Canada’s energy trusts are trying to transform themselves into an irresistible force as they tackle what is posing as an immovable object in an effort to convince the federal government to take a second look at its proposed tax reform package for the trusts.
Just five days after Ottawa dropped its bombshell, the trusts were attempting to reconstruct the pieces.
On Nov. 6 they presented a united front through the Coalition of Canadian Energy Trusts, comprising all 30 oil and gas producing operations, plus pipeline and service sector trusts.
While careful to avoid taking hard-and-fast stands — “It is premature to determine directions,” said Gordon Kerr, chief executive officer of Enerplus Resources Fund — they made a common plea for the government to engage in consultation.
Without that, the trusts have no hope of arguing they are different from conventional business trusts that have started flooding to trust ranks to avoid paying taxes on their income — a move the critics say is motivated by greed.
The energy trusts insist they merit special attention because of what they have done to scrap the bottom of Canada’s oil and gas reservoirs, creating thousands of jobs in the process by tackling lower-risk, lower-reward resources.
Trusts producing 20 percent of Canada’s output
Over just the past five years, their ranks have swelled to the point where they produce 1 million barrels of oil equivalent per day, 20 percent of Canada’s total output, up about four-fold from 2001.
They have spent C$10 billion over the same period, including a major investment in new technology, generating economic benefits from mature resources that “large companies deemed not worth pursuing,” Kerr said.
Topping that list is the success in maximizing production through carbon capture and sequestration and improvements in oil sands recovery technology, Kerr said.
Now, faced with the loss of their tax advantage, trusts are reassessing their capital spending plans, said John Dielwart, chief executive officer of ARC Energy Trust.
He said his own trust will “look more closely at the economics of some projects” and may change its capital spending by late 2007 and through 2008 and 2009.
In deciding to remove the tax exempt status of trusts — effective immediately for new entities and in 2011 for existing trusts — the government is offering a “one-dimensional solution to the perceived problems of large corporations converting to trusts,” Kerr said.
“Stopping these conversions is one thing; effectively eliminating the trust structure is another.
“Retroactively changing the rules creates uncertainty and damages our reputation in the capital markets, making it harder for Canada to be competitive,” Kerr told a teleconference.
Government saying it won’t budge
But Finance Minister Jim Flaherty, while open to meeting with the trusts, said the government will not budge from its plan to remove the tax breaks from new trusts effectively immediately and from existing trusts in 2011.
“If the question is will we change any of the announcements we made last week … the answer is: NO,” he said.
The only hint that the government might be open to other ways of cushioning the blow came from Diane Ablonczy, Flaherty’s parliamentary secretary, who said it is possible trusts might be allowed to reconvert to conventional corporations without tax consequences.
Despite growing worries that the entire trust sector is at risk, the coalition leaders are adopting a diplomatic posture at this time.
Dielwart, Kerr and Sue Riddell Rose, chief executive officer of Paramount Energy Trust, say they intend to present Flaherty with ideas for new tax structures that would work for them “still meet the needs of our unit holders and allow government to address its needs, too.”
If that doesn’t work, they will ask for a slowdown of the transition period, extending the 2011 deadline.
Only when the alternatives have been exhausted will the trusts play their final card by cutting back on spending, which some analysts believe could amount to more than C$5 billion in 2007.
