Investor confidence waning in Alberta

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Appeared in the Financial Post, December 8, 2015

For the past decade, investment in Alberta’s vast oil and gas resources has allowed the province to become Canada’s economic leader. Even when compared to other energy producing provinces and American states, Alberta was a top performer on economic indicators such as real GDP growth and private-sector employment growth between 2001 and 2012. Albertans have benefited greatly from the prosperity that was generated during this period.

But policies are changing in Alberta, and so too are perceptions about Alberta’s attractiveness to investment in oil and gas extraction. Some of the policy changes we have seen so far include increasing corporate income taxes by 20 per cent, instituting a new review of the province’s oil and gas royalties, and a new slate of environmental taxes and regulations. These new policies and changes hamper Alberta’s competiveness and may act as a deterrent to future investment.

Indeed, this was reflected in responses for Alberta in this year’s iteration of the Fraser Institute’s Global Petroleum Survey. The survey tracks the perceptions that investors in jurisdictions around the world have about whether various aspects of policies that govern the oil and gas industry—such as royalties and taxes, duplicative regulations, etc.—make a jurisdiction attractive to investment, or might deter investment.

When focusing purely on whether policy acts as a deterrent to investment, Alberta fell from the 16th most attractive jurisdiction in the world in 2014 to 38th of 126 jurisdictions in 2015, a drop of 22 spots.

This puts Alberta well behind competitors like Texas—the 4th most attractive jurisdiction in the world based on policies, and Saskatchewan and North Dakota, ranked 8th and 9th, respectively.

Digging into Alberta’s ranking helps illuminate why the province fell so much in the eyes of investors. Consider that measure of fiscal terms and royalties. In 2014, only 14 per cent of respondents said the province’s fiscal terms were a deterrent to investment. In 2015, amongst the uncertainty of a new royalty review, 39 per cent of Alberta’s respondents said that this area of policy was acting as a deterrent to investment.

By comparison, only five per cent of respondents in Saskatchewan and two per cent of respondents in Texas said that fiscal terms were a deterrent to investment.

And fiscal terms aren’t the only area where investor concern grew. The general tax system, uncertainty from environmental regulations, and political stability were all rated by investors as being much larger deterrents to investment over the previous year.

Ironically, the only area where Alberta experienced a large improvement, according to investors, was in the availability of labour and skills, likely reflecting the growing pool of potential labour that exists due to large layoffs in the wake of low oil prices.  

That perceptions about Alberta’s investment climate are changing should concern Albertans. As we saw with the last royalty review, perceptions can often become realities.

When the province last reviewed its royalty system and implemented changes under the Stelmach government in 2007, investor confidence in Alberta deteriorated, and so too did actual investment, while both British Columbia and Saskatchewan experienced increases in exploration and development spending.

It’s not all bad news for Alberta, though. The province does still have some of the world’s largest oil and gas reserves and these will continue to provide that province with opportunities for investment moving forward.

However, policy does matter and adding costs and uncertainty to an industry already hampered by low oil and gas prices policies is not the way to go. This will only act to deter future investment and perhaps some of the prosperity that comes with it. At this time, the province should be focused on pursuing policies that are both stable and competitive.

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