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Energy trusts insist fight ‘not over’ Going directly to investors in a C$10 million campaign, coalition of energy trusts is entering federal election arena Gary Park For Petroleum News
Canadian Finance Minister Jim Flaherty issued an “end of story” declaration Nov. 18.
Energy trust executives retaliated with a vow to continue their fight, gambling C$10 million that they can yet win the hearts and minds of Canadians and force the federal government to revise its plan to start taxing trusts in 2011.
In the process the trusts are taking the unusual step, however much they deny it, of entering the political arena as the federal political parties start grooming themselves for an election expected by spring 2007.
Operating through the Coalition of Canadian Energy Trusts, which includes 31 royalty-generating trusts with a market capitalization of C$100 billion, they are pulling out all of the stops in a public campaign they plan to launch early in the New Year.
Their resolve has been stiffened by Flaherty’s refusal to offer any concessions beyond the guidelines that allow trusts to double in size during the transition period.
Government: decision in country’s best interest Flaherty infuriated some of the sector leaders by telling lobbyists they are wasting their time pressing for an extension of the 2011 deadline from four years to 10.
“I’ve been surprised that since Oct. 31 (when he announced an end to the trusts’ tax-free status) some people have entertained the notion that there might be any extension whatsoever from four,” a bristling Flaherty told reporters in Vancouver. “There will not be.”
He said business leaders have “uniformly” told him that the tax on trusts is a necessary move.
To continue along the path of allowing corporations to become trusts and shrink revenue sources for various federal programs would turn Canada into a “coupon-clipping, passive economy. That’s just not in the best interests of Canada,” he said.
Prime Minister Stephen Harper, in a series of year-end interviews, said the trust decision had been his toughest of 2006.
But he said that offering an energy exemption at this stage would “turn into exactly the problem we just got out of.”
Energy trust coalition: decision not in country’s best interest The energy trust coalition is just as certain that what the government has done is not in Canada’s best interests.
When the battle resumes in January it will have heavy political overtones.
The coalition points out that the bulk of its millions of investors are in Ontario and Canada, which represents a combined 60 percent of Canada’s population and are thus the swing provinces in any election.
If the Harper administration is to form a majority government it needs a decisive victory over its three rival parties in the heartland.
While coy about their tactics, coalition leaders such as Gordon Kerr, chief executive officer of Enerplus Resource Fund, told a conference call that when trust investors start receiving the latest value of their trust holdings in January they will see clear proof of the “devastation created by the government decision of Oct. 31 to end the tax free status of trusts — they will feel betrayed, as we do.”
Dielwart: changes could erode retirement income John Dielwart, chief executive officer of ARC Energy Trust, said he is most offended by the fact that Canadians are “giving the government a free pass. We want to put our case out there, if for nothing else than so it can be debated.”
He said the changes could erode retirement income for investors, produce higher energy prices for consumers and have a drastic impact on plans by some trusts to deploy enhanced oil recovery technologies to capture and store carbon dioxide.
“This is not just about taxes,” Dielwart said. “It’s about the environment, personal investments and Canada as an energy leader.
“We believe that when Canadians learn more about the issues that go beyond tax, they will stand by our side.”
He said that once Flaherty tables legislation to implement the changes the bill will face the parliamentary process, which gives the coalition a chance to sway the opposition parties.
If the legislation is defeated it could trigger an early election.
Coalition plans to explain role of trusts Meanwhile, the coalition is rolling out its heavy artillery to explain the role of trusts in the oil and gas industry, accusing the government of failing to understand the sector’s importance to the Canadian economy.
For openers, it has challenged government claims that energy trusts are a source of lost tax revenues.
In a 100-page report, the coalition said energy trusts pay more in taxes than conventional oil and gas companies that generate significant tax pools to pay for exploration and, as a result, end up paying little in corporate taxes.
The report also said energy trusts have paid more than C$35 billion to acquire mature oil and gas assets over the past five years and invested C$15 billion to develop those properties that senior producers had abandoned.
“We go back to those properties and we squeeze them — we squeeze them hard,” said Bill Andrew, chief executive officer of Penn West Energy Trust.
Noting that trusts account for more than one-fifth, or about 1 million barrels of oil equivalent per day of Canada’s oil and gas production, he warned that half of those volumes could be lost if trusts were taxed like regular companies, thus inhibiting their ability to raise capital.
As well, the trusts repatriated C$10 billion worth of assets from foreign-controlled companies over the past 10 years, many of which the coalition says are now being aggressively optimized, while senior producers have turned their attention to the Alberta oil sands or outside Alberta altogether.
Coalition paper says chance could cost 10% of production The coalition paper estimated that 30 percent of the tax revenue collected from publicly traded oil and gas companies came from the trust sector, which represented only 16 percent of the industry’s total revenue.
It also pointed out that the 15 to 25 percent withholding taxes collected from foreign investors did not include any corresponding use of Canadian services or infrastructure by those investors.
Should trust assets revert to foreign ownership as a result of the tax changes, the tax value would most likely leave Canada in the form of deductible interest, the coalition said.
The trust leaders said the net result could be the loss of about 10 percent of Canada’s oil and gas production, while as much as 22 billion barrels of oil-in-place (of which the U.S. experience shows 15-30 percent could be recovered) that is a candidate for enhanced oil recovery is at risk.
Dielwart said EOR projects now being developed by ARC and Penn West Energy Trust that could remove 30,000 metric tons per day of greenhouse gas emissions through carbon sequestration are at risk because the trusts will face higher costs of capital if they rejoin the corporate ranks.
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