Canada’s oil industry frets as pressure mounts to cut fossil-fuel tax incentives

Canada's oil industry is facing a twin threat as environmentalists urge the Liberal government to make good on promises to slash "fossil-fuel subsidies" and impose a tougher regulatory regime on existing applications to build pipelines to the West and East coasts.

A study released Thursday pegged federal "subsidies" for the industry at nearly $1.7-billion, including items such as accelerated capital-cost writeoffs recently extended to the proposed liquefied natural gas plants, and the Canadian exploration expenses that allow companies to deduct a portion of preproduction expenses. The report was prepared by environmental groups Oil Change International and Overseas Development Institute, and urges the Liberal government to make good on a long-standing Canadian pledge to phase out fossil-fuel subsidies.

In an interview earlier this week, Foreign Affairs Minister Stéphane Dion – who heads a cabinet committee on environment, climate change and energy – said the new government intends to move on that commitment, which was in the party's election platform.

Oil companies in Calgary are clearly worried, particularly as they continue to cope with depressed prices for crude and natural gas, while provinces and Ottawa plan to impose more costly climate-related policies and Alberta reviews its royalty program.

The former Conservative government pledged to scale back fossil-fuel subsidies at a Group of 20 meeting in Pittsburgh in 2009, and did cut some tax incentives for the oil sands. But as leaders prepare for a G20 meeting in Turkey on Sunday and for a climate summit in Paris at the end of the month, there is increased pressure to go further.

The elimination of the tax measures would drive up the cost of capital and make the Canadian industry less competitive for international investment, Ben Brunnen, manager of fiscal and economic policy for the Canadian Association of Petroleum Producers, said Thursday.

"The petroleum industry is upfront capital intensive and companies have to put up a lot of investment before they start getting benefit in terms of cash flow and so on," Mr. Brunnen said. "It's also risky in the sense that there is so much uncertainty in terms of the returns the companies are going to get from their initial exploration expenditures." The fiscal system has to reflect that at the end of the day."

Earlier this year, the former Harper government announced it would extend the accelerated capital-cost allowance incentive to LNG facilities, after a lengthy campaign by the industry arguing it needed fiscal relief from large upfront investment in the planned B.C. export terminals.

CAPP's Mr. Brunnen noted the industry paid $18-billion in federal, provincial and municipal taxes and royalties last year, and can hardly be considered to be a net beneficiary of subsidies.

The new government also faces mounting pressure to make good on an election promise to subject existing pipeline proposals to more rigorous scrutiny. Environment Minister Catherine McKenna said this week the government will "in principle" apply tougher oversight to two existing applications: Kinder Morgan's Inc.'s expansion of its Trans Mountain pipeline to Vancouver harbour and TransCanada Corp.'s Energy East project that would carry western crude to eastern refineries and an export terminal at Saint John, N.B.

In an open letter Thursday, a coalition of environmental organizations, community groups and even some local chambers of commerce urged Ottawa to shut down those reviews until it could complete the overhaul of the assessment process. Industry spokesmen say such retroactive rule-making would be unfair and send the wrong signal to global investors.