathways was a dollar taken from hospitals and schools.
Then oil prices spiked as a result of the war in Iran, and Alberta’s oil and gas royalties soared. The province could post a surplus this year, rather than a deficit.
On June 17, flush with an unexpected windfall, the Premier announced all Albertans earning less than $225,000 – about 3.4 million people – will get a $100 cheque this summer.
It’s Ralph bucks all over again, for those whose memories go back 20 years, when former Alberta premier Ralph Klein attempted to buy voters’ affection by handing out $400 cheques from a treasury fuelled by oil patch revenues.
The populist payback will cost Ms. Smith credibility at the poker table with canny oil sands executives, who are represented in the Pathways negotiations by former Suncor chief financial officer Kris Smith.
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In return for funding Pathways, the CEOs will demand Alberta defer or reduce the royalties they pay on oil sands production. Their grand bargain with the Premier will be higher profits in return for any investment in a cutting-edge CCS facility and increased production.
The stakes in these negotiations are huge for Alberta’s fiscal future.
Last year, oil sands producers paid $17-billion in royalties, accounting for 20 per cent of Alberta’s revenues, according to the Canadian Association of Petroleum Producers. It was the province’s single largest source of income, easily outstripping personal and corporate income taxes.
Oil sands royalties are expected to rise in the near future as 39 development projects move from what’s known as the “pre-payout phase,” where they pay royalties as low as 1 per cent of gross revenues, to the “post-payout phase,” with the province receiving 25 per cent to 40 per cent of net revenues.
There are 71 oil sands properties already paying the full freight in royalties to the province because they are post-payout projects.
By handing out $100 cheques ahead of her inevitable appearances at Calgary Stampede parties next week, Ms. Smith is telling energy executives the province doesn’t really need their money.
Oil sands leaders have already shown they are willing to up the ante with Alberta and federal politicians in hopes on winning a better deal on CCS investments and carbon pricing. In March, Canadian Natural paused a planned $8.25-billion expansion of its Jackpine oil sands mine, blaming uncertainty over government policies.
Ms. Smith isn’t the only leader feeling pressure from oil patch leaders. Prime Minister Mark Carney is being lobbied to increase or speed up deductions on capital spending to stimulate investment in all industries, including the energy sector’s potential commitment to CCS.
In Alberta, oil sands executives have a winning hand in renegotiating royalties ahead of an investment in Pathways.
If energy CEOs can defer or reduce the rents (for the use of property) they pay Alberta, as they already do on investments in existing oil sand projects, they cut the cost of production and boost profitability. Lower royalties will make carbon taxes and an expensive Pathways project easier to swallow.
Losing this showdown isn’t the worst outcome for the Premier. If Alberta ends up cutting royalties to win support for Pathways, Ms. Smith can spin funding for CCS as a policy of taking less money from the oil sands now to make more money in the future.
However, there is lesson in what happened after one of Ms. Smith’s predecessors started handing taxpayers their own money. Months after Mr. Klein mailed the Ralph bucks cheques, he was forced to step down after a 14-year run as premier.
Ms. Smith risks giving up a solid negotiating position with oil sands CEOs in a multibillion-dollar showdown for zero political gain.