While the outcome of the election is far from certain, the widely varying views of the major parties on the energy industry have already begun to suggest the path forward will not be smooth sailing. With the oil and gas industry in Canada undertaking a new round of layoffs and budget cuts just before the Labour Day long weekend, it is timely to consider the current industry picture in context of the federal election.
Official federal oil and gas policy platforms remain murky but it is clear that (further) changes could be coming for an industry just keeping afloat. Like fins surfacing from the water, the possibilities and political directions that could be taken have informally appeared and disappeared time and again – prior to the writ drop (climate change policy), during the federal leadership debate (pipelines), or from off the cuff comments of MP candidates (e.g. should any stock be placed in NDP candidate Linda McQuaig’s comments about the oil sands staying in the ground?).
But with Statistics Canada releasing new numbers confirming a recession, the question of where oil and gas fits into the economic equation for each party is an important one. If there is one positive thing that has come from the downturn, it is strong, much-needed proof of the pivotal role the industry plays in the economy; it has become 20 per cent of our value of exports, accounts for more than 550,000 jobs, has contributed as much as $18 billion in government revenues annually, and impacts numerous other sectors across Canada. Even the Liberals and NDP have both acknowledged the economic importance of oil and gas in their guarded statements about the development of the oil sands.
Meanwhile, back in Western Canada, the industry is still reeling from previous waves of hardship both on the economic and political fronts. The earlier wave, which came in the form of low gas prices, market access and the differential between WTI and WCS crude prices, seemed significant in its own right, as pipeline project approvals continued to languish in regulatory delays. The next wave was plunging oil prices and layoffs. In May, it was the advent of the Alberta NDP government which recently increased personal and corporate taxes and confirmed a forthcoming royalty review, a climate change panel and a doubling of the carbon levy by 2017. Now, as energy columnist Deborah Yedlin mentioned in a CBC interview in response to the prudence of undertaking additional rounds of job cuts, “everybody’s in survival mode.”
So, with these issues dominating the collective industry mind space, if there were any attention to spare for the federal election, what will oil and gas companies need to watch in the coming weeks?
Changes to the fiscal regime
The main question is will there be another layer of taxes coming in addition to the taxes companies are facing locally? Tom Mulcair, leader of the poll-leading NDP says he will “end corporate welfare” and “subsidies” to the oil and gas industry. For the record, many industry experts will note, there aren’t any subsidies left to end. The only “subsidy” left is the Accelerated Capital Cost Allowance that was just included in the last federal budget to specifically spur investment in Liquid Natural Gas (LNG). Losing it be a bitter pill after years of aggressive lobbying by BC and LNG players.
It is possible change could take the form of some benefits, like the potential boon of subsidies candidates have promised to the renewables sector, an area in which many larger oil and gas corporations have assets. These subsidies will be of value, but only for a small number of companies. For industry as a whole, the hope will be that any fiscal changes consider the full picture of the tax and economic burden oil and gas companies now carry, particularly in Alberta.
Pipelines and regulatory changes
Where each party stands on pending oil pipeline projects has been tricky to follow prior to and during the writ. As it stands, we know the Conservatives are the biggest advocate for pipeline projects and the Greens are steadfastly opposed. Although they oppose Northern Gateway, the Liberals tend to advocate market access projects through “social permission” which they believe comes from solid environmental protections and public engagement. The NDP, who opposed Keystone XL and Northern Gateway, have hidden behind the “failed” regulatory process to avoid taking a specific stand on projects like TransMountain and Energy East.
So while that is clear (as mud) the underlying question with pipelines is really about regulatory changes that could potentially extend an already prohibitively lengthy review process. After significant efforts on the part of the Conservatives to streamline the regulatory process (hearings, environmental assessments, timelines, etc.), the other parties are talking about overturning the Harper regulatory reforms. Both the Liberals and the NDP have talked about revamping the National Energy Board approval process including expanding opportunities for community and aboriginal input and cross examination. In addition, it appears the consideration of a project’s climate impact could also be on the table for project approval criteria changes. Mulcair has also been particularly vocal even prior to the election period, about making the National Energy Board more “independent”. The recent delay in the TransMountain hearings due to the appointment of Kinder Morgan’s economic consultant Steven Kelly to the Board has not helped to improve the perception of conflicts.
For industry, the hope here is for any forthcoming changes to balance the need to instill regulatory trust (a significant factor in the social permission equation) with a review process that is amenable to business and investment in Canada – which means providing clear approval criteria as well as timely project review and approval processes. For now, particularly for those knowledgeable about the regulatory process, it is clear that the task is incredibly complex and subject to unintended consequences.
This category is especially of interest to the larger emitters, but if the NDP are elected and implement a national cap and trade system, as they have said they would, it might be of interest to other industries and Canadians as a whole. One would have to ask how producing provinces would react, as Alberta and Saskatchewan already have carbon levies and B.C. has a carbon tax. The Conservatives, often criticized for not taking enough action on the climate front, have largely left the task of emissions management to the provinces, with an aim to reduce greenhouse gases by 30 per cent below 2005 levels by 2030. But the path to achieving that goal is less clear.
The Liberals have also been strong champions of emissions reductions, but came out earlier this year saying provinces should continue to lead the charge as they have in the absence of Conservative leadership on the matter. “B.C. has a carbon tax, Alberta has picked up a sort of a carbon tax, Ontario’s bringing in its own plan. Quebec is part of a cap and trade with some other regions,” Justin Trudeau, Leader of the Liberal Party, said in an interview earlier this year. “We have 86 per cent of Canadians now living in provinces that have put a price on carbon.” The role of the federal government in that case would be as a champion, coordinator, and overseer of implementation. In essence, this puts the tangible impact of a Liberal Government’s climate change policy much in the same ranks as the Conservatives. It is worth noting, the Liberals continue to suffer attacks from the NDP about having signed the Kyoto Protocol without introducing a national climate change plan.
As Canada comes to the table in Paris this December for UN Framework on Cilmate Change meetings, there is a very real possibility of significant differences between the federal and provincial governments, the lack of clarity for which has dogged industry and the investment community for years.
Regardless of the election outcome, most of the policy issues facing the industry (project approval, fiscal terms, social license, emissions management, etc.), will continue to be sticking points for Canadian leaders, the electorate and the investment community. The sputtering economy, a struggling oil and gas industry and changing political dynamics both in Ottawa and the provinces, will make public policy a critical issue to watch over the coming months. How will energy producing provinces get along with Ottawa? How will changing federal election results impact the provincial governments’ approach to energy policy issues? Also, where do the off-shore industries in Newfoundland and Nova Scotia fit into the energy debate? And how will any leadership change, or not, impact Canada’s relationship on the international stage, particularly with the United States and China?
Those questions are for a later piece but as we reach the mid-point of the campaign and platforms are released over the coming weeks, things will hopefully become clearer. Or not.