There have been a number of recent interesting economic and legal developments aimed at generating greater investment in Alberta-particularly in areas that will help diversify the provincial economy and make it more resilient to energy commodity price shocks and difficulties in accessing markets. Some of these developments are directly related to the COVID-19 pandemic and the adverse impact it has had on the economy generally and specifically with respect to energy commodity prices. Other developments result from pre-pandemic macroeconomic conditions, as well as the provincial election in 2019. These developments may be of interest to existing, new and potential investors in Alberta.
Part 1: Opportunities in Alberta's petrochemical industry
At the heart of what the government calls the "New Alberta Advantage" is a desire to expand the petrochemical industry in Alberta. The government needs to seize this opportunity, given the province's skilled workforce and significant resource endowments. The government has embraced a strategy to expand and diversify the petrochemicals industry as part of its larger Natural Gas Vision and Strategy, announced on October 6, 2020. The government proposes that supporting the province's capacity to produce petrochemicals is a means to attract investment, capitalize on the education and skills of Albertans, capture a larger share of the commodities value chain, and to mitigate and avoid some of the market access challenges that currently face crude oil, bitumen and natural gas.
Every day, people around the world use dozens of products that are made with petrochemicals, including:
- medical supplies, personal protective equipment, including face shields, masks and gloves, components for ventilators, and computers for X-rays and MRIs;
- commercial fertilizers;
- polyester fabric, televisions, cellphones, bicycle helmets, household appliances and computers;
- car tires and automotive parts;
- desks, chairs, carpets and office supplies; and
- food packaging to keep food fresh and safe during transport and storage.
Alberta already has a significant petrochemical industry, and is Canada's largest hub for refining and petrochemical production. There are 36 chemical and petrochemical manufacturers currently operating in central Alberta. In 2019, the production of industrial chemicals contributed $12.1 billion to the province's economy and employed over 58,000 people directly and indirectly. Methane, ethane, ethylene and propane, among others, are some of the petrochemicals produced in Alberta which are used as the chemical building blocks for manufacturing.
There are five petrochemical production hubs in Alberta, each of which has rail access to export markets. Alberta has four ethane-cracking plants, including two of the worlds largest, with a combined annual capacity of 4.1 million tons per year of ethylene output. These plants make plastics and other building block chemicals from natural gas liquids. The National Energy Board of Canada (now the Canada Energy Regulator) estimated that Alberta's ethane gathering system has an excess ethane supply, which can be tapped to build new steam cracking capacity in the province.
Alberta produces significant volumes of petrochemical feedstocks for manufacturing. The province currently produces an estimated 10 bcf/d of natural gas and 160,000 bbl/d of propane, both in excess of domestic demand, with large quantities available for petrochemicals applications. The province accounts for 68% of Canadian natural gas production and is a major exporter of natural gas and natural gas liquids. The in-Alberta price of petrochemical feedstocks is often lower than the price in other markets and this value differential supports the economics for investing in new or expansions of existing petrochemical facilities in Alberta.
In addition to the availability of feedstock for petrochemical production, Alberta has extensive infrastructure in place, which can help to accommodate new petrochemicals production capacity. Furthermore, Alberta's existing carbon capture infrastructure and geology make the province well-positioned to produce petrochemicals with lower greenhouse gas emissions. The province has the most comprehensive natural gas and natural gas liquids transportation and processing capacity in Canada, with the Nova Gas Transmission Line system, the Alberta Ethane Gathering System and in-depth natural gas liquid extraction infrastructure integrating upstream hydrocarbon production with downstream consumers.
Projects on the horizon
With global demand for petrochemicals expected to continue to increase, there is great potential for expansion in Alberta's petrochemical sector. The government's goal is to establish Alberta among the world's top ten petrochemical producers by 2030. The Alberta Industrial Heartland Association, a non-profit group of municipalities near the Industrial Heartland area northeast of Edmonton, estimates that there could be a further $30 billion of private-sector investment in the province's petrochemical industry by 2030.
The petrochemical industry in Alberta is considered an essential service and has remained active through the COVID-19 pandemic. Industry participants have adapted to the public health crisis and petrochemical production has supported the increased demand for products made from petrochemicals such as personal protective equipment, acrylic shields, ventilators, and COVID-19 testing kits.
The province will be home to Canada's first two propane derivatives plants, each of which will produce polypropylene (a plastic product) from propane: the 525,000 tonne per annum Heartland Petrochemical Complex, currently under construction by Inter Pipeline Ltd., and the 550,000 tonne per annum complex to be constructed by Canada-Kuwait Petrochemical Corporation, a joint venture between Pembina Pipeline Corporation and Kuwait's Petrochemical Industries Company.
On May 11, 2020, two Canadian companies, NOVA Chemicals Corporation, a prominent producer of chemicals and plastic resins, and Enerkem Inc., a world-leading renewable fuels and chemicals producer, announced the signature of a joint development agreement to explore turning non-recyclable and non-compostable municipal waste into ethylene. Enerkem Inc. is the first company in the world to produce renewable methanol and ethanol from non-recyclable, non-compostable municipal solid waste on a commercial scale. This joint venture is a unique and cutting-edge component of Alberta's growing petrochemical industry. It has the potential to unlock the potential of the "circular economy", and recover and recycle plastic initially created for single-use. The government is encouraging of these initiatives, in alignment with its goal of taking stewardship and accountability over plastics management, and becoming the centre of excellence for plastics diversion and recycling in Western North America by 2030.
New Petrochemical Incentives Program aims to maintain momentum
As part of the province's pandemic Recovery Plan, on July 9, 2020, the government announced the Alberta Petrochemicals Incentive Program (APIP), a 10-year program to attract multi-billion dollar investments in the petrochemical sector. APIP is intended to be a re-branding, improvement, and expansion of the province's 2016 Petrochemicals Diversity Program (PDP). Under APIP, the government does not intend to cap grants available to petrochemical facilities developers, according to Samantha Peck, the press secretary for the Ministry of Natural Gas and Electricity.
APIP grants will be provided in line with typical investment cycles, and are anticipated to give petrochemical developers the ability to account for the full value of this incentive in their project modeling, rather than trying to estimate the value of royalty credits in an unpredictable market. On October 6, 2020 in the press conference announcement of the Natural Gas Vision and Strategy, Premier Jason Kenney indicated that APIP grants would take the form of provincial income tax relief, once petrochemical projects are commissioned and operational. In this way, APIP differs from PDP with its more cumbersome system of marketable royalty tax credits. The government pledged that APIP grants will be provided to every project that applies and meets the criteria. However, more specific terms of the grants are uncertain at this time as the government continues its engagement with industry stakeholders to finalize the technical design of the program. The government's announcement indicated that details about the application process and program guidelines are in development and will be made available at the official launch of APIP in fall 2020, but we are still waiting for those details.
The government anticipates that growth in the petrochemical sector through APIP could create more than 90,000 direct and indirect jobs over the construction and operation periods of new facilities, and more than $10 billion in revenue from corporate and personal income taxes.
Part 2: Projects, programs and policies that can support Alberta's growing petrochemical industry through regulation, environmental leadership and new infrastructure
(a) Legislative changes to promoteinvestment
Corporate Income Tax reductions
Alberta is the most tax-competitive business jurisdiction in Canada, and is among the most attractive investment destinations in North America. The government announced its "Job Creation Tax Cut" in 2019. Through the tax cut, the government was to reduce Alberta's corporate income rate from 12% to 8% by 1% increments by January 1, 2022. These reductions have been accelerated though the Recovery Plan, such that Alberta's corporate income tax rate was reduced to 8% effective July 1, 2020. This does not affect the federal corporate income tax rate, which applies across Canada.
"Red tape" reduction
As of June 2020, the government completed more than 200 initiatives to eliminate "red tape" that reduces administrative efficiency and job creation. On June 11, 2020, the government proposed to eliminate further procedural burdens and bureaucratic barriers in order to create new jobs and bolster economic growth in Alberta and tabled Bill 22, the Red Tape Reduction Implementation Act, 2020 (Bill 22) to achieve this. Bill 22 received Royal Assent on July 23, 2020 and will enact changes to 14 statutes across six ministries; these changes come into force upon proclamation.
The amendments that Bill 22 makes to the Business Corporations Act and the Partnership Act are aimed at increasing investment in Alberta. The changes made to both statutes seek to increase foreign and extra-provincial investment and reduce barriers that both corporations and partnerships face when coming to Alberta. Bill 22 does this by removing the requirement for corporations to have directors who are residents of Canada and substituting the requirement to have an "agent for service" who is an Alberta resident. Bill 22 significantly streamlines the process of forming limited partnerships in Alberta (by reducing the public disclosure requirements), provides limited partners with greater statutory rights, and makes it clear that the laws of the jurisdiction of formation of an extra-provincial limited partnership will apply to determine the limited liability status of its limited partners. These changes are investor-friendly and are intended to make Alberta laws as or more attractive than the laws of other Canadian jurisdictions, such that Alberta either has a competitive advantage or is on equal footing with those jurisdictions.
Another change brought about by Bill 22 is a streamlining of the approval process for new oil and natural gas projects, with a goal of giving investors greater certainty that projects will be approved, and will be able to proceed sooner. This acceleration can be seen in both the Mines and Minerals Act and the Oil Sands Conservation Act, where the requirement for certain Cabinet approvals of the Minister of Energy's or Alberta Energy Regulator's (the AER) recommendations will be removed. As a result, the Minister of Energy's or AER's decision will be determinative in these situation without the further review and approval by the Cabinet, saving time and expense.
Bill 22 will also remove Cabinet oversight under the Marketing of Agricultural Products Act and the Municipal Government Act.
Invest Alberta Corporation
On July 31, 2020, Bill 33, the Alberta Investment Attraction Act, came into force. Through this new legislation, the government has created Invest Alberta Corporation (IAC), which has a mandate to work closely with banks and investors globally to define and defend Alberta's leadership on environmental, social and governance standards across all sectors, and to outline major capital investment opportunities as the province recovers from the pandemic. IAC will coordinate the work of Alberta's 11 trade promotion offices around the world and expand its footprint to include key foreign markets for Alberta, beginning with establishing permanent staff in Houston, Texas.
Seven members have been appointed to IAC's board of directors, with diverse backgrounds and professional experience. The board will determine IAC's strategic direction and announced on September 23, 2020 that it has appointed Dr. David Knight Legg as IAC's CEO. Dr. Legg was formerly the Principal Advisor to the Premier of Alberta where his focus was on capital markets, investment, tax, sector diversification, Indigenous equity participation, and environmental, social and governance matters.
Support for innovation in smaller enterprises
On July 22, 2020, the government introduced the Innovation Employment Grant, which is intended to encourage economic growth by supporting small and medium-sized businesses that invest in research and development (R&D) with a grant worth up to 20% of their qualifying expenditures. The Innovation Employment Grant will be delivered through the corporate tax system, and will provide up to $4 million in annual R&D spending. The legislation governing the Innovation Employment Grant will be introduced in the fall of 2020.
(b) Environmental leadership
Carbon pricing and capture
The Technology Innovation and Emissions Reduction (TIER) Regulation came into effect on January 1, 2020. TIER replaces and updates Alberta's Carbon Competitiveness Incentive Regulation. Through TIER, the government aims to manage emissions without disrupting investment through overregulation. TIER applies to any facility that emitted 100,000 tonnes or more of carbon dioxide equivalent (CO2e) greenhouse gases in 2016, or any year following. Facilities with fewer than 100,000 tonnes of CO2e green house gas emissions may be eligible to opt into TIER. The ability to opt in is available in respect of a facility that competes against a TIER-regulated facility or that has greater than 10,000 of annual emissions "in an emissions-intensive, trade-exposed sector."
TIER meets the federal government's carbon pricing requirements - and by opting in, operators of facilities may apply to become exempt from the application of the federal Greenhouse Gas Pollution Pricing Act. TIER was designed to drive continued reductions in emission intensity. It configures emissions obligations by one of two approaches: a facility-specific approach or a high-performance benchmark approach. The facility-specific benchmark calls for a 10% reduction relative to a facility's average emissions intensity. The high performance benchmark, which applies to facilities that have already made substantial progress in reducing their emissions, is linked to the average emissions of the most efficient facilities in the industry. TIER seeks to achieve emissions reduction with a more cost-efficient approach tailored directly to Alberta's industries, while maintaining robust regulation and upholding the highest environmental standards.
Alberta was also the first jurisdiction in North America to direct dedicated funding to implement carbon capture and storage technology across industrial sectors. The province has committed $1.24 billion through 2025 to fund two commercial-scale carbon capture and storage projects. Both projects will help reduce the C02 emissions from the oil sands and fertilizer sectors, and reduce greenhouse gas emissions by 2.76 million per year.
Payments made through the TIER program are allocated into the TIER fund, which will be used for research and investment in carbon capture utilization and storage, and improved oil sands extraction. On September 22, 2020 the government announced that it will spend $750 million from the TIER fund to support projects across all of Alberta's industries reduce their carbon emissions, with a particular focus on advancing carbon capture and sequestration technology. The province's $750 million investment will be supplemented with money from industry and other sectors, for a total investment of $1.9 billion in Alberta's economy, which is intended to create 3,400 jobs through the provincial funding, and up to 8,700 jobs through partnerships with private enterprises who collaborate with the province to make investments aimed at reducing emissions.
In April 2020, the federal government announced a $750 million emissions reduction fund that will help companies continue their progress to reduce methane emissions. Canada's oil and natural gas industry has committed to a 45% reduction of methane emissions by 2025. On August 17, 2020 the federal government announced that eligible conventional and offshore oil and gas companies will be able to apply to a new "repayable contribution program", which will provide repayable loans up to $675 million. The remaining amount, up to $75 million, is for investments in emissions reduction and research and development in the offshore sector, and some of the federal government's contributions in the offshore sector may be non-repayable.
At the provincial level, the AER has developed requirements to address the primary sources of methane emissions from Alberta's upstream oil and gas industry: fugitive emissions and venting. The AER's requirements are set out in Directive 060: Upstream Petroleum Industry Flaring, Incinerating, and Venting and Directive 017: Measurement Requirements for Oil and Gas Operations. The methane reduction requirements in Directive 060 came into effect on January 1, 2020, while the requirements in Directive 017 went into effect immediately upon the directive's release in December 2018.
The emerging market for hydrogen is forecast to increase ten-fold and be worth $2.5 trillion by 2050, offering a potential solution for carbon-intensive sectors such as heavy industry and freight. Alberta is one of the world's largest hydrogen producers, and produces it at the second-lowest cost worldwide, after Russia. Both the federal and Alberta governments are seeking to build on existing hydrogen and natural gas production, with a goal of becoming the frontrunner producer for the world's hydrogen needs. Pure hydrogen can be burned to produce heat in a furnace or engine, just like oil or natural gas. Hydrogen can also be channeled into a fuel cell to produce electricity. Interest in hydrogen as an alternative energy source is on the rise, as hydrogen burns without emitting carbon dioxide, and has been heralded as a potential solution to global emissions and energy storage challenges. In the longer term, the government's goal is to deploy large-scale hydrogen production with carbon capture, utilization and storage in various commercial settings in the province by 2030, and to export hydrogen and hydrogen-derived products to other provinces and countries by 2040.
Hydrogen does not naturally occur in commercially producible quantities, and not all hydrogen is created equally. "Grey" hydrogen is produced using fossil fuels such as natural gas, and accounts for roughly 95% of the hydrogen produced globally. "Blue" hydrogen is made by extracting hydrogen from natural gas using steam methane reformation, and then using carbon capture and sequestration technology to store the remaining carbon. "Green" hydrogen is generated through electrolysis using renewable energy sources, such as solar or wind power.
In July 2020, the government announced $10.8 million in funding for the three hydrogen projects in Alberta. The goal of Alberta's hydrogen plan is to establish "a very aggressive and profitable hydrogen industry", including maintaining the province's position as the leading hydrogen producer in Canada, according to Dale Nally, Alberta's Associate Minister of Natural Gas. The announcement this summer pledged $5 million for a prototype and field-testing for a new method of extracting hydrogen from natural gas, and $3 million on the development of a new early-stage technology to use heat to crack methane into hydrogen and other byproducts. ATCO Ltd. will also receive $2.8 million in provincial funding for a $5.7 million project to be built next year that will blend blue hydrogen into natural gas streams distributed for home heating in Fort Saskatchewan, near Edmonton.
A key benefit to Alberta's hydrogen market is the extensive pipeline and carbon dioxide transportation systems, including Air Products' Heartland Hydrogen pipeline, the Alberta Carbon Trunk Line and the Quest Carbon Capture and Storage Project. Current gas conduits can flow with as much 20% of their streams consisting of hydrogen, and many home furnaces could handle increased hydrogen amounts, providing a ready market for the fuel and a quick way to reduce carbon emissions.
At the national level, the federal government has indicated that a national hydrogen strategy is forthcoming. This plan is expected to be premised on the use of both blue and green hydrogen.
(c) Energy infrastructure projects to support new investors
By the end of 2020, Alberta will have seen the largest-ever government investment in infrastructure. The government has earmarked $10 billion to be spent on projects across the province. These projects are intended to establish the foundation for the private sector to create 50,000 jobs while creating many collateral benefits for Alberta, and drawing additional investors to established and emerging industries in Alberta.
On April 1, 2020 the government announced a $1.5 billion equity investment in the Keystone XL Pipeline (Keystone XL), coupled with a $6 billion loan guarantee. During the next two years of construction, Keystone XL will directly and indirectly support 7,000 jobs, spurring increased economic activity in associated trades, retail, and hospitality services along the construction route. TC Energy Corp. the primary proponent announced on September 29, 2020 that a memorandum of understanding had been reached with Natural Law Energy, which represents four First Nations in Alberta and one in Saskatchewan, for a minority investment in Keystone XL.
Overall, the government estimates that Keystone XL will contribute approximately $2.4 billion to Canada's GDP, and in its first year of service, will generate more than $7 million in property taxes. Keystone XL could generate $30 billion in tax and royalty revenues over the life of the pipeline.
Despite legal challenges, protests and blockades related to the construction of the Trans Mountain Pipeline expansion, construction of the expansion is underway. Courts of all levels, including the Supreme Court of Canada, have repeatedly confirmed the validity of the approvals for and processes undertaken in respect of the pipeline. On January 16, 2020 the Supreme Court of Canada ruled in support of the Trans Mountain Pipeline expansion going forward, and the Government of British Columbia has since announced that it will not initiate further challenges against the Trans Mountain Pipeline. In March 2020, the Supreme Court of Canada declined to hear five additional challenges to the federal government's decision to approve the expansion and, in June 2020, declined to hear additional challenges to the adequacy of the government's consultation efforts. Construction is ongoing in Alberta and Kamloops, British Columbia, and expansion work continues in the Westridge Marine Terminal and the Burnaby Terminal on the West coast. On September 15, 2020, Ian Anderson, president and CEO of Trans Mountain Corp. announced that the Trans Mountain Pipeline expansion is currently on budget and on schedule for completion by the end 2022, despite challenges related to COVID-19. The Trans Mountain Pipeline will increase the pipeline's capacity to transport petroleum products from Strathcona County (near Edmonton), Alberta to the Burnaby Terminal from 300,000 to 890,000 barrels per day.
In October 2018, the joint venture partners of the LNG Canada liquefied natural gas export terminal announced a positive final investment decision to proceed with the project, which will allow LNG Canada to transport natural gas from northeastern British Columbia to the LNG Canada liquefaction facility and export terminal in Kitimat, British Columbia, via the Coastal GasLink pipeline (the CGL Pipeline). The Coastal GasLink Limited Partnership, which is controlled by TC Energy, is building and will own and operate the CGL Pipeline. Pre-construction activities began in November 2018 and completion is targeted for 2025. In late 2019, TC Energy announced that it would sell 65% of the limited partnership units in Coastal GasLink Limited Partnership to investment companies KKR & Co Inc. and Alberta Investment Management Corporation. The transaction closed on May 25, 2020. The government aims to gain access to Asian and European markets via multiple LNG export facilities by 2030.
To address crude oil egress concerns for Alberta's producers, the previous government leased 4,400 rail cars capable of transporting 120,000 bbls/day of crude oil out of the province. Under this arrangement, the Alberta Petroleum Marketing Commission would purchase crude oil from producers and market it, using the expanded rail capacity to transport the marketed oil to purchasers. In February 2020, the current government announced that it had sold or assigned $10.6 billion worth of crude-by-rail contracts to the private sector, a move that retained producers' ability to access the expanded export capacity.
On September 28, 2020, the President of the United States granted a presidential permit for the proposed US$17 billion Alaska to Alberta railway. The project would extend United States access to Alberta's resources and would provide Alberta with an additional means of egress and access to the Southcentral Alaska Ports. The 2,750 km project is not yet fully permitted. The project developer, Alaska to Alberta Railway Development Corp., estimates that the project will provide an additional $60 billion in cumulative economic output through 2040 and create more than 28,000 jobs.
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Alberta's pandemic recovery strategy and the pre-pandemic goals of the provincial government combine to create a welcome environment for investors in the province. Alberta's vast resource endowment gives the province great power to responsibly diversify its economy in the wake of the pandemic. The government is investing heavily in infrastructure to facilitate investors' projects, and introducing legislation and policies to remove barriers to entry. As the demand for petroleum-based products remains ubiquitous globally, Alberta presents a strong option for investors seeking to get involved in petrochemicals, or other projects across various industries.
Citations can be found in the PDF below.
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