How the royalty system supports downstream value-added industries

The elements of the royalty system may be used to encourage activities like upgrading and refining to produce value-added products.

Overview

The downstream sector turns oil and gas into usable products, adding value to Alberta's energy resources. These activities create jobs, increase and diversify economic activity, increase exports and create value for Albertans. The royalty system is one of a number of tools used to encourage investment in the downstream sector, which includes upgrading, refining and petrochemical production. Other tools and strategies also are being considered by the Energy Diversification Advisory Committee.

We can tell if the framework is attracting investment and promoting job growth by tracking:

  • value of downstream energy industry exports
  • employment in Alberta's downstream sector
  • how employment in Alberta’s sector compares with other oil and gas jurisdictions
  • Alberta’s downstream investment as a percentage of Canada’s downstream investment

At a glance

  • Exports of petroleum and chemical products that were refined and processed in Alberta were about $8.7 billion in 2016, about 11% of total merchandize exports.
  • The downstream value-added sector in Alberta in 2016 directly employed about 10,900 people.
  • About $1.1 billion was invested in Alberta’s downstream value-added sector in 2016.
  • In 2016, about one-third (33%) of all estimated investment in petroleum and coal product manufacturing, and chemical manufacturing in Canada was made in Alberta.

Downstream value-added exports

The oil and gas extraction sector has spin-offs in a variety of downstream sectors.  The exports of downstream value-added products include industrial chemical, plastic and rubber products. This category of products includes lubricants and other petroleum refinery products, petrochemicals, and plastic and rubber finished products, among others.

In 2016, Alberta’s downstream value-added sector exported $8.7 billion worth of goods.

Exports of value-added products experienced a moderate downward trend from 2014 to 2016.

In Alberta, after reaching $9.2 billion in 2014, the value of downstream value-added exports declined by 2% to $9.1 billion in 2015, and by 4% to $8.7 billion in 2016. However, despite these declines, basic and industrial chemical, plastic and rubber exports in 2016 were still larger than in 2013, when oil prices were significantly higher.

Table 1. Downstream value-added exports

Figures are in millions of dollars.

  2015 2016
Alberta 9,075 8,670
British Columbia 994 885
Saskatchewan 385 322
Newfoundland 83 28
Canada 33,043 31,793

Overall, Alberta has been able to maintain fairly stable exports of basic and industrial chemical, plastic and rubber products - despite significant challenges in the upstream industry over the 2015 to 2016 period.

Exports from Alberta’s downstream value-added sector made up about 11% of all goods exported from Alberta in 2016. Compared to the key oil and gas producing jurisdictions within Canada - Saskatchewan, British Columbia and Newfoundland - Alberta had the highest exports in this category in 2016 at $8.7 billion. This is down from 2015; these four provinces and Canada as whole all experienced a decline for this category of exports.

Figure 1. Exports of basic and industrial chemical, plastic and rubber products

Employment in the downstram value-added sector

Employment in the downstream value-added sector

The downstream value-added sector, which consists of petroleum and coal product manufacturing, and chemical manufacturing, directly employed 10,900 people in 2016.

Employment, covered by this category, includes employment in petroleum refineries and petrochemical manufacturing, among other industries.

The decline in oil prices that took place in late 2014 had a significant impact on the upstream energy industry employment, and also likely had an impact on some industries that make up the downstream energy sector. Overall employment in the downstream sector declined from 15,100 in 2014 to 12,900 in 2015 (a 15% decline), and then further to 10,900 in 2016 (another 15% year over year decline). However, the overall decline was driven by the decline in chemical manufacturing employment, which indicates that the impact of lower oil prices on the downstream industry has not been the same for all components of the downstream industry.

Figure 2. Employment in the downstream sector

Employment in the Downstream Sector

Capital investment in the downstream value-added sector

The energy industry generates significant downstream activity and investment.

Figure 3. Capital investment in Alberta's downstream value-added sector.

Capital investment in Alberta Downstream Sector

Table 2. Downstream investment (NAICS 324 & 325) in Alberta (2012-2016)

Figures are in millions of dollars.

Source:  Statistics Canada, Cansim Tables 029-0045
Downstream investment 2012 Actuals 2013 Actuals 2014 Actuals 2015 Actuals 2016 Preliminary Actuals
Petroleum and coal products manufacturing (NAICS 324) 256.6 362.6 533.7 800.9 658.3
Chemical manufacturing (NAICS 325) 431.0 680.6 616.1 495.5 449.4
Total downstream investment 687.6 1,043.2 1,149.8 1,296.4 1,107.7
Alberta as a percentage of Canada 22% 31% 34% 36% 33%

Low oil prices caused a significant decline in investment in the upstream mining, quarrying, and oil and gas extraction sector. Investment in the upstream sector went down from $61 billion in 2014 to $40.3 billion in 2015; it was further projected to decline to 25.8 billion in 2016. Estimated mining, quarrying, and oil and gas extraction investment was 58% lower in 2016 than in 2014.

However, this trend in upstream investment didn't translate consistently into similar trends for downstream investment:

  • Petroleum and coal products manufacturing in Alberta significantly increased by 50% from $533.7 million in 2014 to $800.9 million in 2015, but was then projected to decline by 18% to about $658.3 million in 2016. However, estimated investment in petroleum and coal products manufacturing in 2016 was still higher than in 2014.
  • Chemical manufacturing declined by 20% (from $616.1 million in 2014 to $495.5 million in 2015), and was then further estimated to decline by 9% to $449.4 million.

Total downstream investment increased from $1,149.8 million to $1,296.4 million, or 13%, from 2014 to 2015. It was then estimated to decline to $1,107.7 million in 2016, a 15% decline. While the estimated investment in 2016 was 4% lower than in 2014, the decline in downstream investment was significantly lower than the decline in the upstream over this time period.