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By David Yager
Oilfield Services Executive Advisory – Energy Policy Analyst
The old saying in journalism goes, “Never let the facts ruin a good story”. Years ago, allegations emerged that the oil industry was heavily subsidized by governments, part of an opinion shaping strategy by activists convinced fossil fuels were accelerating climate change. As subsidy estimates grew larger, few questions were asked. Governments had to stop contributing to this planetary threat.
Except it wasn’t true. While indeed some countries insulate consumers from the full cost of energy for political reasons, the definition of what constituted a subsidy was expanded beyond previous comprehension. In Canada the allegations of subsidies are complete rubbish. The oilpatch has a huge hill to climb to return sanity to the discussion.
The issue resurfaced in early June when an article appeared from, “the Reuters Thomson Foundation – the charitable arm of Thomson Reuters that covers humanitarian issues, conflicts, land and property rights, modern slavery and human trafficking, gender equality, climate change and resilience.” The title reads, “Rich Nations Spend $100 Billion A Year On Fossil Fuels Despite Climate Pledges”. This obviously falls within the Reuters Thomson Foundation’s long list of things requiring improvement.
This story was quickly picked up by dozens of on-line media redistribution services including several focused on energy. This is how news travels in the 21st century, and how easy it is to disseminate fake news particularly when it comes from what appears to be a trusted and reliable source. Like Reuters.
The article claimed, “The world’s major industrial democracies spend at least $100 billion each year to prop up oil, gas and coal consumption, despite vows to end fossil fuel subsidies by 2025, a report said on Monday (May 28) ahead of the G7 summit in Canada”.
The source was Britain’s Overseas Development Institute (ODI). Its website states, “ODI promotes global progress and prosperity by focusing on improving the lives of the world’s poorest people. Our research and policy work covers a wide range of development and humanitarian issues.” This includes, “Climate, environment and natural resources”.
The article continued, “Britain scored the lowest on transparency for denying that its government provided fossil fuel subsidies, even though it supported tax breaks for North Sea oil and gas exploration”. That tax breaks do not “prop up oil, gas and coal consumption” was lost on the writer. Contrary to the title, governments didn’t actually “spend” any money. They only reduced taxes payable.
The idea fossil fuels are subsidized was easy to introduce into the climate change controversy because in some countries they are. The International Energy Agency (IEA) follows the issue but doesn’t use the ODI definition. The IEA, “…estimates subsidies to fossil fuels that are consumed directly by end-users or consumed as inputs to electricity generation. The price-gap approach, the most commonly applied methodology for quantifying consumption subsidies, is used for this analysis. It compares average end-user prices paid by consumers with reference prices that correspond to the full cost of supply”.
It is well known consumers don’t all pay the full cost of energy. Oil producers like Saudi Arabia, Iran and Venezuela have long provided citizens with cheap gasoline. Poor and developing countries including China and India do this to encourage economic development and industrialization to lift their citizens out of poverty.
Using this method, the IEA estimate for the entire world is US$260 billion for 2016, down from US$320 billion in 2015. 2016 is lower because cheaper oil reduced the spread between the market price and the consumer cost. For countries with national oil and gas production, this could be non-cash expense. The IEA produced the following chart. The source of energy for electricity generation was not indicated.
No G7 countries on this list. What G7 countries do is support investment in new supplies through tax deductions, the same deductions available to all businesses investing money on expanded or future income. More supply reduces prices as the U.S. shale oil boom has proven. Lots of tax deductions in America. Therefore, if ODI’s alleged subsidies increase supply and lower the price, this will reduce subsidies under IEA’s definition as oil prices decline.
The ever-expanding and increasingly disingenuous definition of subsidies got a huge boost in 2006 when Britain’s Nicholas Stern authored a study titled, “The Economics of Climate Change: The Stern Review”. With the science of global warming and climate change apparently settled beyond doubt, Stern linked the current cost of fossil fuel with the future costs of environmental catastrophe caused by carbon emissions.
This resulted in an entirely new approach. Monetizing future impacts is the foundation of multiple lawsuits in the U.S. where municipal governments are suing oil companies for environmental damages from climate changes yet to occur. Because as sure as the sun will rise tomorrow, fossil fuel emissions will wreak massive devastation. The lawsuits claim big oil producers have known for years their products damage the environment and concealed or ignored it for financial gain.
Stern estimates of future damages were theoretical because they had not happened yet, nor has anything like this occurred in recent times (the world has a long history of dramatic climate change). Stern’s work was outside the boundaries of conventional economics. But when it comes to climate change alarmism, there are no rules if your intentions appear noble.
Assisted by the inability of the oil industry and the corporate sector (both have long been vilified as the bad guys by fossil fuel critics) to talk sense into to anyone, the subsidy issue has lost any relationship to accepted practices of financial modelling.
A typical article nowadays is one from The Guardian on August 7, 2017, titled, “Fossil fuel subsidies are a staggering $5 trillion per year”. The Guardian describes itself as, “the world’s leading liberal voice”. There’s a headline that grabs Joe Public’s attention.
The study was published by the Journal of World Development from work done by an arm of the International Monetary Fund (IMF), an organization The Guardian confidently describes as, “well-skilled to quantify the subsidies discussed in the paper”. The IMF’s stated mission is, in part, to, “promote high employment and sustainable economic growth and reduce poverty around the world.”
To arrive at this enormous figure, the IMF attributes 22% of the cost to “undercharging for global warming”, 46% to “air pollution”, and 13% to “broader vehicle externalities”. Undercharging for global warming is the future costs of climate change. Air pollution is health problems caused by contaminated air such as burning poor quality coal to generate electricity. Vehicle externalities include traffic accidents which cause injuries and property damage and traffic jams which impair productivity. These account for 81% of the total, over $4 trillion.
The opening line reads, “A new study finds 6.5% of global GDP goes to subsidizing dirty fossil fuels”. Clearly the oil industry, business and common sense have lost any influence in shaping this discussion. The only acceptable definitions of fossil fuels are bad, awful and worse.
Industry publishes positive information about the economic and life-enhancing benefits of oil, gas and coal. But its influence pales in comparison to juicy headlines from Reuters and The Guardian which are distributed globally via the internet then live forever in cyberspace. Wikipedia, not always a reliable source of anything more complex than the date which events occurred, dutifully repeats this definition on energy subsides stating, “Global fossil fuel subsidies represented 6.5% of GDP in 2015. The elimination of these subsidies is widely seen as one of the most effective ways of reducing carbon emissions”.
Prior to regurgitating the IMF data, neither The Guardian nor Wikipedia investigated the cost to everyone and everything caused by parking all the world’s vehicles or shutting off coal-fired power to 40% of the population. This would indeed make a huge dent in carbon emissions. However, that the global economy would grind to a halt was not referenced; questions about practicality never asked.
It is like reporting how clean and safe the world would be if all the people disappeared. While this would indeed be factually correct, at the time of writing we’re short about 7.6 billion volunteers.
Another example of what’s available to warp the thinking of the curious but financially challenged is a document titled, “Unpacking Canada’s Fossil Fuel Subsidies” from iisd.org, the International Institute for Sustainable Development (IISD). The IISD mission is, “to promote human development and environmental sustainability”.
It states, “A subsidy is a financial benefit the government gives, usually to a specific business or industry”. It confesses to stretching the definition of subsidy by stating, “Economists can debate the difference between a subsidy and “support” for hours, but that’s a pretty good plain-English definition” (italics are the writer’s). Plain-English frequently replaces the truth on this subject.
IISD adds up total Canadian subsidies at $1.9 billion, $1.6 from Ottawa and $289 million from the provinces. They include the traditional deductions for Canadian Development Expense (CDE), Canadian Exploration Expense (CEE), Crown Royalty Deductions, Deep Drilling Credit, and Atlantic Investment Tax Credit. The document pillories Prime Minister Trudeau for committing to phase out fossil fuel subsidies then doing something else.
For those who don’t understand accounting, these are the bread and butter deductions which make capital investment in oil and gas economic. Global accounting firm KPMG says CEE expenses include tax deductions for geophysics, geology, coring, drilling, completion, roads, leases etc. Eligible CDE deductions are drilling, completion, roads, leases, waste disposal, secondary recovery, or converting a well from a producer to an EOR injector or observation well.
It is obvious why the anti-oil movement uses this approach. Since they can’t persuade mankind to quit consuming fossil fuels, they instead lobby to make carbon-based energy more expensive. Which at some point will reduce demand.
It is not that facts don’t exist. CAPP has a statement on Fossil Fuel Subsidies which reads, “One of the tenets of the G-20 commitment was to eliminate inefficient fossil fuel subsidies that ‘encourage wasteful consumption, and undermine efforts combat the threat of climate change’. It is critical to distinguish between subsidies targeted to the production of fossil fuels, versus subsidies targeted to the consumption of fossil fuels…In Canada fossil fuel consumption subsidies are not prevalent, and in fact, the consumption of fossil fuels are heavily taxed which discourages consumption, the opposite of a subsidy”.
CAPP further states, “…it is erroneous and misleading to deem measures of the federal tax framework that seek to enable economic activity and maintain the neutrality of the tax system, a subsidy. In Canada, all businesses can deduct certain expenses and the oil and gas industry is no different.”
Not as riveting as a US$5 trillion subsidy headline, but considerably more accurate. And governments of all stripes eventually understand this. The same governments and politicians that routinely sign commitments to end subsidies – and rarely publicly question their expanding and flexible definition – agree with CAPP and industry.
To encourage LNG exports in 2015 the federal government under Stephen Harper introduced special capital cost allowances (depreciation deductions) for LNG projects. Despite everything the Liberals have said and done on climate change, these still exist. Ottawa is now being asked to remove the import tariffs on machinery required for this industry. The feds have not said no.
B.C. Premier John Horgan, the self-described savior of the earth and the Pacific coastline, announced $40 billion in tax breaks and incentives for LNG Canada at Kitimat in March to get that project launched. This will be in the form of reduced carbon taxes and provincial sales reductions on construction costs. The market is Asia. LNG will be shipped by tanker.
As Canadians watch capital, drilling rigs and service equipment leave Canada for the U.S., the reason is obvious. President Donald Trump’s tax reforms include the full deduction of capital expenditures from taxable income in the first year. This greatly increases the return on invested capital. By comparison, Canadian governments have removed accelerated capital cost allowances for new oil sands projects, raised corporate tax rates and introduced carbon taxes. Why this industry is moving south is not complicated.
The truth went out the window years ago. What politicians say and what they do is very different. They agree with fossil fuel’s opponents in public then do what they must to keep the economy alive. It is complete hypocrisy that Justin’s Trudeau’s best plan to support Canada’s oil industry (after directly and indirectly killing Northern Gateway and Energy East to garner anti-oil votes) was for Ottawa to buy the Trans Mountain pipeline.
For cash. That is indeed a subsidy.
To fully understand how perverse and disingenuous the subsidy discussion has become, compare the mission statements of the ODI, IMF and IISD with their behavior.
All three claim their purpose is supporting human development and reducing poverty. This is exactly what developing countries do when they provide cheaper energy to their citizens. Fossil fuels have done a wonderful job facilitating this for over a century.
Then they attack and undermine these same proven and reliable sources of affordable energy by demanding the end of subsidies (direct and implied, real or imagined). That renewable energy will cost more and accomplish less is irrelevant. This is for your own good. We know best.
What is particularly discouraging is politicians who support this nonsense publicly then quietly do something else to sustain the economy, without understanding the long-term damage of their duplicity. Like the flight of investment capital out of Canada.
The business community – the only people who understand what is going on – remains marginalized.
Voters, increasingly getting their news in 280 characters batches on Twitter, have no idea what or who to believe. Except is remains fashionable to hate the oil business as opponents continue do whatever they can to denigrate this essential industry.
About David Yager – Yager Management Ltd.
Based in Calgary, Alberta, Canada, David Yager is a former oilfield services executive and the principal of Yager Management Ltd. Yager Management provides management consultancy services to the oilfield services industry in a number of areas including M&A, Strategic Planning, Restructuring and Marketing. He has been writing about the upstream oil and gas industry and energy policy and issues since 1979.
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David Yager can be reached at Ph: 403.850.6088 Email: yager@telus.net
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