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The Alberta Disadvantage

Experts cite pipeline obstruction, regulatory uncertainty, taxation behind unfriendly environment for investors in province’s oilpatch

TransCanada’s 4,250-kilometre Keystone pipeline system transports approximately 20 per cent of western Canadian crude oil exports to refineries in the U.S. Midwest and Gulf Coast. Photo courtesy of TransCanada Corp.

The road to success is always under construction. For Alberta’s oil and gas sector, however, it’s turning into a highway to hell for investors, who experts say are ready to give up on in light of pipeline obstruction, increased taxation and regulatory uncertainty.

“No matter how you describe it or which side you take, it creates a lack of confidence in our environment. It’s destabilizing,” says Tim Pickering, president and CIO with Auspice Capital Advisors Ltd.There’s absolutely no doubt it is hurting interest in investment in the resource sector.”

Currently, all eyes are on Kinder Morgan’s Trans Mountain pipeline expansion from Alberta to B.C. Earlier this spring, Kinder Morgan chief executive Steven Kean said the company would scrap a $7.4-billion project should it face additional roadblocks.

The federal government has already approved the expansion, which would nearly triple capacity to 890,000 barrels a day. Yet since then, it has been caught up in legal challenges and politics between Alberta and British Columbia.

“If Kinder Morgan actually walks away from the Trans Mountain expansion, it will be such a black mark on Canada,” says Pickering, noting the project is being closely monitored by investors because it would represent the third major infrastructure project to be cancelled in the past 18 months – the other two being TransCanada Corp.’s Energy East and Enbridge Inc.’s Northern Gateway proposals.

Martin Pelletier, portfolio manager with TriVest Wealth Counsel Ltd., says Kean’s comments reflect a boiling point for industry leaders who are fed up over their inability to get shovels in the ground – whether that be due to politics, environmental regulations or costs such as increased corporate income taxes and the carbon tax.

“Industry should have been drawing lines years ago instead of kicking the can down the road. I don’t think we can kick that can any further,” says Pelletier.

Ali Hounsell, spokesperson for the Trans Mountain expansion project, says due to ongoing uncertainty, Kinder Morgan will not commit further shareholder resources to the project.

“We cannot resolve the differences between governments that have continued,” says Hounsell. “We remain clear and steadfast in our two objectives: the ability to construct in B.C. and to protect our shareholders.”

According to the Canadian Association of Petroleum Producers (CAPP), world capital investment in the oil and natural gas sector increased globally in 2017, but was down in Canada. Total capital spending on Canadian oil and natural gas was $45 billion in 2017, down 19 per cent from 2016 and 46 per cent from 2014.

In comparison, capital spending on oil and natural gas in the United States last year increased by 38 per cent to $120 billion.

In a report titled A Global Vision for Canadian Oil and Natural Gas, CAPP attributed rising government costs, the burden of inefficient regulations and the lack of infrastructure to move Canadian energy to growing markets as factors in undermining investor confidence in Canada.

“We’re being confronted with a competitiveness challenge that is threatening investors’ confidence with the sector as a whole in Canada,” says Ben Brunnen, vice-president of oilsands and fiscal policy with CAPP. “It begins with the market access issue, which has been an emerging and continuing challenge. That’s tempering investment expectations for both oil and natural gas.”

Brunnen adds the erosion of investor confidence in Canada overall is being augmented by a cumbersome regulatory process. He notes there are currently 40-50 policy and regulatory initiatives across Canada that have the potential to, or are already, making the country less competitive.

“Take a look at approval timelines in Alberta and B.C., and compare them with other jurisdictions that are actively trying to court investment,” he says. “In Canada, the message is, ‘We may take your money if….’”

Pickering notes investors are instead turning to jurisdictions such as Texas, Oklahoma and North Dakota – all of which recently ranked well ahead of Alberta as attractive places to invest in the Fraser Institute’s 2017 Global Petroleum Survey.

“They are looking at the Permian (Basin) and different plays anywhere outside of Canada,” says Pickering. “We’ve seen companies leave oilsands. We’ve seen companies leave pipelines. They’ve had no problem saying it makes far more sense to look at other jurisdictions.

“You only have to look as far as Shell, which has grown frustrated and slowly pulled away from Western Canada. We don’t have many opportunities left.”

Earlier this year, Shell launched its multibillion-dollar Appomattox oil platform in the Gulf of Mexico, representing the company’s first major deep-water project since oil prices crashed in late 2014. And yet over the past 18 months, the company has sold most of its stake in Alberta’s oilsands, retaining just a 10 per cent stake in its original mines.

Despite a surge in domestic supply, Canada continues to import oil. By last count, Canada produced about 3.8 million barrels a day, exported about 2.7 million and kept about 1.1 million for domestic refining. But we also imported between 700,000 and 800,000 barrels daily.

In 2017 alone, Canada managed to import crude oil from the U.S., Saudi Arabia, Azerbaijan, Norway, Nigeria, the United Kingdom, Angola, Russia, Colombia, Kazakhstan, Oman, Ghana, Ivory Coast and Trinidad and Tobago.

Pickering is quick to point out that, without a national pipeline, it’s actually more economical for East Coast refineries to take in oil from tankers than from Alberta.

“It costs a few dollars per barrel to ship by tanker, compared with $7 to $15 to the Texas Gulf,” he says. “We have no one to blame but ourselves. We lack the infrastructure and government support. Energy East is a perfect example where we had a chance to make a significant change nationally in that equation, but it was killed for political reasons.”

The fallout from infrastructure bottlenecks is also being played out in commodity pricing. The gap between Western Canadian Select, a benchmark price for most Canadian producers, and West Texas Intermediate has doubled to $28/bbl since November, according to the Alberta government.

“Most people believe the price of Canadian oil – the heavy sour we produce – is discounted because of the grade. The reality is that is not the case,” says Pickering. “We have the cheapest heavy sour in the world, and it’s due to transportation costs out of Alberta – simple as that.

“We do not produce a barrel of oil that the world doesn’t want. They want it. They need it. We’ve got it. We just don’t have a transportation outlet to the coast and we don’t have enough capacity to send it to the U.S.”

Hounsell adds Canadian producers are not getting a fair global price because they only have access to one buyer – the United States Midwest – and that enhanced access to growing Pacific Rim markets is essential in providing a critical alternative market.

“For much of the last decade, Canada has been selling into the United States at a discount to the world price for similar oil products,” says Hounsell.

“The simple truth is Canada’s oil will fetch a better price if we give ourselves the option of shipping more of it via Trans Mountain’s Pacific tidewater terminal in Burrard Inlet. Canada will earn more on every barrel of oil that’s piped west compared to those sold to our existing customers in the United States Midwest market, a differential that exists regardless of the price of oil.”

CAPP, meanwhile, is anticipating a year-over-year decline in oil and gas investment in Canada for the rest of 2018. In oilsands, that will represent the fourth consecutive annual decrease.

“We haven’t seen that in the history of the oilsands,” says Brunnen. “Now compare that with the U.S., where we expect to see a 15-20 per cent increase in investment. Investors are definitely seeing the U.S. as the place to prioritize and generate returns – and that draws capital away from Canada.”