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Energy discount gives Ottawa $4-billion pinch

Syncrude's oil sands plant at Mildred Lake north of Fort McMurray, Alta

Kevin Van Paassen/The Globe and Mai

The federal government says it is losing $4-billion a year in revenue because Canadian oil and gas exports are selling at a deep discount to international prices, as it makes the case for new pipelines and export terminals to access world markets.

But in his budget Thursday, Finance Minister Jim Flaherty rejected a plea for tax breaks on liquefied natural gas export facilities planned for the British Columbia coast, which supporters say would boost revenues for the energy sector and for governments. Producers say they face an uncompetitive tax burden in the LNG facilities, and urged Ottawa to treat them as manufacturing facilities that would be eligible for accelerated writeoffs.

Finance Canada provided an analysis that suggests Canada needs to diversify its energy export markets to capitalize on higher world prices for both oil and natural gas. Last year, Mr. Flaherty used his budget speech to announce an aggressive effort to speed up environmental reviews of resource projects and to tighten rules for environmental charities that opposed projects such as Enbridge Inc.'s Northern Gateway pipeline.

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While this year's budget offers few new measures for the oil and gas companies, Mr. Flaherty also provided virtually nothing on the environment that might boost Canada's reputation in a public relations contest against critics of the oil sands who vow to block all new pipelines. It did inject new capital – $325-million over eight years – into Sustainable Development Technology Canada, its flagship venture fund for clean tech companies.

In Thursday's budget, the government noted that Canadian crude exporters are suffering from a double discount – with North American prices lower than international levels, and a larger-than-normal gap between Canadian prices and the West Texas intermediate benchmark.

In making the case, Ottawa is echoing concerns raised by Alberta Premier Alison Redford who says the lower-than-expected crude prices have deprived the province of $6-billion in revenue this year. But the government also noted that North American gas prices are far below European levels, saying that more exports of gas could help narrow that gap.

To reduce that discount, the federal and Alberta governments are supporting construction of pipelines to the U.S. Gulf Coast, through B.C. to the Pacific, and across Canada to New Brunswick. And Ottawa has also been promoting ambitious plans to build a half dozen LNG export terminals in Kitimat and Prince Rupert, worth tens of billions of dollars.

But the industry warns that the unfavorable tax treatment could impede investment from multinational companies that are scouring the global for projects.

"It's just one factor but it is certainly not going to help," said David Collyer, president of the Canadian Association of Petroleum Producers.

"We're obviously disappointed the government did not act on that because we think it is important to ensure we have a competitive fiscal system so we can compete in a market that is very competitive."

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Ottawa estimated that, if crude markets returned to their historic price relations, it would boost exports revenue by $8-billion a year and federal tax revenue by roughly $1-billion.

Depressed North American gas prices represent an even greater loss to the Canadian economy. Finance noted that Canadian gas prices recently traded for $3.21 per million Btus, while the price in Europe was $11.77.

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About the Author
Global Energy Reporter

Shawn McCarthy is an Ottawa-based, national business correspondent for The Globe and Mail, covering a global energy beat. He writes on various aspects of the international energy industry, from oil and gas production and refining, to the development of new technologies, to the business implications of climate-change regulations. More

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