Alberta Headline Replay: Politics, Court Decision on Bill C-69, Royalties and CCS Incentives
Episode Summary
While the Battle of Alberta is front-page news, this week, Jackie and Peter take a break from hockey and talk about some other game-changing local headlines.
First, they talk about the political change with Premier Jason Kenney announcing that he is stepping down as leader of the United Conservative Party (UCP).
Next, an Alberta court found the Impact Assessment Act (formerly Bill C-69) to be unconstitutional. The Act defines the review process for large energy infrastructure projects in Canada.
After that, an update on the Canadian oil and gas industry’s fiscal pulse. With higher oil and gas prices, the outlook for revenue and cashflow for 2022 has increased and can be viewed on the last page of our weekly ARC Energy Charts publication. Today’s higher prices have significant implications for royalties, specifically, speeding up the timeline for oil sand projects to achieve the higher post-payout royalty rates.
Finally, Peter and Jackie weigh in on the debate about who should pay for Carbon Capture and Storage (CCS) – federal and provincial governments or industry.
While one Battle of Alberta has been playing out on the ice between the Oilers and Flames, there are several other battles of and in Alberta making headlines. Jackie and Peter dig into these in this episode of the ARC Energy Ideas Podcast.
One of those battles is Bill C-69. It is legislation introduced in 2019 to change the process review around major projects. It was supposed to give more certainty around timing, but many have said it creates more uncertainty. It was ruled unconstitutional recently by the Alberta Court of Appeal.
“The provinces in Canada have power over their non-renewable resources under the constitution,” explains Jackie.
“They also have it over their power, like electricity grids and things like that. And the idea is, well, this process they believe is going to stop investment and therefore they aren’t going to be able to develop their natural resources. So, the Alberta court found that it is unconstitutional because it would constrain the development of their right to develop their non-renewable resources.”
ARC is forecasting $30 billion in royalties to be paid by the Canadian Industry this year
“The flip side is the federal government, I’m pretty sure, would argue something along the lines of, well, give it a chance,” says Peter.
“These projects, yes, they’re delayed right now because of COVID but (the legislation) really hasn’t been tested, and the idea you will have a stricter timeline with more streamlined processes is untested.”
Other topics include a look at the potential cash windfall for Alberta this year from oil and gas royalties. The WTI average right now is estimated by ARC at $100/barrel. At those prices, ARC is forecasting $30 billion in royalties to be paid by the Canadian Industry this year, 80 percent of that ($24 billion) likely coming to Alberta. So, the big question is – What is the Alberta Government going to do with that money? Peter and Jackie examine the structure of royalties in Alberta, including how oil sands projects pay higher royalties after they achieve post-payout status.
Also discussed in this episode are Alberta politics, with Premier Jason Kenney announcing his resignation and the debate about who pays for carbon capture and storage incentives.
The Calgary Herald article that Jackie mentions can be found here.
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Episode 155 Transcript
Disclosure:
The information and opinions presented in this ARC Energy Ideas podcast are provided for informational purposes only and are subject to the disclaimer, link in the show notes.
Announcer:
This is the ARC Energy Ideas podcast with Peter Tertzakian and Jackie Forrest. Exploring trends that influence the energy business.
Jackie Forrest:
Welcome to the ARC Energy Ideas podcast. I’m Jackie Forrest.
Peter Tertzakian:
And I’m Peter Tertzakian. Welcome back.
Jackie Forrest:
Hey Peter, so I was looking at your tweets. You’re talking about the battle of Alberta.
Peter Tertzakian:
Yeah, I don’t tweet a lot these days, but I felt compelled during the battle of Alberta hockey game to tweet about the other battle of Alberta that just emerged, which is a consequence of Jason Kenney, our Premier losing. Well, he didn’t actually lose, he got 51% of the vote, but he stepped down. So now we have the battle of Alberta politically, and I think that’s pretty big news.
Jackie Forrest:
Oh, for sure. And definitely a surprise for a lot of people. So, it’ll be interesting to see how this all unfolds here over the next. I don’t know if it’s going to be months or many months.
Peter Tertzakian:
Well, it’s going to be months. And I think the bigger backdrop is that the next election is next May. So, it’s a year away. So not only is it battle of Alberta within the UCP party, but it’s going to be battle of Alberta in terms of the election. Now we’re going to hear a lot more about campaigning and stuff, because typically once you get inside that one year left marker for the election, things really start to ramp up in terms of campaigning and the rhetoric and so forth. And it’s very consequential. It’s consequential in terms of investors coming into Alberta to understand what the next political regime is going to look like, because obviously then it has consequence to policy. So, we hope it all gets resolved and that there’s more certainty in a very uncertain world.
Jackie Forrest:
Right. Well, let’s talk today a little bit about Alberta. Our podcast is really going to focus on some of the most recent issues, including the Impact Assessment Act and was found by an Alberta court to be not within the constitution. We’ll talk about that. We’ll give you an update on Canadian oil and gas industries, fiscal pulse, which is very important to Alberta, but then talk about some of the implications when it comes to provincial revenues. But before we get to that, I do want to make our listeners aware of… You may not know that we started putting transcripts of the podcasts up on our website. So, for the last five or so episodes, they’re there and I’ve actually found them pretty useful myself. There’s been a couple times where I’ve been like, “What was the number for that or what was that said,” and all that data is there. So just be aware of that if you’re ever listening while you’re at the gym. I know I do that sometimes. And then want to go back and just confirm a fact, that’s all there for you now.
Peter Tertzakian:
You’re not typing that in all yourself, are you?
Jackie Forrest:
No. Apparently there’s software that does that these days.
Peter Tertzakian:
Of course, there is. Well, let’s talk about that Impact Assessment Act, which is formally Bill C-69, for those that remember that it seems like such a distant memory. It was a pre pandemic that’s sort of the marker, isn’t it? Pre or post pandemic.
Jackie Forrest:
Yes. This one was pre. I think it’s probably worth just reminding our listeners a bit of background of it. So the Impact Assessment Act actually was put into legislation in 2019. And the point of it was to change the process review around major projects. And it actually specifically named types of projects that would fall into it, including renewable energy, oil and gas, linear transportation, marine, mining, and nuclear. And this is important because it… There is actually a lot of uncertainty today about if a project is in it or not. And most projects don’t want to be in it because they perceive that will be uncertainty and delay.
Jackie Forrest:
The other thing is it does have five steps that are outlined and although a lot of the opposition to it is that it will take a long time. They actually do have specific number of days for each of these five steps. And it was supposed to give a little more certainty to timing. However, so far, we haven’t really seen that. I found an article as of May of 2021 there was about 10 projects going through it. However, they aren’t really following that timeline. And a lot of that’s because of COVID. So, we haven’t really seen them been able to meet those fixed timelines that would’ve given some certainty.
Peter Tertzakian:
Okay. Let’s just stop for a second. So, the Environmental Assessment Act formally, Bill C-69 was actually a replacement for the Canadian Environmental Assessment Act of 2012. You listed off the various types of projects that it applies to. The one I didn’t quite catch is this linear and transportation. What is it? Is it roadworks? Is that what that is?
Jackie Forrest:
No, I think that’s more like pipelines.
Peter Tertzakian:
That’s pipelines. Okay.
Jackie Forrest:
Yeah. So different types of pipelines. So, if we wanted to build a hydrogen pipeline, transmission lines, I think would fall into that as well, but there is some uncertainty in terms of what falls into it.
Peter Tertzakian:
So, basically any project that is proposed by a company, it has to go through this act and the processes to get basically permission to build the project?
Jackie Forrest:
Exactly. And includes consultation and all the normal steps that you think you would see in environmental reviews and opportunities for people to ask questions and things like that.
Peter Tertzakian:
And so, the proponents of the act have long said, “Well, it’s taking so long to get approvals.” True. However, this act is being put into place so that there is specific timelines that have to be met to ensure that the approval process has more certainty gets done by a certain date. And what you’re saying that is as a consequence of COVID the early tests of the act actually have not adhered to the timeline.
Jackie Forrest:
Yeah, in general. And I’ve been reading a number of articles and some of them are a little bit dated, but yeah generally due to COVID. These timelines can easily be extended too so I think there’s a little bit of skepticism that they could actually be followed. As you know, in Canada, everyone gets involved in these things and sometimes the timelines expand. Now, Alberta has been opposed to this, since the beginning so has a lot of industry. I do want to add that when this court case Alberta wasn’t alone in it, the governments of Ontario and Saskatchewan, as well as several indigenous and private interest groups actually intervened in support of Alberta’s position. So, it is broader than Alberta that opposes this act.
Peter Tertzakian:
Right. And so, let’s think about that because let’s just take Alberta, let’s take oil and gas. Companies partner with the people of Alberta, the province of Alberta through the provincial government to come to a fiscal arrangement that fiscal arrangement includes royalties. We’re going to talk about that here in a few minutes, but the province would be opposed to Bill C-69 because in their view, it sort of impedes the building up of projects that would accrue revenue to the provincial treasury, for example. Is that and Ontario and others, they have mining projects, they have all sorts of other mega projects that involve resources. And so, the opposition is because, “Hey, it’s still going to hold things up. We don’t agree with this thing.”
Jackie Forrest:
Right. Yeah. The provinces in Canada have power over their non-renewable resources under the constitution. They also have it over their power, like electricity grids and things like that. And the idea is, well, this process they believe is going to stop investment and therefore they aren’t going to be able to develop their natural resources. So, the Alberta court found that it is unconstitutional because it would constrain the development of their right to develop their non-renewable resources.
Peter Tertzakian:
Right. Okay. So, what’s happened is that the Impact Assessment Act was challenged in courts, went to court and the court ruled that what?
Jackie Forrest:
Well, it ruled that they were right. Now, there were, was one dissenting judge, but the majority of the judges ruled that climate change concerns cannot override the division of power in the constitution. And so, this is now going to go to the Supreme Court because the liberal federal government disagrees with this and has already announced that they are going to challenge it. It may take a year or so for a decision. So, we’ll see. There are some folks that are saying this has a lot of parallels to the decision that happened in March of 2021, where the Supreme Court said it was constitutional for the federal government to impose a carbon tax. And in this case, the judges noted that climate is a threat to human life in Canada, around the world, and therefore warrants the consideration of national concern.
Jackie Forrest:
And it kind of overrides the provincial concerns. So, there are some people that are saying, well, based on that decision, maybe this one is going to go the same way. However, I think it is uncertain because that’s a very narrow thing to apply to imposing a carbon tax versus saying you don’t have the rights to develop your natural resources that you clearly have under the constitution. So more to come on this, but I think it’ll be interesting to see how it comes down from the Supreme Court.
Peter Tertzakian:
Well, it’ll be interesting to see, but before we finish up here, a couple things. So, is it only the issue of time delays and things that the provinces are concerned about? What are the tests that projects have to go through and of which of those tests are of concern to provinces?
Jackie Forrest:
Well, I think the timing is a big issue as we can see with the TMX and the coastal link. We cannot take 10 years to build a project here, but I think another real concern is that you could go through this whole process. And at the very end of the day, there’s a political decision because the minister of climate change and environment ultimately can say yes or no at the very, very end. I’ll give you an example of the Teck mine, the will sands mine project, that… They went through the previous process. I think they spent close to a billion dollars on that project to go through this environmental review, to do all the work. And at the very end of the day, a politician who was thinking about the next election can just say, no, I don’t want that project.
Jackie Forrest:
So, I think it’s not only the time it takes, but also the uncertainty in that you could spend all that money and have a political decision at the very end that makes making people who look at projects in Canada and say, “Hey, maybe this is a little too risky because there’s a lot laying on this decision at the very end that’s totally out of my control.”
Peter Tertzakian:
Yeah. I think that’s a major concern and I can see why companies wouldn’t want to spend a ton of money on that sort of one final binary yes or no decision by one person, depending upon whose in power. The flip side is a federal government. I’m pretty sure would argue something along the lines of, well, give it a chance. These projects, yes, they’re delayed right now because of COVID and all those sorts of things, but it really hasn’t been tested. And the idea that you will have a stricter timeline with more streamline processes is untested. So, let’s try it out.
Jackie Forrest:
Yeah. I think you’re right. And I mean, the old process actually had that mechanism at the end too. I will tell you too, that I think the uncertainty around what falls under it is a major source of concern. I wanted to just share a quote from ACOs, Chief Executive Nancy Southern and her AGM last week. And she basically says that she felt C-69 is so far reaching and has created so much uncertainty for the industry that to invest. And the fact is they don’t even know they have this hydrogen project they’re advancing in the Edmonton area, and they don’t know if it falls under C-69. They want clarity on that but for her that’s the real impediment. She doesn’t want to go forward if it’s under this process. So anyway, I do think it is contributing to some uncertainty in terms of investment.
Peter Tertzakian:
Yeah. Well, I think my biggest problem with this whole thing is why is it in the courts in the first place? Can’t we get to a place in this country where policies are negotiated between federal and provincial governments, between federal provincial governments and industries so that there are no core challenges. In other words, that you achieve some kind of consensus and say, “Okay, I can live with this policy. This is a good policy. It’s good for everybody and away we go,” and there aren’t these core challenges because they just kill us. And the courts take forever to come to any sort of decision, creates even more uncertainty layered upon the uncertainty of the policies that we, for, which we did not achieve consensus. And then it just creates this haze through which foreign investors look and say, “No way. I’m not coming here.”
Jackie Forrest:
Yeah. And then it seems frustrating at a time like this, where the world needs energy. Europe needs energy. The Americans seem to be pretty happy to start moving forward with building their LNG terminals. And we have these processes that keep people away from investing here and being able to add. It is a race, there’s a timeframe in terms of getting new supply to Europe and our processes take a long time.
Peter Tertzakian:
Well, it seems incredibly trite to say, but I mean, I think this country needs a big team building exercise to figure out how to avoid these sorts of things. Because if we don’t, they say everything is just going to get mired in the courts and nothing is going to get done. So anyway, that’s my piece. Where are we going to next?
Jackie Forrest:
Let’s talk about the fiscal pulse. We have that on our energy charts. I will put a link to our energy charts in the show notes each week and we have updated it because commodity prices still continue to be strong. Now we are expecting about a $100 on average WTI, or that’s our current scenario at about $5 gas at ACO. And that’s higher than one when we talked about it last time. So, I just, we thought we’d quickly go through our estimates for revenue and cashflow.
Peter Tertzakian:
Yeah. Well, let’s do that. But before we do that, let’s talk about that a $100 WTI so that’s the average that benchmark that’s used. And from that benchmark, we have a sense of what all the other different hydrocarbon products, because we don’t sell WTI. I mean, we sell what we call Western Canadian Select, which is a blend that comes from the heavy oils. There’s Edmonton light, which is the light oils. There’s all sorts of, I think we have eight or 10 different hydrocarbons off of which that WTI is priced.
Jackie Forrest:
Yes, and there’s differentials. And this year they’ve been fairly stable. I’d say ACOs, the one that’s probably been a little bit more volatile, but we’ve assumed some differentials on average for this year. The oil ones have been quite stable this year in general.
Peter Tertzakian:
Yeah. I mean this a $100. Well, today I’m just looking at it. It looks like about 112 we’re well above that and ACO $5 gas. I mean the last I looked at Henry hub in the US, it was eight something, $8 something.
Jackie Forrest:
Right. Well, remember this is the average for the year, but also right now we have very wide differentials between the gas price in Alberta and the price at Henry hub. So, this is an ongoing problem here in Alberta, but we are suffering a little bit in terms of not enough takeaway capacity and grading, getting wider differentials. And there was a big project that was supposed to be done here this spring. That’s been delayed again, the TC Energy project to expand the NGTL system. And so that’s contributing to the wide differentials. We’re hoping that work will get done and that will get a bit more narrow differentials in the future. But we do hope to assume wider differentials this year.
Peter Tertzakian:
And ultimately hopefully within a couple of years, what is it by 2025, we’ll have an LNG export terminal in the west.
Jackie Forrest:
Yeah. And that will be super helpful for taking away some of that pressure in terms of our gas production, having other places to go and hopefully we’ll have more stable, narrow differentials at that point.
Peter Tertzakian:
Okay. So, if we have a $100 WTI average for the year, $5 per GJ for natural gas and we run it through the volumes that we produce price times volume equals revenue,.the number is just staggering. It’s $242 billion will flow through the 10 square block, downtown offices of Calgary.
Jackie Forrest:
Yeah, that’s right. Yep.
Peter Tertzakian:
And the 242 billion is just for those who care to look at the charts. The last high-water mark, when we had a $100 a barrel, US a $100 a barrel was about 2013 or so I think it was 150 billion. So, we’re almost… We’re $90 billion over the last high-water mark because volumes are greater today. The volumes of production over the course of the last decade, oil sands production has increased quite substantially. And also, because the Canadian dollar is no longer at parity as it was back then we’re trading around 77, 78 cents or something.
Jackie Forrest:
Yeah. That’s a good point. These are Canadian dollars that we’re quoting. So that’s helping as well.
Peter Tertzakian:
Yeah, but we got paid in American dollars, which in the global economy today is the high value for reserve currency.
Jackie Forrest:
Yeah. Now after companies pay because revenue, isn’t all in your pocket, you’ve got to pay your operating costs, your taxes, your royalties we’ll get to that. What’s left is still about $147 billion so that’s just a huge number. If you think last year, it was about 81 billion for comparison. On a typical level if we just go back and kind of look over the last 10 years is closer to 30 billion. So, the industry is just record breaking off the chart type numbers when it comes to cash flow this year.
Peter Tertzakian:
And what’s interesting is a lot of the money is unaccounted for in a sense that only about 40 we’re estimating about 42 billion will go back into the ground to maintain production, to maintenance, to grow production here and there a little bit. Historically that number would’ve been way higher, but because over the course of the last few years, and the directives have come both from the financial industry and others that the oil and gas industry and free markets at large, including the United States, that companies do not grow their production, that they just focus on profitability and reducing emissions and becoming more efficient, et cetera, et cetera. So, the money that would’ve otherwise gone into more drilling and more facilities building and all that sort of thing is now what we call free cash flow.
Jackie Forrest:
Yes. And it’s going to things like dividend, share buybacks and things like that. So, we’ve talked about that a lot, but I think we wanted to focus a little more on this podcast on the royalty piece, and we’ve done an updated estimate based on these commodity prices. And we think for all of Canada, including the east coast and all the Western Canadian provinces, there will be about $30 billions of royalties paid by the Canadian industry. Now about 80% of that, or about 24 billion of this, we think could come to Alberta. So very significant amount of royalties coming to the province at these prices.
Peter Tertzakian:
Yeah. I think we have to talk about that because there’s a lot of misconceptions and the conversations I have with people or no conception at all of what’s going on and how is it that we’ve gone from a couple, well, two, $3 billion of royalties say during the pandemic, all of a sudden to almost well could hit 25 billion actually. Just for reference the average amount of royalties per year, over the course of 2016 to 2020, which were really the sort of the low, the low-price years here, it was, I’m just sort of ball parking the number. We’ll publish the chart here. It’s about $4 billion a year. And all of a sudden it rockets up. Why is that? Well, that’s because of the way the royalty structure works and there’s two distinct phases in the life cycle of a well, or in the life cycle of an oil sands project.
Peter Tertzakian:
It’s what’s called the prepay out where the monies that are generated from the profitability of the operation goes back to the providers of the capital. In other words, the company, until it is paid out. So, if a company spends, say a million dollars on a project, as soon as they get their million dollars back, then there’s the profit sharing. And at a much higher royalty rate, the province starts to get its share over the course of the life, entire life of the project going forward. So, what’s happened over the course of the last 10 years is for example, that the oil sands industry has spent I’m just ball parking at about $250 billion building up all the facilities during the boom in construction last decade. And the production started to come on, but as the production was sold and the profitability accrued at not very much profitability because the commodity prices were low.
Peter Tertzakian:
There really wasn’t much payout taking a long time to get the capital back. But when you’re at 60, 70, 80, a $100 a barrel, all of a sudden, the profitability increases and what’s happened over the course of the last couple years is that a lot of these facilities have started to pay out. So, when you pay out and the price goes up, that combination leads you from a say on an oil sands facility, as low as 1% royalty prepay out to now at a $100 above 40% rate royalty, it’s really quite staggering. And that’s why we’ve got these huge numbers. And once you hit post payout, I mean, you get the province’s treasury is going to get a long-term royalty stream. Even if the price of oil say falls down, like what is the long end of the strip Jackie right now like 25?
Jackie Forrest:
It’s around $70 in that range.
Peter Tertzakian:
$70. So well-
Jackie Forrest:
So, it’s $70. The province would still be making in the range of 30% royalty payment. Once it’s a post payout before that it’s like three or 4%. The more that gets paid out if the old price falls, all things the same, we’re going to be making a lot more royalties because we’re getting a much bigger share.
Peter Tertzakian:
Yeah. And so, though that share would lead you to sort of like a, if we believe the forward strip, well let’s just take $65 as a notional long-term benchmark. I mean, I would say that the royalties from both oil sands and non-oil sands probably be about $12 billion a year, contrast that against the prior sort of decade where royalties would be lucky to hit 5 billion a year. So, it’s just a staggering, long term influx of capital. And the big question is, as we think about the battle of Alberta, whether it’s within the UCP or the broader election is, what is the government going to do with that money?
Jackie Forrest:
Yeah, for sure. And we did actually, the government did announce that they were going to have a small surplus that was estimated at $70. If the price of oil was $70 for all of this year, there’d be a half billion-dollar surplus. I think if price is hold here, it’s going to be quite a bit larger than that. I did want to share a little calculation we did. If the price of oil were to stay near a $100 all the way out to 2023, then it’s possible. We think that upwards of 80% of all the oil sands production would have reached that post payout. Because this period where we’re making all this cash flow and is really contributing to paying that off a lot more quickly than models predicted.
Peter Tertzakian:
Oh yeah. And then… And you’re going to have even higher numbers. And so that $500 million or so surplus that the province recorded last fiscal year that-
Jackie Forrest:
They’re planning… They’re thinking that will happen in 2022 based on the spring budget if we had $70 oil.
Peter Tertzakian:
Right. So, and it’s important to note that our numbers are calendar year, January to January and the provinces number are March to March fiscal year.
Jackie Forrest:
Right. Yeah.
Peter Tertzakian:
Right. So, you won’t be able to compare them. Exactly. There is a little bit of a lag, but the magnitude of the numbers don’t change ultimately. So that surprise surplus was a consequence of the prices rising and more barrels, achieving payout, but many more barrels are going to be under payout and the price is even higher right now. So, the surplus, I don’t calculate the provincial surplus budget at large, but it’s going to be much higher than people think. And the other thing is by the way that there are numbers I’ve seen published on what the royalty expectations are and they just include the oil sands royalties. They don’t include the non-oil sands. In other words, conventional drilling royalties, which are actually quite substantial. So, for 2022, for example, the oil sands royalties are going to be about 16 billion here in Alberta. The non-oil sands conventional drilling royalty is about eight. So, 16 plus eight is 24.
Jackie Forrest:
So, it’s, I mean, as an Albertan, it’s great in that we’ve had obviously couple hard years here and the royalties have really not been there. And if prices do fall, all things the same, we’re going to have more income as a province than we would’ve before this period. Now I do want to switch a little bit to the debate around who should pay for carbon capture and storage. As you know, and we’ve talked about it on the podcast, the federal government has agreed to pay part of the capital cost through this tax credit. But based on our previous podcast with BMO Nesbitt Burns, we had Jared and Rachel on, they concluded you still needed a $100 carbon tax to make up back a return, even with that lower capital cost. And since then, we’ve had a number of industry leaders say that the province needs to step up and help more.
Jackie Forrest:
For example, the CEO of MEG, Derek Evans has talked about this quite a bit. We’re very interested in waiting with bated breath for the province to step up. And Alex Pobe, here’s a quote from an article a few weeks ago, “As an industry, we’re going to require some more help for this to go forward. And I suspect there will be contributions from both levels of government.” So, there’s pressure on government to do more. There was a really interesting article May 7th by Chris Varcoe, Calgary Herald, where he actually had quotes from both Jason Kenny and Minister Guilbeault, the federal environment and climate change minister, both saying these companies are doing quite well. I think these are important for their future of these projects, so they should find a way to make it work. So, hey, for once Jason Kenny was on the same page as our environment, climate change minister.
Jackie Forrest:
So, I bring this up because there was kind of an interesting comment in this article that Jason Kenny was saying that these companies are actually going to have a real value to do these CCS projects, because they’re going to be able to apply their capital spending to this post payout situation that we’re just talking about. So, if they spend billions of dollars on CCS, they would get a lower royalty rate until that’s paid off. And that the province would be contributing to CCS through that mechanism. And it would, could be significant. For example, the Meg CEO, Derek Evans talked about the Pathways Group, potentially spending $14 billion on this first phase of their CCS so that would then put them at a lower royalty rate until they paid that off.
Peter Tertzakian:
Right. Well, let’s just back up a bit and understand to gain the relationships here, to answer your question who should pay while I’m not going to necessarily answer the question. But for people to think about who should pay, should understand the structure of how all this works. So, the people of Alberta own the resource, whether it’s the oil sands or the natural gas or light oils underneath our feet, the government of Alberta is the custodian of those resources under the ownership of the people of Alberta. They enter into a deal with companies that are governed by their shareholders, and that deal has that fiscal arrangement called the royalty arrangement. So, actually the royalty structure is a deal between province and companies. Companies bring money and expertise to develop the resource and sell it. And then once it’s paid out, both parties benefit by sharing in the profitability of the projects.
Peter Tertzakian:
Okay. The government of Canada, as we discussed earlier, when we were talking about the Impact Assessment Act controls the environment and other things and offers the people of Canada security, so on and so forth. They benefit from taxation, corporate taxes, income taxes of people that work on these projects and so on, but they do not participate in the royalties. And the policies that are coming down in terms of climate and environment and all those sorts of regulations then have to be paid for. And so, it’s really now a three-party problem. It’s the people of Canada, the province of Alberta and the oil and gas industry as represented by the shareholders of the company. And so, in my opinion, all three have a responsibility to pay for it.
Peter Tertzakian:
We’ve got some sort of tacit agreement, but I wouldn’t exactly call the way that it’s working out in complete teamwork here, that there are uncertainties as to exactly who’s paying for what, and I think it’s going to get more and more resolved as we go forward. But I’d like, sure, like to see it more harmonized, like there’s a lot of advanced work done, you call the Pathways Group. So, it’s relatively clear on more on the oil sands, emission side than it is on the conventional oil side.
Jackie Forrest:
Yeah. And I was just going to say this post payout situation that Jason Caddy is describing, which I do think is a great incentive. You would get a much lower royalty rate if you spent this money, there’s definitely value there, but that doesn’t help other types of CCS projects into province. For example, on concrete or power plants or chemical plants or the conventional oil and gas industry, they don’t have that same benefit by spending money on CCS that they get a lower tax rate or royalty rate. So, it definitely, I think, contributes to the oil sands question, but maybe not the broader economy and the CCS opportunities there.
Peter Tertzakian:
Yeah. No, that’s a really good point. And I mean, the other thing is in this three-party problem, everybody benefits. The shareholders are benefiting the government of Alberta on behalf of the people of Alberta are benefiting. As I said, the government of Canada, people of Canada benefit through taxation and so on and so forth. So, everybody’s benefiting, it’s now a question of, okay, we want to move ahead with sustainability, climate change mitigation and so who pays. The good news is for the first time, in a long time, there is money in the till. And it’s just a question of how we pay for it going forward.
Jackie Forrest:
Yeah. And I’m optimistic. This is going to get worked out. There’s a win-win for everyone here. And for the provinces’ perspective, if we can decarbonize and actually get our emissions down to net zero in our oil and gas sector, I think that gives a much longer runway for our resources in a world where we didn’t do that. And we’re decarbonizing globally, our oil would be probably ramping down faster than a world where we achieve net zero. So, I think there’s a benefit to the province, to the citizens of Alberta to have the oil science projects produce maybe 5, 10, 20 years longer than they would’ve otherwise, if you didn’t make them net zero.
Peter Tertzakian:
Okay. Well, that, I think wraps a lot up. I mean that’s a lot of material there and a lot of questions for which people will have opinions about. And so, this is probably not the last time we’re going to talk about this sort of thing, whether it’s policy or regulatory policy or fiscal policy.
Jackie Forrest:
Yeah. We covered it all on the Alberta focus. So, thank you to our listeners. If you enjoyed this podcast, please rate us on the app that you listen to and tell someone else about us.
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