The federal government’s announcement of new legislation for consideration of energy projects addresses competitiveness of the Canadian energy sector. This article was released by the C.D. Howe Institute and posted in the Globe and Mail on Feb. 8, 2018.  Photo by Nexen.

By Benjamin Dachis

The federal government announced sweeping new legislation on Thursday that will govern how it will consider major energy projects.

Exactly how the new legislation will affect the sector will become apparent as parliamentarians, energy companies and the public dissect and debate it. No matter what, the legislation is a step forward in the long-simmering debate over how to review a major interprovincial pipeline application.

The announcement addresses the problem that has had the largest cost on the competitiveness of Canada’s energy sector.

One after another, government policies are piling on to affect the competitiveness of energy producers in Western Canada. Much attention has been paid to carbon taxes, but a lack of market access for oil and taxes on investment – not emissions prices – are the main policy-induced competitiveness problems for conventional energy producers in Western Canada.

The competitiveness of Western Canadian energy producers depends on two key factors. First are the region’s inherent characteristics – the geology and the productivity of its oil or natural gas fields. Second are government-imposed costs that cut into a well’s profitability.

Capital is mobile. Governments need to pay close attention to their policy competitiveness. If they don’t, investments will go elsewhere, to jurisdictions competing with Alberta.

The first step in assessing Western Canada’s energy-policy competitiveness is creating an apples-to-apples comparison of policy costs. That cost includes corporate-income taxes, royalties, property taxes, regulatory delays and emissions charges.

I’ve calculated the cumulative cost of taxes and a lack of pipeline access for a conventional oil or natural gas producer. Imagine taking a well from Northwest Alberta. Now, plop it down in a place such as Texas, North Dakota, Pennsylvania or a different Canadian province. Then, tally up how much the operator of that well would pay in taxes or other costs. Then, compare those costs with those if the well were still in Alberta.

Such a measure indicates the likelihood that an energy company would choose to invest here. If costs are higher in Alberta, a company will invest elsewhere in North America for an otherwise identical well.

Why is this important? More investment means higher incomes, higher government revenues and more jobs. There are four key lessons that emerge from this policy-competitiveness scorecard.

First, pipeline constraints have reduced the price that oil producers receive. Delays in pipeline construction have meant that less Canadian oil has reached global markets than would have otherwise been the case. For producers, the resulting oversupply of oil in Western Canada has meant lower prices than those in global markets. Pipeline constraints are by far the largest competitiveness cost on oil producers.

Second, corporate taxes and provincial royalties are major policy costs for producers. Canadian provinces have historically been competitive with the United States on taxes. Alberta was a laggard. But the outcome of Alberta’s recent royalty review was a step in the right direction. Other provinces should follow Alberta’s lead to become more competitive. The United States has lowered its corporate taxes. Ottawa should also lower its taxes on businesses. That will keep energy producers competitive relative to those in the United States.

Third, greenhouse gas emission taxes have been big news politically and publicly. But, so far, they have not been economically important for conventional energy producers. The Alberta system gives companies a strong incentive to reduce their emissions with little cost to competitiveness. Indeed, companies with below-average emissions are better off under the current system.

Finally, property and municipal taxes have enormous variation across Canada and the United States. There is room for provinces to reduce the cost of both provincial- and municipal-property taxes on energy producers.

Government-influenced costs are highest for oil producers. For an average Alberta oil well, I estimate the total policy costs are around US$6–7 a barrel for non-oil-sands producers. That is a substantial share of the approximately US$45 to US$50 a barrel producers got over the past two years.

Canadian provinces have about the same policy-induced costs. Aside from pipeline delays, Alberta’s policies have kept producers competitive relative to those in many U.S. states. Property taxes are higher in Texas, for example. However, some states with booming new oil-and-gas fields don’t charge property taxes at all. And U.S. tax changes will be a major competitiveness change.

After taking account of issues such as greenhouse gas emissions prices, corporate-income taxes, royalties and property taxes, the main competitiveness problem is still a lack of pipeline access.

Benjamin Dachis is associate director of research at the C.D. Howe Institute and author of the report Death by a Thousand Cuts? Western Canada’s Oil and Natural Gas Policy Competitiveness Scorecard.