Canadians must think like investors in oil and gas: Don Pittis

Canadians must think like investors in oil and gas: Don Pittis

There is lots of money to be made in oil and gas stocks.

In a world where most trading is short term, shares as volatile as those in the petroleum business can be cash cows for those who repeatedly get it right.

On Friday, oil prices and petroleum stocks rose sharply after a what appeared to be a missile strike on an Iranian tanker. Historically, Middle East conflicts have been good for the price of oil and for the stocks of non-Middle-Eastern producers, at least in the short term. 

But as Koch Industries and the Norweigian pension fund unload shares in Canadian oil properties, it is fair to ask whether they know something the rest of us don’t.

If you are saving for retirement with a 30-year buy-and-hold strategy, should you be investing in oil and gas? The question is important even for those Canadians who don’t have their own portfolio of stocks to manage, because as taxpayers that is what the governments are doing with your money.

Displacing ‘OPEC dictator oil’

As part of his recent guest appearance in the national election campaign, Alberta Premier Jason Kenney has been touting the advantages for Canada of fossil fuel extraction. And as one of Canada’s most articulate political salesmen, he made a strong case, including during last week’s interview on CBC Radio’s The Current, that other provinces should support the industry.

“If they want to benefit from the resource wealth created in Alberta, then please help us to get that to global markets, get a fair price for it and displace OPEC dictator oil, both in Eastern Canada and around the world,” he told guest host Kathleen Petty.

But as he championed the fossil fuel sector Kenney appeared to be discounting a powerful new movement that has declared fossil fuels and the carbon they produce Public Enemy No. 1, dismissing youthful protesters as wild-eyed political radicals. 

“There were communist hammer-and-sickle flags out there — I wouldn’t go to a rally with a hammer-and-sickle flag any more than I would to one with a swastika, quite frankly,” said Kenny.

While mentioning your opponents in the same breath as communists and Nazis may be good politics that will appeal to the conservative-minded and those whose livelihood depends on the oil industry, it may not be good investment advice.

Plenty of thoughtful conservative voices, including the editors of the Economist magazine, Bank of England governor Mark Carney and corporate leaders have warned that long-term investors in fossil fuels must beware. If pressure to cut carbon output continues as sea levels rise, crops fail and more species go extinct, they have warned, oil, natural gas and other fossil fuels must be left in the ground.

Many conservative economists have supported the carbon pricing that Kenney has adamantly opposed.

As an investor it does not strictly matter if you believe in the forces that will make your portfolio rise or fall. But for your self-interest, you simply cannot ignore them.

And many independent observers say it is very likely that the fossil fuel industry’s days are numbered. The debate is mostly how long it’s got.

Mark Kamstra, a finance professor at the Schulich School of Business, a specialist in risk, is skeptical that society will quickly abandon fossil energy.

“Everyone can see the future and, sure, it’s not really bright for oil 50 years from now, or even maybe 30 years from now,” said Kamstra.

He compares oil companies to Kodak, which faded away due to changing technology and new consumer needs. But he sees investment opportunities in the meantime. Rather than investing as much in exploration, oil and gas producers will return profits to shareholders resulting in higher dividends yields. Also, psychology can play a part.

Oil stock embarrassment

“You can’t go to a party and boast about making money on oil stocks right now,” jokes Kamstra.

As shareholders divest to demonstrate their disapproval, they may have the unintended effect of making fossil fuel share prices lower than returns would justify, something observed with so-called sin stocks such as tobacco and liquor companies.

But despite warnings of a climate emergency, the “extinction rebellion” and the student marches following the example of teenage climate champion Greta Thunberg, Kamstra believes the petroleum industry is simply too entrenched in economic life for the world to make a speedy pivot. 

“I just don’t think people will be willing to make personal sacrifices. It’s got to be win-win,” said Kamstra.

The growing credibility of hydrogen as a transportation fuel could offer Alberta a gradual transition to low-carbon technology that would use its energy skills. (Kim Hong-Ji/Reuters)

Matthew Klippenstein, a chemical engineer with a long history in the clean-energy sector, sees a win-win for the Alberta oil and gas industry as the world moves to low carbon.

Kodak went bankrupt partly because it was terrified of undermining its own principal business that depended on film. But Klippenstein sees a way around that conundrum. 

Sophisticated players in the oil and gas sector including Suncor are already looking for ways to avoid the Kodak mistake, for example by installing high-speed electrical vehicle chargers in the company’s Petro-Canada service stations.   

Klippenstein, who recently worked on an innovation report for Zen Clean Energy Solutions, told me last week that Alberta’s high-tech energy sector should use its skills and wealth, for example, in the young but growing hydrogen sector, which David Layzell at Canadian Energy Systems Analysis Research says is already feasible. It’s a low-carbon technology that will grow as oil and gas gradually declines.

“Yes, [Alberta’s] energy sector and infrastructure are for now fossil-focused,” wrote Klippenstein in a recent tweet.  “But that’s incidental, not intrinsic.”

Like Kamstra, Klippenstein sees the demand for Canadian oil and gas continuing for decades. But the companies that survive and prosper will not be those that dig their heels in and refuse to change.

If the low-carbon revolution actually happens, the companies that will still be worth owning in 30 years and the places that will attract investment will be those now making the effort and the investment to find ways to adapt.

Follow Don on Twitter @don_pittis





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Wages, pensions, plant investments still issues in GM strike

Wages, pensions, plant investments still issues in GM strike

With the strike by factory workers against General Motors in its 29th day, there are signs that negotiators may be moving toward an agreement.

After both sides exchanged barbs late last week, bargainers met late into the night during the weekend, and they’ve returned in the morning, talking with few interruptions. All of those are signs that they’re progressing on key issues.

“The fact that they’re not name-calling anymore, at least for now, they’ve stayed a little later at least,” said Art Schwartz, a former GM negotiator who now runs a labour consulting business in Ann Arbor, Michigan.

On Thursday GM accused the union of responding slowly to an offer it made early in the week and said that CEO Mary Barra urged it to speed up negotiations.

But Terry Dittes, the union’s top GM negotiator, accused the company of releasing “half truths” that did nothing to reach a final agreement. The union raised strike pay by $250 US per week to $275, starting this week.

Here’s where the talks stand as the strike by 49,000 workers that has paralyzed GM’s U.S. factories heads toward its second month:

Areas of disagreement

The union and GM are still apart on the company’s commitment for new products at U.S. factories, with the union arguing that all vehicles sold in the U.S. should also be built in the U.S.

GM has offered $9 billion worth of investments at U.S. factories, $7.7 billion from the company and another $1.3 billion from joint ventures, according to two people briefed on the talks. The $1.3 billion includes a battery cell factory in the area of Lordstown, Ohio, where GM wants to close an assembly plant, said the people, who didn’t want to be identified because the talks are confidential.

Wages and lump-sum payments also are areas of disagreement, with the union seeking hourly pay raises and the company wanting annual lump sum payments.

A company offer last week gave workers 4 per cent lump sums in the first and third years of the four-year contract, with 3 per cent pay raises in the second and fourth years. This would be in addition to annual profit-sharing checks. This year workers got checks for $10,750 each. GM also offered to lift the $12,000 cap on profit-sharing checks.

Also at issue are the union’s drive for sweeter retirement benefits. Workers hired before 2007 get defined benefit pensions, while those hired after 2007 get 401K-style payments. The pension formula has not been increased for a dozen years.

Areas of agreement

After initially trying to cut health care costs, GM has agreed to keep benefits and payments the same as they are now. Union members pay 3 per cent premiums while most workers at large companies in the U.S. pay over 30 per cent, according to the Kaiser Family Foundation.

Both sides also have agreed on a path for temporary workers to get permanent jobs, the people said. GM proposed that they become permanent after three uninterrupted years of work, but that has been shortened, according to one of the people, who was not sure by how much.

On the pay issue, GM initially offered an $8,000 bonus to workers to sign the contract, but sweetened that to $9,000, the people said.

What’s been lost

There is pressure on both sides to end the walkout. Most workers, who were hired before 2007, make about $30 per hour, or $1,200 per week, not including overtime pay. So for the four weeks of the strike, they’ve lost a minimum of $3,800 each. Strike pay has cost the union roughly $48 million so far, according to the Center for Automotive Research, an industry think-tank .

GM, the centre estimates, is losing $450 million every week, or $1.8 billion thus far. GM made more than $8 billion last year and has racked up more than $30 billion in profits in the past five years.

The strike immediately silenced about 30 GM factories in the U.S. and has brought down two plants in Mexico and one in Canada. Parts companies that supply GM have had to lay off thousands of workers.

If there’s an agreement

The strike would not end immediately. Bargainers would have to vote on a tentative agreement, followed by the union’s International Executive Board of officers and regional directors. Then factory-level union leaders, including local presidents and bargaining chairmen, would meet in Detroit and also vote.

If they approve it, then this group would also decide if workers would put down picket signs and go back to work. It’s likely, though, that the workers would stay on strike until after all members vote on the contract. That voting could take a week or longer.



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Prairies ‘bright spot’ in Canadian cannabis market as legalization anniversary nears, expert says

Prairies 'bright spot' in Canadian cannabis market as legalization anniversary nears, expert says

As the one-year anniversary of the legalization of recreational cannabis approaches, an industry expert says the Prairie provinces are outpacing larger players Ontario and Quebec in the Canadian market with a smoother rollout and stronger sales.

“Manitoba and Saskatchewan are making Ontario and Quebec look very bad,” said Chris Damas, editor of BCMI Cannabis Report, a newsletter for cannabis investors in Canada and the U.S.

In the two largest provinces, Damas said poor regulatory frameworks and slow-to-open stores meant the industry underperformed in its first year. He praised the framework in Alberta, Manitoba and Saskatchewan for allowing private retailers to sell product and opening the door to e-commerce.

In Alberta, which Damas said has led the country for per-capita sales, the government regulator has passed on discounts from licensed producers to retailers, dropping prices for customers. In July 2019, Statistics Canada reports legal cannabis sales surpassing $21 million in that province, compared to $29.6 million in Ontario, which has more than three times the population. 

Saskatchewan reported $6.3 million in sales from cannabis stores in July 2019, the latest month for which data is available, according to Statistics Canada. In Manitoba, the agency reports monthly sales from cannabis stores have climbed steadily from $4.2 million in December 2018 to $5.8 million in July 2019.

Delta 9 CEO John Arbuthnot said the company has benefited from low costs in the Manitoba market. (Lyzaville Sale/CBC)

Damas attributes much of that success to the number of stores, which have proliferated across the Prairie provinces compared to their larger counterparts.

Manitoba currently has 26 operational stores, and Saskatchewan has 37.

Ontario, with more than 10 times Manitoba’s population, had 25 stores. Quebec, with a population just over six times Manitoba’s, had 21. Cannabis store sales were $29.6 million in Ontario and $21.8 million in Quebec in July 2019.

“Manitoba has been punching above its weight,” Damas said. “We can’t expect that to change the industry structure, but I think Manitoba is doing very well.”

While the Prairie provinces are a “bright spot,” he said, the legal cannabis industry as a whole in Canada still needs to mature, and has been plagued in its first year by a calamitous drop in stock prices, a persistent black market and the lack of stores in the two largest provinces.

Manitoba advantage: Delta 9

He predicts oversupply in the coming months as an increasing number of licences have been granted will lead to more challenges. But he noted his long-term assessment still includes a half-dozen cannabis companies that will survive and thrive.

John Arbuthnot, CEO of the Winnipeg-based cannabis producer and retailer Delta 9, said the Manitoba market has been buoyed by factors like cheap power, low rent and a relatively inexpensive cost of living that keeps labour costs down.

The publicly traded company — which now holds the province’s only federal licence to process and cultivate cannabis, after Health Canada suspended the licence of competitor Bonify in February — reported a gross profit of $2.9 million in the second quarter of 2019, according to investor material provided to CBC.

Arbuthnot said the company expects legal weed prices to drop as the industry recovers from shortages early in the legalization process. (Jeff Stapleton/CBC)

“We’ve been champions of Manitoba for quite some time.… This is a great place for us to do business,” Arbuthnot said in an interview with CBC News Thursday.

“I think we’ve done a very good job here, from a regulatory standpoint, to make sure that Manitoba, over the long term, will be competitive in retail as well [as cultivation].”

Since the out-the-door lineups seen on legalization day, Arbuthnot said Delta 9 has completed 350,000 transactions in its four Manitoba stores (two in Winnipeg, and one in each of Brandon and Thompson). 

Despite expectations heading into legalization of a consumer base driven by young men, Arbuthnot said customer demographics have been varied.

He said he’s optimistic about the cannabis industry’s ability to build on success heading into the future, despite trouble in the stock market. Delta 9 stocks closed at $0.60 on the Toronto Stock Exchange Friday, compared to $2.07 on the day after legalization.

The spectre of empty greenhouses … is now pervading [the] cannabis investor mind frame.– Chris Damas, editor of BCMI Cannabis Report

That doesn’t mean there aren’t challenges. New numbers released by Statistics Canada Wednesday show a gram of weed costs an average of $5.85 in Manitoba’s illegal market, compared to $10.71 a gram on the legal side, based on prices reported by Canadians over the past 11 months.

Arbuthnot is hoping to see legal prices drop as the industry recovers from last year’s supply shortages and increases production scale.

A Canopy Growth employee handles cannabis plants in a facility in 2018. (Sean Kilpatrick/Canadian Press)

Sheilagh Dohie, regional director for the Winnipeg cannabis retailer Garden Variety, said in an email the company’s business has been growing each month since its first store opened in March.

“Partnerships with Manitoba Liquor & Lotteries and the Liquor, Gaming, and Cannabis [Authority] have been very positive,” Dohie wrote.

The retailer is part of a consortium involving Manitoba’s Fisher River Cree Nation, the Chippewas of the Thames First Nation in Ontario, and the cannabis companies Avana Canada, Native Roots Dispensary and MediPharm Labs.

Dohie said the group would like to see more relaxed marketing regulations heading into the second year of legal cannabis.

“I would like to be able to showcase our business,” Dohie wrote. “Advertising cannabis should be comparable to marketing liquor, clothing, groceries, or anything else.”

CBC News reached out to other Manitoba retailers for comment. Meta Cannabis and Fire & Flower did not respond to CBC’s requests. A spokesperson for Tokyo Smoke said the business wasn’t available to comment Friday.

Stocks ‘absolutely a bubble’: Damas

Looking back on the first year of legal cannabis, Damas said it’s obvious the stock side, at least, was overvalued to begin with. Stock prices for big-player Canadian and U.S. cannabis companies have plunged in the past year.

Canopy Growth Corp., the company behind retailers Tweed and Tokyo Smoke, dropped from $69.90 on April 29 to a Friday close on the Toronto Stock Exchange of $25.67, for example. Stocks in the Edmonton-based producer Aurora Cannabis closed at $4.86 on the TSX Friday, compared to a 12-month high of $15.07 in the days leading up to legalization.

“It’s absolutely a bubble. It’s probably one of the worst ones since the mortgage meltdown in Canada,” Damas said of the industry’s performance on the stock market.

Where investors were in the “euphoria” stage a year ago, he said, they’ve now moved through the “denial” stage and into “panic,” as the industry underperformed compared to inflated expectations. Next, he’s expecting “capitulation,” as shareholders start selling good stocks along with the bad.

“The spectre of empty greenhouses — half-filled, vacant — is now pervading [the] cannabis investor mind frame,” he said.

“Here at BCMI, we’re still looking for a very optimistic $172 million in monthly sales in December, which is 70 per cent or so more than what we had in July,” Damas said.

“It’s just that the stocks were too high and now they’re coming down to earth.”



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Beyond Meat drops claims that eating meat ups risk of heart disease, cancer

Beyond Meat drops claims that eating meat ups risk of heart disease, cancer

Beyond Meat has dropped from its website scary statistics about the health risks of eating meat that had been posted for months.

The move follows complaints from critics that Beyond Meat was marketing its vegetarian burger as healthier than meat without the science to prove it. The California-based company said its message hasn’t changed; instead it’s revising the website to add more information.

“Improving human health is a core tenet of our brand,” said spokesperson Allison Aronoff in an email. 

It appears that sometime after Sept. 11, Beyond Meat removed a startling graphic which stated that eating meat increases the chances of getting cancer by 16 per cent and the chances of developing heart disease by 21 per cent. 

A footnote below the graphic said the numbers were associated with processed meats — which excludes fresh beef — and based on a scientific study. An internet search found that it was a Harvard Study published in 2012 and the processed meats subjects ate included hot dogs and bacon. 

According to an internet archive search, sometime after Sept. 11, Beyond Meat removed this graphic from its website which included claims about the health risks of eating meat. (Beyond Meat)

The removed graphic also included statistics about how raising livestock harms the environment.

A second colourful segment stating that plant-based proteins help improve human health and the environment remains on the site.

When asked about the missing graphic, Aronoff said Beyond Meat is changing things up.

“We are in the process of updating our website to share additional information around the multiple benefits of our products to further help consumers make an informed decision around the food they eat.”

Beyond Meat’s website still shows this graphic which explains the purported benefits of eating plant-based burgers. (Beyond Meat)

In July, a CBC News story included a link to the now-removed statistics and quoted nutrition experts who said the evidence isn’t there — at least not yet — to declare that a processed plant-based burger is healthier than beef.

“Where is their research saying that — that this is better than eating a small, portion-controlled, lean piece of meat?” said Toronto-based dietitian and nutritionist Rosie Schwartz. 

Food policy expert Sylvain Charlebois said a company can expect criticism when making claims based on science which is still in flux. 

He points to a controversial new study where a team of international researchers concluded that adults don’t need to cut back on eating red and processed meat — because the purported health risks are small and uncertain. 

“Science is not an absolute, things evolve,” said Charlebois, a professor at Dalhousie University specializing in food distribution and policy.

Beyond Meat stands by its health claims, telling CBC News that its plant-based products offer the “delicious taste” of meat, but with more protein and iron and less fat and no cholesterol. 

It’s not meat

Beyond Meat’s burger has exploded in popularity with consumers looking for meat alternatives. But the company has also generated criticism for its marketing techniques. 

Charlebois said Beyond Meat invited the controversy by making comparisons to meat. 

“They provoke the marketplace,” he said. “If you start comparing your product with other products, you’re bound to make enemies.” 

It’s not just nutrition experts who have raised questions. Canadian Cattle farmers have a beef with marketing that promotes the Beyond burger as “meat.”

The Quebec Cattle Producers Federation has filed two complaints with the Canadian Food Inspection Agency (CFIA) on the issue, and has the backing of the Canadian Cattlemen’s Association. 

The first complaint, launched in January, took issue with A&W’s French-language ads which promoted the Beyond Meat burger sold in its restaurants as “fait de viande vegetale” or “vegetable-made meat.”

The Quebec Cattle Producers Federation took issue with A&W’s French-language ads which promoted the Beyond Meat burger sold in its restaurants as ‘fait de viande vegetale’ — vegetable-made meat. (A&W/YouTube)

The federations’ second complaint, launched in May, objected to Beyond Meat referring to its burger as “plant-based meat” in promotional material and on product packaging in grocery stores. 

The federation bases its complaints on CFIA’s definition of a meat product which states it must come from animal flesh. 

“Meat is from a carcass. There’s nothing that says meat can be plant-based,” said Kirk Jackson, a cattle farmer and the vice-president of the Quebec Cattle Producers Federation. 

“We just want a fair level playing field.”

He reports the federation has so far achieved a partial win as restaurant chain A&W has agreed to change or remove any advertising referring to its Beyond burger as a meat product.

The company’s current French slogan for the burger is “vrai bon burger” or “truly good burger.”

Kirk Jackson is a cattle producer in Saint-Anicet, Que., and serves as the vice-president of the Quebec Cattle Producers Federation. (Isaac Olson/CBC)

Jackson believes the outcome is a positive sign that the federation will also be successful in getting Beyond Meat to stop calling its product a plant-based meat.

“I’m hoping it’s going to be like this [outcome],” he said. “It’s just abiding by the rules.”

Both A&W and CFIA declined to comment on the issue. Beyond Meat told CBC News in May that it “takes regulatory compliance very seriously” and is “reviewing internally to ensure we comply with Canadian regulations.”



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Canada’s top plastic polluters, service centres under scrutiny: CBC’s Marketplace consumer cheat sheet

Canada's top plastic polluters, service centres under scrutiny: CBC's Marketplace consumer cheat sheet

Miss something this week? Don’t panic. CBC’s Marketplace rounds up the consumer and health news you need.

Want this in your inbox? Get the Marketplace newsletter every Friday.

Nestle and Tim Hortons top plastic polluters. Again.

Those discarded coffee cups and plastic water bottles are adding up. For the second year in a row, Greenpeace Canada says Nestlé and Tim Hortons were the top companies behind branded plastic bottles, coffee cups, lids and other plastic waste collected in shoreline cleanups across the country

These are some of the plastic bottles collected during shoreline cleanups in 2019. Despite the fact that they are widely recyclable, they were one of the most common items found. (Greenpeace)

Are drivers being misled?

How often do you really need to have your vehicle serviced? A class-action lawsuit is claiming drivers are being misled about their vehicle’s maintenance schedule, and raising questions about how often drivers need to service their cars or even change the oil.

Back in 2017, Marketplace tested service centres to find out if customers were being ripped off.

Canadian banks missing online security feature

Google offers it, some video games require it, but three of Canada’s big five banks don’t even want to talk about two-factor authentication, an extra layer of online security that some experts say banks should be required to provide to help protect consumers.

Three of Canada’s big five banks aren’t ready to discuss two-factor authentication. (CBC)

Busting tech support scammers

ICYMI: Marketplace tackled one of the largest scams targeting Canadians: Fake technicians claiming your home computer or smartphone is compromised. 

Read more about our investigation and watch our full episode below.

We want to hear from you

Do you have questions about vaccines? Heard conflicting or confusing evidence? We want to hear from you! Email katie.pedersen@cbc.ca

What else is going on?

Seafood giant vows change after hidden camera shows ‘unacceptable’ treatment of salmonVideo from a New Brunswick company’s hatchery in Maine shows salmon being smashed and stomped.

Little-known rule says airline can keep your money without delivering what you pay forA Calgary couple is fuming after paying Air Canada hundreds of dollars for an upgraded flight package they never fully delivered on.

Legalized cannabis hasn’t hurt productivity Recreational cannabis has not had nearly the negative impact on workplaces that some Canadians expected it would have prior to legalization, a new online survey suggests.

California sues travel sites FlightHub, JustFly for ‘swindling’ customers and ‘deceptive’ feesThe Montreal-based parent company says the lawsuit’s allegations are unfounded.

The latest in recalls

This week: Credit scores with Asha Tomlinson

It’s one number but it can have a huge impact on your life — from whether you qualify for a mortgage to renting an apartment or buying a car. That’s why millions of Canadians are signing up online to get those three powerful digits. Their credit score.

But did you know not all credit scores are the same? Or that some scores carry more weight than others? We put four popular companies (Credit Karma, Borrowell, Equifax and TransUnion) to the test and the numbers just don’t add up. Each company offered totally different scores. Some were much higher and some were much lower.   

Plus, in our investigation we find out that big banks and other lenders aren’t using the same scores you get. Most lenders pull a secret score that you may never see. 

I hope you’ll watch on CBC TV, Gem or on YouTube.

— Asha and the Marketplace team



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How board members at Alberta Energy Regulator were duped repeatedly

How board members at Alberta Energy Regulator were duped repeatedly

If business school professors are looking for new material about the importance of having a strong and effective board of directors — the Alberta Energy Regulator provides a gripping case study of what not to do.

The AER’s board oversaw a regulator whose executives travelled by air first-class and stayed at $500-per-night hotels, plotted how to privatize the province’s intellectual property, and spent millions of dollars in public money on a private venture in order to secure their future employment.

In some instances, the board knew of the behaviour and allowed it to happen, while at other times, it was completely unaware of activities. Board members not only failed to provide oversight, but they often didn’t even question senior leadership.

These are the conclusions of three different investigative reports by Alberta’s Auditor General, Public Interest Commissioner and Ethics Commissioner. Each agency launched separate probes into the AER last year after whistleblower complaints about senior management.

Costly side project shut down

The AER, which is funded by a levy charged to the energy sector, oversees the province’s massive energy sector and is expected to ensure the safe and environmentally responsible development of the industry.

The reports focus largely on the AER’s failed attempt to launch a side project, called the International Centre for Regulatory Excellence (ICORE). The private venture was supposed to provide training to foreign energy regulators. In the end, ICORE was shut down less than two years after it launched and cost the AER millions of dollars.

Jim Ellis announced his resignation as chief executive of the Alberta Energy Regulator in November 2018. (CBC)

Investigators found Jim Ellis, who was president of both the AER and ICORE, was anticipating a significant pay cut because of a change in Alberta’s provincial government and he was looking for a way to maintain his compensation level as one of the highest paid civil servants in the province. In 2017, his total compensation is stated as $728,000.

At ICORE, he and his inner circle planned to continue with lucrative salaries and luxury travel. They planned to get the venture running with AER resources, then take senior jobs there. In text messages to each other, they mused about collecting hefty compensation, suggesting $650,000 for Ellis and $500,000 for his close colleague, with a profit-sharing model as a bonus.

Even as recently as September of last year, when problems with ICORE were apparent, the AER board reasserted its support for the international project. 

Hiding money, misleading board

By definition, a board of directors is supposed to provide oversight of management.

The regulator spent more than $5 million creating and operating ICORE, although investigators say the total figure is difficult to pinpoint considering how poorly expenses were recorded.

Executives hid costs and staff were told to “remove references to ICORE in their expense reports,” according to the Public Interest Commissioner’s report, to purposely “avoid attracting attention when the expense reports were posted on the AER website.”

Ellis displayed “reckless and wilful disregard” for the proper management of public funds, according to the government watchdogs.

‘The AER board … did not receive complete and accurate information about ICORE,’ according to government watchdogs. (AER)

From the beginning, Ellis withheld information and misled the board, according to details in the investigative reports.

For instance, in early 2016, Ellis introduced a training concept with the board that would improve the skills of AER staff, however, he was already planning to use the training material internationally, selling it through ICORE, and was reportedly holding meetings with Mexico.

In February 2017, Ellis told the board that ICORE was created with a board consisting of AER staff. He did not disclose that he was actually the only board member nor did he mention how he was holding private talks about securing future employment related to ICORE.

In addition, investigators say Ellis also told the board that Mexico had formally joined ICORE and at least two other countries were also interested. The Auditor General discovered Mexico never formally joined ICORE and there wasn’t any evidence that two other countries were seriously interested in joining.

The board never did approve the creation of ICORE. The board also wasn’t even aware Ellis had applied for a $30-million federal grant for ICORE (which the government ultimately rejected).

Intellectual property

According to investigators, one way Ellis tried to raise money was by monetizing a software program developed by the AER by transferring it to ICORE. OneStop is an online tool for the energy industry to submit project applications, reclamation work and renewals, among other information.

Ellis wanted to boost the coffers of ICORE by offering the software to foreign countries like Ukraine, which expressed interest. 

This amounted to selling Alberta’s intellectual property. No wonder lawyers at the AER pushed back against the plan, highlighting concerns about the use of AER resources and pointing out how the OneStop program could be used to raise money for the AER itself. 

Ellis discusses how ICORE can make money from a program developed by the AER, called OneStop. (Public Interest Commissioner report)

Still, Ellis persisted, and according to the reports, suggested renaming the program before selling it through ICORE, writing “There must be another option. Take the experts out of the AER and recreate it. Call it something else.”  

One of the Public Interest Commissioner’s recommendations is for the AER to “take any necessary measures to protect its intellectual property” relating to OneStop and to AER training programs.

Lavish travel

Ellis and the AER’s vice president of national and international affairs, Zeeshan Syed, travelled frequently and often would book business class airfare, upgrade their seats, and stay at $500-per-night hotels.

The luxury travel was against AER policy, which states staff should use the most cost-effective method of transportation and accommodation.

One trip by Syed from Calgary to Copenhagen and London cost $8,089, while one trip by Ellis to London cost $8,789. Ellis also racked up more than $5,000 in flight change fees between March and November last year.

The ICORE-related trips were covered up, according to the reports, by often classifying them as “AER reputation meetings.”

Jim Ellis and a senior AER employee discuss concealing Ellis’s ICORE expenses: (Public Interest Commissioner report)

Only after a series of CBC News stories about excessive executive travel at the AER, did the board conduct a review of regulator’s travel policy.

Lacking expertise

At times, there were multiple vacancies on the AER board between 2015 and 2018.

Those who were on the board did not pay enough attention to ICORE, did not ask useful questions about ICORE, and lacked certain expertise to be effective, according to the reports.

Specifically, board members needed more experience with information technology and corporate law.

Foreign affairs minister Chrystia Freeland was on hand for the signing of a letter of intent between ICORE and the Ukraine Government. Zeeshan Syed with ICORE is pictured on the left, Ukranian economic development minister Stepan Kubiv is on the right, while Ukraine’s prime minister Volodymyr Groysman is behind Freeland. (kmu.gov.ua)

Among the information they failed to gather was an ICORE business plan, governance structure, AER staff involvement, and how AER policies and legislation would be followed.

The board’s general lack of interest in ICORE was noticeable, since ICORE was not included as an agenda item at their meetings for more than a year while ICORE was ramping up.

Chairman’s conflict

While the board was often oblivious to ICORE activities, the chairman seems to have had more knowledge than the others.

Former chair Gerry Protti had his own ICORE email address and travelled abroad to promote the initiative, according to the provincial watchdogs. He also actively recruited prospective members for ICORE’s advisory board.

AER board members are supposed to list any potential conflicts, but Protti never disclosed his involvement with ICORE.

The Alberta government suspended all ICORE-related activities after it learned of multiple investigations surrounding the organization. (International Centre of Regulatory Excellence)

The overwhelming support for ICORE by Ellis and Protti “deterred [other board members] from questioning ICORE further,” according to the Auditor General’s report.

Protti knew Ellis was planning to leave his job to head ICORE and also envisioned a role with ICORE himself, according to the Ethics Commissioner’s report. 

“He now remembers very little and is trying to distance himself from ICORE,” the commissioner wrote in her report after interviewing Protti.

Neither Ellis or Protti returned messages seeking comment.

“The AER Board … did not receive complete and accurate information about ICORE. The AER board’s challenges were further aggravated by the former AER board chair’s failure to disclose his involvement in ICORE,” the Auditor General’s report states.

Since the ICORE affair, the provincial government replaced the board of directors. Ellis and members of his inner circle are also no longer with the AER or ICORE. Despite the personnel change, it’s not clear whether fundamental improvements have been made.

When presenting her findings, Ethics Commissioner Marguerite Trussler said she was troubled by the senior management culture at the AER under Ellis, one which attempted to mislead the board and the government.

“It still needs to be ascertained if that culture still exists,” she said. 

The provincial government sets the budget for the AER, but the oil and gas industry itself funds the regulator through administrative fees. (Kyle Bakx/CBC)


The Auditor General’s recommendations to improve oversight of the AER board:

  • Establish effective processes to evaluate corporate culture and senior executive performance.
  • Obtain formal and periodic assertions from management that activities comply with legislation and AER policies, including policies related to conflict of interest.
  • Ensure officers in key risk management, compliance and internal control roles are well-positioned and supported to provide complete information about AER activities.
  • Review and approve CEO travel and expenses.
  • Ensure the primary channel of communication to the responsible ministers is through the board.
  • Establish processes to engage with executive staff, and other staff within the organization, to gain comfort that all significant matters have been brought to the attention of the board.



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How it suddenly became chill to tax Netflix and other web giants

How it suddenly became chill to tax Netflix and other web giants

In the last federal election campaign, the Conservatives released an ad featuring their leader, Stephen Harper, admitting that Breaking Bad was among his favourite TV shows.

But it’s what he said next that actually had a more profound impact on the viewing habits of the Canadian public. 

Harper promised he would never, ever tax Netflix. His main rivals quickly made the same promise.

In this election campaign, the parties have again come to hold remarkably similar positions on whether to tax Netflix and other web giants — only now, everyone embraces the idea.

The Liberals, the NDP and the Greens have nearly identical proposals in their platforms to tax multinational corporations that conduct their business online.

Even the otherwise tax-adverse Conservative Leader Andrew Scheer supports taxing their revenues.

Mélanie Joly, minister of Canadian heritage at the time, was widely criticized in Quebec when she announced the terms of the government’s deal with Netflix. (Justin Tang/The Canadian Press)

This dramatic change of heart might be attributed in part to the public’s reaction when the Liberal government kept its promise to not impose a Netflix tax.

In exchange for its tax-free status, Netflix promised to spend $500 million on Canadian productions over five years, including $25 million on French-language content.

The 2017 deal was deeply unpopular in Quebec. Many felt the feds gave in too easily to an American corporation without doing more to support the local film and television industry.

But around the world, national governments are also facing mounting public pressure to tax web giants.

This global backlash, say tax experts, is pushing countries like Canada to revisit tax rules that were drafted long before prime ministers could binge-watch shows on the internet.

A sales tax on Netflix

There are roughly three distinct policy ideas that come up when the political conversation turns to a “Netflix tax.”

Let’s begin with the least controversial: forcing streaming sites like Netflix and Spotify to collect and remit federal sales tax, an idea backed by the Liberals, the NDP, the Greens and the Bloc.

Netflix announced earlier this year that it has already spent $500 million on Canadian productions, two years into its five-year deal with the federal government. (Christophe Ena/Associated Press)

 

Two provinces — Saskatchewan and Quebec — already require foreign web companies to do this with their provincial sales tax. It’s been a smashing success, revenue-wise, in Quebec.

The provincial government had expected to raise $28 million this year from the new tax. As of August 31, it had already raised $38 million.

“This part of the proposals is straightforward and fairly unsurprising at this stage. Many countries are exploring the prospect of digital sales taxes,” said Michael Geist, who holds a Canada Research Chair in internet and e-commerce law at the University of Ottawa.

The challenge, he said, will be ensuring international companies comply with the rules. That could entail additional costs for the government which might outweigh the financial benefits of applying the tax in the first place.

In Quebec, digital companies have been willing to play along, signing up voluntarily to charge and remit sales tax.

After all, it’s consumers who are paying the tax, not the companies themselves.

Income tax on web giants

More controversial is the proposal to impose an income tax on web giants like Google, Amazon, Facebook and Apple.

The idea is backed by every party. The Liberals, the Conservatives and the Bloc have even suggested a specific rate: three per cent of all revenues generated in Canada.

While campaigning in Montreal Wednesday, Green Party Leader Elizabeth May says if elected, she promises to tax major tech giants that she sees as a threat to Canadian culture, such as Netflix and Facebook. 0:24

Slapping an income tax on web giants was thought to be impossible just a few years ago, said Brigitte Alepin, a tax expert who advised the Quebec government as it drafted its Netflix tax.

The problem was double taxation. The corporations are headquartered in the United States and already pay corporate tax on their revenues there.

Many feared that if countries went ahead and imposed their own income taxes without consulting each other, they would simply end up creating tax havens elsewhere.

There was also the very real possibility that the United States, angry at other countries eating into its tax revenues, would retaliate with tariffs.

But earlier this year, France went ahead with a three per cent tax on income international companies earn from providing digital services in the country.

The absence of retaliation from the U.S. suggests a similar move could be feasible for Canada.

But Alepin suggested that, before moving forward, the next government should discuss the issue with American trade officials.

Unions representing film and television workers have been lobbying the federal parties since the summer. They want services like Netflix and Amazon Prime to contribute to the Canadian Media Fund, which invests in local programming.

 

“We have to be very careful with this approach. We have to be careful not to vex our neighbour to the south,” she said. 

Alepin also said a three per cent tax should be seen as a short-term measure to address gaps in a tax system that wasn’t designed with internet commerce in mind.

An international effort — headed by the OECD — is underway to harmonize the taxing of web giants. Canada should follow those rules when they’re ready, Alepin said.

What to do about Cancon

The third and most controversial issue related to a “Netflix tax” is what to do about Canadian content.

Unions representing film and television workers have been lobbying federal parties since the summer to commit to forcing services like Netflix and Amazon Prime to contribute to the Canadian Media Fund, which invests in local programming.

Liberal leader Justin Trudeau and Conservative leader Andrew Scheer take part in the the federal leaders French language debate in Gatineau, Que. on Thursday. (Adrian Wyld/Canadian Press)

In Quebec, where a vibrant entertainment industry is considered vital to protecting the French language, there is still lingering anger over the Netflix deal.

The parties have been less specific about how they’d respond to these demands.

When Liberal MP Pablo Rodriguez released his party’s cultural policies last month, he said “we’ll ensure that digital platforms play by the same rules and contribute Canadian content.” He offered few details about what that meant.

The NDP platform makes the same commitment to making sure digital companies “play by the same rules as Canadian broadcasters.” The Greens are more explicit, saying Cancon rules will apply to Netflix.

But despite the anxieties within the culture industry about the Netflix deal, Geist said there are indications the Liberal approach has been successful.

“The reality is the company has spent more than $500 million on production in Canada just in the last two years alone. And they’re doing that without the need for regulation,” he said.

Geist added that advocating for a level playing field could be a double-edged sword for Canadian content producers.

While domestic cable and satellite providers, along with Canadian broadcasters, do have to help finance local productions, they enjoy other benefits that foreign streaming services do not.

According to Geist, these include simultaneous substitution, must-carry requirements and copyright exceptions.

“If the [next] government does argue that what we need is a level playing field, then perhaps it also ought to recognize there are a whole range of advantages that the existing incumbents have.”



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MasterCard, Visa exit Facebook’s Libra digital currency plan

MasterCard, Visa exit Facebook's Libra digital currency plan

Visa and MasterCard on Friday announced their departure from Facebook’s Libra project, a potentially fatal blow to the social network’s plan for a worldwide digital currency.

Along with the two payment giants, several other large companies have said they’re exiting Libra. Payment processing company Stripe said it is stepping back, as well as online auction company eBay.

PayPal was the first of Libra’s big partners to leave, announcing last week it would no longer be involved.

Facebook faced substantial criticism over its plans to create a separate, private currency system to allow cross-border payments. The Libra Association, based in Switzerland, was supposed to give the currency project a comfortable arm’s length distance from Facebook, which wouldn’t own Libra.

Despite those efforts, financial regulators, as well as members of Congress on both sides of the political divide, noted the privacy issues raised with the social networking company controlling a currency, while also expressing concern about money laundering. Even U.S. President Donald Trump tweeted that Facebook should be subject to U.S. banking laws if the Libra project were to move forward.

The impact of Libra’s loss of Visa and MasterCard cannot be understated. The two hold an effective duopoly over credit and debit cards in the U.S. and Europe, and are making substantial inroads into developing countries’ payment systems. Their initial agreement to join the Libra Association instantly gave Facebook’s project legitimacy.

But both companies made it clear from the onset that their interest in Libra was at least partly out of curiosity. It now appears that the political pressure on Facebook to drop the project was enough to convince a chunk of the original members to cut ties.

The Libra Association said in a statement that it is “focused on moving forward.”



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Hyundai, Kia earmark $760 million to settle U.S. lawsuits over engine fires

Hyundai, Kia earmark $760 million to settle U.S. lawsuits over engine fires

Hyundai Motor Co. and affiliate Kia Motors Corp. have earmarked 900 billion won ($758 million US) to settle U.S. class action litigation and address engine-related issues in the United States and South Korea.

The move marks the South Korean auto giant’s first major effort to resolve years of trouble over engine defects that have also sparked probes by the U.S. safety regulator and prosecutors.

Hyundai Motor will make a provision of about 600 billion won in its July to September earnings while Kia will book one for about 300 billion won, they said on Friday.

Hyundai and Kia said in a statement that under the U.S. settlement they would install software to monitor for symptoms of engine failure and take other steps, including offering compensation options and lifetime warranties.

A total of 4.17 million Hyundai and Kia models equipped with Theta II gasoline direct injection (GDI) engines will be affected by the U.S. settlement.

Hyundai and Kia, together the world’s fifth-biggest automaker by sales, recalled nearly 1.7 million vehicles in the United States to address the possibility of engine fires.

In November, Reuters reported that U.S. federal prosecutors had launched a criminal investigation to determine if the recalls had been conducted properly.

Since 2017, the U.S. safety regulator has been investigating whether the recalls covered enough vehicles and were conducted in a timely manner.

The investigation comes after Kim Gwang-ho, then an engineer at Hyundai, flew to Washington in 2016 to tell the National Highway Traffic Safety Administration (NHTSA) the companies should have recalled more vehicles over the problem, citing an internal report.

Hyundai Motor at that time denied allegations.

The NHTSA this year opened a fresh investigation into 3 million Hyundai and Kia vehicles after reviewing reports of more than 3,000 fires that injured more than 100 people.

That probe came in response to a petition seeking an investigation filed in June by the nonprofit Center for Auto Safety.



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Cracks found in 38 of 800 Boeing 737 NG jets inspected globally

Cracks found in 38 of 800 Boeing 737 NG jets inspected globally

Boeing Co said Thursday that airlines had inspected 810 of the company’s 737 NG jets around the world, and found 38 structural cracks requiring repair and replacement.

The planes will be grounded until the repairs are made, Boeing and airline officials said. Nearly five per cent of inspections have found cracks in a “pickle fork” — a part that attaches the plane’s fuselage, or body, to the wing structure and manages forces.

The 737 NG is the third-generation 737 and the version before the now-grounded 737 Max, which is not impacted by the cracking issue.

On Wednesday, Southwest Airlines Co and Brazil’s Gol Linhas Aereas grounded at least 13 of the 737 NG airplanes after U.S. regulators ordered urgent inspections. The U.S. Federal Aviation Administration (FAA) last week told U.S aircraft operators to inspect 165 older 737 NGs for structural cracks.

American Airlines and United Airlines said earlier this week they have not seen any cracks in their airplanes.

Raymond James analyst Savanthi Syth wrote in a research note Thursday that the findings from the 737 NG inspections could “potentially take up to four per cent of capacity off-line” between mid-October and mid-December.”

Planes with cracks “may need to be taken out of the fleet for up to 60 days for maintenance,” Syth said.

The FAA last week said inspections would look for “cracking of the left and right hand side outboard chords of frame fittings and failsafe straps.”

It said the cracking “could adversely affect the structural integrity of the airplane and result in loss of control of the airplane.”

Aircraft with more than 30,000 cycles must be inspected within seven days, while planes between 22,600 and 29,999 cycles must be inspected within 1,000 cycles, which typically correspond to the number of flights. In total, 1,911 U.S. 737 NGs are covered by the FAA directive.



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