Real question behind Moody’s credit downgrade: Is UCP making Alberta a risky place to invest?

Is Premier Jason Kenney’s refusal to face reality becoming a liability for the Alberta oil and gas sector?

Moody’s downgraded Alberta’s credit rating Tuesday, partly because of a “structural weakness in the provincial economy” caused by over-reliance on high-carbon crude oil production. A new report about the pace of the energy transition provides a glimpse into how much risk that weakness may pose for oil companies and, by extension, the provincial economy and government coffers.

Alberta Premier Jason Kenney.

The credit rating agency also pointed to a variety of issues that were behind the downgrade – for example, the pipeline capacity shortage that is responsible for low capital spending in the oil and gas sector, “with no near-term expectation of a significant rebound” – which in turn leads to volatile revenue for the government.

Predictably, the Kenney government tried to blame the downgrade on the previous NDP government. “Over the past four years, the previous government drove Alberta into a fiscal crisis with policies that weakened growth and business competitiveness,” Finance Minister Travis Toews said in a statement.

Premier Jason Kenney blamed it all on a nefarious European “political agenda.”

“The bigger challenge we have is, increasingly, financial institutions — and this apparently includes Moody’s — are buying into the political agenda emanating from Europe, which is trying to stigmatize development of hydrocarbon energy,” he told Danielle Smith on Global News Radio 770 CHQR. “And I just think they are completely factually wrong.”

Moody’s is not factually wrong.

Climate change is now a material risk – one that could damage the viability of a public corporation and threaten investors’ capital – that must be managed by the board of directors and senior management, as set out in the Canadian Securities Administrators’ Staff Notice 51-358 Reporting of Climate Change-related Risks released on August 1.

In fact, as Eric Denhoff, former Alberta environment and climate change deputy minister,  explains in his Energi Media op-ed, the giants of Wall St. now demand that Alberta corporations properly manage climate risk. Moody’s, of course, is a venerable member of the New York-based financial community and hardly a wild-eyed radical eco-terrorist.

The Premier’s insistence upon viewing climate risk and other environmental issues through a political lens is a serious problem, made worse because many of the oil and gas industry’s leaders agree with him. Why is that?

The global energy industry – technologies, markets, investor decisions, policies, for example – is changing rapidly, but Alberta energy leaders cling stubbornly to an outdated status quo. They resist change at every turn. And they always have a bogeyman to blame: foreign-funded activists, a federal government led by a Trudeau, obstructionist premiers in BC and Quebec.

Now we can add “European political agenda” to the list. “What’s the harm in that?” readers may ask.

Kingsmill Bond, Carbon Tracker.

Kingsmill Bond, a financial expert with Carbon Tracker, co-authored a paper examining the narratives around both a slow and a rapid energy transition. There are sound, evidence-based arguments for both points of view. But the take-away for Alberta is that electricity generated by low-carbon technologies like sun and wind – increasingly coupled with battery storage – is now cheaper than new coal-fired generation and will soon be cheaper than existing coal plants. Already, this is leading to exponential growth in emerging markets.

“[G]rowth is likely to continue rising exponentially,” Bond told host Chris Nelder in a recent The Energy Transition Show podcast. “On this particular issue, it’s reasonable to say that at present the rapid approach is much more accurate because new technologies simply have been growing exponentially, not in a linear way, and a lot of the linear models use cost structures for renewables, which are actually out of date quite quickly in a fast-changing world.”

Abundant, cheap electricity combined with rapidly falling battery costs will speed up electrification of transportation, which in turn will soon slow the growth of global oil consumption, leading to peak oil demand sometime during the 2020s.

“The key message is that the energy transition will have a dramatic income impact on incumbents in the decade to come,” Bond told Nelder. “The risks are much higher than they appear, and most incumbent fossil fuel companies will struggle to make it through the decade.”

This is the risk Moody’s is worried about: “Moody’s considers environmental risk to be high. Alberta’s oil and gas sector is carbon-intensive and Alberta’s greenhouse gas emissions are the highest among provinces.”

What must international investors make of an Alberta premier who openly mocks standard corporate risk management practices and ascribes them to political plots hatched in Europe? A premier who cancelled the province-wide carbon tax, gutted the large emitter carbon tax, and did away with a plethora of other emissions-reducing programs? A premier deeply entrenched in the status quo while the world rapidly changes?

More importantly, at what point will investors view Premier Kenney as a liability to the Alberta oil and gas industry instead of an asset?

Sources tell Energi Media that there are already industry executives and leaders who have come to that conclusion. How many remains to be seen. More public talk about European political agendas, however, may swell the ranks in short order.

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