Oilpatch dismisses ‘Band-Aid solutions’

CALGARY• Tax breaks announced by Ottawa and Alberta have been dismissed as “Band Aid solutions” that won’t help spur new investments in the beleaguered sector until new pipelines are built.

Ottawa’s changes, announced Wednesday, include immediate deductibility of expenses for new plant and equipment and clean-energy technology, while Alberta offered Thursday new exemptions from the carbon tax for drilling companies and said it could buy rail cars to help move oil to U.S. refineries.

Earlier Thursday, Notley called on Ottawa to buy locomotives and railway cars to deal with the “real and present danger” that US$40 to US$50 per barrel oil price discounts pose to the Canadian economy.

“Since work stopped on the Trans Mountain pipeline in August, it’s cost the Canadian economy more than $6 billion,” Notley said at a forecast breakfast hosted by the Canadian Association of Oilwell Drilling Contractors on Thursday morning. “The only longterm solution to this is building new pipelines and getting more value from our resources.”

Bloomberg News reported Ottawa would likely reject Alberta’s request to purchase locomotives and railcars to move oil out of Alberta, where a glut of crude has built up in storage tanks given pipeline constraints and a slower-than-expected ramp up in oil-by-rail exports.

Alberta then signalled its willingness to buy the railcars even if Ottawa wouldn’t. “If Ottawa won’t come to the table, then we’ll get it done ourselves,” Notley said.

Notley also announced drilling companies would be exempted from its carbon taxes for a number of the fuels they use to drill wells in the province.

While oil executives said they wouldn’t turn down offers for assistance, the measures do little in the short term while Canadian oil prices are subject to record-setting discounts relative to the U.S. crude oil benchmark due to a lack of export pipelines.

One of the measures, contained in Morneau’s fall economic update, was a 100-percent deduction in the first year for new manufacturing, processing machinery and equipment, an incentive similar to what’s available in the U.S.

“The changes in the deduction rates for the equipment does very little for an E&P company in Western Canada,” Advantage Oil and Gas Ltd. president and CEO Andy Mah said. “Most of the companies are non-taxable at this point because our revenues have diminished so significantly.”

“A lot of the E&P companies already have a pretty sizable deductibility from prior investments that haven’t paid out,” Mah said.

The biggest problem facing the Canadian oil and gas industry is the regulatory delays for building projects like pipelines and LNG projects, Mah said.

Canadian Energy Research Institute vice-president, research Dinara Millington thinks the measure could benefit producers embarking on new projects as it “will impact their bottom line and project economics, too.”

But few producers are embarking on new projects right now.

The new deduction allowances are “a step forward,” Cenovus Energy Inc. spokesperson Sonja Franklin said in an email, adding that “the allowance for energy producers is less attractive than that for similarly trade-exposed industries, and it still leaves us at a competitive disadvantage to U.S. energy producers.”

“Also, due to the oil pricing crisis facing the Canadian oilpatch, producers won’t likely be able to take advantage of this tax measure any time soon because companies are not planning any significant capital spending in the near future,” Franklin said in an email.

Cenovus has previously said it won’t embark on new growth projects until new export pipelines are closer to being completed.

Prime Minister Justin Trudeau made Calgary his first stop after the fiscal update announcement in Ottawa, and was greeted by a pro-pipeline rally outside the Calgary Chamber of Commerce event, in the heart of the city’s downtown, chanting, “build that pipe.”

Trudeau told business executives at a Calgary Chamber of Commerce event that he was “very, very aware how crucial” the stalled Trans Mountain pipeline expansion is to Canada.

“There is no question that folks in Alberta, folks here in Calgary, are living through extremely difficult times. This is very much a crisis,” Trudeau said.

Ottawa purchased the Trans Mountain pipeline system for $4.5 billion from Houston-based Kinder Morgan Inc. earlier this year but work halted on the expansion project in August when a Federal Court of Appeals judge ruled the federal government had not properly consulted with affected First Nations along the route.

The federal government has since announced more consultations and a renewed regulatory process for the pipeline.

Advantage’s Mah said the proposal to buy new railcars to ship oil out of storage was a “Band-Aid for all the issues that we didn’t address earlier.”

The deepening crisis in the oilpatch is expected to continue next year, according to CAODC, which is estimating less than one-percent increase in wells being drilled in 2019, compared to the current year.

“Our members are on life support,” CAODC president Mark Scholz said in a release.