Updated 10 November 2020
In an earlier report on the crucial role played by the Alberta Petroleum Marketing Commission (APMC) in government finances, we highlighted the Commission’s role in overseeing the North West Redwater Upgrader investment, commenced in the latter years of the Stelmach regime. We raised some doubts, given APMC’s record with the North West Redwater Partnership (NWRP), about its competence in negotiating with TC Energy on the Keystone XL project. APMC is also the agency tasked with negotiating the Energy East commitment and the controversial oil-by rail contracts.
With the two-month delay in the publication of the Government of Alberta’s Annual Report and audited consolidated financial statements, the public finally has been apprised that Alberta’s budget shortfall of $7.5 billion forecast at 28 February, had ballooned to $12.4 billion by the end of August.
Certainly, budget forecasters could not have known that oil prices would go negative in a matter of weeks and that within a month of the budget date, the economy was in shut-down mode (Toew’s triple black swan event). The final accounts show a $2.8 billion difference in “revenue” from APMC. The February budget had forecast a $152 million deficit for APMC, which was reported as -$172 million in the audited financial accounts.
Between late February and 29 July 2020, the date that the Auditor General rendered his opinion, APMC had to produce a complicated calculation of the worth of the agreement with the North West Redwater Partnership (NWRP). The best place to start to unpack this loss is Schedule 8 of the Consolidated Financial Statements. Over two and a half pages, undoubtedly carefully vetted by dozens of government and outside lawyers, APMC officials, Energy and Treasury Board and FInance officials, outside consultants, and then the Provincial Audit Committee, the complexity of this 30-year agreement is summarized. In this report, we review in some detail the history and players responsible for this investment
2019-20 Disclosure
Schedule 8 entitled Equity in Government Enterprises goes on for 7 pages detailing how government accountants arrived at values for the government’s equity in a host of significant provincial enterprises. These enterprises include Alberta Gaming, Liquor and Cannabis Commission, ATB Financial, Balancing Pool, APMC, and the Credit Union Deposit Guarantee Corporation. 2019-20 was not a good year for these agencies. At 31 March 2019 the cumulative value of the government’s (i.e. taxpayers’) equity or interest was $3.1 billion. One year later, the value had fallen to $1.1 billion. $2 billion in value was wiped out in just one year. The bulk of this change came from APMC’s investment in the NWRP. APMC’s “paper loss” only explains 40 per cent of the change in the deficit.
Abpolecon.ca will be exploring the remaining $3 billion difference in a future column.
Context- Financialization of oil markets
The goal of the Stelmach regime in the 2007-09 period was to encourage value-added processing of bitumen. According to its website, APMC “is responsible for marketing Alberta’s conventional crude oil royalty, developing prices used in royalty calculations and other energy related activities. In 2012, the APMC’s mandate was expanded to include assisting in the development of Value Added activity in Alberta’s petroleum sector, such as the development of the Sturgeon Refinery as well as new energy markets and transportation infrastructure.” In other words, APMC plays a critical role in monetize government royalties both through selling the Crown’s oil but also “developing prices” used to determine royalty payments.
One would think this first task would be an easy, rather mundane task involving daily auctions of the raw bitumen to achieve the highest price for Alberta taxpayers. However the buying and selling of oil in its many different guises over the past three decades has become financialized.
The trading of oil and gas contracts through exchanges such as the New York Mercantile Exchange has become an object both of speculation and major revenue sources for large players such as Goldman Sachs and, before they went bankrupt, Salomon Brothers. This is not to say that market trading is all speculation, but rather to point out trading revenue is big business and it introduces a great element of uncertainty and at times instability since oil both has a use value (plastics, fuel) and a quasi-monetary value. Thus, in order to understand why, to this simple scribe, converting raw bitumen to an enhanced higher value would not automatically lead to a profit, one needs to understand the key market variables which determine input costs, processing, and final price for the diesel product.
After the failure of the Our Fair Share report, by 2009 the Government began entertaining proposals on adding value to Alberta’s resources. A key quote from the Report is relevant here.
Next, the panel reaches a very difficult recommendation that, while directly applicable to its mandate, may be seen as a betrayal of a department with which it has had to work very closely for the past 6 months. It is this: Alberta must conceive a go-forward environment for royalty design, maintenance, fairness and Effectiveness that is not inherently conflicted in the hands of its functionaries. One seemingly simple. and also obvious, problem that occurred to the panel throughout its work was that the Alberta Department of Energy is tasked with Mission Impossible. One cannot, by definition, be simultaneously responsible for both maximizing activity in the energy sector (in terms of rule setting, licensing policy, etc.) and also ensuring that Albertans receive their “fair share” from energy development in terms of royalty terms-design, and audit/policing of royalty compliance. Those two mandates work in opposing directions and trade-offs against this and other sectors of the economy also come into play. During the public hearing process, the Panel heard many submissions about competing in for a relative to the energy. (Emphasis in Report)
In other words, the Energy Department should not function as both a collector for the Crown (taxpayers) and industry promoter. The Panel, which included two prominent economists- Ken McKenzie and Andre Plourde and Judith Dworkin a respected energy economist, was highly critical about the lack of focus by governments in receiving a fair share for the owners of the resource- Alberta taxpayers. The industry reaction was visceral, furious and unremitting.
The Report which was submitted not to the premier of the Energy Minister flagged a deep structural flaw in Alberta’s approach to revenue maximization and made the industry even more focussed on ensuring the Energy Department would dominate discussions of royalties and not the Finance staff. Energy ministers became even more territorial of their role in industry promotion and Finance became a portfolio less senior in the government.
The report laid bare the difficulty the Alberta government has faced since the 1973 OPEC crisis of maximizing the resource wealth for the people of Alberta. By the time Ralph Klein’s revolution took hold, it was clear that maximizing the Owner’s share was subordinate to building the oilsands up and maximizing short-term construction and engineering jobs while hoping the revenues would eventually flow. So Ed Stelmach and his Tory leadership competitors did pledge to do a royalty review.
Premier Stelmach and his government quietly retreated from the industry backlash and committed instead to adding value to the resource. Consideration of proposals such as “bitumen royalty in-kind” formed a critical part of Goal 1 of the Government’s overall strategy to have a “prosperous economy” in 2008-09. The logical place would be at oilsands locations, but existing bitumen producers were then experiencing vast overruns on their construction projects and were not interested in upgrading a product when there was ample demand for heavy oil from the Gulf Coast. Another prospective location was the “Industrial Heartland” a consortium of industrial enterprises, counties and cities aiming to further investment and employment in the region east of Edmonton.
By the spring of 2011, a “contract” between the APMC and North West Upgrading Inc. “to supply an ugrader in the Industrial Heartland with bitumen royalty-in-kind volumes,” was announced. Canadian Natural Resources Limited and North West Upgrading would own the upgrader in a 50/50 partnership. “Phase I would process 37,500 barrels per day of Crown bitumen into ultralow sulphur diesel, naptha, diluents, light petroleum gas, vacuum gas and pure CO2 for use in enhanced oil recovery.” On November 8, 2012, the North West Redwater Partnership (Partnership) announced the sanctioning of the construction of Phase 1 of the Sturgeon Refinery which it will build, own and operate.
| Elected Official | Position | Time Frame |
| Ed Stelmach | Premier | 15 December-06- 7 October 2011 |
| Lyle Oberg | Finance Minister | 15 December-06- 4 February 08 |
| Mel Knight | Energy Minister | 15 December-06- 4 February-08 |
| Iris Evans | Finance Minister | 12 March 2008-7 October 2011 |
| Ted Morton | Finance Minister | 15 January -10- 27 January-11 |
| Ron Liepart | Energy Minister | 15 January -10- 27 January-11 |
| Alison Redford | Premier | 7 October -11-23 March-14 |
| Ted Morton | Energy Minister | 7 October-11-8-May 2012 |
| Ron Liepart | Finance Minister | 12 October-11-8-May 2012 |
| Doug Horner | Finance Minister | 8 May-12- 15 September-14 |
| Dianna McQueen | Energy Minister | 13 December 2013- 15 September 2014 |
| Jim Prentice | Premier | 15 September-14-24 May-15 |
| Robin Campbell | Finance Minister | 15 September-14-24 May-15 |
| Frank Oberle | Energy Minister | 15 September-14-24 May-15 |
| Rachel Notley | Premier | 24 May-15-30-April-19 |
| Joe Ceci | Finance Minister | 24 May-15-30-April-19 |
| Margaret McCuaig-Boyd | Energy Minister | 24 May-15-30-April-19 |
| Jason Kenney | Premier | 30 April-19-present |
| Travis Toews | Finance Minister | 30 April-19-present |
| Sonya Savage | Energy Minister | 30 April-19-present |
Saga continues
In the 2014-15 accounts, a new type of disclosure revealed the Processing Agreement “gives rise to unavoidable costs.” Further, an annual assessment was needed to determine whether an expense and therefore a liability was to be incurred. The financial model had to take into account the following:
technical variables that arise from the design of the project such as catalyst volumes or energy consumption; pricing related variables such as crude
oil prices (WTI), heavy-light differentials, ultra-low sulphur diesel-WTI premiums, exchange rates, capital costs, operating costs, interest rates, discount rates and actual operating performance compared to capacity.
The disclosures flow from the Commission’s annual financial statements and into the province’s consolidated financial statements. The Schedule on equity in provincial enterprises noted the Commission “use of professional judgment” on market prices including the use of forecasts by “global consultancies, reserve evaluation consultants, forward markets and the Government of Alberta.” In short, this valuation exercise is complex and ultimately a best guess, which can change at any point in time. Moreover, reliance on these consultants never comes cheap.
By 2015, and the surprise election of the NDP government, it was apparent that NWRP was becoming a boondoggle with cost overruns the primary culprit. The capital costs continued to rise and the toll liability. In April 2015, Ted Morton the erstwhile Energy and Finance Minister under Ed Stelmach, who had returned to the University of Calgary, released a study entitled The North-West Sturgeon Upgrader: Good Money after Bad?
Morton’s question is a perennial one faced by elected and appointed officials caught by uncontrollable forces such as rising labour and material costs in an overheated economy, political commitments to keep jobs, and the feeling that they, on behalf of the taxpayers’, are being taken to the cleaner. What had seemed to have been a firm price at $6.5 billion seemed to get away as the political transition from Redford to Hancock to Prentice to Notley took place. It was odd that this should be happening at a time when the economy began to go into a tailspin as rising unemployment and capital investment were falling dramatically.
In the annual report for 2015-16, the report began to note the “measurement uncertainty” inherent in the NWRP. Indeed, it was the “Province” (i.e. Department of Energy and/or Finance) which was starting to apply its judgment to estimate the net present value of the 37,500 barrel; per day commitment. As the Table below records, the estimate, or best guess, changed over time and usually in the direction of a higher number.
One of the key drivers in determining the net present value is the discount rate. However, not one of the annual disclosures by the Province told the readers and taxpayers informed about what the discount rates, exchange rates, and interest rates used to allow readers and analysts to make judgments about whether the professional judgment of APMC was at all realistic. This is curious because the disclosure on the actuarial liability of pension plans always has the discount rate used. Whether the discount rate was a “commercial secret” we do not know.
Curiously, in 2016-17, it was again the APMC which was using its “judgment “:to estimate the value of the processing agreement in the measurement of uncertainty paragraph. As the table below indicates, the toll commitments calculation and capital construction costs continued to grow. By 2017-18, we had an inexplicable break in the quantification of of the toll commitments with the simple statement that the APMC management believed the processing agreement would not cost the government anything over the long-run, in other words the arrangement would either break even or turn a profit.
By 2018-19 the liability was again disclosed and had increased marginally. At this time however, the province’s economy which was slowly emerging from a brutal tw0-year recession caused largely by the drop of capital investment in the energy industry. As Imperial’s Kearl Lake project was reaching completion, Alberta politics became consumed with what is Notley going to do to get raw bitumen to market. 
| Fiscal Years | Future toll Commitments ($billions) | Construction Costs ($billions) |
| 2012-13 | 19.06 | 6.5 |
| 2013-14 | 19.06 | 6.5 |
| 2014-15 | 26.01 | 8.5 |
| 2015-16 | 24.75 | 8.5 |
| 2016-17 | 25.955 | 9.4 |
| 2017-18 | “No liability” | 9.7 |
| 2018-19 | 26.715 | 9.9 |
| 2019-20 | 26.432 | 10.1 |
Completion finally
There is really very little information about the NWRP other than it is a 50/50 partnership between Canadian Natural Resources Limited and North West Upgrading (NWU). NWU’s website is rather uninformative as it is a private corporation that does not need to disclose information to the public. The website has four subjects: “Our Story;” “The Sturgeon Refinery;” “Commitment to Environment;” and “Commitment to Alberta.” Pretty uninformative and unoffensive. Our Story reveals NWU is “group of Albertans who shared a vision to create value-added products from bitumen in an environmentally sustainable manner.” Very patriotic. Under the Sturgeon Refinery is the outdated statement: “We are currently constructing Phase One of the first greenfield refinery in Canada since 1984.” Commitment to Environment boasts “its comprehensive recycling program, which sees 98.68 per cent of all construction waste and surplus site materials recycled.” Finally “Commitment to Alberta” includes the vapid corporate social responsibility list of “responsibilities to neighbours,” supporting Alberta livelihoods, building a prosperous future, sustainable and responsible development, employing over 8,000 Albertans, and partnering with Women Building Futures. “We understand that the province deserves the best and our goal is to deliver.”
Opinion
At this juncture, under a UCP government and from the taxpayers’ point of view, it appears Alberta taxpayers have been hosed- at least on paper. There is the political danger that the total expense booked by APMC of $2,678 million may change and in fact grow. However, we do not know how much of this “paper loss” is a change in the discount rate, catalyst volumes or energy consumption; or another half dozen variables, including judgment that has gone into the assessment of the value of this processing agreement.
The danger is that the current ministers in charge will decide to cut their losses and blame previous governments for this loss to the taxpayers- as the UCP ministers have blamed the NDP about the oil-by-rail contracts. This is the easy way out. However, protecting taxpayers without understanding the assumptions going into these complex financial models, can lead to real losses if the government decides to get out at an inopportune moment. The sale of assets under the Klein government in the late 19990s of the province’s interest in the Husky Bi-provincial upgrader, Vencap Equities, and Alberta Energy Company may not have been such a wise decision.
Right now, we need more disclosure about the derivation of the numbers that are producing extra bleeding in the ocean of red that is Alberta’s current public finances. How sensitive are the numbers to low oil prices, low differentials, low interest rates? Might oil prices rise again? Will interest rates move skyward as financial markets distrust central banks and government debt? Is now the best time to be unloading this commitment or indeed the oil-by-rail contracts? For the public to regain trust with governments, elected leaders, on both the opposition and government side, must ask more probing questions of their public servants and make their own judgments rather than being steered blind into decisions without all the relevant facts.
As a final note, in the 2019-20 accounts the ghosts of Gainers Inc. and N.A. Properties (1994) Ltd. still haunt Alberta’s accounts.