The government of Alberta is set to announce new subsidies for oil companies later this month, aimed at boosting production to fill the proposed Pacific Link pipeline to the West Coast.
These incentives come as major oil producers report billions in profits in their latest financial disclosures, with the oil industry enjoying one of its most profitable years in the last ten years.
Recent quarterly earnings reports indicate that Suncor Energy, Cenovus Energy, Canadian Natural Resources, and Imperial Oil collectively achieved profits exceeding $12.5 billion. According to Studio Energy, the Canadian oil and gas sector is projected to generate revenues surpassing $200 billion by 2026, following several instances of oil prices soaring above $100 US per barrel this year amidst the U.S.-Iran conflict.
This has led some industry analysts to question the necessity of new subsidies.
“What kind of incentives does the oil and gas sector really need?” commented Janet Annesley, a former executive with Husky Energy and Shell Canada, during an appearance on CBC Radio’s Alberta at Noon.
“They’ve got the funds, they are repurchasing shares, and they are distributing significant dividends to shareholders. So what more do we Albertans need to do to encourage them to invest here and initiate more projects?”
According to Annesley, Premier Danielle Smith must “make a compelling argument to Albertans about why we should be providing additional incentives to oil companies.”
Former Suncor chief executive Mark Little explains why shareholders of oilsands companies may have little incentive to support spending tens of billion of dollars on new production facilities. Currently, the Alberta government is developing an incentive program to encourage companies to increase production.
Oil production is currently at unprecedented levels; however, with numerous new and expanded pipeline projects underway, there is uncertainty regarding whether the industry can produce enough crude oil to justify the initiation of construction on the Pacific Link, which Smith aims to start building in the fall of 2027.
The province is looking to implement an “alternative enhanced royalty structure,” as stated by Smith, to motivate companies to focus on increasing oil production.
“We anticipate that once this proposal is on the table and all contributing factors are understood, there will be considerable interest in filling that pipeline,” Smith informed reporters in Fort McMurray, Alta., in September.
Demand for more oil
The forthcoming subsidy is expected to target the oilsands sector, as it constitutes the majority of oil production in the province, with new projects typically large enough to significantly elevate overall production figures.
The Alberta government currently offers financial incentives to oilsands companies for developing new projects, as they pay reduced royalties to the government during their initial years of operation.
A view of Suncor’s Base Plant oilsands mine. Suncor is one of the companies considering whether to proceed with expanding production in the oilsands. (Kyle Bakx/CBC)
Several companies have already indicated they may expedite the construction of new projects.
Imperial Oil was contemplating moving forward with its Aspen oilsands project by the end of the decade, but CEO John Whelan mentioned that this timeline could be advanced.
“We are evaluating whether to accelerate this,” he commented during a conference call with analysts on October 30, while recognizing the positive steps taken by both the provincial and federal governments to support the sector.
Suncor executives are reviewing their strategic growth plans for the coming years and considering how they might expedite their efforts if they choose to, according to CEO Rich Kruger.
“We are currently asking ourselves and conducting some preliminary analyses,” he stated during a conference call with analysts on November 4.
“We are all eagerly awaiting further information from the province regarding royalties and incentives. All parties are actively engaged in discussions and collaborating closely.”
The Oil Sands Alliance has chosen not to comment on the proposed incentives from Alberta until an official announcement is made.
Setting a timeline
Some oil companies may be hinting at potential growth plans to gauge investor interest and response. Despite favorable oil prices, many investors prefer that oil companies continue to generate substantial profits for shareholders rather than expend billions on new projects.
Investors are currently benefiting from significant profits and are hesitant to part with their returns, as noted by Mark Little, the former CEO of Suncor.
Company leaders are “assessing investors’ willingness to support expansion,” stated Little, to determine if they will back growth initiatives or advise against them.
“In my view, the greatest uncertainty regarding growth isn’t from the [federal government], nor from the province, nor financial resources,” remarked Little. “It hinges on whether investors will back it.”
The last significant oilsands project was developed almost ten years ago, which is why Little emphasizes the importance of investing in the future of the industry.
“I refer to this phase as the ‘liquidation phase’ because we have primarily focused on production, minimizing expenses, and returning cash to shareholders,” he said.
An aerial view of an oilsands mine north of Fort McMurray, Alta. Oil production continues to increase as companies expand and improve existing facilities. (Bob Grieve/CBC)
Little described the Alberta government’s intention to introduce a new incentive as “perplexing,” given that the current royalty framework is already sophisticated, adaptable, and effective. Nonetheless, he sees potential benefits in the provincial government setting timelines for companies to develop their owned properties.
Production from the oilsands continues to rise as companies invest in expansion projects and enhance their operational efficiencies.
Lennie Kaplan, a former senior manager with the Treasury Board, estimates that some level of incentives is crucial for companies to invest billions in new large-scale oilsands initiatives.
“These projects require substantial capital,” he noted, regarding the necessary investment levels.
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To achieve its objective of doubling oil output, the Alberta government, according to Kaplan’s calculations, would need to extend $115 billion in incentives from 2027 to 2050, which includes $95 billion in royalty relief and $18 billion in additional construction subsidies. In a scenario of normal oil prices, as projected by Alberta Energy, the government would collect an extra $250 billion in royalties.
However, in a low oil price scenario, the government would require $240 billion in incentives while facing a net fiscal loss of $80 billion.
Kaplan’s analysis also considers other factors, such as an increasing industrial carbon tax, which he emphasized is significant since the Alberta government remains committed to achieving net-zero emissions by 2050.