The Alberta government is set to announce new financial incentives for oil companies later this month aimed at increasing production to support the proposed Pacific Link pipeline to the West Coast.
These incentives arrive as major oil producers report billions in profits in their most recent financial disclosures, with the industry enjoying one of its most profitable years in the last ten years.
Recent quarterly earnings revealed that Suncor Energy, Cenovus Energy, Canadian Natural Resources, and Imperial Oil collectively earned over $12.5 billion. The Canadian oil and gas sector is projected to generate revenues exceeding $200 billion by 2026, according to Studio Energy, following several instances of oil prices surpassing $100 US per barrel this year due to the ongoing U.S.-Iran conflict.
This has led some industry analysts to wonder why additional subsidies are necessary.
“What sort of incentives does the oil and gas sector genuinely require?” questioned Janet Annesley, a former executive at Husky Energy and Shell Canada, during an interview on CBC Radio’s Alberta at Noon.
“They have the funds, are buying back shares, and distributing substantial dividends to shareholders. So what more do we Albertans need to do to encourage them to invest and initiate more projects here?”
Annesley stated that Premier Danielle Smith must convincingly “make the case to Albertans on why further incentives for oil companies are warranted.”
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 output is already at unprecedented levels, yet with various new and expanded pipeline initiatives underway, there is uncertainty about whether the industry will produce enough crude to warrant starting construction on the Pacific Link — for which Smith aims to initiate construction 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 anticipate that once this is presented and they understand all the factors involved, I believe there will be significant interest in filling that pipeline,” Smith shared with reporters in Fort McMurray, Alta., last September.
Increased oil production desired
The forthcoming subsidy is likely to target the oilsands sector, given that it is the primary source of oil production in Alberta and new initiatives are often substantial enough to significantly boost overall production levels.
The Alberta government currently offers financial incentives to oilsands companies to initiate new projects, as they pay significantly lower royalties to the government during 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 signaling they might accelerate the timeline for launching new projects.
Imperial Oil was contemplating a decision on proceeding with 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 expedite it,” he stated during a conference call with analysts on October 30, acknowledging that the company is encouraged by the actions taken by both provincial and federal governments to bolster the sector.
Suncor executives are reviewing their growth strategies for the upcoming years and considering how they might speed up their plans if they choose to, according to CEO Rich Kruger.
“We are asking ourselves and undertaking some initial evaluations,” he remarked during a conference call with analysts on November 4.
“We are all eagerly awaiting more information from the province regarding royalties and incentives. All parties are fully engaged in discussions and collaborating diligently.”
The Oil Sands Alliance has refrained from commenting on the proposed incentives from Alberta until an official announcement is made.
Setting a timeline
Certain oil companies may be hinting at potential expansion plans as a means to gauge investor interest. Despite favorable oil prices, many investors prefer that oil firms continue generating substantial returns for shareholders rather than investing billions in new projects.
Numerous investors are enjoying the strong profits and are hesitant to relinquish the cash they receive, according to Mark Little, the former CEO of Suncor.
Industry leaders are “testing the waters with investors regarding their appetite for expansion,” Little noted, to ascertain whether they would support growth initiatives or advise against them.
“In my view, the most significant uncertainty surrounding growth isn’t from the [federal government], the province, or financial constraints,” stated Little, “It’s whether investors will back it.”
The last major oilsands project was completed nearly ten years ago, which is why Little emphasizes the necessity for the industry to invest to secure the long-term viability of the sector.
“I almost refer to it as the ‘liquidation phase’ because we have primarily been producing, minimizing expenditures, and returning cash to shareholders,” he remarked.
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 decision to introduce a new incentive is “puzzling,” according to Little, since the current royalty framework is already highly developed, adaptable, and effective. Nevertheless, he sees potential value in the provincial government imposing a timeline for companies to develop their owned properties.
Production from the oilsands 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 are crucial for companies to invest billions in constructing new large-scale oilsands projects.
“These projects demand substantial capital,” he stated regarding the investment level required.
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In order for the Alberta government to achieve its target of doubling oil production, Kaplan’s estimates suggest that the government would need to allocate $115 billion in incentives between 2027 and 2050, which includes $95 billion for royalty relief and $18 billion for additional construction subsidies. Under this scenario, assuming normal oil prices as projected by Alberta Energy, the government would gain an additional $250 billion in royalties.
Conversely, in a low oil price scenario, the government would be required to provide $240 billion in incentives while facing a net fiscal loss of $80 billion.
Kaplan’s analysis also considers other factors, including an increasing industrial carbon tax, which he mentioned is significant as the Alberta government remains committed to achieving net-zero emissions by 2050.