February 24, 2016
Dear Premier Notley,
CC: Mr. Brian Michael Jean
I am writing to pledge my support for the future of Alberta’s oil and gas industry. As we all are aware, oil and gas investment and development have been instrumental in making Alberta and Canada a prosperous place to live and work. Alberta’s energy sector has provided us with a comparatively high standard of living, good health care, quality education and a bright future provided that it is fostered appropriately and permitted to continue growing.
As the co-founder and Chief Executive of Torq Energy Logistics Ltd, headquartered in Calgary, that offers oil producers and refiners energy transportation and logistics solutions, I have witnessed the gruesome impacts of the current economic environment from the front lines. To put this in context, at its peak in 2014, Torq employed more than 400 people across Alberta and Saskatchewan. Unfortunately Torq has been not immune to the current conditions and we have had to right size our workforce by 50% over the past eighteen months.
At Torq, we consider our business as a large family or team. We attempt to make decisions for the business that are in the best interests of the team, or at very least, in the best interest of the overwhelming majority of our team. With that spirit in mind, we at Torq undertook the approach to delay further personnel cuts as long as we possibly could by instead reducing wages and salaries across the board. These wage reductions have had extreme impacts on my colleagues and their families which haunt my sleep and every waking moment.
In contrast to our story at Torq, Albertans watched you attempt to increase the pay of a select few of your highest paid personnel, while many provincial stakeholders face dire economic circumstances. Be sure Premier Notley, there is a distinct difference between being elected as a leader and exemplifying the characteristics of one. While I acknowledge that our current economic tribulations are largely the result of an international act of economic warfare by OPEC, I and many other of your constituents feel that our leaders, both provincially and federally, are not acting to improve our own cause and publically supporting the best interests of Albertans.
While I continue to bear the guilt of disappointing my colleagues, most of them understand that we are trying to preserve their, and their families’ best interest and they express a preference of “less over none”. But it continues to get evermore difficult to explain to them why global demand for energy continues to grow rapidly but despite our superfluity of oil and gas reserves, Alberta’s global market share is actually shrinking. It’s also difficult to explain to them why we spent $3 million of tax payer money in effort to increase energy royalties in a time when we should be considering a temporary royalty holiday to help stimulate industry activity. Nevertheless, these are complex questions with many layers that are all interrelated. To be sure, there is no one solution that works in isolation. All initiatives must be considered compliments to each other and should be acted upon jointly.
On the topic of market access, quite frankly our federal and provincial governments both past and present have failed us and continue to do so, yourself included. An increasing number of hurdles continue to be put in the way of getting our energy economically out of the ground and to a competitive market. We currently have major private sector infrastructure projects that pose exponentially more economic gain to Alberta than any amount of infrastructure stimulus the Trudeau government is offering this province and yet those projects seem to get little publicized supportive action from your government. Rather, by hiring out of province, anti-oil activists into your cabinet, your government projects a perceived message of opposition to the very industry that accounts for the largest proportion of our provincial economy. Furthermore, by travelling to Paris and issuing disdainful remarks reflecting your shame of Alberta’s energy industry rather than offering supportive commentary and action to the world, you are sending a clear and distinct message to your constituents, intended or not. These remarks are extremely hurtful to the very families that contribute to your personal income. Why would the leader of any organization not publically support its own people and economy, or at very least stay silent on their perceived performance, unless dissention was the intent?
I am not qualified to determine if your message to Albertans is purposeful and reflective of your actual position or not, but rightly or wrongly, “too much talk and not enough action” is the impression the Alberta public has of its government and it is possible that this is correlated to your most recent approval ratings within this province. In extreme conditions such as these the people of this province and its energy sector need a leader that is publically defending them from external baseless, anecdotal rhetoric, taking action to improve economics, publically supporting market access projects and representing her constituents best interests.
Albertans expect that when our federal government requests cooperation from Alberta on any initiative, carbon pricing for example, your response would be a non-threatening, direct, quid pro quo approach. Instead, Justin Trudeau recently outlined new political conditions that further delay decisions on energy infrastructure projects that could secure new markets for our energy and serve the best interest of Albertans yet we have not heard any objection from your government. The people of Alberta are looking for you to publically defend our best interests. Like it or not, our future is a negotiation, one we beg you more assertively engage in. While our refining sector continues to import foreign crude oil from jurisdictions that exercise unacceptable environmental and sadistic human rights practices, we have seen no tangible action from your government to advance the market access interests of Albertans.
You recently were quoted saying, “I think we all understand we are all part of Confederation and we all benefit from each other’s participating in it and there are opportunities for us to work together in a way that enhances the economic prosperity of all Canadians.” Assuming the “we” you were referencing in that quote appears to be Canadians in general and the “it” being Energy East Pipeline; with due respect Premier Notley, your thinking is simply erroneous. 82 municipalities in Quebec, ironically the province which benefits most from our energy sector’s contribution to federal equalization payment, have publically condemned the project. “We” don’t all understand, this is clear. We are counting on you to educate those that don’t.
On the issue of your proposed carbon tax; this initiative strikes particularly close to home for the Torq family. The (un)intended consequences of your carbon taxes are wide spread. In a time when, as an industry, the race is on to be the lowest cost source of production, your government is proposing a carbon tax which you did not expressly include as part of you campaign platform. Nevertheless, Alberta’s energy industry has made great strides to reduce its cost structure over the past 18 months. Those cost improvements are focused on making our industry more competitive in the global marketplace. Without full industry consultation, your proposed carbon tax has the great potential to reverse the competitive benefits our energy sector has recently created. Though the details aren’t yet clear about your proposal, it is clear that you are targeting fuel consumption in this province which poses a significant threat to Alberta’s transportation sector and inadvertently provides further incentive for resource development in other jurisdictions with which we share borders.
Let me explain how this is currently affecting Torq. In response to lower oil prices, producers are seeking lower rates from all of their service providers in order to remain economic and continue to drill, produce and employ their people. Service rate reductions are being demanded across the industry, including in transportation and logistics. Producers are asking service providers like Torq to discount rates by more than 35% to 50% (from 2015 rates). We understand their rationale; it’s a necessary process in order to remain economic in light of current energy prices. As any other industry, the transportation industry has both fixed and variable costs. The majority of these costs have come down but not in relative proportion to revenues. One of the largest variable costs in the transportation sector is fuel. And while Western Canadian crude oil prices have fallen approximately 75%, fuel prices have only come down by approximately 30%. As a result we are seeing a disconnect between what a producer needs transportation rates to be and the lowest price a transportation company can offer and still make a return which its shareholders require in order to continue to support the business with investment. However, it’s typical for a service provider to bridge that pricing gap by accepting very small returns in exchange for a longer term contract, otherwise known cash flow certainty/predictability, exercising the preference of “less over none”.
This is where it gets difficult for a company like Torq or any of our industry peers. With little to no detail about your proposed carbon tax available to the public, it is very difficult to predict what our input costs will be. Thus it’s very difficult to competitively price our service rates on a multi-year term basis to ensure we can earn the business, meet even the smallest return requirements and keep our contractors economically healthy. Hypothetically, if we signed a three year contract today with a producer that fixes our service rates/revenue for that period but exposes our company to fuel cost upside risk of even as little as 10% resulting from your proposed carbon tax, the result could be incurable. In that case there will be many, many more job losses and contractor bankruptcies in the transportation sector as economics will turn severely negative.
One might suggest that we propose a fuel surcharge or something similar to the producer in order to pass on the additional cost to the producer. This notion is widely unacceptable to the producers. Most producers are demanding flat transportation rates as their focus remains on reducing costs in order to remain economically competitive. If they cannot remain economically competitive, they will shut the production in and in that case we all lose; fewer producer jobs, fewer oilfield service jobs, less royalty revenue, less corporate taxes, less personal income taxes, less consumer spending (less carbon tax) and so on. It is possible the adverse side effects of your proposed carbon tax have not yet been fully contemplated and in that case I would like to offer my assistance in helping your government formulate constructive, value add policy for the province.
Making Alberta’s natural resources less competitive in the global market place by virtue of a carbon tax may or may not be your objective, however, you have not been clear with Albertans. We are seeking near term clarity from you on that topic. It is unfair to leave industry in the dark and not provide certainty. A lack of information or transparency triggers paralysis and makes it impossible for industry to make affirmative investment decisions within the Alberta energy sector. Simply put, the results of your government’s lack of transparency on this matter (and others) are the continued elimination of jobs, reduction of employee earnings and a redirection of capital into other energy markets with more certainty.
Much concern also originates from the pace of proposed change. Albertans have the perception that you are hurrying your agenda into action at a pace which appears to neither welcome nor provide adequate time for full consultation with industry stakeholders. In fact, we are a mere nine months away from the implementation of your proposed carbon tax and the citizens of Alberta have been given absolutely no details about it. While you did publically state that “there will be certain efforts made to work with particularly vulnerable industries” but that doesn’t ring of transparency to industry. Many Albertans feel that while there may be merit in some of the initiatives you have put forth, the magnitude of the changes you are proposing are such that they require fully evolved thoughts in order to get them right. Providing little detail and hastening such significant changes through the legislative process gives your government the appearance as if they’re not welcoming of stakeholder input where it may contrast your agenda. This behavior results in fractured trust between the people and state. Haste and secrecy from leadership cause people to question whose best interests are being represented. Obviously this is not the objective of a modern-day, libertarian leader such as yourself, right?
Regardless of your government’s position on non-renewable energy consumption, global energy demands continue to rise and where there is demand, it most certainly continues to be met with supply. Nevertheless, your government is giving Albertans the impression that your understanding of our “best interests” includes a curbing of our contributions to the global energy supply solution. To that Premier Notley, I assert, you have misinterpreted Albertans and your mandate. Rather, Albertans wish to grow our contributions to global energy supply as it represents our best interests and those of generations of Albertans to come. Reducing industry cost and taking action on new market access are fundamental initiatives to facilitating that growth interest. Those are initiatives which you have a mandate to devoutly support, defend and fight for at any cost to your personal agenda. True leadership is the act of sacrificing one’s self interests for those which increase the prospect for betterment of the collective; I trust you agree.
Most Sincerely,
Jarrett Zielinski
Proud Albertan
President & CEO
Torq Energy Logistics Ltd.