Oil slump puts diversification back in view for Alberta Premier Jim Prentice

Share

When Alberta Premier Jim Prentice took office in September, oil prices were falling slowly, but the new premier couldn't fathom how far prices would plunge or how massive a problem the decline would become.

The price of a barrel of oil was $92.86 on the day Mr. Prentice was sworn in. By Feb. 11, oil had fallen to $48.84, turning a slim provincial budget surplus into a deficit that could top $7.5-billion.

The fall in oil prices has handed the Premier one of the biggest challenges the province has faced in decades, and all of Canada is watching in anticipation.

Two weeks ago, Mr. Prentice's Finance Minister took one of the government's first concrete steps by announcing he would cut program spending by 9 per cent in a spring budget. That's part of the way to a short-term solution.

Longer term, Alberta's Premier is vowing to get the province off oil. The task of diversifying the energy-dependent economy and ending its perpetual cycles of boom and bust has frustrated every Alberta government in living memory. Whether the price of a barrel of oil is high or low, most conversations about Alberta's energy sector eventually turn to diversification and whether the province's greatest strength – its vast reserves of oil, natural gas and gooey bitumen – are also its curse.

"It's certainly a time, long overdue, for Alberta to diversify its economic base in earnest," Mr. Prentice told The Globe and Mail. "I intend to stick to that regardless of oil prices."

For now, Mr. Prentice says Alberta needs to diversify around the pillars of its existing economy: energy, agriculture and tourism.

The uncertainty over the future oil market is part of the reason he has promised to table a five-year spending plan in March that could move Alberta away from its dependence on resource revenue. Over the past decade, an average of 29 per cent of the provincial government's revenue has come from natural resources. When oil booms end, that revenue disappears, leaving large and unexpected deficits.

There is no talk of getting out of the oil sands. Mr. Prentice often repeats that oil production in northern Alberta will grow this year. However, he has indicated increasing interest in building around the province's energy sector.

While that could mean many things, a number of government panels and reports commissioned over the past four decades have preached the expansion of the province's petrochemical industry. The act of refining or transforming oil into a more expensive product would create jobs and more stable government revenue, and keep more oil profit in Alberta.

The head of the Alberta Federation of Labour, Gil McGowan, has been an outspoken opponent of the current system of digging up bitumen and stuffing it in pipelines – what he calls the "rip it and ship it approach."

Houston-based engineer David Netzer led a study in 2006 that concluded building Canada's largest refinery complex north of Edmonton would be economically feasible and beneficial. Mr. Netzer still stands by the idea. "I gave Alberta the plans nine years ago and nothing happened," he said. "I've started to look again at very preliminary numbers on building a refinery in Canada and that idea today looks better than ever."

With a large refining complex on the U.S. Gulf Coast, most oil companies have so far preferred to ship oil there rather than building new refineries in Canada. The refinery Mr. Netzer designed would have cost more than $10-billion. If oil companies are unwilling to build the complex, he says, government should look at the idea of entering the refining business.

With its fat cash piles during boom times, Alberta has long faced calls to invest in the economy to help wean the province off oil.

The government of Alberta's first Progressive-Conservative premier, Peter Lougheed, launched many industrial initiatives in the 1970s. While some of them funded many of the projects that helped create the oil sands, the government also engaged in failed interventionism when it purchased a B.C.-based airline, created a large energy company and expanded a provincewide bank.

"Governments don't tend to do very well at creating new sectors of the economy," said Andrew Leach, the Enbridge professor of energy policy at the University of Alberta. "Will we need to use our energy royalties to not only support government services, but a startup sector? That's the question here."

Prof. Leach warns that the government risks losing the so-called Alberta Advantage – low taxes – if it invests outside the resource sector.

While the province has seen the creation of a fledgling tech sector, Alberta remains a petro-economy. For those who expect to ride out the current dip in oil prices, the Paris-based International Energy Agency has warned that the world's oil market is undergoing a historic shift. "Rebalancing of the market does not equate to a return to the status quo ante," it said in mid-January.

Far away from the oil fields, Mr. Prentice is eyeing the campuses of Alberta's universities to do more with their research. In 2014, Alberta's universities and colleges received $2.27-billion in grants from the provincial government, funding the world's largest collection of energy and environmental researchers, according to the Premier.

"I'm quite passionate about this whole notion about our inability to commercialize our university research. I'm focused on that," he said. "We need to be successful at going from primary research to the building of companies and the commercialization and capitalization of companies that can take advantage of that research."

While the province boasts seven universities and more than a dozen colleges, the University of Alberta is at the heart of its education landscape. Watching oil prices drop, the university's president says the institution needs guidance and stable funding from the province to lead a move away from oil.

Indira Samarasekera, who will be stepping down as president this summer after a decade at the helm, says Alberta's past premiers have done a poor job of providing universities with a vision. "We've had 30-years of on-again, off-again investment from the provincial government, there has been no sustained vision and then they get in an economic crisis and they want us to turn on the tap. It doesn't happen just like that," Dr. Samarasekera said.

"I've enjoyed my time in Alberta," she said. "There's an edge here and potential for greatness. Alberta just needs to get its act together."

No matter what the province does long term, there remains the pressing need of today. In that regard, the government is looking at cutting billions from spending while raising enough new money to stay out of debt.

Over the first month of 2015, Mr. Prentice faced questions about whether his government would introduce a provincial sales tax. While the new revenue would help take the province off the resource roller-coaster, the Premier rejected the proposal after loud opposition. He's also ruled out corporate tax hikes or changes to resource royalties.

It has become cliché in Alberta to mention the bumper stickers that proliferated during a particularly difficult recession in the mid-1980s. The stickers promised that Albertans wouldn't squander the next economic rally. Many are hoping, as the province faces deep deficits and debt again, that the lesson has finally been learned.