The government of Alberta is set to announce new subsidies for oil companies later this month, aiming to boost production to support the proposed Pacific Link pipeline to the West Coast.
These incentives are being introduced as major oil producers report profits in the billions in their latest financial statements, with the industry enjoying one of its most profitable years in the past decade.
Recent quarterly earnings from Suncor Energy, Cenovus Energy, Canadian Natural Resources, and Imperial Oil collectively exceeded $12.5 billion. According to Studio Energy, the Canadian oil and gas sector is projected to generate more than $200 billion in revenue by 2026, largely due to oil prices exceeding $100 US per barrel multiple times this year amid ongoing tensions in the U.S.-Iran conflict.
This situation has led some industry analysts to question the necessity of new subsidies.
“What kind of incentives does the oil and gas sector really need?” questioned Janet Annesley, a former executive at Husky Energy and Shell Canada, during an appearance on CBC Radio’s Alberta at Noon.
“They have the funds, they are repurchasing shares, and they are distributing substantial dividends to shareholders. So what more do we Albertans have to do to encourage them to invest here and initiate more projects?”
According to Annesley, Premier Danielle Smith will need to “make a strong case to Albertans” regarding the justification for 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.
While oil production is already at unprecedented levels, the development of several new and expanded pipelines raises uncertainty over whether the industry will produce sufficient crude oil to warrant the commencement of construction on the Pacific Link, which Smith hopes to see under construction by fall 2027.
The province aims to establish an “alternative enhanced royalty structure,” as stated by Smith, to motivate companies to increase oil production commitments.
“We anticipate that once this proposal is on the table, and they understand all contributing factors, there will be significant interest in filling that pipeline,” Smith remarked to reporters in Fort McMurray, Alta., in September.
Increased oil demand
The forthcoming subsidy is expected to focus on the oilsands sector, as it accounts for the majority of oil production in the province, with new projects capable of significantly enhancing overall production levels.
The Alberta government currently offers financial incentives to oilsands companies for launching new projects, as they pay significantly lower royalties during the initial years of their operations.
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 are already indicating they might expedite plans for 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 could happen sooner than previously expected.
“We are evaluating whether to accelerate this,” he noted during a conference call with analysts on October 30, recognizing the positive actions taken by provincial and federal governments to bolster the sector.
Suncor’s executives are reviewing their growth strategies for the upcoming years and exploring ways to potentially expedite their plans if they choose to do so, according to CEO Rich Kruger.
“We are examining this and conducting some initial assessments,” he stated during a conference call with analysts on November 4.
“We are all eagerly awaiting further details from the province regarding royalties and incentives. All parties are engaged in productive discussions, working diligently together.”
The Oil Sands Alliance has refrained from commenting on the proposed incentives from Alberta until an official announcement is made.
Setting a deadline
Some oil companies may be hinting at potential growth strategies to attract investor interest. Despite favorable oil prices, many investors prefer that oil companies continue generating substantial profits for shareholders rather than investing billions in new projects.
Many investors are benefiting from strong profits and may be hesitant to part with the cash they have accumulated, 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 back growth plans or caution against them.
“For me, the primary uncertainty regarding growth is not the [federal government], nor the province, nor funding,” added Little, “It’s whether investors will back it.”
The last significant oilsands project was completed nearly a decade ago, prompting Little to emphasize the necessity for the industry to invest to secure its long-term viability.
“I refer to it as the ‘liquidation phase’ because we’ve essentially been producing, minimizing expenses, 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 initiative to launch a new incentive is “puzzling,” according to Little, as the existing royalty system is already complex, adaptable, and functioning effectively. Nevertheless, he sees the potential benefit of the provincial government setting a deadline for companies to develop their properties.
Oilsands production continues to rise as companies pursue expansion initiatives and seek to enhance their current operations.
Lennie Kaplan, a former senior manager with the Treasury Board, estimates that some form of incentives will be essential for companies to invest billions in developing new large-scale oilsands projects.
“These projects require significant capital investment,” he stated, referring to the financial commitment necessary.
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To achieve its objective of doubling oil production, the Alberta government, based on Kaplan’s estimates, would need to allocate $115 billion in incentives between 2027 and 2050. This figure comprises $95 billion in royalty relief and $18 billion in additional construction subsidies. With normal oil prices as projected by Alberta Energy, the government could anticipate collecting an additional $250 billion in royalties.
Conversely, in a scenario of low oil prices, the government would need to provide $240 billion in incentives while incurring a net fiscal loss of $80 billion.
Kaplan’s modeling also incorporates other factors, such as a rising industrial carbon tax, which he noted is significant given Alberta’s commitment to achieving net-zero emissions by 2050.