BUDGET CHANGES WILL CRIMP EXPLORATION, OILPATCH WARNS
Moments after being named among the top petroleum producers in the country, a pair of oilpatch CEOs were asked about the fallout from the new federal budget.
It didn’t take long for Darren Gee of Peyto Exploration and Development, or Tamarack Valley Energy’s Brian Schmidt, to set their sights on tax changes that will affect drilling and exploration in their sector.
The moves won’t affect the companies immediately. But the executives worry about the longterm implications of Ottawa’s decision to slow down deduction rates allowed on discovery wells.
They believe the budget will make conventional oil and gas producers less likely to take on additional risky exploration spending, particularly in a period of turbulent commodity prices.
They also fear it will make the Canadian oilpatch less competitive to attract global investment dollars.
“The industry is so focused right now on trying to make money, and risk is off the table at this point,” said Gee, whose company was named top intermediate/senior producer last week by the Explorers and Producers Association of Canada (EPAC).
“But at some point we are going to have to start adding risk, because when we get some of these (existing) resource plays developed, we are going to have to move to the next play — and where is that next play?
“We don’t know where it is because we haven’t been out looking for it.”
Last week’s budget changed the tax treatment that allowed producers to deduct all of their expenses from discovery oil and gas wells in one year, commonly known as the Canadian Exploration Expense (CEE).
Instead, these expenses will be shifted into a different category with a deduction rate of 30 per cent annually on a declining basis.
The budget also affects a policy that lets smaller firms pass along exploration expenses that can be immediately deducted by investors with flow-through shares.
Natural Resources Minister Jim Carr said the changes are part of the commitment Canada has made with other G-20 countries to gradually phase out fossil fuel subsidies “as the economy can handle it.”
“We think it’s important that any of these tax changes be sensitive to the economic moment. We think they are,” he said in an interview.
Carr stressed the federal government has approved new oil pipelines such as the Trans Mountain expansion in the past year. It’s also retooling the National Energy Board, which received an extra $17.4 million over three years to bolster pipeline safety oversight.
As well, Ottawa is giving $30 million to the Alberta government to create jobs in the resource sector through the accelerated cleanup of orphan wells.
But if the minister is looking for applause from conventional oil and gas operators, he’s not going to get it.
Yes, the amount of federal money at play with these changes is small; the CEE modification is estimated to raise an extra $145 million in government revenue between 2019 and 2022.
But the effect shouldn’t be underestimated, said Schmidt, whose company was named top junior producer by EPAC.
“It’s real simple. That’s the seed capital … these exploration wells go on to put plays together that are worth billions of dollars,” he said.
“The question is how much business is going to get killed off in four to five years because the seed hasn’t been planted?”
The timing of these changes is baffling, as the sector has only begun to recover from a dramatic plunge in exploration and drilling work triggered by the oil price collapse.
The Canadian Association of Oilwell Drilling Contractors predicts 4,665 wells will be drilled this year, up about 1,000 from last year. But that’s far off the 11,200 wells drilled in 2014.
CAODC figures show the number of completed exploration wells in Canada has dropped from 834 three years ago to less than half that amount drilled through the first 11 months of last year.
The broader issues of industry competitiveness relative to the U.S. is also boiling as the sector faces additional costs connected to the carbon tax in Alberta and, starting next year, a national carbon price.
And there are still fears a border adjustment tax will be put in place by the Trump administration, which would punish Canadian energy.
Since the beginning of the year, the S&P/TSX Capped Energy sub-index is down 11 per cent, a point that hasn’t gone unnoticed by the energy executives.
Schmidt points out supermajor Shell just sold off most of its oilsands assets in northern Alberta, yet another international player spending less in the country.
“When Shell pulled out of the oilsands, that is a sign something is seriously wrong. If you look at the capital exodus from the energy sector into other sectors, like financial, into the United States, the market is telling us we’re not competitive,” he added.
Ultimately, both CEOs are worried about the various forces battering conventional producers who’ve been under intense pressure during the recession.
With the industry still trying to find its feet after the worst downturn in a generation, these changes aren’t helping.
“I would say the mood has changed even in the last three months from being one of cautious optimism to one where we’re a lot more careful these days,” said Gee.
“For once we would love to have the wind at our back — but it’s not like the headwind is slowing at all.”