May 01, 2014

Danielle Smith speech to Economic Club of Canada

Thank you all for coming this morning and allowing me the privilege of speaking.

It’s hard to believe there was a time when Alberta politics was considered boring...

Those days, thankfully, are over. Our politics should never be boring. Albertans are among the most dynamic, adaptive and forward-looking people in the world. After 43 years, I’d say it’s about time our politics caught up to who we are.

I see in this room what I’ve been seeing right across this province: An Alberta that isn’t content with the status quo.

It’s an Alberta that is breaking the mould. An Alberta that’s casting off the shackles and preconceptions of what we can and should achieve.

We ask the bold questions because they need to be asked. We demand the provocative answers because they need to be heard.

We’re a province that doesn’t look backwards on what we’ve achieved. We look ahead to our next great achievement.

We’re a remarkable province with remarkable people. It is our purpose and our promise. To be remarkable.

This is the Alberta I want to lead.

But in a province of enduring political dynasties, Wildrose is still a relatively new party. Earning the trust and confidence to govern is no small task.

Albertans make you earn it. And that’s what we plan to do.

Over 20 years ago James Carville, a campaign strategist for Democratic presidential hopeful Bill Clinton, coined the famous line, “It’s the economy, stupid”.

This helped Clinton win two terms as U.S. President where he accomplished, among other things, a strong turn-around of the American economy.

Unemployment fell steadily. Poverty shrunk. GDP climbed. Inflation stabilized and wages grew.

You know how it works – sometimes politicians don’t – but you do:  Capital flows, investments are made, and jobs, wealth and opportunity are created, and lo and behold people’s lives improve. 

But all of that only happens when investors have confidence that the political and fiscal regime under which the companies invest and operate is stable and predictable.

We used to call this the “Alberta Advantage”. You don’t hear much of that these days.

The Alberta Advantage was coined during the Ralph Klein era.  At a time when he and his government cut spending, cut corporate taxes and ended up turning a huge provincial debt into a huge surplus.  At one point late in the last decade the Alberta government had $14 billion in the Heritage Fund and a staggering $17 billion in the Sustainability Fund. Be assured, global capital markets notice these sorts of things.

During this period the Alberta Advantage created some interesting economic opportunities and not the sort normally associated with what is widely regarded as our resource-based economy. Giants of Canadian business like Imperial Oil and Canadian Pacific moved their corporate head offices from central Canada to Alberta. Capital flowed in from all over the world.  We all got to enjoy the benefits of that.

This is what you want to hear about today.   

What will Alberta’s economic future look like?

What will be the foundations for the continued economic prosperity that we have enjoyed?

What does this look like? How will we get there?

Discussions about our economic future must begin with where we are today.

That involves talking a lot about energy.

Energy drives most things around here and even the things that are not about energy have been helped by what energy had brought.

So here’s a brief review of the current situation:

There is no doubt that Alberta’s economic success is to a great degree underpinned by vast quantities of oil and gas. As fate would have it, in 1905 when federal surveyors laid out the borders of what become the province of Alberta, by accident these boundaries included the largest deposits of hydrocarbon resources in Canada and some of the biggest in the world.

This is not unique to Alberta. Lots of places have oil and gas.

A few jurisdictions with hydrocarbon resources that rival Alberta are Saudi Arabia, Venezuela, Iran, Nigeria, Iraq, and Mexico.

All of these places have numerous advantages over our province. Oil and gas developers don’t have to work in the freezing winter or spring thaw. This reduces exploration and production costs.

All of these jurisdictions are on tidewater, meaning they have low cost access to all global markets by tanker.

They all have much lower labour costs which further lowers exploration and development expenses.

If you go back in history, in fact these countries did attract much more capital than Alberta in the early days. Almost all of these places were producing oil for global markets years before the Leduc discovery of 1947.

But something happened along the way.

Because of resource nationalization, excessive taxation, political uncertainty and civil unrest, global investment capital began to move to Alberta.

Why? It wasn’t the geology. It wasn’t the geography. It wasn’t low exploration and development costs. And it certainly wasn’t the balmy weather.

It was a stable political regime, economic certainty, and investor confidence.

Capital is often described as liquid. You could describe capital as being like water: driven by the powerful force of gravity - it flows freely and takes the path of least resistance from where it is, to where it is going.

We’ve learned a lot about this in Alberta in recent years. The hard way.

Based on our history, we’ve always believed that if we have the resources, the capital will flow our way. But you know this isn’t the case.

We had capital leaving Alberta only a few years ago because of the New Royalty Framework. We’ve fixed that, but trust was broken -- I’ll get back to that shortly.

New technology has unlocked vast supplies of natural gas and crude oil in shale rocks and tight formations. This has caused an energy renaissance in the United States and demonstrated to all of us the geographical disadvantage Alberta faces by being landlocked.

I don’t need to say much more than that about the need for export pipelines. This issue is in the news every day. Fixing this is REALLY important.

To demonstrate the fierce competition Alberta now faces – competition that we have never faced before -- look no further than EnCana. Of the five main producing areas EnCana will be pursuing in the next few years, three are in the United States. Ouch.

Because of geography and high costs, Alberta is no longer the destination for capital that it once was.

Thanks to geology we can increase production for many years.

The oilsands are, for all practical purposes, unlimited. And, exciting new resource discoveries like the Montney and Duvernay have shown the world we’re not just a one-trick-pony with oilsands.

But geography and high costs detract from the opportunities.

Let me give you another example. Six weeks ago, ATB Financial revealed at an investment conference that the Chinese investment in Nexen was yielding only a 3% rate of return, one of the lowest yields in the growing oil and gas portfolio of the Chinese National Offshore Oil Company.

Think about this: This is not a case of Alberta competing with another country. This is a case of the Nexen arm of CNOOC competing for capital with other divisions of its own parent company – or in this case, maybe failing to compete.

The simple point I’m trying to make here today is that we take our current and historical financial riches for granted at our peril.

On the energy side the Alberta Advantage has faded somewhat and what advantage is left is fading fast.

In some ways we have been successful not because of our resource endowment or enlightened fiscal management, but because of the failure of other hydrocarbon-bearing jurisdictions to provide a stable and predictable fiscal and regulatory regime. I’ve already mentioned just a few of them.

Yes, Alberta has been for the most part a safe place to invest. We would not have overcome our operating disadvantages of geography, high costs and seasonality if we had not been an attractive destination for investment capital.

Let me tell you about a few other aspects of why I believe Alberta is going the wrong direction. Then I’ll counter with what a Wildrose government would do differently.

Nothing is more important to investors than the sanctity of a contract. You read the rules, comply with the regulations, sign the papers, plunk down your money, then get on with the challenge of generating a satisfactory rate of return.

Business intrinsically has many risks. But an attractive destination for capital is one where investors only have to deal with business risks, not political risks.

Unfortunately, Alberta is increasingly introducing political risks.

Nothing is more damaging to our reputation among global investors than the recent cancellation of oilsands leases in northeast Alberta, first through the Lower Athabasca Regional Plan, and more recently by the prohibition of development on several oilsands leases adjacent to the community of Fort McMurray.

These issues don’t make the news very often. But behind the scenes these oil companies are negotiating with the government for compensation.

Alberta has in the past figured out ways to compensate mineral title holders who are not permitted to develop their properties, thus maintaining its reputation as fair and forthright. But generally the Crown has only refunded the cost of the lease. Unfortunately, in some of the recent cancellations, developers have invested funds far beyond the cost of the mineral lease alone. Some are publicly traded, and their valuations by capital markets include proven and probable reserves and sunk development costs.

To be truly fair, when Alberta breaks what the buyer regards as a legally binding contract, the Crown should be providing compensation that includes some of the opportunity cost.

This could cost a lot of money.

Now, exactly how much money the Alberta government actually has these days to spend on anything is a matter of significant debate.

While none of these compensation cases has yet been resolved, a situation where the government decides that it will only refund a fraction of the total investment will not be a positive signal to world capital markets. That’s political risk.

Another risk that people are sort of aware of but isn’t well understood is the growing regulatory burden faced by all business, not just resource development. There’s permitting, regulatory approvals, land access, environmental reviews, community impact assessments, local consultation.

No single rule, regulation or process exists that isn’t well intentioned. But as Samuel Johnson remarked so many years ago, “the road to hell is paved with good intentions”. The cumulative impact of all that paperwork and red tape is driving up cost and delaying developments.  Red tape is another form of political risk.

World capital markets see this political risk.

In 2012 offshore investors like the Chinese invested a whopping $27 billion in Canada, mainly Alberta. Remember the national debate over the CNOOC purchase of Nexen?  “Do we really want THEIR money?”

Well, we need not have worried; we’re not getting as much of their money as we thought.

In 2013 offshore investment in Alberta slowed to a trickle. Part of this is federal government regulations; the rest is access to market.  -- When will we ever build some pipelines?

U.S. independent Devon Energy, which bought its way into Canada years ago through the purchase of Northstar Resources and Anderson Exploration, recently sold most of its Canadian conventional assets to Canadian Natural Resources Limited for $3.1 billion.

Why? They want to invest more money in the Eagle Ford play in south Texas.   It’s more profitable. 

This is not a new story. Offshore investors buy into Alberta at top dollar then over the years learn that this is a tough place to earn a competitive rate of return on invested capital. The Chinese are really scratching their heads wondering how a country for whom oil and gas is so important, can’t figure out how to build a pipeline to the ocean.

Now that I have you as concerned as I am, I am sure you are wondering what would Wildrose do differently?

Let me tell you.

The first thing a Wildrose government would do is honour our contracts.

A subsurface mineral license is a property right.

We cannot claim that regions of Alberta are open for exploration and development, sell the rights, and then change our minds a few years later for other reasons.

I understand there are increasing development and land use conflicts as Alberta’s population and environmental pressures grow.

I understand that many people are pleased when resource development is delayed or curtailed.

But if we keep collecting cash for mineral rights then changing our mind and not permitting development – especially in cases when the buyer has invested additional capital – there are only two possible outcomes, both unpleasant:

One is that the developer only receives a fraction of its investment, forcing a write-down and loss of capital. The world will notice. Capital won’t come here.

The other is that the government pays compensation far in excess of funds received. While this may salvage our international reputation with investors, it will infuriate many voters and result in the government spending more money it doesn’t have.

The second issue a Wildrose government would tackle is streamlining the regulatory process for business.

I know most think this is underway because the government merged the Energy Resources Conservation Board and Alberta Sustainable Resource Development into the Alberta Energy Regulator, creating a so-called “one window” approach to permitting.

Well like many things governments do, the stated purpose and the actual progress are two different things. I hope this works. It will take time and focus.

I have to admit that I am more than a little concerned about how long it is taking to get up to full speed.

But it’s not just oil and gas.

Before entering politics I was the Alberta director for the Canadian Federation of Independent Business. For years I represented 10,000 small business owners trying to make their way through the regulatory and taxation jungle as they met with layers upon layers of paperwork, rules, forms, overlapping jurisdictions and conflicting direction.

Wildrose will work diligently to streamline regulatory processes without compromising their intent: protection of consumers, workers, the land, air and water.

Governments can no longer hide behind regulators to avoid the tough decisions.

Government must stand for something. And for Alberta to succeed, our government must stand behind the continued success and growth of the economy.

We’re here to build Alberta for its people; to ensure future generations have access to the economic freedom and prosperity that has made our province a beacon for capital and people.

In a world where everyone everywhere is increasingly asking “What’s in it for me” when it comes to building anything from cellular phone towers, to shopping centres, to oilsands plants, to adding an addition to your home, only true political leadership on why-we’re-doing-this can keep Alberta on a positive economic path forward.

As for the economy, our basic position at Wildrose is that our ability to do any of the things we aspire to do will be affected by provincial government spending and the rise of the debt.

The last budget indicated that by Budget 2016 our debt will be $21 billion. Call it infrastructure debt. Call it a mortgage. Call it an investment. It doesn’t matter.

At a paltry 4 per cent per year, the interest payments alone will be approaching one billion dollars per year. That doesn’t include principal repayment.

That’s $1,000 per year for a family of four for the interest alone. That same family of four’s share of the debt principal will be $21,000. Plus interest for however many years it takes to pay it off.

Investors want a stable and predictable fiscal regime.

People want the same thing.

Under this current government either taxes are going up or the debt is going up, or both.

This is not the direction of the Alberta Advantage that we have previously enjoyed.

There are many other initiatives we at the Wildrose would pursue given the opportunity. One of them is a natural gas strategy-- the local exploitation of this massive resource endowment.

We like to see natural gas used a fuel for power generation and transportation fuel. We like to see micro-power electricity generation using natural gas for large buildings and structures to generate your own electricity and capture the waste heat. This will lower electricity costs by moving generation closer to consumption.

This will go a long way to offsetting carbon emissions from the oilsands and establishing Alberta as a world leader in the clean and sustainable production and consumption of hydrocarbon fuel.

And we have got to get better at reducing emissions from oilsands. We cannot have this vast and important global resource remain a lightning rod for those opposed to hydrocarbon development all over the world.

Wildrose would work with industry and research institutions to determine what is required to accelerate the innovative and exciting initiatives already underway to eliminate tailings ponds, reduce energy use for thermal extraction, and allow us to continue to develop this resource for the benefit of the whole world. For as long as it is required.

Speaking of greener oil, another vast resource that nobody talks enough about is increasing recovery from our existing conventional oilfields.

Over seven of every ten barrels of oil discovered in our legacy fields like Turner Valley and Swan Hills remain trapped in the ground because it is currently uneconomic to recover. This will take technology, innovation and a focused fiscal regime.

You see ladies and gentlemen, there is no greener barrel of oil than an incremental barrel recovered from a field where the roads are already built, the well has already been drilled and the production infrastructure is already in place.

It’s called Enhanced Oil Recovery, and we don’t do nearly enough of it in Alberta.

What is exciting about Enhance Oil Recovery is that when Alberta has another technological breakthrough – and we have had many – it will be required in every other mature oilfield in the world. And every oilfield faces this same challenge. This will create another secondary industry where Alberta exports expertise and technology, and imports capital in return.

As I close, let me talk a little bit about “economic diversification.” This term has been around for so long I’m not sure anyone agrees on what it means.

The first thing to acknowledge is that our oil and gas industry is already highly diversified through the oilfield services sector.

This is often missed. The oilfield services sector is a high tech, valued added industry with global export potential. We build an amazing amount of what we need right here. Albertans are recognized world leaders on the processes, equipment and technologies used for oil and gas development worldwide.

Indeed, everybody in the world seems to know how good Alberta companies are at creating and commercializing world class energy technologies.  That is everyone except the average Albertan who isn’t in the energy business.

This important growth area is a huge business and it should get bigger.  

As for diversifying beyond oil and gas, a Wildrose government will not be here to pick winners.

That’s up to the private sector and private capital.

Frankly, we are hoping that everyone in private capital is very good at it.

History has shown that governments are most definitely not good at it.  If you don’t believe me, come to my home town and I will show you a shuttered “world-class magnesium plant.”

People pushing losers have always been very good at cozying-up to government. Our government, like most, has been very poor at picking winners. It shouldn’t be our job.

But it is the job of your provincial government to create the macro-economic conditions for research and development and technological innovation to take place.

This is - and I know I’m repeating myself - a stable and predictable, long-term fiscal and economic regime, that attracts capital and the brightest people from all over the world, and ensures that the only risks they face are their own, not from their provincial government.

When successful technological research, innovation and commercialization occurs it is inevitably driven by carrots, not sticks. It is never driven by cronyism and central planning.

Wildrose believes we should set the stage and ask the private sector to figure it out.  You’re good at this - governments are not.

But we can certainly work together to create the conditions for success.

Ladies and gentlemen, the issues I’ve raised and discussed today are near and dear to my heart.

They are the essence of why I get up every morning and travel this province from border to border.

After 43 years, Alberta needs a new government. If you haven’t come around to that conclusion yet, I hope what I’ve shared today has got you started.

Albertans have never felt secure in the soft comfort of mediocrity - other provinces, maybe. But not in Alberta.

We’ve never thought that standing pat is good enough, or that our past is somehow currency for the future.  The challenges of today and the opportunities of tomorrow don’t care much about what we accomplished yesterday.

We’re Albertans, and we will lead the way. 

Thank you.



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