National Post (National Edition)
Budget comes up empty on oil, gas
After the approval of two oil pipelines late last year, Justin Trudeau’s budget shows little interest in the future of Canadian oil and gas.
It even eliminates a couple of what it calls “inefficient fossil fuel subsidies” that will hurt exploration and investment. Meanwhile, the budget doubles down on subsidies and other incentives for green energy. It’s as if the election of Donald Trump didn’t happen, pipelines are no longer Ottawa’s concern, and preserving the competitiveness of a major sector of the economy so it attracts capital someone else’s job. Instead, the Liberals are sticking to their energy gameplan, which is to “get the country on the path to a lowcarbon economy.”
The budget proposes to eliminate the tax treatment of successful oil and gas exploration drilling as part of an international commitment.
That commitment is to phase out subsidies that “impede investment in clean energy sources, and undermine efforts to combat the threat of climate change.”
The change means that expenses associated with oil and gas discovery wells are treated as Canadian development expenses, which are deducted gradually over time, rather than as immediately deductible Canadian exploration expenses.
The budget also removes a tax preference that allowed small oil and gas companies to reclassify Canadian development expenses as immediately deductible Canadian exploration expenses when they are renounced to flow-through share investors.
Tim McMillan, president and CEO of the Canadian Association of Petroleum Producers, said the changes are particularly damaging for small, entrepreneurial companies that are trying to find new resources, and the overall message is that the competitiveness of Canadian oil and gas is further eroded.
Indeed, he said industry had been putting forward ideas to improve the exploration expense to attract capital.
“With prices of commodities dropping in late 2014 through 2015, Canada’s oil and gas sector had the biggest pullback in capital expenditures in the world,” he said in an interview from Mexico, where he was speaking at a conference. “We fell deeper and harder than the Middle East, than Africa, and certainly more than the U.S. Now that the price has stabilized around US$50 (per barrel of oil), the capital is coming back in the area, and it is in Canada as well, but our rebound is slower than it is in the U.S.”
McMillan took exception to budget “language” that defines the two tax measures as “fossil fuel subsidies,” while ignoring that oil and gas contributes $15 billion to governments every year in royalties and taxes.
The oil and gas services sector scored a modest win. The budget includes a onetime payment of $30 million to the Alberta government to support the decommissioning of orphan wells, pipelines and facilities.
“While the amount is less than we had hoped for, any amount helps this beleaguered sector,” Mark Salkeld, president and CEO of the Petroleum Services Association of Canada, said in a statement. The money should help create work for thousands off unemployed oilfield services workers, he said.
Salkeld said orphan well associations collect levies from current industry players to ensure funding for the clean-up of wells where the owners have become defunct, but the drop in commodity prices has resulted in widespread bankruptcies, overwhelming the resources of the orphan well associations. The Alberta government is expected to announce within days how the money will be used, he said.
The lone item in the budget on oil and gas pipelines relates to $17.4 million in spending over three years to help the National Energy Board enhance pipeline safety oversight activities, with a further $1.9 million over three years to provide timely access to energy information. Both investments will be “fully cost-recovered from industry.”
Of course, it could have been worse. Damage avoidance could be as good as it gets for an industry that is clearly out of Ottawa’s favour.
There was considerable anxiety among oil and gas players the government would increase capital gains taxes and the capital gains treatment of stock options. Ottawa wants to see how U.S. President Trump’s tax agenda unfolds before making such moves.
Gary Leach, president of the Explorers and Producers Association of Canada, said his members are frequent visitors to capital markets and such changes would have been damaging for capital formation and capital retention in Canada versus the U.S., as well as to attract talent.