The Alberta government is set to announce new subsidies this month aimed at oil companies to increase production, which is intended to facilitate the filling of the province’s proposed Pacific Link pipeline to the West Coast.
These incentives will be introduced at a time when major oil producers are reporting substantial profits, with the industry as a whole enjoying one of its most profitable years in the past decade.
In their recent quarterly earnings, Suncor Energy, Cenovus Energy, Canadian Natural Resources, and Imperial Oil reported combined 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 exceeding $100 US per barrel this year due to the ongoing U.S.-Iran conflict.
This context raises questions among industry analysts regarding the necessity of additional subsidies.
“What type of support does the oil and gas industry really require?” queried Janet Annesley, a former executive with Husky Energy and Shell Canada, during an interview on CBC Radio’s Alberta at Noon.
“They possess significant capital, are buying back shares, and distributing substantial dividends to their 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 will need to “make a compelling case to Albertans as to why we should be offering more incentives to oil corporations.”
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.
Although oil production has reached all-time highs, uncertainty remains regarding whether the industry can produce sufficient crude oil to warrant the commencement of construction on the new and expanded pipeline projects currently underway. Premier Smith aims to start construction on the Pacific Link by the fall of 2027.
The province is looking to implement an “alternative enhanced royalty structure,” as stated by Smith, to incentivize firms to commit to increasing oil production.
“We anticipate that once this structure is presented and they understand all the elements involved, we believe there will be significant interest in filling that pipeline,” Smith informed reporters in Fort McMurray, Alberta, in September.
Increased oil production needed
The forthcoming subsidy is anticipated to focus on the oilsands sector, as it constitutes the majority of the province’s oil production, and new undertakings are typically substantial enough to notably elevate overall production figures.
The Alberta government currently offers financial incentives for oilsands companies to initiate new projects, as they enjoy significantly reduced royalty rates in the 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)
Some companies are already indicating a willingness to accelerate their plans for new projects.
Imperial Oil is contemplating a decision regarding its Aspen oilsands project by the decade’s end, with CEO John Whelan suggesting that this could happen sooner than anticipated.
“We are evaluating whether to expedite it,” he remarked during a conference call with analysts on October 30, noting the company’s optimism regarding provincial and federal government measures that support the industry.
Suncor’s executives are reviewing their growth strategies for the upcoming years and considering how they might accelerate their plans if they choose to, according to CEO Rich Kruger.
“We are conducting preliminary assessments,” he stated during a conference call with analysts on November 4.
“We are eagerly awaiting further details from the province regarding royalties and incentives. All parties are actively collaborating and working diligently together.”
The Oil Sands Alliance has refrained from commenting on the proposed Alberta incentives until an official announcement is made.
Setting a timeline
Some oil companies may be signaling potential growth initiatives to attract investor attention and gauge interest levels. Despite favorable oil prices, many investors prefer that oil companies maintain substantial profits for shareholders rather than expend billions on new projects.
Investors are currently enjoying robust profits and are hesitant to relinquish their returns, according to Mark Little, the former CEO of Suncor.
The corporate leaders are “assessing investors’ willingness for expansion,” Little stated, to determine whether they will endorse growth plans or caution against them.
“To me, the greatest uncertainty regarding growth isn’t the [federal government], nor the province, nor financial resources,” remarked Little, “It’s whether investors will back it.”
The last major oilsands project to be launched was nearly ten years ago, which is why Little emphasizes the necessity for the industry to invest to secure its long-term viability.
“I often refer to it as the ‘liquidation phase’ because we have primarily been focused on production, minimizing expenditures, and returning cash to shareholders,” he asserted.
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 plan to introduce a new incentive as “puzzling,” given that the current royalty system is already complex, adaptable, and effective. However, he believes there could be value in the provincial government establishing a deadline for firms to develop their owned properties.
Oilsands production continues to rise as companies invest in expansion initiatives and enhance existing operations.
Lennie Kaplan, a former senior manager with the Treasury Board, estimates that some form of incentives is essential for companies to allocate billions toward constructing new large-scale oilsands projects.
“These initiatives demand extensive capital investment,” he explained regarding the level of funding required.
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To achieve its objective of doubling oil production, the Alberta government, according to Kaplan’s assessments, would need to allocate $115 billion in incentives between 2027 and 2050. This figure includes $95 billion in royalty reductions and an additional $18 billion in construction subsidies. Under a scenario of standard oil prices, as projected by Alberta Energy, the government would collect an extra $250 billion in royalties.
Conversely, in a situation with reduced oil prices, the government would require $240 billion in incentives while facing a net fiscal loss of $80 billion.
Kaplan’s analysis takes into account other factors, including an increasing industrial carbon tax, which he highlights as significant due to the Alberta government’s commitment to achieving net-zero emissions by 2050.