Good and Bad News for Canadian Oil and Gas Sector

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Tim McMillan, president and CEO of the Canadian Association of Petroleum Producers. Calgary Herald

New Pathway.

Last week brought both positive and negative news for the Canadian oil and gas sector. The positive news came on Friday, March 24, when Donald Trump issued a presidential permit for the Keystone XL oil pipeline which will deliver up to 830,000 barrels of oil per day between Hardisty, Alberta, and Steele City, Nebraska. While the project was approved by the Canadian National Energy Board almost exactly seven years ago, it took it more than eight years to get the high approval in the US.

Tim McMillan, president and CEO of the Canadian Association of Petroleum Producers, explained to the New Pathway that because the project has all of its Canadian permits received and activated, its development now depends on approvals by different American states, “which TransCanada, the owner of the project, will be working towards.” Tim McMillan was optimistic about the fate of Keystone XL pipeline: “I don’t want to downplay the efforts that TransCanada will be making at the state level, but I am quite optimistic that the project is very well positioned to go ahead.”

Negative news came on Wednesday, March 22, when the Minister of Finance Bill Morneau presented the new federal budget. The new budget changes the tax treatment of exploration activities in the oil and gas and mining sectors. Now, early-stage exploration expenses will not be written off in the same year they are incurred, but at a rate of 30% annually. This will make it more difficult to finance exploration because lower rate of deduction will make it less appealing to investors which benefit from tax-free treatment of their investments in the so-called flow-through shares. Moreover, the new legislation eliminates flow-through shares for exploration development starting in 2019.

Tim McMillan explained: “We see this is a challenge to our industry, it changes that very important part of the value cycle, that early stage of exploration, when companies are exploring new areas that have not been proven out, bear high risk and require a lot of capital. Changes in the flow-through financing mechanism affect entrepreneurial junior Canadian companies that are out there doing that high risk early stage. These changes in the budget may seem small but they could have a large effect on the whole value chain of the Canadian oil and gas industry. All this makes Canadian exploration less economic when we are already struggling with the Americans attracting more and more investment, due to the planned tax and regulatory reforms in the US. This investment would otherwise be coming to Canada and this is something that, as a nation, we need to address.”

Will the potential American protectionist policies affect Canadian oil and gas exports into the US? Tim McMillan said: “It’s something that we at CAPP are watching very closely when engaging with the American Federal and state legislators to ensure that they understand what the possible effects are. We have a very integrated system and any changes in our ability to export oil and gas into the US will affect both countries. We are trying to make that case very strongly.”

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