Subsidy game grows as Alberta NDP to invest up to $1B in partial upgrading


Like a frog jumping into a pot of warm water, Alberta continues to sink deeper into the energy subsidy game.

At what point does a hot bath become a boiling cauldron?

I suspect we’re all about to find out.

On Monday, the NDP government released a long-awaited report from its Energy Diversification Advisory Committee, formed to examine ways Alberta can move up the value-added energy chain.

As the oil and gas industry goes through a period of transformation, the province must do more to seize the opportunities to grow the sector, the report notes.

“Time is of the essence,” it states. “In short, this report is aimed at helping Alberta survive and thrive in an energy economy that is in the midst of profound change.” 

Following the report’s release, the government agreed to provide up to $1 billion — roughly $800 million in loan guarantees and $200 million in direct grants — over eight years to private-sector firms pursuing partial upgrading of bitumen.

Partial upgrading technology is still under development but holds significant promise, reducing the thickness of Alberta’s molasses-like bitumen so it can move through pipelines without needing as much diluent.

“Make no mistake, there is a role for us in incenting and fostering energy innovation and diversification,” Premier Rachel Notley said in Edmonton.

“We don’t need to sit on the sideline and watch places like Louisiana eat our lunch.”

Roughly 10 companies are now working on partial upgrading technologies in pre-commercial phases, although more development and investment is required.

Incentives should help companies charge ahead to prove the technology on a broader scale, which would provide benefits to the entire sector.

“They have definitely doubled down on the partial upgrading commitment, which is exactly the key opportunity we saw for Alberta,” said Ben Brunnen of the Canadian Association of Petroleum Producers.

“This probably moves the needle (for) an investment decision for some of our members. Will it be enough? It’s to be determined.”

If successful, partial upgrading would increase the value of the resource, expand the number of refineries that can use Alberta’s heavier crude, and generate fewer emissions per barrel than full upgrading.

It could save companies billions of dollars annually from having to purchase diluent and would free up space on constrained pipelines, by as much as 30 per cent.

For an industry struggling to get pipelines built in Canada, this would be a win.

The province said the $1 billion will leverage up to $5 billion in private sector investment, with two to five partial upgrading facilities being built, creating 200 full-time jobs.

But how far down the path of offering subsidies will Alberta travel?

This latest investment comes after the province agreed in 2016 to provide $500 million in royalty tax credits to two large petrochemical projects.

Both petrochemicals and partial upgrading seem like natural opportunities that play off of Alberta’s strength as a major energy producer. 

The committee also lays out a number of sensible recommendations, such as ensuring Alberta’s timelines for regulatory approval are in line with competing jurisdictions like Texas and Louisiana.

The panel suggests Alberta enter talks with B.C. with the goal of supporting a new liquefied natural gas (LNG) industry and recommends taking steps to enhance infrastructure for extracting natural gas liquids.

But it also proposes taking government investment activism to a level not seen in Alberta since the Getty era.

It recommends transforming Invest Alberta — an agency within Alberta Economic Development — into an organization that attracts investment with access to a “robust diversification fund.”

The committee suggests setting aside 30 per cent of all future royalty revenues, with the money dedicated to diversifying the downstream energy sector.

Such a commitment would be worth billions of dollars.

The report recommends Alberta use royalty tax credits, loan guarantees, direct investments and other “fiscal tools” to partner with the private sector.

These are risky ideas.

It’s almost as if there’s been a collective amnesia about the losses Albertans suffered from poor investments in NovaTel, MagCan, Gainers and the Bi-Provincial Upgrader that cost the provincial treasury billions of dollars.

Notley insists safeguards will be put in place to evaluate investments independently. “It’s not going to be some free-for-all,” she added.

Economist Trevor Tombe of the University of Calgary said partial upgrading would have broad benefits for Alberta’s energy sector. Freeing up pipeline capacity could have a material impact on reducing the oil price discount facing petroleum producers.

He’s more nervous about the idea of putting public money at risk in the pursuit of loosely defined economic diversification objectives.

“We’ve been down that road before with Peter Lougheed and Don Getty and it was not successful,” he said. 

Energy Minister Marg McCuaig-Boyd said the government will not accept a panel recommendation to create a stand-alone agency to administer such a diversification fund.

The idea of using 30 per cent of royalty revenues for investment into the downstream oil sector isn’t going ahead, either.

“We think it’s a great idea, but right now, it’s just not in the cards,” she said. “It doesn’t mean we won’t look at it further down the road.”

However, the energy minister said loan guarantees and direct investments in projects remain on the table. 

There are many sound ideas within the diversification study. Investing in research and development for partial upgrading makes sense if the program is well-designed.

But one can’t escape the feeling this path to more corporate subsidies and bigger incentives is leading the province into hot water.

And the temperature just keeps rising.

Chris Varcoe is a Calgary Herald columnist.