Home June 2017 Alberta’s Competiveness in the Canadian Energy Sector

Alberta’s Competiveness in the Canadian Energy Sector

What happened to the Alberta advantage?

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Christina Lake oilsands facility. Photo courtesy of Cenovus.

Alberta’s GDP growth is expected to rise 2.2 per cent after a 2.7 per cent decline in 2016, even though the petroleum industry still faces hurdles amid production cuts and a 20 per cent increase in corporate income tax.

This change in tax policy has created challenges in competiveness for the energy sector as recent corporations have bailed out of the oilsands prompting uncertainty about ‘what has happened to the Alberta advantage?’”

Not long ago, Alberta had the lowest personal and corporate income tax rates in North America over other jurisdictions. This was deemed Alberta’s “tax advantage,” but as of late the new government tax policies have impacted this benefit.

According to a recent Fraser Institute report, the historically low personal and corporate income taxes in Alberta have increased. Unfortunately, Alberta has dropped from the 14th best place in the world for oil and gas companies to invest in 2014, to 43rd place in 2016.

“This has had a great substantial effect on where we rank in terms of tax competiveness,” says Fraser Institute’s senior policy analyst, Steve Lafleur.

Changes to both personal and business tax policies in Alberta have impacted the province’s “tax advantage” compared to other provinces in Canada. Specifically, the Alberta government’s overspending and corporate tax increase from 10 to 12 per cent have affected the province’s competiveness.

“We use to have the lowest corporate tax rates in Canada, but now Saskatchewan is just about to undercut our advantage with this since B.C is already lower. So, we are also not uniquely low in both personal and corporate taxes which is a big departure,” explains Lafleur.

During the years that Alberta had lower taxes, there was high employment, economic progress and GDP growth, but “as the government had to contend with large spending increases over the years, it decided to take our tax advantage for granted, and I think it has done significant harm to the province’s competitiveness,” adds Lafleur.

He suggests corporate taxes are one of the most harmful taxes for investment. “Ultimately, as much as we like to think that corporate taxes just end up hitting lucky shareholders – in reality they hit the entire economy. A large portion of corporate tax increases are passed off to workers in the terms of lower wages, reduced investments and the options that investors have elsewhere around the world.”

One major concern is businesses will move away because of raised corporate taxes in Alberta. “If you’re going to increase taxes, there are other places for people to invest since it’s not that difficult to decide to invest in Saskatchewan instead of Alberta – especially if you are a global oil company,” adds Lafleur.

Hence, the recent exiting of Royal Dutch Shell, Statoil ASA, Koch Industries and ConocoPhillips from the oilsands has created fear that corporations are leaving for better global economic opportunities.

“When you think about an energy company – and how they are competitive – there are a few things companies will look at; one is the resource itself, and how expensive it is to extract that resource? In Alberta, we are a higher-cost jurisdiction,” states Todd Hirsch, chief economist of ATB Financial.

Overall, the petroleum industry will need to capitalize on new cost efficiencies and applications in technology to become more competitive on a global scale. Clean energy advancements will force corporations to remain productive and competitive in a low-carbon future.

“The challenge is going to be for the industry to continually find ways to reduce costs,” explains Hirsch. “I am not expecting the activity in the energy sector to go back to where it was three years ago because I am not expecting the prices to go back to $80 to $100 levels for another two to five years.”

Instead major players like Canadian Natural Resources Limited and Cenovus Energy have not backed out of the oilsands. Cenovus’ acquisition of the majority of ConocoPhillips’ oilsands and natural gas assets is transformational since the $17.7-billion deal will firmly establish Cenovus as one of Canada’s largest thermal oilsands and gas producers.

“We believe it will significantly enhance the scale and flexibility of our company and give us a greater competitive edge (because) the acquisition will effectively double our production and reserves base at closing,” says Cenovus’ spokesperson, Sonja Franklin.

This transaction will increase Cenovus’ 2018 forecast adjusted funds flow by 18 per cent after taking into account the impact of planned asset sales. There is a long-term upside potential. “Our 100 per cent-owned oilsands assets and our new Deep Basin conventional assets are expected to give us a decade of development opportunities,” explains Franklin.

Although investment in the energy sector will not rise significantly this year, a positive development is the approved Kinder Morgan’s Trans Mountain pipeline and Enbridge’s Line 3 project. If constructed, Alberta’s export capacity will increase to nearly a million barrels of oil per day.

This is good news for Alberta’s energy sector, but there is uncertainty about how Canada’s environmental and carbon tax policies will affect the sector’s competitiveness as the new administration in the United States moves away from this direction.

“Now we are hearing President Trump say he’s going to be eliminating some of the environmental regulations in order to improve America’s competitiveness (which) might affect Canada in making us less competitive,” states Hirsch.

Nonetheless, Cenovus Energy supports the Alberta Climate Leadership Plan as it tries to become more efficient with the reduction of its inputs while lowering emissions.

“A broad-based (and) economy-wide price on carbon is one of the fairest and best ways to stimulate innovation to reduce emissions along the entire energy value chain from production to the end use,” describes Franklin.

Though carbon pricing and environmental policies are pushing for changes in the oil and gas sector, a move towards new renewable energy services and technology will create changes in the industry that will influence competiveness in Alberta.

“With the carbon policy, governments must balance the desire to reduce environmental impact with the need to ensure their jurisdictions remain competitive and continue to attract capital. It will be especially important for Canada to ensure the U.S. does not gain trade advantages due to policies implemented here that make our industry less competitive,” says Franklin.

Though the oil and gas sector faces a wave of changes, Premier Notley is trying to promote Alberta’s energy sector as a clean and green energy leader. With this in mind, the Notley government plans to hike the current carbon tax ($20-a-tonne levy from this January) to $30 next year.

“In the short term there might be some drawbacks, but in the long run I believe it will all work its way out because the companies that are making long-term investments will see past these short-term regulatory changes,” says Hirsch.

Alberta’s energy sector needs to compete on cost effectiveness with other global sources to remain sustainable in a changing industry. At Cenovus, there have been significant steps over the past several years to ensure the company remains competitive with these measures.

Franklin explains, “We reduced our oilsands sustaining capital costs by 33 per cent in 2016 compared with 2015, and we’re down 50 per cent from 2014. Also, we reduced our greenhouse gas emissions intensity from our oilsands projects by a third since 2004 (with) a set target of reducing our upstream GHG intensity by another third by 2026 from January 2016 levels.”

Though Cenovus has demonstrated reformation is possible, the fact still remains there are indications of fluctuations in the energy sector as Canada advances in climate change and environmental credibility. The only question is “How will this ultimately affect the future competitiveness of Alberta’s energy sector?”

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