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Alberta warns Ottawa on taxes

STEVEN CHASE
Friday, March 09, 2007
OTTAWA — Alberta Finance Minister Lyle Oberg warned Thursday against any move by Ottawa to scrap a special tax break for the oil sands, saying it would be the final punch in a triple whammy blow to the energy sector.

The Harper government, which needs Opposition party support to pass its March 19 budget, is reviewing an NDP call to scrap what's called the accelerated capital cost allowance program for oil sands.

This comes as the oil patch is struggling to adjust to the Conservatives' controversial tax on income trusts — which hits energy trusts — and is worried about the hundreds of millions of dollars in costs it will face under Ottawa's pending plan to fight climate change.

“It has to be recognized that we ... can't do a one-two-three hit on the oil companies all at once,” Mr. Oberg said in an interview. “It's very dangerous, because the effects tend to build on top of each other.”

His comments also come as oil sands projects face rising costs that threaten to delay their expansion.

Mr. Oberg, who will soon speak with federal Finance Minister Jim Flaherty to reiterate his concerns, said scrapping the tax measure could hurt Alberta's economy and discourage investment in oil sands.

The tax break was enacted by the former Liberal government in the 1990s to encourage development in the oil sands, which, at the time, was seen by some as a high-risk and expensive way to produce oil. It allows many oil sands projects to write off investments in assets at a rate faster than their economic life.

Mr. Flaherty's Finance Department could not provide up-to-date estimates of the cost to taxpayers of this break, which vary according to how it's measured.

But tax expert Jack Mintz of the University of Toronto's Rotman School of Management estimates that oil sands projects would pay $165-million more in federal and provincial corporate income tax a year if the income tax rules applied to them were the same as conventional oil and gas investments. But, he adds, if oil sands investments were treated the same as Alberta's non-energy projects, the additional tax would be $440-million a year.

Mr. Oberg said government has to avoid piling too many burdens on the energy sector, which already faces rising costs in Alberta, British Columbia and Saskatchewan, a region oil investors refer to as the Western Canada Sedimentary Basin.

“What you're seeing now is that our basin is the highest-priced basin in the world when it comes to exploiting the oil and gas,” he said.

“One of the main benefits we have is stability, but stability only goes so far when costs outstrip.”

The Alberta Finance Minister spoke following a meeting in Banff with more than 100 petroleum companies that he said are spooked over the future of the oil sands writeoff measure as well as the prospect of big costs to fight climate change. “The oil patch is extremely nervous right now.”

Mr. Oberg said Alberta is conducting its own review of the royalty rates levied on the oil patch by government and that this process should be allowed to run its course before tax changes are considered.

“We have to just really be careful about damaging our economy,” he said. “Let's take a look at it very closely and know all the consequences and permutations before we do anything rash.”

The NDP is one party the Conservatives may turn to for support in passing their budget, given that the Official Opposition Liberals are likely to oppose it. This means the Tories may have to offer the New Democrats concessions. NDP finance critic Judy Wasylycia-Leis sent Mr. Flaherty a letter yesterday asking him to remove “the perverse tax advantages provided to the oil sands in the form of accelerated capital cost allowance.” There may be multiparty support for removing the oil sands break. A draft copy of a Commons natural resources committee report leaked to media last week also recommended repealing it.