Alberta gov’t can now borrow up to $900M as part of new bitumen royalty-in-kind program

The Alberta government plans to collect oil sands royalties by taking on bitumen instead of cash, so it can help bring the bitumen to market.

Alberta’s decision to take oil sands royalties in physical barrels rather than cash, combined with new authority to borrow up to $900 million, has sparked debate over whether the province is simply marketing bitumen or positioning itself to financially support major infrastructure projects.

An order in council dated Jan. 21 authorizes the Alberta Petroleum Marketing Commission (APMC) to borrow up to $900 million for what the province describes as “hydrocarbon marketing activities.”

The order also allows the finance minister to raise money through provincial debt and advance those funds to the commission.

The borrowing authority comes as Alberta moves to activate its bitumen royalty-in-kind (BRIK) program, which allows the province to collect oil sands royalties as physical barrels instead of cash and sell those barrels on the open market.

Energy and Minerals Minister Brian Jean says the borrowing power is intended to manage short-term cash flow tied to the sale of royalty barrels, not to subsidize private companies or guarantee corporate loans.

“That is a line of credit that is going to be used to be able to backstop our sale of bitumen under the BRIK program,” Jean said.

“For a couple of days here and there, when we sell it, we don’t have the funds, and those funds are to cover that time period between the buy and the sell of those.”

Jean also rejected concerns about transparency and financial exposure.

“I’m an open book. I’m not going to hide anything from the people of Alberta. That’s who I work for,” he said.

“This money is not used to secure any corporate loans or anything else. It is simply used as an overdraft to make sure that we are able to go into the business of selling products that producers give us to sell.”

But energy economist Richard Masson says the scale and structure of the borrowing authority suggest something much broader than routine oil marketing.

“That’s all that this could be,” Masson said.

Masson, a former CEO of the APMC, says the authority granted by cabinet goes far beyond what would be required to sell royalty barrels on the open market.

“They don’t need $900 million of authority for bitumen royalty in kind, even if they were going to sell the two million barrels a month that’s in that press release,” he said.

“That would be like one very large tanker full every month. That’s $150 million, but you don’t even need the money, because you’re paying for it with royalty credits.”

He says the real significance lies in provisions that allow the commission to make loans, purchase shares, enter joint ventures, guarantee obligations or establish subsidiary corporations.

“The ordering council uses the exact words ‘hydrocarbon marketing activities,’” Masson said.

“It also allows for the purchase of shares, making loans, doing joint ventures, providing loan guarantees or setting up subsidiary corporations. None of those things are required for what we were just talking about.”

Masson said those powers closely align with what would be required to support a private pipeline proponent unwilling to shoulder early-stage financial risk.

“If there’s no private-sector proponent for a pipeline and APMC is now going to step in and be the loan guarantor for the pipeline, for the development phase, at least,” he said.

Opposition NDP Leader Naheed Nenshi says the government is stepping into the heavy oil market without demonstrating it has the expertise to do so responsibly.

“The government is attempting to interfere in the market for heavy oil,” Nenshi said.

“The problem we have is this government has never shown any evidence of being competent or sophisticated or thoughtful when it starts messing around in the private sector.”

Nenshi says if the province really is preparing to use the money to backstop a pipeline, it’s a dangerous move for the Alberta treasury.

“What is $900 million going to do to backstop a $34-billion pipeline for which there is no private proponent?” he said.

“Basically, this is a fever dream, and I just hope it doesn’t cost Albertans a ton of money.”

The Canadian Taxpayers Federation says even if the borrowing is simply for marketing, as Jean contends, it exposes public funds to significant risk.

“Taxpayers definitely shouldn’t be on the hook for any sort of government business enterprise,” said Gage Haubrich with the federation.

“That’s $900 million of taxpayer money being put on the line by the government. That’s a huge amount of money.”

Haubrich said oil marketing is already handled by private companies and questioned why public money is needed.

“There’s oil companies that sell oil every day. That’s their job,” he said.

“If the government is the one who has to step up and do the investment, it shows that there’s not a very good deal to be made within the private sector, and that puts all of the risk on the taxpayer.”

Masson said Alberta does have a strong incentive to pursue additional market access but warned the approach carries substantial downside risk.

“The upside would be we would have a pipeline moving forward that would allow for better market access,” he said.

“And that’s important because it allows for growing production from Alberta and makes sure that we don’t end up with bottlenecks that lower royalties.”

He said the downside is taxpayers could be left covering large losses if a project fails.

“You could spend a lot of money on this feasibility phase coming up next that ends up going nowhere,” Masson said.

“And taxpayers end up on the hook for whatever they’ve guaranteed, up to $900 million potentially.”

Masson pointed to past pipeline development as a cautionary example, noting Enbridge spent about $600 million developing the Northern Gateway pipeline before it was cancelled.

“If a private-sector company was going to step in, they would probably want to know that they’re not going to lose money, and APMC is prepared to backstop them,” he said.

Masson said the borrowing authority represents a direct exposure for the public.

“It’s absolutely taxpayer money,” he said.

He also raised concerns about transparency, noting the commission’s Crown corporation status could limit disclosure if agreements are deemed commercially sensitive.

“They would argue that we don’t want to disclose the details because it’s commercially confidential,” he said.

Under regulations passed late last year, the APMC may direct producers to deliver the Crown’s share of royalty bitumen to specified delivery points such as Edmonton or Hardisty.

The commission can then manage, market, exchange or dispose of those volumes under detailed rules governing quality, reconciliation and compensation.

Masson said royalty-in-kind programs are operationally complex and risky, particularly when governments attempt to outperform private marketers.

“I used to be the vice-president (of) risk when I was at Nexen, a global marketing firm, for years,” he said.

“It’s super complicated, and you can get your butt handed to you easily.”