The Alberta administration is set to introduce fresh subsidies for oil firms later this month, aimed at boosting production to assist in filling the proposed Pacific Link pipeline to the West Coast.
These incentives arrive as major oil producers report billions in profits from their latest financial statements, with the industry witnessing one of its most profitable years in the past decade.
In recent quarterly earnings, Suncor Energy, Cenovus Energy, Canadian Natural Resources, and Imperial Oil reported a collective profit exceeding $12.5 billion. The Canadian oil and gas sector is projected to generate revenues surpassing $200 billion by 2026, as per Studio Energy, following multiple instances of oil prices soaring above $100 US per barrel this year amid the U.S.-Iran conflict.
This situation has led some industry analysts to question the necessity of new subsidies.
“What sort of incentives does the oil and gas industry genuinely require?” queried Janet Annesley, a former executive at Husky Energy and Shell Canada, during an appearance on CBC Radio’s Alberta at Noon.
“They have 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?”
Annesley remarked that Premier Danielle Smith must “make a compelling case to Albertans on why we should be offering more 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.
Although oil production has reached unprecedented levels, there is uncertainty regarding whether the industry will generate sufficient crude oil to warrant the initiation of construction on the numerous new and expanded pipeline projects in progress. Smith aims to begin construction on the Pacific Link in the fall of 2027.
According to Smith, the province is looking to establish an “alternative enhanced royalty structure” to motivate companies to increase oil production.
“We expect that once this is presented and the involved factors are understood, there will be substantial interest in filling that pipeline,” Smith stated to reporters in Fort McMurray, Alta., last September.
Increased oil demand
The anticipated new subsidy is likely to focus on the oilsands industry, as it accounts for the majority of oil production in the province, and new ventures are typically significant enough to noticeably boost overall production levels.
The Alberta government already extends financial incentives to oilsands companies for launching new initiatives, as they pay considerably lower royalties to the government during their initial operational years.
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 have already suggested they may accelerate their plans for new projects.
Imperial Oil was contemplating a decision regarding its Aspen oilsands project by the decade’s end, but CEO John Whelan indicated that this could happen sooner.
“We are evaluating whether we want to advance it,” he remarked during a conference call with analysts on October 30, acknowledging the company’s encouragement from the provincial and federal governments’ supportive actions toward the sector.
Suncor executives are examining their growth strategies over the next few years and considering how they might expedite plans if they choose to, according to CEO Rich Kruger.
“We’re conducting some initial assessments,” he mentioned during a conference call with analysts on November 4.
“We are all eagerly awaiting further information from the province regarding royalties and incentives. The parties involved are diligently collaborating and meeting frequently.”
The Oil Sands Alliance has refrained from commenting on the proposed Alberta incentives until an official announcement is made.
Setting a deadline
Certain oil companies may be signaling potential growth strategies to attract investor interest. Despite high oil prices, many investors prefer that oil firms continue to deliver substantial profits to shareholders rather than invest billions in new endeavors.
Many investors are enjoying robust profits and are hesitant to forgo the cash they receive, according to Mark Little, the former CEO of Suncor.
Company leaders are “assessing investors’ willingness to support expansion,” stated Little, to determine if they will endorse growth plans or advise against them.
“For me, the main uncertainty surrounding growth is not the [federal government], not the province, and not the funding,” remarked Little, “It hinges on whether investors will back it.”
The last major oilsands project was completed nearly ten years ago, prompting Little to emphasize the importance of industry investments for the sector’s long-term sustainability.
“I refer to it as the ‘liquidation phase’ because we have predominantly been producing, minimizing expenditures, and returning cash to shareholders,” he explained.
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)
The Alberta government’s initiative to implement new incentives is viewed as “puzzling,” according to Little, given that the existing royalty framework is already advanced, adaptable, and effective. Nevertheless, he expressed that establishing a deadline for companies to develop their properties could be beneficial.
Oilsands production continues to rise as companies invest in expansion initiatives and enhance current operations.
Lennie Kaplan, a former senior manager with the Treasury Board, believes that some level of incentives is essential for companies to invest billions in constructing new large-scale oilsands projects.
“These projects require significant capital investment,” he noted.
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In order for the Alberta government to achieve its objective of doubling oil output, Kaplan estimates that it would need to allocate $115 billion in incentives from 2027 to 2050, which includes $95 billion in royalty relief and $18 billion in additional construction subsidies. Under this normal oil price scenario, as anticipated by Alberta Energy, the province would garner an additional $250 billion in royalties.
Conversely, in a scenario with lower oil prices, the government would face the necessity of providing $240 billion in incentives while still experiencing a net fiscal shortfall of $80 billion.
Kaplan’s analysis also considers other factors, including an escalating industrial carbon tax, which he highlighted as significant, given the Alberta government’s commitment to achieve net-zero emissions by 2050.