The Alberta government is set to announce new subsidies for oil companies later this month, aimed at increasing production to support the proposed Pacific Link pipeline to the West Coast.
This initiative comes as major oil firms report substantial profits in their latest financial statements, with the industry experiencing one of its most profitable years in the past decade.
Recent quarterly earnings from Suncor Energy, Cenovus Energy, Canadian Natural Resources, and Imperial Oil revealed combined profits exceeding $12.5 billion. The Canadian oil and gas sector is projected to achieve revenues over $200 billion by 2026, as per Studio Energy, following multiple instances of oil prices surpassing $100 US per barrel this year due to the U.S.-Iran conflict.
This context has led some industry analysts to question the necessity for new subsidies.
“What kind of incentives does the oil and gas sector really require?” asked Janet Annesley, a former executive with Husky Energy and Shell Canada, during an interview on CBC Radio’s Alberta at Noon.
“They have the funds, are repurchasing shares, and distributing generous dividends to shareholders. So, what more do we Albertans need to do to encourage them to invest here and initiate further projects?”
According to Annesley, Premier Danielle Smith must effectively communicate to Albertans the rationale behind providing additional incentives to oil companies.
Current oil production levels are at an all-time high, yet with various new and expanded pipeline projects in progress, there is uncertainty over whether the industry can produce sufficient crude to warrant the start of construction on the Pacific Link, which Smith aims to commence in fall 2027.
Smith has indicated that the province is working towards establishing an “alternative enhanced royalty structure” to motivate companies to boost oil production.
“We anticipate that once this proposal is presented and all relevant factors are considered, there will be significant interest in filling that pipeline,” Smith stated to reporters in Fort McMurray, Alberta, in September.
Increased oil production desired
The forthcoming subsidy is expected to target the oilsands sector, as this area is responsible for the majority of the province’s oil output, and new projects tend to be large enough to significantly elevate overall production levels.
The Alberta government currently offers financial incentives to oilsands companies to encourage the development of new projects, as they pay reduced royalties to the government during their initial operational years.
A view of Suncor’s Base Plant oilsands mine. Suncor is among the companies evaluating whether to advance production expansion in the oilsands. (Kyle Bakx/CBC)
Some companies are already suggesting that they might expedite the development of new projects.
Imperial Oil is contemplating a decision on its Aspen oilsands project by the decade’s end, with CEO John Whelan indicating that this could happen sooner than expected.
“We are considering whether to accelerate its timeline,” he stated during an analysts’ conference call on October 30, while acknowledging the positive impact of recent provincial and federal government actions to support the sector.
Suncor’s executives are assessing their growth strategies for the coming years and pondering how they might increase their pace if they choose to, according to CEO Rich Kruger.
“We are conducting some preliminary analyses and asking ourselves critical questions,” he remarked during an analysts’ conference call on November 4.
“We are eagerly awaiting further details from the province regarding royalties and incentives. All parties are actively engaged in discussions, working diligently together.”
The Oil Sands Alliance has refrained from commenting on the proposed Alberta incentives until a formal announcement is made.
Setting a deadline
Some oil companies may be hinting at potential growth strategies to attract investor interest and assess their willingness to support such plans. Despite favorable oil prices, many investors prefer that oil companies focus on generating substantial profits for shareholders rather than allocating billions toward new projects.
Many investors are benefiting from robust profit margins and are hesitant to relinquish the cash they receive, according to Mark Little, former CEO of Suncor.
Company leaders are “gauging the investors’ willingness for expansion,” noted Little, to determine if they will endorse growth initiatives or advise against them.
“In my view, the greatest uncertainty surrounding growth isn’t linked to the [federal government], the province, or finances,” Little explained, “It’s about whether investors will support it.”
Former Suncor executive Mark Little, depicted in 2022, asserts that the existing Alberta royalty system is effective. (Kyle Bakx/CBC)
The last significant oilsands project was initiated nearly ten years ago, which is why Little emphasizes the importance of investment for the industry’s long-term viability.
“I refer to it as the ‘liquidation phase’ because we have primarily been in a mode of production, minimizing spending, and returning profits to shareholders,” he remarked.
An aerial view of an oilsands mine north of Fort McMurray, Alberta. Oil production continues to rise as companies enhance and expand existing facilities. (Bob Grieve/CBC)
Little finds the Alberta government’s proposal for new incentives “puzzling,” since the current royalty framework is already sophisticated, adaptable, and operates effectively. Nevertheless, he believes there may be value in the provincial government imposing a deadline for companies to develop the properties they possess.
Oilsands production continues to grow as firms invest in expansion initiatives and seek improvements to their existing operations.
Lennie Kaplan, a former senior manager with the Treasury Board, estimates that some level of incentives will be crucial for companies to invest billions into constructing new large-scale oilsands projects.
“These projects require substantial capital,” he noted, highlighting the investment demands involved.
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To achieve its objective of doubling oil production, Kaplan estimates that the Alberta government 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 scenario, assuming normal oil prices as projected by Alberta Energy, the government could collect an additional $250 billion from royalties.
However, in a scenario characterized by low oil prices, the government would have to offer $240 billion in incentives while incurring a net fiscal loss of $80 billion.
Kaplan’s modeling also accounts for other factors, including an increasing industrial carbon tax, which he emphasized is significant given the Alberta government’s commitment to achieving net-zero emissions by 2050.