For Big Oil, the Party’s Over in Alberta

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from Bloomberg Businessweek,

An election win by liberals strikes fear into the heart of Canada’s oil industry.

There’s a reason they call Alberta the Texas of the North. The province is home to Canada’s oil industry and produces more than three-quarters of the country’s crude. Cowboys are popular there. Each July, Calgary hosts the Stampede, a 10-day rodeo that’s one of the largest in the world. Alberta’s government also has deeply conservative, probusiness roots that predate the Republican Party’s ascension in the Lone Star State. The Progressive Conservatives have controlled Alberta’s provincial government since 1971, ushering in an era of loose regulation and low taxes that helped give rise to the development of Alberta’s vast tracts of tarlike oil sands.

Now, there’s a new sheriff in town. On May 5, the liberal New Democratic Party won a general election, ending the conservatives’ four-decade reign and delivering a blow to the spiritual home of Canada’s conservative movement. The NDP’s brand of social democratic politics tends to favor things like subsidized day care and government job-creation schemes over low corporate tax rates. Leader and soon-to-be Premier Rachel Notley, a 51-year-old lawyer whose father ran the party in the 1970s, plans to make the oil industry pay up and fill a C$7 billion ($5.8 billion) budgetary gap for schools and hospitals—even after crude prices collapsed last year. “We need finally to end the boom-and-bust roller coaster that we have been riding on for too long,” she said in her May 5 victory speech. That means higher corporate taxes, a review of royalties that companies pay the government for extracting fossil fuels, and tougher environmental and climate rules for a province that accounts for 38 percent of Canada’s carbon emissions.

Notley’s challenge is to squeeze industry without killing the economy. Low oil prices have already erased C$100 billion of value from Canadian oil and natural gas stocks since last June. That’s led to slower growth and higher unemployment as the industry sheds an expected 30,000 jobs this year. “Alberta’s economy is in the doldrums with a recession on the horizon,” says Jack Mintz, director of the University of Calgary’s school of public policy. “Ms. Notley is trying to calm the business sector as she makes clear that she understands the energy sector.”

Outgoing Premier Jim Prentice, a former federal cabinet minister and bank executive, riled voters last year by increasing income taxes—while sparing corporations—to plug a budget shortfall, even as a survey by his own government showed about three-quarters of Albertans wanted companies to share the burden. Prentice countered that corporations hit with higher taxes would cut thousands of jobs (which they did anyway) and that Albertans should “look in the mirror” for the cause of years of rising health-care and education costs. He and the conservatives got hammered at the polls, losing 61 of their 70 seats in the legislature.

The election of the NDP has been enough to spook investors in Alberta oil companies. The day after the vote, the S&P/TSX Composite, an index of Canadian energy companies, had its worst plunge in three months. “Oil sands to me is public enemy No. 1 in the new premier-elect’s mind,” says Eric Nuttall, a Toronto-based fund manager at Sprott Asset Management. “The investment thesis in all of those stocks evaporated overnight.”

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