The value of Alberta's value-added strategy

In September 2005, on the occasion of the announcement of the closing of the Celanese petrochemical plant in Fort Saskatchewan, Parkland Institute published the report Back to Hewers of Wood and Drawers of Water: Energy, Trade and the Demise of Petrochemicals in Alberta. That report placed the Celanese closure in the context of the North American Free Trade Agreement (NAFTA) and Alberta’s increasing shift away from a concerted value-added strategy to a "rip it and ship it" approach to natural resource development. Given the increased jobs, economic stability, and revenue benefits of maximizing value-added resource processing, the report concluded with a series of recommendations to the provincial government.

Less than two years later, at the height of Alberta's bitumen-driven economic boom, Parkland built on those same themes, and numerous others, in the report Taming the Tempest: An Alternate Development Strategy for Alberta.

Both reports highlighted the degree to which Alberta had moved away from Peter Lougheed’s approach of building a well-balanced and diverse economic development strategy to one focused exclusively on getting our raw natural resources out of the ground and to market as quickly as possible, without any regard to adding value, creating long-term employment, or economic and environmental sustainability.

It is in this context that Parkland welcomed the formation of the Energy Diversification Advisory Committee (EDAC) by the Alberta government in the fall of 2016. It showed that the government took seriously the recommendation made earlier that year by the Royalty Review Advisory Panel that Alberta "make a bold stretch and seize opportunities to enhance value-added processing in the province, and position our energy industry for long term success."

EDAC completed its work in the fall of 2017 and the government made the final report public at the end of February, announcing that it would move quickly to implement the report’s recommendations. With the introduction of Bill 1, the Energy Diversification Act, in the Alberta Legislature on March 8, it did just that.

Given Parkland Institute’s past publications and recommendations in the areas of value-added processing and the importance of a comprehensive economic strategy, here is an brief analysis of how Bill 1 measures up.

What the government got right

There has been a long-standing need for Alberta to prioritize and focus on adding value to our natural resources. The implementation of NAFTA in 1994 had a series of impacts on the Canadian energy industry, but for the purposes of this blog the two most notable impacts were 1) the prohibition of preferential pricing for Canadian industries, and 2) the elimination of export taxes and Canada’s 25-year vital supply safeguard for energy. This level of deregulation, along with a significant increase in pipeline capacity for both natural gas and bitumen, resulted in it becoming much cheaper to ship out our resources raw to be refined and processed in the markets where the final products would be used.

Value-added processing not only increases the profit derived from our natural resources, but also creates more permanent jobs than straight extraction and provides some cushioning from the wild fluctuations in world prices. As the world begins its eventual transition away from fossil fuels it is more important than ever that Alberta derives as much value and long-term benefits as possible from the natural resources we extract.

The government’s quick movement on EDAC’s value-added recommendations is definitely positive. The launching of a Feedstock Infrastructure Initiative will increase the availability of natural gas liquids, ethane in particular, for use in petrochemicals. Likewise, the continuation of the Petrochemicals Diversification Program will provide strong incentives and supports for further investment in and growth of a value-added petrochemical industry in Alberta.

The move to build partial upgrading capacity in Alberta, whereby bitumen is upgraded to a level which allows it to flow through pipelines without the use of expensive diluent will increase export capacity, increase the number of refineries that can handle the product, and ultimately increase the price derived for the product, all while creating more long-term jobs in value-added industries here in Alberta.

All of these initiatives reflect the recommendations made by Parkland Institute over the years, and both EDAC and the government should be commended on finally moving forward with a concerted value-added strategy for Alberta.

What the government got not so right

The money

The second phase of the Petrochemicals Diversification Program is funded through $500 million in royalty credits, just as the first phase was. Although petrochemical facilities do not pay royalties themselves, they are able to trade the credits to an oil or gas producer to encourage their supply of feedstock. It’s an innovative approach in that it does not cost taxpayers anything up front and still provides some financial incentive to both facilities and producers. The Feedstock Infrastructure Initiative is funded more traditionally, with $300 million in grants and $200 million in loan guarantees. The partial upgrading program will benefit from $1 billion in direct government funding.

While these funding approaches will undoubtedly achieve their objectives in terms of investment, they are one-time close-ended initiatives that provide no support or incentive for value-added processing going forward.  A better way to provide long-term incentives to these kinds of initiatives would have been to build some progressivity into the province’s royalty regime, whereby the higher the level of processing and value-added a natural resource undergoes, the lower the royalty rate for that resource. This was the recommendation made by Parkland Institute 12 years ago—along with recommendations for higher royalty rates overall—and it still stands today. This kind of incentive requires significantly less cash investment up front while sending a strong signal that the province is committed to a value-added strategy going forward. It also serves as something of a disincentive to reverting back to “rip and ship” once the initial enticement runs out.

There is also the argument that Alberta tax dollars should not be going to fund industries unless those funds are buying Albertans a direct stake in said industry. Alberta’s petrochemical industry owes much of its early success to publicly owned ventures like Nova Corporation’s publicly owned predecessor, the Alberta Gas Trunk Line Company Ltd. (AGTL), and the founding by the Lougheed government of the Alberta Energy Company.

All of these alternate approaches would free up government resources, which could be used to fund some of the competing priorities highlighted by Ian Hussey in his blog on the EDAC.

The bitumen

The other area of concern is the question of why the government chose to stop at partial bitumen upgrading. If the evidence shows that moving higher up the value chain means greater benefits, why focus only on partial upgrading? The Parkland Institute reports mentioned above, as well as an in-depth 2014 report published by the Alberta Federation of Labour, argue that the more upgrading and refining done in-province, the better. There is absolutely no reason why we shouldn't be encouraging full upgrading and refining of our bitumen.

The contradiction

It is the question about partial upgrading that exposes the bigger contradiction in the Alberta government’s energy policy as a whole. One of the ways that Peter Lougheed was able to encourage value-added processing and the development of a petrochemical industry in the province was by requiring that all feedstock be stripped from the natural gas before the remaining gas was exported.  That policy was reversed in 1985 on the condition that natural gas exports would not negatively affect ethane supply to the province’s petrochemical industry, but that condition was never enforced.

Parkland’s 2005 and 2007 research into value-added processing found that a key to building up the industry in Alberta would be for the government to stop encouraging increased capacity for raw exports. "Set clear increasing targets for upgrading and refining and a declining cap on exports as the capacity comes on line. This would include a moratorium on any new pipelines for raw exports. There are five pipelines coming up for [federal government] approval for bitumen exports. Without the capacity to export, the industry would have to build the capacity in Canada," Diana Gibson wrote in Taming the Tempest.

As such, to simultaneously prioritize new bitumen pipelines and value-added processing is a fundamental contradiction that will see the government working at cross-purposes to itself. To refer to the objectives of Bill 1 as energy diversification is a bit of a misnomer; Alberta already has industries and investment across the entire value chain for its bitumen and gas resources. What Bill 1 seeks to do is alter the balance between raw exports and value-added processing, and maximizing value-added processing means limiting raw exports, which will not happen if new bitumen pipeline capacity is being built.

The bottom line

One of the key things to keep in mind as we consider Parkland Institute’s past recommendations on a value-added strategy is just how much the context for energy and industrial policy has changed over the past 12 years, especially given the implications of Canada’s (and by extension Alberta’s) commitments under the Paris Agreement, the growing international consensus around the need for a managed decline and energy transition, and the impacts of the new low-price climate. EDAC articulates these changes in the opening lines of its final report: "The global energy system is being transformed. Changes to technology, markets and public policy are disrupting how, where and how much energy is produced and consumed." There is also the reality of an unstable government to the south seeking to blow up NAFTA and increase its own energy nationalism.

All of these factors make continued expansion of a "rip it and ship it" approach to fossil fuels sheer economic folly, and make a concerted value-added strategy all the more important to ensure that Alberta is able to extract maximum value and benefit from our natural resources while we can, rather than locking ourselves into expensive export infrastructure that may never actually be used. The low-price climate makes such a strategy more affordable and economically viable than ever before.

While a concerted value-added strategy is critical for Alberta going forward, it cannot stand alone. The changed political and economic climate actually strengthens the case made by Parkland Institute in 2007 for a broad economic development strategy for the province—one that includes fair royalties, adequate long-term savings of oil and gas revenues, reduced economic dependence on fossil fuel industries, and a well-planned and managed eventual transition away from fossil fuel extraction. The Alberta government has already dropped the ball on the first two of those requirements, royalties and long-term savings, and while there is still hope for movement on reduced economic dependence and a planned energy transition, the current singular focus on increased bitumen production and export capacity makes significant progress on those fronts also seem unlikely.

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Photo credit: Premier of Alberta under a Creative Commons licence.