How Do You Like Me Now?

Rachel Not­ley has done more to change the en­ergy sec­tor than any Pre­mier in a decade. And she’s not done yet.

Alberta Oil - - FRONT PAGE - By Nick Wil­son

W hen Rachel Not­ley led the New Demo­cratic Party to a shock elec­tion vic­tory in 2015, it sent a shud­der down the spine of many in the oil in­dus­try who saw the new gov­ern­ment as in­dif­fer­ent to pipe­lines, hun­gry for taxes and roy­al­ties, and sus­pi­ciously close with en­vi­ron­men­tal­ists. Yet the NDP also promised eco­nomic di­ver­si­fi­ca­tion and “value-added” job cre­ation through ex­panded up­grad­ing, re­fin­ing and petro­chem­i­cal ca­pac­ity.

Nearly two years on, the Not­ley doc­trine on en­ergy has taken shape: a com­pre­hen­sive, rapid over­haul of the en­tire sec­tor, in­clud­ing the highly con­tro­ver­sial car­bon tax. It’s an in­te­grated strat­egy cen­tered on car­bon pric­ing and the use of oil and gas roy­al­ties. The roy­al­ties sup­port petro­chem­i­cal in­vest­ment, boost propane de­mand, and may even­tu­ally sup­port re­fin­ing. Along with some car­bon cash, roy­al­ties also help oil firms in­no­vate to cut costs and emis­sions. An­other chunk of car­bon pric­ing is be­ing used to cre­ate more de­mand for nat­u­ral gas as coal plants close. On the radar are tar­get­ing meth­ane emis­sions and sup­port­ing small firms to de­com­mis­sion dis­used oil and gas wells.

If that’s the plan, then will it work? The op­po­si­tion ac­cuses the gov­ern­ment of hurt­ing the in­dus­try with taxes and reg­u­la­tions while sub­si­diz­ing boon­dog­gles.

First came the roy­al­ties re­view. The NDP’s pre-elec­tion call for a “fair share” of roy­al­ties for the prov­ince was taken by many as a com­ing squeeze on com­pa­nies that were al­ready plung­ing into a re­ces­sion. It also cre­ated un­cer­tainty—a word loathed by in­vestors. In the end, the re­view got broad ap­proval by the in­dus­try. The main change was to in­cent in­no­va­tion by re­ward­ing ef­fi­ciency, fa­vor­ing com­pa­nies that pro­duce be­low the year’s av­er­age drilling and com­ple­tion cost.

Not­ley says the gov­ern­ment worked closely with in­dus­try lead­ers to de­sign a frame­work that makes Al­berta more com­pet­i­tive and pro­vides bet­ter re­turns for ev­ery­one—in­dus­try, in­vestors and all Al­ber­tans. She points to a Univer­sity of Cal­gary anal­y­sis that de­ter­mined the re­forms have made Al­berta more com­pet­i­tive than Saskatchewan, British Columbia and even Texas. “We an­nounced it a year ago,” Not­ley says. “It only [came] into ef­fect Jan­uary 1, but un­der the early ac­cess plan we had 145 new wells ap­proved, each cre­at­ing 135 jobs—that was good news,” she says, cit­ing fig­ures from the Cana­dian As­so­ci­a­tion of Petroleum Pro­duc­ers.

In De­cem­ber—later than ex­pected—the gov­ern­ment an­nounced that two new petro­chem­i­cal projects in Al­berta’s In­dus­trial Heart­land (AIH) qual­ify for up to $500 mil­lion in roy­alty cred­its un­der the Petro­chem­i­cals Di­ver­sity Pro­gram (PDP), which aims to trig­ger $5 bil­lion-plus in in­vest­ment. Petro­chem­i­cal pro­duc­ers—which don’t pay roy­al­ties—can now sell their roy­alty cred­its to oil and gas pro­duc­ers.

Cal­gary-based Pem­bina Pipe­line, in a joint ven­ture with Kuwait’s Petro­chem­i­cal In­dus­tries Com­pany, aims to build a 22,000 b/d propane con­ver­sion plant, pro­duc­ing polypropy­lene. It will cost about $4 bil­lion and has been se­lected to re­ceive up to $300 mil­lion in roy­alty cred­its. Cal­gary-based In­ter Pipe­line has qual­i­fied for up to $200 mil­lion in roy­alty cred­its for its sim­i­lar-sized polypropy­lene plant. Both could start op­er­at­ing by 2021, but nei­ther firm has yet taken a fi­nal in­vest­ment de­ci­sion.

A sim­i­lar petro­chem­i­cal pol­icy, in­tro­duced by Peter Lougheed’s gov­ern­ment in the 1970s, made Al­berta Canada’s top pro­ducer of petro­chem­i­cals with four eth­yl­ene plants, em­ploy­ing 7,700 peo­ple. “Lougheed was very in­ter­ested in the no­tion of up­grad­ing and adding value in a way that helped Al­ber­tans,” Not­ley says. “In that sense we share that view. He played a very in­tel­li­gent lead­er­ship role with re­spect to the in­dus­try and was very thought­ful about it.”

The value in “value-added” in­cludes down­stream cor­po­rate taxes that more than make up for the roy­al­ties sub­sidy. The gov­ern­ment ap­plies a sim­i­lar ar­gu­ment to bi­tu­men up­graders—the poor eco­nom­ics of which have led to the can­cel­la­tion of a dozen planned new builds and ex­pan­sions.

But a pro­gram sim­i­lar to the petro­chem­i­cal in­cen­tives could help get them built, Not­ley says. “The PDP is one model—us­ing roy­al­ties will hope­fully stim­u­late more busi­ness,” she says. The Eco­nomic Di­ver­si­fi­ca­tion Ad­vi­sory Coun­cil’s (EDAC) pro­posal, ex­pected in the spring, will spell out the gov­ern­ment’s op­tions. N

ot­ley’s zeal for rapid change is

re­flected in how she de­scribes the EDAC’s work­load. “We es­tab­lished, not too long ago ac­tu­ally, EDAC, but there are only so many hours in the day, so I’ve got them work­ing this fall.”

One prob­lem, how­ever, is that up­graders and re­fin­ers don’t only add value, they also add emis­sions—big time. Al­berta’s Cli­mate Lead­er­ship Plan has an ad­di­tional 10 mega­ton al­lowance for re­fin­ing on top of the 100 mega­ton oil sands emis­sions limit. Shell’s Scot­ford up­grader and the North West Red­wa­ter Stur­geon com­plex both cap­ture car­bon diox­ide. Stur­geon sends it along the Al­berta Car­bon Trunk Line for in­jec­tion into oil fields. The gov­ern­ment hasn’t in­cluded car­bon cap­ture and stor­age (CCS) in its en­ergy plan, but the es­ca­lat­ing car­bon levy on big emit­ters will in­cent CCS tech­nol­ogy in fu­ture plants.

The car­bon tax on con­sumers is Not­ley’s big­gest

gam­bit—and cen­tral to the Cli­mate Lead­er­ship Plan. Two thirds of low- and mid­dle-in­come house­holds will get cash back, and small busi­nesses will get a cor­po­rate tax cut from three per­cent to two per­cent as an off­set. But the car­bon tax cre­ates un­cer­tainty for busi­nesses—un­til the tax works its way through the econ­omy, no one can pre­dict how much of it will pass on to cus­tomers.

On Jan­uary 1, a $20-per-ton levy was put on heat­ing and trans­porta­tion fu­els, and the levy on big in­dus­trial emit­ters, rose to $30 per ton. Un­der an Ot­tawa-im­posed plan, those levies rise to $50 per ton by 2022. Al­berta ex­pects to col­lect $9.6 bil­lion over the next five years.

Not­ley pulled off a ma­jor pub­lic re­la­tions coup when the heads of CNRL, Sun­cor, Cen­ovus and Shell stood along­side her as she an­nounced her car­bon pric­ing plan in 2015—her En­vi­ron­ment Min­is­ter Shan­non Phillips has a photo of this sem­i­nal mo­ment proudly hang­ing on her of­fice wall. “The pro­gres­sive oil pro­duc­ers that re­ally care about the en­vi­ron­ment were say­ing, ‘For the love of God give us some rules,’” Not­ley says.

Many small pro­duc­ers, how­ever, are bit­terly op­posed to the plan and fear that car­bon pric­ing will drive in­vest­ment to the U.S.

Pre­mier Not­ley ar­gues that Al­berta con­tin­ues to have, by far, the low­est taxes in Canada. It con­tin­ues to hold a $7.5 bil­lion tax ad­van­tage over the next low­est-taxed prov­ince in Canada, Saskatchewan. Al­berta has no sales tax, no pay­roll tax and no health pre­mium, she points out. As for talk of car­bon poli­cies driv­ing away in­vest­ment—a sim­i­lar pre­dic­tion was made when the NDP were first elected—Not­ley says re­cent in­vest­ment de­ci­sions from oil com­pa­nies are telling a different story, point­ing at re­cent de­ci­sions by CNRL to restart the $1.3 bil­lion Kirby North oil sands project, and Koch and Pen­growth ap­ply­ing to start a new SAGD project. Koch, how­ever, has also can­celled an­other oil sands project and Sta­toil has quit al­to­gether.

Not­ley says that these poli­cies, in­clud­ing the 100 mega­ton cap on emis­sions from the oil sands, “got us the pipe­lines,” re­fer­ring to Prime Min­is­ter Justin Trudeau’s de­ci­sion to green­light two key oil pipe­lines last year. “By putting the cap in place it al­lows us to move the con­ver­sa­tion about pipe­lines, so it’s not about emis­sions it’s about get­ting bet­ter re­sults,” Not­ley says. “Pipe­lines help the pro­duc­ers.”

Ma­jor oil sands play­ers agree that the car­bon cap cuts off at the knees the ar­gu­ment that build­ing pipe­lines will al­low un­lim­ited oil sands growth with ac­com­pa­ny­ing emis­sions. The mech­a­nism, how­ever, has yet to be worked out. Will the cap trig­ger a race for projects to launch be­fore it is reached, or will it in­cent pro­duc­ers to re­duce their car­bon out­put?

The Cli­mate Lead­er­ship Plan will cut meth­ane emis­sions by 45 per­cent from 2014 lev­els by 2025. This pol­icy was cut-and­pasted by Washington, Mex­ico City and Ot­tawa, es­tab­lish­ing Al­berta as a car­bon thought leader. How­ever, crit­ics say if U.S. Pres­i­dent Don­ald Trump welches on the deal, it will tilt the play­ing field away from Canada.

Not­ley proudly points out that her gov­ern­ment and Trudeau’s have achieved some­thing that the pre­vi­ous gov­ern­ments didn’t—a re­al­is­tic chance of get­ting crude to tide­wa­ter. It’s a strange turn­around for a Pre­mier who came to of­fice say­ing she wouldn’t ac­tively pro­mote two ma­jor pipe­lines—Key­stone XL to the U.S. and North­ern Gate­way to the Pa­cific.

Fast for­ward one year and, at a three-day moun­tain re­treat in Kananaskis, Al­berta, Not­ley was bang­ing home to Trudeau the im­por­tance of pipe­lines to Canada’s econ­omy. Three months later he ap­proved the Trans Moun­tain Ex­pan­sion, tripling the 300,000 b/d pipe­line’s ca­pac­ity, and En­bridge’s re­build­ing its Line 3 pipe­line into the U.S, cit­ing Al­berta’s car­bon plan as a ma­jor fac­tor in his ap­proval.

Not­ley says she is open to hear­ing from in­dus­try how to res­ur­rect the North­ern Gate­way on the chance it will be re­vived un­der a fu­ture fed­eral gov­ern­ment. “Gen­er­ally speak­ing, it’s al­ways been a ques­tion of li­cense, given the op­po­si­tion that it faced,” Not­ley says. “That be­ing said, I was of the view that we still need to get our prod­uct to tide­wa­ter. I think right now with the tanker ban it’s not hope­ful.” But, she adds, “you never know for sure.”

“Lougheed was very in­ter­ested in the no­tion of up­grad­ing and adding value in a way that helped Al­ber­tans. In that sense we share that view.”

A t the pre­miers’ meet­ing in de­cem­ber, ev­ery­one un­der­stood the eco­nomic im­por­tance of oil, Not­ley says. “We want to de­velop move our en­ergy, in­tel­li­gently, sus­tain­ably, re­spon­si­bly. It’s not easy to get ev­ery­body on-side with that. When they see you [go­ing green] it gets eas­ier,” she says. In driv­ing home to Trudeau the im­por­tance of oil rev­enue, Not­ley had an un­likely and un­wel­come ally: the Fort McMur­ray wild­fire. She says it also re­in­forced her un­der­stand­ing of the in­dus­try’s so­cial com­mit­ment. “I was with the fire ser­vice get­ting briefed on how quickly that fire moved— look­ing at how we’d get peo­ple out of there. Peo­ple were in camps and those camps could have been even more vul­ner­a­ble. So we’re talk­ing to the fed­eral gov­ern­ment about how we can get a Her­cules [he­li­copter] and evac­u­ate them and then mean­while oil com­pa­nies hire a fleet of WestJet [planes]. And they lit­er­ally evac­u­ated some­thing like 20,000 peo­ple in 24 hours—it was ab­so­lutely great.”

The or­phaned oil well cri­sis has been one of the few things grow­ing dur­ing the re­ces­sion. The Petroleum Ser­vices As­so­ci­a­tion of Canada has asked for $500 mil­lion from the fed­eral and provin­cial gov­ern­ments to aban­don some of the prov­ince’s sus­pended oil and gas wells. Not­ley says of her talks with the feds on de­com­mis­sion­ing them: “We are work­ing with the in­dus­try and are hop­ing that we will have some rec­om­men­da­tions com­ing [by April]. We are work­ing with the fed­eral gov­ern­ment to help small con­trac­tors.” At the same time she stresses the im­por­tance of the prin­ci­ple that “the pol­luter pays.”

Per­haps Not­ley’s bold­est en­ergy am­bi­tion is for Al­berta to be­come Canada’s re­new­able en­ergy cap­i­tal. “Ba­si­cally, it’s sim­ple,” Not­ley says. “Ob­vi­ously much of [the money] will be in­vested by com­pa­nies. Ten bil­lion will be the over­all in­vest­ment by in­dus­try be­tween now and 2030. We’ve bud­geted for $3.5 bil­lion from the gov­ern­ment—that’s a rough es­ti­mate—all of that will be paid for the hy­dro­car­bon levy that we put in place.” A lot de­pends on the bids that re­new­ables firms ten­der.

“Re­new­ables in­vestors were get­ting ready to leave Canada, but they now say, ‘You know what, the mar­ket in Al­berta looks re­ally good. That’s some­thing we can in­vest in,’” Not­ley says. She’s adamant that her legacy would hold even un­der a different fu­ture gov­ern­ment, as the in­vest­ment amount and ben­e­fits would be too great to lose. “The fact of the mat­ter is re­new­ables are part and par­cel of the over­all trend—it adds sig­nif­i­cant value.”

Not­ley aims to end all coal-fired power emis­sions—leav­ing clo­sure or un­sub­si­dized CCS as an op­tion open to plant op­er­a­tors—by 2030 at a cost of $1.1 bil­lion, which will also come from the car­bon levy on heavy emit­ters. Util­ity com­pa­nies such as TransAlta sup­port the plan. The de­tails, how­ever, need work­ing out. Such a plan is tough to achieve in a dereg­u­lated mar­ket—and wind and so­lar are more ex­pen­sive than coal—so it may need rev­enue guar­an­tees to sweeten the deal. The re­sult will be 30 per­cent of elec­tric­ity sup­ply com­ing from re­new­ables by 2030, through an ad­di­tional 5,000 megawatts of power. The prov­ince’s fuel sup­ply will change from about 50 per­cent coal to 70 per­cent nat­u­ral gas, cre­at­ing de­mand for an ex­tra 1.5 bil­lion cu­bic feet of gas per day. “We’re still work­ing on it,” Not­ley says. “It’s not com­pleted yet.”

One of the rea­sons for the dras­tic change to Al­berta’s power model, Not­ley says, is, that “the mar­ket was bro­ken—the in­vestors were telling us that they weren’t com­ing into it.” Crit­ics point to On­tario’s dis­as­trous switch from coal that sent prices soar­ing. “We can avoid some of the prob­lems faced in other prov­inces,” Not­ley says.

About the scope, speed and depth of her to­tal over­haul of the en­ergy in­dus­tries, Not­ley says: “When we first got elected, CEOs said they wanted cer­tainty. We cre­ated cer­tainty.” The in­dus­try will judge the shakeup by the fi­nal in­vest­ment de­ci­sions it pro­duces. So far, it’s too early to tell.

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