“As it relates to the energy file, she has been very solid.” – Dave Collyer, former Shell Canada executive, CAPP CEO, in 2018
If the oil and gas industry has a future beyond the next few decades, Albertans can thank Rachel Notley. Her NDP government modernized provincial energy and climate policy from 2015 to 2019. As the energy transition accelerates and hydrocarbon demand destruction looms, those policies at least give the sector – and the Alberta economy – a fighting chance to survive in a low-carbon world. They were certainly not a disaster, as UCP leader Danielle Smith is claiming in the midst of a bitterly-fought election campaign.
What is a mystery is why Notley is, again, largely remaining silent about her government’s energy and climate policies. She made the same mistake in 2019. Kenney ran on a “Pipelines, Economy, Jobs” narrative and mopped the floor with her. Read my column, Why did Rachel Notley refuse to run on her energy policy record?, from the day after the election.
While energy isn’t front and centre this campaign, the economy is, and the UCP have pounced on Notley’s silence about her record while in power.
To get a better sense of Notley’s energy and climate policies, I reviewed Energi Media columns and news stories from 2015 to 2019. That review suggests Notley’s policies stand up pretty well.
Climate Leadership Plan
Launched at a press conference in late 2015, the parts of the plan that applied to oil and gas included a carbon tax for industry; upstream oil and gas methane emissions reductions of 45 per cent; and a 100 megatonne per year (Mt/yr) oil sands emissions cap. Behind Notley at the podium stood four oil sands CEOs cheering heartily. The backstory about their attendance is a peek inside an industry that knows change is coming but is deeply conflicted about how to manage it.
On a warm summer night in September of 2014, five CEOs met with five environmental group executive directors to discuss a truce in the “dirty oil” campaign against Alberta oil sands. You can read the details of their many meetings and their handshake deal, which was presented to NDP Environment Minister Shannon Phillips in the fall of 2015, in my columns here and here. Here’s the bottom line: the CEOs conceded on emissions policy in return for no limits on production growth. That’s the quid pro quo.
As this chart demonstrates, the CEOs got their wish. Since the Climate Leadership Plan, Alberta oil production has risen by one million barrels per day.
Not only has oil production risen, but so have emissions, especially from the oil sands. That isn’t great climate policy (though Phillips provided a credible defence), and the NDP are open to criticism on this point, but it’s hard to see the supposed damage to the oil industry.
Cutting the pipelines deal with Trudeau
Notley leveraged the Climate Leadership Plan – Canada was headed off to COP21 in Paris without a climate plan of its own and Alberta’s was the most advanced provincial plan – to secure federal approval of the Trans Mountain Expansion and Line 3 projects. The Prime Minister made it very clear that Alberta’s plan was key to the deal. The two pipelines added nearly 900,000 barrels per day of crude oil shipping capacity.
When US President Donald Trump re-approved the Keystone XL pipeline that his predecessor Barack Obama had nixed, Trudeau allowed the Canadian government’s approval to stand. Keystone XL would have added 830,000 barrels per day of capacity. President Joe Biden later nixed KXL, but that was no fault of Notley’s.
Petrochemical Incentives Program
The NDP government’s 2018 Energy Diversification Act included a new program to stimulate investment in petrochemical manufacturing.
“There’s the opportunity to do things you and I haven’t even dreamed of yet in terms of finding value-added products of the hydrocarbons,” said Professor Michal C. Moore of the University of Calgary. “They’re out there and it’s just going to take a fair number of incentives I think that they take advantage of to actually get at them and use them, but I think that’s going to happen.”
$300 million in royalty credits was granted to a joint venture between Pembina Pipeline Corp. and Kuwait’s Petrochemical Industries Company to build a plant capable of manufacturing 800,000 tonnes a year of polypropylene, which will require 35,000 b/d of propane. A further $200 million in royalty credits was granted to Inter Pipeline for a similar facility.
The government estimated the two new manufacturing operations will create about 1,400 direct and indirect full-time jobs when they opened in 2021.
The program was expanded by the UCP in 2020, increasing the grant to 12 per cent of capital costs and making it available to any company willing to invest in an Alberta petrochemical project.
The other significant initiative in the Energy Diversification Act was the Partial Upgrading Program. Bitumen is a gooey hydrocarbon with the consistency of peanut butter. Getting it to flow in a pipeline requires dilution with a light hydrocarbon, usually 30 per cent of the volume. Partial upgrading technology turns bitumen into medium or heavy crude oil that flows in a pipe without dilution.
Alberta exports three million barrels per day of heavy crude. Imagine if a third of existing pipeline space could be freed up using partial upgrading. Alberta would never need to build another export pipeline.
Only one project was funded. In early 2019, the NDP government awarded Value Creation Inc. $440 million to build a $2 billion oil sands upgrader near Edmonton. The Value Creation project seems to have stalled. Fractal Systems’ JetShear partial upgrading regional hub, which was not funded by Alberta, also stalled despite having a non-binding commitment from Cenovus Energy.
The UCP government cancelled the program in late 2019, citing financial risk. “Is there risk in loan guarantees?” Economist Kent Fellows asked in a tweet. “Yes, but if you have confidence and faith in the industry, and if you take the time to understand these risks (which the Province did) then these can be responsible risks.”
Partial upgrading support was an excellent policy designed to foster homegrown technologies and companies. Its cancellation was short-sighted and the rationale, financial risk, was scarcely credible.
Bitumen Beyond Combustion
Alberta Innovates, the provincial research and development agency, began searching in 2017 for processes to turn bitumen into higher-value products than simply feedstock for refineries to make gasoline, diesel, and bunker fuel for marine shipping. The agency is now in Phase 3 of its Carbon Fibre Grand Challenge, which attracted teams from across the world. A commercial process to turn bitumen into carbon fibre precursor is expected within two or three years, according to Dr. Paolo Bomben. Other products, such as asphalt binder and activated carbon, are also being researched.
While BBC, as it is commonly known, wasn’t instigated by the Notley government, the NDP did maintain Alberta Innovates funding throughout the lean years, unlike the UCP, which slashed its budget by more than 25 per cent.
Alberta leads the world in research to transform heavy crude and captured carbon dioxide into commercial products. As Energi Media has frequently argued, post-combustion uses for Alberta hydrocarbons is key to a prosperous Alberta economic future. The NDP deserve credit for supporting the early years of that research.
The hugely controversial oil and gas royalty review promised by the NDP was announced on August 28, 2015.
Dave Mowat, CEO of ATB Financial, headed up a panel to determine if royalties provided optimal returns to Albertans, encouraged investment and diversification while supporting responsible development of the resource.
Critics argued that the review would create uncertainty and discourage investment.
But finance professor Gordon Sick of the Haskayne School of Business told Energi Media that the Alberta government might consider regular reviews every few years to ensure the province continued to receive a fair return on the resource. “I do agree with the NDP that it is worth having a look at what is going on. If nothing needs to be changed, then don’t change anything,” he said.
Mowat’s panel recommended no overt changes. As economics professor Blake Shaffer noted, the “oil sands framework remains virtually unchanged. Existing crude oil and natural gas wells are grandfathered under the current system for 10 years. And the ‘modernized royalty framework’ for new wells will initially provide the same industry returns and same government take as the current system would achieve.”
Energy economist Allan Fogwill of Calgary-based Canadian Energy Research Institute told Energi Media that Notley’s government “streamlined [the royalty structure] and made it easier to manage, but given the economic challenges of the industry they didn’t really change the quantum of royalties that they were going to collect.” The NDP “struck a reasonable balance,” he concluded.
“Today’s announcement has been the result of a fair and credible process, one Albertans can trust,” CAPP President Tim McMillan said.
“In Alberta we believe that markets are the best way to set prices but when markets aren’t working, when companies are forced to sell our resources for pennies on the dollar, then we have a responsibility to act, a responsibility to defend our province and to defend our resources,” then Premier Notley told reporters in early December 2018.
She was responding to the catastrophic crash of oil prices for Alberta producers that was caused by a leak on the Keystone pipeline system. Alberta was producing 190,000 barrels of crude oil more than the Canadian pipeline system could transport to market. The discount between Western Canadian Select (Canada’s heavy crude benchmark) and West Texas Intermediate (the US light crude benchmark) widened from the historic $10 to $15 a barrel to over $50, effectively driving down prices below the cost of production for many Alberta producers.
Notley had several options for responding to what was a temporary issue. She chose to order a production curtailment of 325,000 barrels per day starting January 1, 2019. UCP Energy Minister Sonya Savage continued the curtailment program for another year.
What the experts said about Notley’s policies at the time
Alberta energy politics has always been intensely partisan. It should come as no surprise that opposition to NDP energy policies was partisan then, just as it is now.
“Many in corporate Calgary, though not all, voted for the other team in the last election,” Ed Whittingham, former CEO of the Pembina Institute and one of the environmental group executive directors involved in the climate policy discussions with oil sands CEOs, said in a 2018 interview. “I think those criticisms come with a certain political bias.”
The oil and gas industry is conservative. No one should expect to find many NDP fans in the Calgary Petroleum Club. That said, during the Notley government it wasn’t hard to find industry spokespeople offering a fair and balanced perspective on her management of energy issues.
“I think she has taken some sound decisions in Alberta’s interest. So, I think when you sum it all up, as it relates to the energy file, she has been very solid,” said Dave Collyer, a long-time Shell Canada executive who was CEO of the Canadian Association of Petroleum Producers from 2008 to 2014 and served as co-chair of the Oil Sands Advisory Group.
Economists appreciate the technical work that goes into creating energy policy. They generally gave Notley top marks for her willingness to rely upon experts.
“I think the NDP has been good at offloading the workload to the regulator whenever possible and then engaging in consultation so that they try to avoid unintended consequences of these policies,” said Professor Kent Fellows, an energy economist with the University of Calgary. “A lot of this stuff ends up being fairly technocratic. I’m not convinced that the policies would be a whole lot different if we had a different government in place.”
So, why were NDP times, difficult times?
The price of Western Canadian Select crude oil explains most of Alberta’s economic woes from 2015 to 2019. The province benefited from three years of high prices prior to the 2015 election. Then, in 2014, prices began a free fall that lasted for two years. West Texas Intermediate reached $106USD per barrel in June 2014 before falling to $27 in February 2016, a decline of 75 per cent over 18 months.
Rapidly growing US shale oil production, along with an OPEC decision in December 2015 to scrap output limits, created a huge surplus on global markets. From 2008 to 2014, American production grew from 5 million barrels per day to 8.8 million barrels per day.
Over this same period, Canadian crude oil production increased from 2.7 million barrels per day to 3.8 million barrels per day, contributing to oversupplied markets.
During the Notley government, Alberta oil production rose by over 500,000 barrels per day, led by the oil sands.
Capital investment (capex) in the oil sands was a major driver of economic growth, peaking at $27 billion per year in 2014; total oil and gas capex that year was $60 billion.
Capex plummetted along with oil prices. reaching a low point of just under $25 billion in 2020.
The precipitous drop in oil prices and capex combined to destroy tens of thousands of jobs.
When the NDP formed government in 2015, 152,000 workers were employed in the Alberta oil patch. That was already down from a peak of 172,000 a year earlier. Employment loss bottomed out at 120,840 in July 2016, a loss of 52,000 jobs (about 30% of total oil and gas employment in the province) in less than two years.
While employment recovered after mid-2016, job creation sputtered, rising and falling with oil prices. By December 2018, employment had recovered to 151,000 but the production curtailment crisis caused it to plunge again. By the time of the election, another 6,000 jobs had been lost.
Governments tend to be blamed when economic times are difficult and it’s not hard to see why oil patch workers would believe the narrative that the NDP was responsible for their woes.
Rachel Notley the most oil and gas-friendly premier since Peter Lougheed?
Contrary to claims that the NDP tried to “kill” the oil and gas industry, Notley brought a commonsense, pragmatic approach to policy-making that was frequently praised by the industry. She governed through some of the most difficult economic circumstances in modern Alberta history. At the same time, she pulled off major victories for the sector, like getting the federal government to approve the Trans Mountain Expansion and Line 3 pipelines. And she did it while implementing what was, at the time, considered to be one of the most progressive climate policies in North America.
Notley is arguably the most consequential premier for the oil and gas industry since Peter Lougheed in the 1970s and 1980s.
An important theme runs through almost all of the Notley government’s energy and climate policies: the reliance upon external experts. Rather than make policies based upon ideology, the NDP struck panels, populated them with respected experts, then accepted most of their recommendations and enacted them in legislation.
In a subsequent column, I’ll review the energy and climate policies of the UCP under Jason Kenney and Danielle Smith. Without giving away too many spoilers, suffice it to say that conservative policies were frequently ideological rather than pragmatic, they were far too subservient to industry demands (especially from Little Oil), and they failed to prepare the industry for the wrenching changes wrought by the global energy transition that have already begun to restructure the oil and gas sector in Alberta.
In short, Notley arguably served the interests of the Alberta oil and gas sector far better than the UCP premiers, despite their many claims to the contrary. Unfortunately, just like 2019, the NDP leader refuses to tell Alberta voters about her own energy and climate policy record.