Energy firms decry tax clampdown in federal budget

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Ottawa's plan to end tax allowances for oil firms seeking to drill new wells is riling the energy sector – especially small and medium-sized producers who have already been hit hard by the oil-price drop and increasing competition from the United States.

Canadian firms say the push to eliminate any preferential tax treatment for oil and natural gas development, in large part to honour federal environmental commitments, adds to their list of problems as they try to distinguish themselves in the global hunt for energy investors.

They argue the federal Liberals' removal of tax incentives, as laid out in this week's federal budget, is another knock against the Canadian energy sector as the Trump administration begins to enact policies and tax changes that could unleash more U.S. oil and natural gas on the North American market.

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"It's a short-sighted view of the industry. It takes a lot of capital, that you put at risk, to develop new plays," said Brian Schmidt, chief executive of junior oil and gas producer Tamarack Valley Energy Ltd.

"It's going to inhibit Western Canada's ability to grow in the longer term," he added, noting Alberta's new carbon tax and minimum-wage hike are also on his list of problems.

"We've got a lot of battles to fight right now and this is just another one."

Even the Alberta NDP government, on most days a strong ally of the federal Liberals, said it is concerned about adding to the financial burden of exploration companies. "We want to ensure that Canada and Alberta are competitive around the world," Alberta Energy Minister Marg McCuaig-Boyd said in a speech referencing the changes Thursday.

In budget documents released Wednesday, the federal government proposes changing key provisions around the Canadian exploration expense (CEE), which allows companies to fully deduct costs associated with exploratory drilling for new oil or natural gas reserves from the company's income. The move will mean expenses can only be deducted gradually over time, rather than immediately – unless the wells are deemed unsuccessful. The budget also proposes similarly changing the regime for flow-through shares that permits small oil and gas companies to transfer some resource expenses to investors, who are then able to use the expenditures as a tax deduction against their own income.

The changes, which will come into effect over the next several years, make financing risky and expensive exploratory drilling work less attractive.

Despite the industry's disappointment, it isn't a total surprise. In the 2015 election, the Liberals campaigned on clamping down on oil and gas sector deductions. Ottawa's reasoning behind its elimination of the credit is clear – budget documents state the move improves the neutrality of the tax system, supports Canada's international commitments to phase out "inefficient fossil fuel subsidies" and will help the country reduce its greenhouse gas emissions.

In an interview, federal Natural Resources Minister Jim Carr said the government is phasing out inefficiencies within the subsidy regime.

"The government of Canada wants to be certain that any effort that it takes is consistent with our objective of creating jobs in the energy sector, of encouraging industries to gradually transition to the lower carbon economy, and we think these measures will help down that road," the minister said on Thursday.

"But it's incumbent on us to do it in consultation with industry, and at a pace that people will think it is a reasonable one."

However, what the government calls a subsidy, the industry says is a necessary tax incentive that recognizes the high risk and high costs involved with oil and gas exploration and development. The Canadian Association of Petroleum Producers says the United States and Britain allow even more in the way of deductions when it comes to some development expenses, and the industry had asked for similar tax policies here.

Tim McMillan, president of the industry group, said Thursday the changes announced in the budget further widen the gulf between Canadian and U.S. companies in their search for capital. He said they will hit smaller and medium-sized producers the hardest.

"The government is very focused on the middle class. When I look at this change, I look at who does the industry employ? It employs 425,000 people in Canada, mostly that are in the middle class," Mr. McMillan said.

"The effect of this is to incrementally make it more difficult to find those new plays and to maintain those middle class jobs."

With a report from Shawn McCarthy in Ottawa

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