BUSINESS ECONOMY

Splitting up the energy spoils

Robert Collison March 11 1985
BUSINESS ECONOMY

Splitting up the energy spoils

Robert Collison March 11 1985

Splitting up the energy spoils

BUSINESS ECONOMY

Robert Collison

When he was on the campaign trail last summer Brian Mulroney pledged that he would return peace and prosperity to Canada’s troubled energy sector. He added that he would sign new deals with the energy producing provinces and implied that he would dismantle the Liberals’ National Energy Program (NEP), with its nationalist and interventionist designs. Then last month Mulroney took the first step in that direction when he signed the Atlantic Accord in St. John’s, giving Newfoundland control over its offshore energy resources. But his ability to deliver on his remaining commitments is now being severely tested in talks between Ottawa and the western provinces over energy pricing and revenue-sharing. As Energy Minister Patricia Carney prepared to resume negotiations with her Alberta counterpart, John Zaozirny, $24 billion in revenue generated by Canada’s energy sector remained to be divided between Ottawa and the producing provinces.

With a deadline of March 31 set for an agreement, the Tories are trying to settle Alberta’s and the industry’s major grievances with the NEP. Although the energy ministers from British Columbia and Saskatchewan are participating, the talks with Alberta are critical because the province’s oil and gas revenue accounts for 80 per cent of Canada’s energy earnings. High on the list for discussion is the fate of the lucrative Petroleum Gas and Revenue Tax (PGRT), a wellhead tax worth more than $2 billion a year to Ottawa. Alberta considers the tax to be a royalty on production and an infringement of the province’s constitutional right to assess royalties on natural resources. For its part, the oil and gas industry claims that it can reenergize the economy—if government lessens its tax take.

Like Alberta, the industry is calling for the PGRT’s abolishment and for a tax on profits to take its place. As well, the industry wants Alberta to slash its own royalties by 20 per cent, or about $1.3 billion. Said Ian Waddell, energy critic for the New Democratic Party: “Signing with Newfoundland was easy because

the oil has not started to flow yet. Now Mulroney is dealing with [Alberta Premier] Peter Lougheed—and he is one tough customer.”

In public, the federal Conservatives are still expressing confidence that an agreement will be reached. In New York recently, Finance Minister Michael Wilson called the energy sector a “magnet” for investment. He told an influential conference board audience: “Energy accounts for 30 per cent of total business investment in Canada.” As well, he condemned the “previous government’s heavy-handed and arbitrary changes to the framework of the energy sector [that] choked off both domestic and foreign investment.” Added the minister: “Confronted with discriminatory taxes and incentives, investment has left and stayed away. This will change.”

Some critics charge that the Conservatives are already beginning to abandon their earlier energy stands. Before the election, said Liberal energy critic Russ MacLellan, Mulroney said he would abolish the PGRT, but after their September triumph the Tories said that they would keep the PGRT in force until

they reached an agreement with the provincial governments. Added MacLellan: “That alarmed Peter Lougheed. He was ready to resign but he has now decided to stick around for these negotiations.”

For its part, the oil industry is intent on holding Mulroney to his often-stated conviction that business should be the “engine” of growth for the Canadian economy. To do that, the industry says that it needs more money. In 1984 oil and gas revenue amounted to $24 billion, and Ottawa took 20 per cent, or $4.8 billion; the provinces kept 29 per cent, or $7 billion; leaving the industry with 51 per cent, or $12.2 billion.

The Calgary-based Canadian Petroleum Association (CPA) recently commissioned Toronto-based economic forecasting firm Chase Econometrics Canada to analyse the impact on the Canadian economy of a $30-billion tax relief plan spread over nine years. (The figure assumes that each year, Ottawa would give up the $2-billion PGRT tax and Alberta would forgo $1.3 billion in royalties.) The study concludes that industry would use the money to create $100 billion in new investment and 300,000 new jobs.

Oil experts say that rather than dismantling the NEP the Tories still support the program’s major goals—energy self-sufficiency and increased Canadian control. But they are intent on removing the NEP’S more contentious aspects.

Also destined for eventual phase-out is tl>e Petroleum Incentives Program, which gives cash grants to companies for oil exploration. Insiders say that it will probably be replaced by another type of incentive program. PIP grants, which cost the government $1.6 billion last year, are almost universally criticized because they encourage exploration for its own sake. Declared William Daniel, president of Shell Canada Ltd.: “These grants reward activity and not results.” As well, multinational firms contend that PIP grants are discriminatory because they pay out more to Canadian-owned firms. The grants should be replaced, Daniel says, with tax credits for exploration undertaken at the company’s own risk. Analysts say that the Tories will probably recover tax revenues lost in reducing the PGRT by eliminating PIP grants.

The industry also wants the Tories to shelve the NEP’S widely criticized “back in” provision. That policy allows Ottawa to claim 25 per cent of any oil discovered on Crown-owned lands in the frontier and offshore.

The oil companies are also putting pressure on Alberta to reduce its royalty tax, now as high as 45 per cent of the revenue generated by a well. Recently, the premier’s brother, Don Lougheed, executive vice-president of Esso Re-

sources Canada Ltd., added his name to a growing list of industry leaders petitioning the government for a revision of royalties. According to Myron Kanik, Alberta’s deputy minister of energy, royalties may be “reviewed” if the federal government also reduces its tax share.

One issue on which industry and government agree is oil price deregulation. If prices were deregulated, industry would earn more because it could charge world prices for all its oil, and Ottawa could eliminate the costly Petroleum Compensation Charge. Currently the price of Canadian oil is determined by blending the regulated price of “old oil,” discovered before 1974, and “new” oil, found after this date and priced at world levels.

To equalize oil costs across Canada, Ottawa also levies the PCC on all refiners and uses it both to fund development and to subsidize eastern refiners who must bring in expensive foreign crude. The former Liberal government allowed the PCC to accumulate a deficit, which now stands at $1.2 billion. The Tories raised the tax (which is passed on in the form of higher prices to consumers) when they took office, effectively sending domestic prices to world levels. But because world oil prices are calculated in U.S. dollars, Ottawa’s bill from the PCC is spiralling as the Canadian dollar shrinks.

Because the world price for oil is now almost equal to the blended Canadian price, analysts say that consumers would not notice the difference if oil prices were deregulated. But Bruce Willson, of the Consumers’ Association of Canada, claimed that if prices are deregulated the public will have no protection from future increases. Declared Willson: “Decontrol is a fashionable term they are using for charging OPEC control prices to Canadians for their own resources.”

With so many issues outstanding observers say that they would not be surprised if the March 31 deadline were missed. But none of the participants expects the Mulroney government to increase its take of energy revenues. Said the CPA’s Ian Smyth: “That would fly in the face of everything this government has uttered.” And the talks are proceeding with a reasonable amount of goodwill. Added Smyth: “No one has

stomped away from the table and that is a big improvement over past federalprovincial negotiations.” Still at stake are billions of dollars in oil revenue—and the credibility of the new Tory government among some of its most powerful constituents.

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