Konrad Yakabuski begins a new weekly column for Report on Business. He will appear on Fridays.
A few weeks ago, Rachel Notley stood in front of an oil upgrader in Edmonton and accused the governing Progressive Conservatives of squandering Alberta’s wealth “with a fire sale of our resources.” The PCs, she said, were more interested in creating jobs in Texas than at home.
Ms. Notley, leader of Alberta New Democrats and now premier-designate, promised that the NDP would introduce a new royalty regime that would “reward value-added processing” of Alberta’s oil within the province, producing thousands of new jobs and generating hundreds of millions of dollars in new taxes.
What seemed then like boilerplate NDP talk denouncing the “rip and ship” mentality of Alberta’s oil industry has taken on real currency with Ms. Notley’s stunning electoral victory. The vow to create a new Resource Owners’ Rights Commission to review Alberta’s royalty structure, with an emphasis on adding value, is sending shudders down the spines of oil executives but has Alberta’s top union exec “walking on air.”
It also constitutes Ms. Notley’s biggest challenge. She must balance the expectations of her supporters, who feel the province has not been extracting its fair share from its resources, with the harsh reality of capital mobility and already weaker investment in the oil patch.
How Ms. Notley handles this single file could well set the tone for her entire mandate.
Ask former Ontario premier Bob Rae. In 1990, he, too, came to power unexpectedly with an activist NDP caucus and a long list of progressive promises. None figured as prominently as the introduction of public auto insurance.
But faced with an onslaught of opposition from the business community, and a massive budget deficit, Mr. Rae abandoned the promise by his government’s first anniversary.
“This is a day of reckoning,” Mr. Rae said as he threw in the towel on insurance. “There’s only so much you can do. We can’t afford to govern with blinkers on.”
Mr. Rae’s base and caucus never forgave him for that flip-flop. His government never recovered the unity of purpose that might have allowed it to endure tough recessionary times. It went downhill from there, until the party’s defeat in the 1995 election.
Ms. Notley has put herself in a similar situation by vowing to adopt a tougher royalty regime, which is a sine qua non for her base but anathema to business.
“I will get back to you on that,” was all she allowed Wednesday when pressed by reporters on her timing. But the NDP platform insists the party will move fast: “We are losing more by not acting now,” it says.
The Alberta Federation of Labour, which played a big part in the NDP victory and whose president Gil McGowan claimed to be “walking on air” in its wake, is a leading advocate of this plan. A report it commissioned last fall argues the economic case for more oil upgrading and refining in Alberta, although it allows that economics are much iffier at $50 (U.S.) oil. Still, Albertans “should think like owners of the oil sands” and invest for the long-term, Mr. McGowan said then.
Former NDP leader Brian Mason, who is expected to assume a major role in Ms. Notley’s cabinet, has said upgrading or refining should be a condition of oil leases. Alternatively, a royalty regime could be adopted that penalizes oil companies that fail to process resources within the province.
Economics aside, the oil industry’s rip-and-ship ways rub most Albertans the wrong way. Even former PC premier Ed Stelmach once likened exporting raw bitumen to “scraping off the top soil, selling it and then passing the farm on to the next generation.” Without new upgraders, the proportion of bitumen processed in the province is set to fall to about one-third by 2023, from about half now and 70 per cent a decade ago.
Still, most independent analysts suggest that the economic case is weak for in-province upgrading (which involves turning raw bitumen into refinery-ready light crude) or refining (which would further transform crude into end products, such as diesel fuel).
There is already a glut of refining capacity in North America and private investors would not undertake the high capital costs of upgrading without hefty subsidies.
Critics point to the North West Upgrading refinery project now under construction near Edmonton. Its capital costs have ballooned to $8.5-billion (Canadian) and its detractors say taxpayers will ultimately shoulder its losses. That’s because North West will process bitumen supplied by the Alberta government under its Bitumen Royalty-in-Kind (BRIK) program and the government will be on the hook to sell the diesel end product.
The government will pay North West a toll amounting to $26-billion over 30 years to process the bitumen – a whopping $63 a barrel, according to a recent study by former PC cabinet minister Ted Morton, who is a harsh skeptic of the “refine it where you mine it” argument that led to the project’s approval on Mr. Stelmach’s watch. (Mr. Morton says he opposed the upgrader in cabinet.)
Deciding how to manage Alberta’s resources is now Ms. Notley’s job. Her premiership is riding on it.Report Typo/Error