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Federal Carbon Tax Plans Temper Oil-patch Optimism – MNP LLP

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​The federal government is expected to release an outline of its proposed carbon tax plan this week, borrowing heavily from the Alberta model which already has oilfield services anticipating rising costs.

Uncertainty around how Ottawa will impose a price on carbon has dogged the oilpatch for years, with Saskatchewan and Manitoba vehemently opposing a levy they see as anti-competitive to industry.

As well, the Canadian oil and gas industry has suffered through a prolonged bout of it in the past few years and while there is optimism flowing back into the oil patch, there are still many unknowns ahead.

“Uncertainty breeds fear and fear breeds confusion and confusion doesn’t lead to an investment environment. Lots of companies then shelve major projects,” says Lanny Westersund, public sector development manager at MNP LLP.

That uncertainty continues for industry since Alberta became just the second jurisdiction in Canada, after B.C., to ​implement a carbon tax when the levy kicked in at the beginning of this year, Westersund says. “The oilfield services guys are hit by a double whammy – they’re the first to feel the pinch and the last to feel the recovery.”

The Alberta model taxes transportation and heating fuels, except agricultural, then divides the revenue between rebates to lower and mid-income Albertans, cuts to small business tax and investments in green infrastructure.

The tax adds $20 per tonne of greenhouse gas emissions to gasoline, diesel, natural gas and propane. That will increase to $30 per tonne in 2018. “The bills are coming in for businesses and some of them are pretty tough,” says Mark Salkeld, president and CEO of the Petroleum Services Association of Canada.

His organization has been inundated with members seeking relief. While there is optimism about a turnaround, the industry is far from recovery, Salkeld says. “We’re still cautious,” he says. “There’s positive signs out there with respect to what producers have indicated they’re going to invest in drilling and exploration programs but we’re still kind of tender from the last two years and that could turn on a dime.

“There’s growing confidence but it’s a cautious confidence.”

Rock-bottom prices for more than two years squeezed the sector. As a result, an industry that had the capacity to drill and complete as many as 12,000 wells a year in Western Canada from 2011 to 2014 drilled 3,950 wells in 2016.

However, the sense of optimism saw PSAC boost its 2017 drilling activity forecast by 60 per cent at the end of April, to an estimated 6,680 wells. “That’s only half of what we had the people and the equipment for prior to [the crash] so a lot of that capacity is gone,” Salkeld says.

Now those companies are being hit with a carbon tax, he says. They can’t pass on the cost to customers, who just won’t pay it, and they’re carrying that cost while they await rebates from government, he says.

“We’re talking hundreds of thousands of dollars here and it’s a big hit for a small service company,” Salkeld says. “It’s early days but we’re feeling some pain.”

The Alberta carbon tax is expected to generate $3 billion this fiscal year that will be used to invest in greening the province’s economy. B.C. was the first Canadian province to implement a carbon tax, in 2008. The tax has been $30 a tonne since 2012 and will remain so for the immediate future. The most recent provincial budget forecast the province will collect $1.2 billion from the tax this fiscal year.

The B.C. government says the tax is “revenue neutral,” meaning the funds raised are offset by other, equal tax breaks for B.C. taxpayers. The Liberal government says it has succeeded, though critics argue that the government’s use of pre-existing tax credits fails to deliver on the commitment.

Ontario and Quebec have opted to join a cap-and-trade market with California for carbon pricing, which sets limits for emissions and then establishes a market in which industry can buy and sell allowable emissions.

But all four will soon be joined by even the most reluctant regions, after the federal government announced last fall that all provinces and territories will have to implement some form of carbon pricing next year as part of Canada’s international commitment to tackle climate change. Ottawa wants carbon prices set at at least $50 a tonne by 2022.

Alberta’s carbon pricing plan offers some clarity for industry and spotlight the province’s environmental policies to the public, says Frank Oberle, strategic advisor to MNP and former Alberta Conservative minister of both energy and sustainable resource development.

“We need to be seen nationally and internationally as taking bold steps,” says Oberle. “Alberta really needs to demonstrate environmental performance and they need to be on board with and support international efforts on climate change.” Oberle says

Alberta, in particular, battles perception as much as reality when it comes to climate change and its oil and gas industry.

“We had a price on carbon emissions and we had the climate change and emissions management fund, which used that money towards technology and spent hundreds of millions of dollars on great technological advances but it wasn’t widely publicized, it wasn’t recognized outside of the province,” he says.

“They [the NDP government] brought in the tax and a number of other initiatives and it’s hard to fault them. They’re trapped, as we were, and they have to do something.”

Provincial and territorial leaders emerged from a first ministers meeting with Prime Minister Justin Trudeau in December voicing support for carbon pricing. They committed to a review, to be completed by 2022, comparing the different systems in Canada.

An interim report due in 2020 will include an assessment of the effect on the competitiveness of emissions-intensive, trade-exposed sectors.

While climate change and the uncertainty around the federal government’s carbon pricing plans have contributed to the depressed oil and gas market, Oberle says the uncertainty in oil prices is a bigger factor.

“I’m not sure how big of a role climate change is playing right now. My suspicion is that the price of oil probably has a lot more to do with it,” he says.

Westersund says the oil and gas and farming sectors have taken the biggest hit from the carbon tax in Alberta and it hasn’t necessarily brought the clarity industry needs. Some policies remain undefined and, as yet, there is no clear picture of how carbon pricing will be implemented across the country.

It’s not even clear whether a carbon tax does, in fact, reduce emissions, he says. “Industry, right now, especially in the OFS base, are looking for certainty and to date they don’t necessarily have that certainty,” Westersund says.

But there is tempered optimism, he says, and Albertans are resilient. “Wait and see” is his advice to industry. “You’ve survived this long with a certain amount of uncertainty.”

Contact MNP’s Oilfield Services Team​

MNP LLP Patrick Wigmore

MNP understands the oilfield services industry – its drivers, challenges and opportunities. We are proud to provide insight into the latest industry news and trends in our newsletter, issued in association with JuneWarren-Nickle’s Energy Group. ​​

For more information on MNP’s OFS services, contact a member of our team:

​Patrick Wigmore, Business Advisor, Oilfield Services,​ ​403.356.1284 ​ ​​or patrick.wigmore​​​Lanny Westersund, Senior Advisor, MNP Government Affairs, at 403.648.4163 or lanny.westersund​​​​ ​​​

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