Adam Waterous is co-head of equity and advisory for the Bank of Nova Scotia.
The recent election of the New Democratic Party majority government in Alberta has led some in the country's business community to declare that the province's days of leading the Canadian economy are over. They are overlooking the opportunity that a fresh perspective can bring.
While tax rates are definitely going up, the province continues to be Canada's economic engine by many important measures – gross domestic product (GDP) per capita, business starts, employment growth and fiscal position.
For perspective, Alberta had the highest GDP per capita of any province ($81,000 versus the national average of $52,000) in 2014. Alberta Finance recently forecast that GDP will grow to about $100,000 per person by 2020, almost double the average growth rate of the rest of Canada. By 2020, Alberta will represent 25 per cent of the GDP of the country, not including the economic spinoffs to the rest of Canada.
The business climate remains Canada's most dynamic. The province has grown the number of head offices of TSX-listed companies to about 200. Alberta's entrepreneurial culture has allowed the province to grow the number of small businesses by 13 per cent annually over the past decade, more than double the national average of 6 per cent. The 2013 Global Entrepreneurship Monitor ranks Alberta as Canada's most entrepreneurial province and one of the most entrepreneurial places in the world. Despite the drop in oil prices, Alberta's unemployment rate, at 5.8 per cent, is still ranked the third-lowest in the country.
The fact that the Canadian dollar moves in near lockstep with the price of oil is a clear signal of the importance of the energy business to all of Canada.
While Alberta is currently facing a forecasted fiscal deficit of $5-billion this year as a result of the sudden drop in oil prices, the province still has the strongest fiscal position of any province or state in North America. For perspective, if Alberta maintains its deficit at the current $5-billion, it will take 15 years to reach the same per capita debt as Ontario has today. This strong position has allowed Alberta to provide transfer payments to the rest of Canada as the federal government has collected more revenue from Alberta per capita than any other province over the past 10 years. According to Alberta Finance, in certain years since 2005, the province contributed $20-billion more (through taxes and other revenue) annually to the federal government than it received back through transfer payments or other investment in Alberta.
The exciting opportunity for Alberta's new NDP government is the chance to add a huge horsepower boost to Canada's economic engine by solving the problem of a single export market for Canadian oil and gas – the United States. Historically, the U.S. was a fabulous market for both oil and gas. Unfortunately, President Barack Obama's administration does not want our oil (hence the lack of approval of Keystone XL) and the U.S. market does not need our gas any more (as a result of success in developing its own shale gas reserves).
This lack of market access has led Alberta energy companies, over the past two years, to sell oil at a discount to U.S. benchmark prices by an average $21 (U.S.) a barrel for heavy oil and $8 a barrel for light oil, as well as sell gas for less than would be possible if it were sold into Asian markets.
Getting pipelines built to tidewater and eliminating these discounts could add more than $10-billion (Canadian) a year in oil revenue to Alberta producers. While most of the gas for liquefied natural gas projects would come from British Columbia reservoirs, Alberta's producers would benefit indirectly by B.C. gas taken out of Canada, lessening the oversupply in the Canadian market. If Canadian benchmark Alberta AECO natural gas prices were to increase only $1 a 1,000 cubic foot as a result of LNG offtake, it could add another $4-billion to Alberta energy companies. In total, lack of market access is costing the energy industry about $14-billion a year.
For perspective, government's increase in corporate taxes to 12 per cent from 10 per cent is forecast to increase total corporate taxes in Alberta by $800-million (including $500-million a year for the energy industry). If the Alberta government's royalty review results in the industry paying 10 per cent more in royalties (which would be seen by industry as a large increase), then total payments will increase between $300-million and $800-million a year, depending on underlying commodity prices. Clearly, the cost of this policy choice would be a near rounding error compared to what lack of market access is costing the industry.
Rather than worry about the Alberta New Democrats, the country's business and political leaders should be worrying about the lack of market access. In fact, the NDP may be more successful in solving the issue of market access than the previous Progressive Conservative government for two reasons. First, the NDP may be able to cultivate better relationships with the premiers of Ontario and Quebec – two key provinces in getting approvals for the Energy East Pipeline – because it strongly shares some of the same concerns around the need to carefully consider the environmental and social impacts of such projects. Second, the NDP may already have more credibility with environmental groups, which will be important in garnering support from other provincial governments.
At this week's 2015 summer meeting of Canada's premiers in Newfoundland, the Alberta government has a historic opportunity to take a leadership role in solidifying an agreement for energy market access. It's in the best interest of Alberta, the industry and all Canadians. Solving this challenge would dramatically boost the economic qualifications of the Alberta government and position Premier Rachel Notley in the driver's seat for the next election.