Later this month, the Alberta government plans to announce new subsidies aimed at oil companies to boost production, a move intended to support the proposed Pacific Link pipeline to the West Coast.
These financial incentives come as major oil producers are reporting billions in profits from their recent financial statements, with the industry enjoying one of its most profitable years in the last decade.
Recent quarterly earnings from Suncor Energy, Cenovus Energy, Canadian Natural Resources, and Imperial Oil show a combined profit exceeding $12.5 billion. According to Studio Energy, the Canadian oil and gas sector is expected to generate over $200 billion in revenue by 2026, fueled in part by oil prices that have surged above $100 US per barrel several times this year due to the U.S.-Iran conflict.
This situation raises questions among industry analysts regarding the necessity of additional subsidies.
Janet Annesley, a former executive at Husky Energy and Shell Canada, expressed her skepticism on CBC Radio’s Alberta at Noon, asking, “What kind of incentives does the oil and gas sector really need?”
She continued, “They’ve got money, they’re buying back shares, they’re distributing substantial dividends to shareholders. So what more do we Albertans need to do to encourage them to invest here and initiate more projects?”
Annesley pointed out that Premier Danielle Smith will need to “make a compelling case to Albertans about why we should be providing more 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.
Oil output is already at record highs, but with multiple new and expanded pipeline projects underway, there is doubt about whether the industry can produce enough crude to warrant the initiation of construction on the Pacific Link, for which Smith aims to start construction in the fall of 2027.
The province intends to establish an “alternative enhanced royalty structure,” as stated by Smith, to incentivize firms to boost oil production.
“We anticipate that once this proposal is on the table and they understand all the factors involved, there will be significant interest in filling that pipeline,” Smith mentioned to reporters in Fort McMurray, Alta., in September.
Increase in oil demand
The forthcoming subsidy is likely to focus on the oilsands sector, which is responsible for the majority of oil output in the province, and new initiatives tend to be sizable enough to significantly boost overall production.
Currently, the Alberta government offers financial incentives to oilsands companies for establishing new projects, as these companies pay considerably lower royalty rates to the government during their 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 hinting at the possibility of accelerating the development of new projects.
Imperial Oil has been contemplating a decision to move forward with its Aspen oilsands project by the end of the decade, but CEO John Whelan indicated that this could happen sooner.
“We are evaluating whether we want to expedite it,” he stated during an analysts’ conference call on October 30, acknowledging the encouragement from provincial and federal government actions to support the industry.
Executives at Suncor are reviewing their growth strategies for the coming years and considering how they might accelerate their plans if they choose to do so, according to CEO Rich Kruger.
“We’re asking ourselves and conducting some preliminary assessments,” he mentioned during a conference call with analysts on November 4.
“We are all eagerly awaiting further details from the province regarding royalties and incentives. The involved parties are actively collaborating and working hard together.”
The Oil Sands Alliance has refrained from commenting on the proposed Alberta incentives until an official announcement is made.
Setting a timeline
Some oil companies may be signaling possible growth strategies to attract investors and assess their interest. Despite high oil prices, many investors prefer that oil firms continue generating substantial profits for shareholders instead of investing billions into new projects.
Mark Little, the former CEO of Suncor, noted that many investors are currently enjoying robust profits and are hesitant to relinquish the cash they receive.
Little remarked that company leaders are “testing investors’ appetite for expansion,” trying to gauge whether they will endorse growth initiatives or advise against them.
“In my view, the major uncertainty surrounding growth isn’t the [federal government], nor the province, and not even funding,” stated Little, “It’s about whether investors will support it.”
The last significant oilsands project was completed nearly a decade ago, which is why Little emphasizes the need for the industry to invest in its long-term sustainability.
“I often refer to it as the ‘liquidation phase’ because we have primarily been focused on production, minimizing expenditures, and returning cash to shareholders,” he explained.
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)
Little described the Alberta government’s plan to introduce a new incentive as “mystifying,” given that the existing royalty framework is already comprehensive, adaptable, and effective. However, he acknowledged that there could be value in the provincial government establishing a deadline for companies to develop their owned properties.
Oilsands production continues to grow as companies invest in expansion and enhance their current operations.
Lennie Kaplan, a former senior manager with the Treasury Board, estimates that some level of incentives will be essential for companies to invest billions in new large-scale oilsands projects.
“These ventures are extremely capital-intensive,” he remarked, referring to the investment requirements.
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For the Alberta government to achieve its objective of doubling oil production, Kaplan’s projections suggest that the government would need to provide $115 billion in incentives from 2027 to 2050, which would encompass $95 billion in royalty relief and $18 billion in additional construction subsidies. Under a scenario of stable oil prices, as anticipated by Alberta Energy, the government could collect an extra $250 billion in royalties.
Conversely, in a low oil price scenario, the government would require $240 billion in incentives while facing a net fiscal loss of $80 billion.
Kaplan’s analysis also considers other factors, including a rising industrial carbon tax, which he highlighted as significant, given the Alberta government’s commitment to achieving net-zero emissions by 2050.