Oil Patch Insider

Tax breaks urged for Canada’s energy sector

Over decades, British- and U.S.-based companies bought up and sold countless billions of dollars of Canadian petroleum assets and were welcomed by the federal Conservative party as a vital source of financing for the industry.

Over a few months this year, France’s Total and three of China’s state-owned companies moved into Alberta’s oil sands and they are seen by the Conservatives as a threat to Canada’s energy security.

The party’s deputy leader Peter MacKay says Canadian oil and gas companies need additional tax breaks to put them on a competitive footing with global companies that are becoming “more and more aggressive” in their hunt for assets.

Canada is “at a crucial point … the natural advantage and the prosperity we should be achieving (from natural resources) won’t be there forever,” he said. MacKay argued Canada has to learn from its mistakes as an exporter of raw materials.

“We need to improve the manufacturing sector and that includes the energy field,” he said.

“We don’t want to see lost control over that industry. We want to make sure we are maximizing the benefits in terms of jobs and investment (at a time when) the Chinese and other countries are taking a very interested look at our energy sector.”

But MacKay emphasized he was not proposing limits on foreign ownership — “a dangerous line to cross” — although he warned Canada could lose control of the industry if the government didn’t improve the tax position of Canadian companies.

“Right now we have a tax structure which punishes investment, that holds back Canadian investors and companies who are trying to compete on the international stage,” he said.

Tax breaks, not subsidies, would remove an impediment to exploration and development of offshore Nova Scotia, which is crumbling under the weight of drilling failures and abandoned leases, MacKay suggested.

The corporate tax rate for the energy sector has dropped from 28 percent and will be 21 percent in another two years, the same as for the rest of corporate Canada. Federal Finance Minister Ralph Goodale has reportedly indicated to the Canadian Association of Petroleum Producers that he is now considering a further cut to 19 percent.

—Gary Park

Rolling the dice on oil prices

CIBC World Markets Chief Economist Jeff Rubin bet on an average US$84 per barrel in 2006 and US$93 in 2007, with the price breaking the US$100 barrier by the end of 2007; TD Bank Financial Group economists are betting on a rollback to US$45 by early 2007, although they don’t rule out US$80 if “further unanticipated supply disruptions occur.”

However the ball bounces, industry executives in Canada are worried about the impact of fast-rising world energy consumption and laid out their concerns at a conference in Banff, Alberta.

Shell Canada Chief Executive Officer Clive Mather said the urgent need is to get back to an “orderly market as quickly as we can,” instead of panic gasoline buying on fears of further hikes.

He said that sort of jittery response by consumers, regardless of how understandable, contributes to supply shortfalls.

Mather said a far greater concern than SUVs in North America is the demand for energy in the developing world, especially in China, India and other parts of Asia, where consumption will double and possibly triple in the next 20 to 30 years.

Gwyn Morgan, EnCana chief executive officer, doubts the tight supply-demand outlook will ease any time soon.

He said the “single biggest reason” for soaring oil prices is the unprecedented economic growth rates of 8 to 9 percent in Asian countries with combined populations of more than 2 billion people.

But the demand growth in China, India and South Korea is putting the focus on unsustainable levels of consumption in North America, where millions of cars caught in traffic jams burn fuel “when there is a better way.”

Morgan practices what he preaches, occupying a condominium within walking distance of his downtown Calgary office and pursuing a vigorous fitness regime as a runner, cyclist and cross-country skier.

—Gary Park