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As the world weathers an economic crisis being likened to the leadup to the Great Depression, Canada’s federal government is reportedly preparing a $15 billion bailout package for the oil and gas industry — which is raising questions about the best ways to support workers, while incentivizing environmental innovation.
Oil prices have tumbled alongside global markets, with the price of Western Canadian Select — the benchmark commonly used to measure the value of crude from Alberta’s oilsands — falling to just above US$5 per barrel last week.
Following reports of a federal bailout for the oil and gas industry, on Friday the Government of Alberta also announced it would step up support for the sector. The provincial government will make $113 million in payments for levies owed to the Alberta Energy Regulator — which is normally entirely funded by industry — on behalf of struggling companies for six months.
These moves have led some to question whether, and how, the oil and gas industry should be supported through the economic challenges of the pandemic.
The International Energy Agency is calling for governments to take into account climate challenges when designing stimulus and support packages.
“This situation is a test of governments and companies’ commitment to clean energy transitions,” wrote Fatih Birol, executive director of the International Energy Agency.
Warren Mabee, the director of the Queen’s Institute for Energy and Environmental Policy at Queen’s University in Ontario, is hopeful governments can look at the headwinds facing the industry prior to the COVID-19 pandemic — headwinds including lower oil prices, demand for action on climate change, reduced investor confidence and a supply glut — and support the industry in a way that acknowledges existing challenges.
And, in Alberta, those challenges were not insignificant.
“There was going to be a number of companies that … weren’t going to make it anyways. But [the recent oil price crash] is just speeding the whole process up significantly,” Chris Severson-Baker, Alberta regional director of the Pembina Institute, told The Narwhal.
But as Mabee points out, the current crisis isn’t just a result of the pandemic.
“The world [has been] telling us … demands are changing, so let’s get in front of it,” Mabee said.
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Canada’s auto bailout ‘disaster’
As oil prices remain low, calls are increasing for strengthened government response.
Last week, dozens of businesses in Alberta, including many companies from the oil and gas sector, signed a letter to the federal government asking for widespread relief programs in the face of the COVID-19 pandemic.
They requested, among other measures including postponing planned increases to the federal carbon tax and suspending income tax payments, “a federal Troubled Asset Relief Program (TARP) modeled after the U.S. program developed in 2008 to purchase positions in distressed companies.”
According to The Globe and Mail, Alberta Premier Jason Kenney has voiced support for similar measures, including a TARP-style program to facilitate the federal government’s purchase of shares in struggling oil and gas companies.
Measures like this have been tried in Canada before.
In 2009, facing a catastrophic collapse in the automotive sector in Ontario, the federal government sought to bail out the industry by providing a total of $13.7 billion in loans to Chrysler, GM and their Canadian subsidiaries. Many of those loans were converted into government-owned shares in the company, with the Ontario government also pitching in money in return for shares.
“What a disaster that bailout was,” Gordon Laxer, a political economist and professor emeritus at the University of Alberta, told The Narwhal.
He notes that Canadian taxpayers were left on the hook as the number of jobs in the industry dwindled and factories shuttered.
“The lessons from the TARP subsidy program should not be repeated,” Jeff Rubin, former chief economist with CIBC World Markets, told The Narwhal.
“When all was said and done, Canadian taxpayers were left holding the bag,” he said
“There’s not much to show for the money in terms of long-term job creation,” Rubin added. “Just because Ottawa buys shares in these companies doesn’t mean these companies are going to continue to employ Canadians in the future.”
That leaves open the question of how a struggling oil industry could be supported without leaving workers out of jobs — and taxpayers on the hook.
“The real question is: how do you design those longer-term funding packages to help the industry make a transition?” Mabee asks. “[A transition] that the industry itself might not yet understand or accept?”
The Government of Alberta, for its part, has been reluctant to provide funding for nascent clean energy industries in the province, cancelling Alberta’s rebate program for energy efficiency upgrades and scrapping the province’s renewable electricity program — creating uncertainty for former oil and gas workers transitioning to jobs in the solar sector.
As the oil industry faces yet another crisis, some are left wondering if governments at all levels should be more creatively incentivizing environmental innovation in the oil sector, while finding ways to support workers through the pandemic fallout.
Syncrude’s upgrading facility at the company’s Mildred Lake oilsands site. Photo: Alex MacLean
Beyond cash infusions to smart investments
Governments have tied bailouts and financial assistance to so-called green terms before, says the Pembina Institute’s regional director in Alberta, Chris Severson-Baker.
He points to the Pulp and Paper Green Transformation Program put in place by the Stephen Harper government from 2008 to 2012. The pulp and paper industry was suffering from reduced demand for Canadian lumber, a decline in interest in newsprint, a falling dollar, a global recession and other factors.
The Green Transformation program injected funds into the struggling industry by tying grants to company initiatives to improve environmental performance — specifically, the use of renewable energy and energy efficiency measures.
“By making a smart investment today, we are laying the groundwork for a greener, more secure future for the pulp and paper sector and the people who work in it,” Lisa Raitt, then minister of natural resources, said at the time.
Programs like this, Severson-Baker says, can help make companies — and industries — more competitive in the long run.
“It wasn’t just a cash infusion,” he told The Narwhal. “It was money to go towards things that would ultimately set them up to be lower-cost and more competitive in the future.”
In Alberta’s oil and gas sector, he said, that kind of program could include tying government funding to reducing methane emissions or cleaning up environmental liabilities, like shuttered oil and gas wells — an idea already alluded to by the office of the minister of natural resources. Finance Minister Bill Morneau told reporters last week that funding to put Albertans to work cleaning up orphan wells was in the works, though details are yet to be released.
The International Energy Agency is advocating that governments work environmental incentives into bailout programs in the face of the economic fallout from the COVID-19 pandemic.
“Large-scale investment to boost the development, deployment and integration of clean energy technologies … should be a central part of governments’ plans,” wrote Birol of the International Energy Agency.
That, he wrote, would “bring the twin benefits of stimulating economies and accelerating clean energy transition.”
Alberta loans industry-funded association $100 million to ‘increase the pace’ of orphan well cleanup
Calls for public funds to support workers, not companies
In the backdrop to discussions on how and whether to support a struggling oil and gas sector is a conversation that had been happening long before Saudi Arabia flooded the market with cheap oil or a pandemic caused world demand to plummet: is Alberta’s oil industry poised to be a major employer in the long term?
Ian Hussey, a researcher at the Edmonton-based Parkland Institute, doesn’t think so.
In a paper published earlier this month, Hussey found Alberta’s oilsands have been producing more bitumen in recent years, and at the same time have been creating fewer jobs.
From 2011 to 2019, he found labour productivity in the oilsands increased by 72 per cent, meaning less workers are needed to produce a barrel of oil.
“The industry in Alberta, and across Canada, has been shedding jobs consistently over the last five years,” Hussey told The Narwhal.
“We’re talking about an industry that is cutting costs, it’s cutting jobs, and it is the fastest-growing sector for greenhouse gas emissions in Canada,” he said.
“It’s unclear why the federal government would directly bail out those companies.”
There is a growing coalition of environmental groups calling for governments to target financial support during the pandemic to workers, not oil companies.
Dozens of groups signed an open letter sent to the Prime Minister earlier this week calling on the government to take into account the climate crisis when designing a bailout.
“The federal government has the opportunity with this stimulus package to immediately and directly support workers in Alberta and across the country while also investing in what is needed to grow and support a low carbon economy, and the kind of economy that can weather storms,” they wrote.
“Giving billions of dollars to failing oil and gas companies will not help workers and only prolongs our reliance on fossil fuels.”
While calling on the federal government to provide significant bailout resources to industry, in their open letter to the Prime Minister, Alberta CEOs also called for measures to be put into place to benefit the workforce including the creation of an ‘employee retention tax credit’ that would help companies pay wages and the provision of “immediate and universal income support to all Canadians during this crisis period.”
There is some early indication the federal government is considering how funds allocated to the oil and gas industry can positively impact workers and the environment.
“This could include making significant investments in orphan wells remediation, to help both companies and workers in the province,” Finance Canada spokesperson Pierre-Olivier Herbert said in a statement to the Financial Post.
Pipeline as a ‘lifeline’
While Rubin agrees that a one-size-fit-all bailout for the oil sector fails to take into account long-term trends in the industry, he is adamant that the industry isn’t going to shut down overnight, either.
“Let’s salvage what we can,” he said. “Alberta can’t just afford to shut it all down. There are consequences for people.”
And part of the bridge to the future, Rubin believes, is the completion of the Trans Mountain pipeline expansion project — in a way, its own government subsidy to the industry.
“If we’re going to throw the industry a lifeline,” he said, “I’d rather see them twin the pipeline.”
As Rubin explains, it’s not just COVID-19 affecting the industry, it’s supply-side issues as well, particularly the recent decision of Saudi Arabia — which produces oil at a fraction of the cost of Alberta’s oilsands — to flood the market with cheap oil.
“Let’s assume that this [pandemic] is ephemeral and will pass,” Rubin said. “What is not ephemeral is Saudi Arabia. They can make money at a low price, more than anybody else.”
In order for Alberta to sell oil at anything resembling an economical price, Rubin said, what’s known as the price differential between bitumen and West Texas Intermediate needs to be reduced. The quality of oilsands bitumen influences that differential, Rubin said, but so does access to markets.
He believes increasing pipeline capacity could help reduce that differential.
Severson-Baker of the Pembina Institute isn’t so sure that logic still holds true. “[Pipeline capacity] was clearly having an impact on the value that energy companies were receiving for their product prior to this downturn,” he said.
“I wonder if that same reality exists today. I just don’t know the answer to that.”
For Rubin, more pipeline capacity still seems likely to provide some relief for Albertan oil producers.
“I’m not for a moment suggesting building a pipeline is a panacea,” he said. “It’s a lifeline.”
A road sign directs traffic to Syncrude operations and the community of Fort MacKay along the main highway in Fort McMurray. Photo: Kris Krug
‘Deglobalization’
Regardless of the way a bailout program is rolled out, there are obviously going to be long-term economic and social implications of the COVID-19 pandemic.
One of them, according to economists, could be a trend toward “deglobalization.”
“Our interconnected global economy creates more problems than it solves,” Rubin told The Narwhal.
“It’s going to change the way that we organize our economies. And I’m not talking specifically of Canada, I’m talking about the world,” he said.
Laxer also anticipates a shift away from globalized economies as he sees the role of national governments becoming more clear, in the same way the New Deal highlighted how government spending could invigorate a struggling economy during the Great Depression in the United States.
“What we’ve seen with this pandemic is the importance of government. Governments are taking action,” Laxer said. “The market isn’t providing solutions for this, government is. Governments are national. We have no global government.”
“It’s going to lead to some deglobalization.”
‘Wake-up call’
Alberta hasn’t had a plan for how the province will cope with a decline in demand in the future, or how it will respond to climate change and the large number of liabilities left behind by struggling oil and gas companies, says Severson-Baker.
“We know that these challenges are there, we’re going to have to face them,” he said.
“It just seems like lack of a plan to deal with those things is really hurting us now,” he told The Narwhal. “We can’t just say, ‘okay, well, let’s just accelerate the plan.’ The plan still needs to be created.”
“There are a few things that we know we are going to have to deal with in the future. So, as much as possible, we should be trying to orient the stimulus towards dealing with those issues.”
And for some, that means directing more money toward an energy transition than to energy companies.
For Laxer, bailing out oil companies in an effort to save jobs would be akin to sending cash to Blockbuster Video stores in an increasingly online world.
“You can either have one of two kinds of transitions … you can bail it out with taxpayer money hoping that it’ll keep the industry afloat for a bit before it will fall off a cliff,” he said. “Or you can have a managed transition.”
“We should see this as part of the start of a managed transition.”
“This is really a wake-up call,” Laxer said. “Alberta needs to get onto something else, get off oil, and get workers moving into other industries.”
Mabee doesn’t think the demand for Alberta oil is going to totally dry up overnight, but he does see it changing — and changing dramatically.
“Can we anticipate that we help our industry adapt to that, and maybe get them there ahead of the curve so that they can take advantage?” he asks.
“That’s where I think there’s this huge opportunity.”
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