Two energy company executives made a wager. The one who bet that Jim Prentice would never give up $3 million a year in exchange for power lost. True story.
On May 16, 2014, Mr Prentice entered the Progressive Conservative leadership race. After two months of dancing on the edge, he managed to satisfy himself that he had a shot at winning. His funding strategy is ready to roll, his four campaign co-chairs are assembled and he’s been endorsed by 18 MLAs so far.
Jobs Minister Lukaszuk made an interesting point with respect to the 18 MLAs eager to prove their loyalty—none of them has a clue what Mr Prentice stands for.
Mr Prentice’s policies
As much as it pains Ms Soapbox to say so, she agrees with Mr Lukaszuk. Mr Prentice hasn’t said a word about his policies, likely because they won’t be finished, even in draft form, until this weekend.
While the 18 MLAs may be content to endorse Mr Prentice on blind faith, more discerning Alberta voters should read some of the speeches Mr Prentice made while he was senior executive vice president and vice chair of the Canadian Imperial Bank of Commerce—particularly since all of these speeches concern the energy industry.
Mr Prentice’s policy is simple: rip, strip and ship—with a dash of “social contract” thrown in on the side.
Here’s an example. Last October Mr Prentice spoke at the CIBC Global Investors Forum. He said he supports the free market (“Free markets produce impressive results when they are allowed to work”) but managed to argue all the same for greater regulatory control of Canadian/US energy policy. He’d like “full-on harmonization” of the transportation grid, rail and aviation industries and wants to stop US state governments from creating their own renewables standards and low-carbon fuel standards because they shut out Canadian hydro and bitumen.
Mr Prentice acknowledged that Canada and the US should be environmental leaders but was content to fall back on industry innovations and the existing environmental regime to get there. Even the petulant prime minister recognizes that Canada needs to step up its environmental game if it hopes to make Canadian bitumen more acceptable to American and European markets.
Mr Prentice stressed the need to open up Asian markets (this as a “national imperative”) but failed to consider upgrading in Alberta or elsewhere in Canada in order to create jobs and reduce the opposition to raw bitumen from the US and Europe.
Mr Prentice wants Alberta (and Canada) to be an energy superpower. However he’s missed the forest for the trees. This is not surprising given Mr Prentice’s recent experience as a banker.
Banks are in the business of identifying, managing and controlling risk. There’s not much point in lending someone money if they can’t pay it back with interest.
CIBC manages risk by running daily “stress test scenarios” to figure out what impact certain events would have on the bank’s financial wellbeing. Some events like 9/11 or the sub-prime/Lehman Bros collapse have a negative impact. Others like the US debt default or the growth of Chinese economy have a positive effect.
Not one of the bank’s 12 scenarios focuses on the energy industry. Given the importance of energy to the Canadian economy this is puzzling…until you remember the black swan.
The Black Swan
The premise of Taleb’s book, The Black Swan, is that while extreme events are rare, they do happen. And when they do, all hell breaks loose. Examples of Black Swan events are 9/11 and the rise of the internet, particularly Google. The energy industry, like international banking, is not immune from Black Swan events
For example, if the Alberta Energy Regulator determines that the bitumen leaks at CNRL’s Primrose site were not caused by wellbore failure but a geological condition exacerbated by fracking, the future of fracking is in serious jeopardy.
On a more dramatic scale, concerns about the impact of climate change have filtered into the minds of investment bankers who’ve asked all the major energy companies to describe how they would respond to regulations that reduce emissions levels to the point that their oil and coal deposits become stranded assets.**If the banks are not satisfied with the energy companies’ response, the cost of running their operations will skyrocket.
No longer business as usual
Mr Prentice’s speeches indicate that he has fallen prey to the “business as usual” outlook—it reflects an optimistic bias, sees familiar patterns and is blind to the unexpected. ***
While the energy industry may be forgiven for ignoring the grim possibility that the gravy train may leave the station; the future Premier of Alberta cannot assume that Alberta’s prosperity will continue forever if he can just find a way to ram a pipeline to the west coast, another to the Gulf of Mexico and a third to New Brunswick.
Albertans deserve a premier with vision who can transform a tired old government into one capable of creating a diverse economy capable of supporting investments in people and infrastructure through the boom and bust of the energy cycle.
It’s the only way to ensure that when the next black swan drifts by Alberta won’t go into a tailspin.
*2013 Annual Report starting at p 63