The Alberta oil patch is in uncharted political territory after the NDP’s unprecedented rise to power.
The energy sector, the province’s dominant industry and one that’s been friendly with the Progressive Conservatives, will find itself dealing with a left-of-centre premier and ruling party that have been among its harshest critics on issues of royalties, taxes and environmental policy.
NDP Leader Rachel Notley, who ended nearly 44 years of Progressive Conservative rule in Alberta in an extraordinary majority win on Tuesday, has said her government would review the royalties rates paid by oil and gas companies, increase corporate taxes, strengthen environmental rules and halt the practice of spending taxpayer dollars to promote pipeline projects in Washington and elsewhere.
The stunning change comes at a time when oil prices are just starting to recover from lows that had sapped billions of dollars of government energy revenues as the sector fell into a downturn.
The NDP’s stated policies are “directionally negative” for the industry, as they point to higher costs, said Samir Kayande, analyst at ITG Investment Research in Calgary. For instance, a royalty review does not suggest that rates will be cut, he said.
“I think everyone needs to take a deep breath here, though, because governments that don’t grow the economy don’t get re-elected,” Mr. Kayande said. “I think it’s in the NDP’s interest to have a strong economy.”
The party has been much more closely associated with the unions that represent energy workers than the managers of oil producers. In fact, it had been more than two decades since any NDP politician represented a Calgary riding. That all changed on Tuesday.
Another focus, according to Ms. Notley’s platform, will be bolstering the province’s reputation on climate change as previous governments have resisted establishing tougher targets for carbon reduction from the oil sands and other industries. Some energy experts have said a better record on climate could help the industry further its aims to improve access to markets.
In the oil patch, royalties are the top hot-button issue. A past experiment with tinkering with the fiscal regime for collecting rent from resources, under former PC premier Ed Stelmach, resulted in a near-revolt by the energy sector, which threatened to pull investments. One major problem with the initiative was that it was implemented just as oil and natural gas prices fell amid the global financial crisis.
The PC government of the day, which had expected billions of dollars in additional royalty income from the changes, eventually backtracked. It is not yet known how an NDP government will respond to energy executives, who have long had a close relationship with the PCs and have influenced public policy.
Ms. Notley’s NDP called for a new review of the highly complex royalty system to determine whether Albertans are getting acceptable return on their resources. She did not, however, promise to change them. The Tories and Wildrose had promised no changes to the royalty structure.
Another change to royalties or removal of royalty credits that small companies take advantage of to drill wells could lead investors, particularly foreign ones, to divert their capital to other energy regions, cautioned Chris Cox, analyst at Raymond James. “That’s one concern, for sure,” Mr. Cox said.
Some energy analysts have predicted that oil and gas shares would fall if the NDP formed government and that could put pressure on the broader TSX market.
Early in the campaign, the Canadian Association of Petroleum Producers cautioned against changing the royalty rates with oil prices at the start of a fragile recovery from depths near $40 (U.S.) a barrel. It said industry investment is expected to fall to $33-billion (Canadian) this year from $69-billion last year, and layoffs have already climbed into the thousands.
“While some groups continue to suggest Alberta should increase the royalties and corporate taxes paid by the industry, adding more costs of any kind would be irresponsible and would put more jobs at risk,” CAPP president Tim McMillan wrote.
The NDP has said it would hike the corporate tax rate to 12 per cent from 10 per cent. The New Democrats said companies should pay more to make sure health care and education are not underfunded.
Ms. Notley has also said she would stop government promotion of the Northern Gateway and Keystone XL pipelines, in sharp contrast to Mr. Prentice’s plans to keep spending tax dollars to push projects aimed at adding new markets for Alberta’s oil, among the highest-cost deposits globally.Report Typo/Error