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Property Tax and Surface Lease Issues Highlight Industry’s Ongoing Challenges – David Yager


By David Yager

For EnergyNow.ca February 18, 2020

The notion that the oilpatch is economically indestructible in the face of relentless economic and political challenges – and is only concerned with its own interests – remains common, even in Alberta.

The latest accusations of bad behavior emerged in January after it was publicized that oil and gas operators were not paying all of their municipal property taxes or surface rights leases. The indignation was palpable, the solution simple. The Government of Alberta must step in and right this egregious wrong.

The headlines said it all. “Province must act on unpaid property taxes by energy firms.” “AUMA wants tax changes to collect from defunct O&G companies.” “Alberta landowners urge farmers to cut power to wells with unpaid debts.”

The stories originated when the Rural Municipalities of Alberta (RMA) association revealed that oil and gas producers were in arrears to the tune of $173 million for property taxes, more than double that of a year ago and not an insignificant account of money. RMA wrote in a news release January 20, “RMA is deeply concerned that flaws in Alberta’s tax collection regime are allowing oil and gas companies to transfer their struggles to municipalities in the form of unpaid taxes.”

This was picked up by the Alberta Urban Municipalities Association (AUMA) which urged changes to the Municipal Government Act, “…so that municipal property taxes can be collected from oil and gas properties in the event of bankruptcy or receivership.”

AUMA also wants the Alberta Energy Regulator to consider unpaid property taxes as grounds to deny an energy company an operating license.” “Having municipalities shouldering these economic burdens from oil and gas companies impairs our economy”, said the AUMA.

There’s a lot of that going around.

Private surface rights holders, who are also owed money, joined in. The Action Surface Rights Association, representing some 200 landowners in southern Alberta, suggested the aggrieved take matters into their own hands and shut off the electricity that keeps wells and facilities operating.

The Calgary Herald wrote, “A group of Alberta landowners is asking farmers and ranchers to fight back against unpaid debts and unreclaimed oil and gas wells by closing valves and cutting power to energy sites.” A representative stated, “They need to let these companies know they’ve defaulted on the leases and there are consequences.”

The story had legs for a week but faded away not because the problem was solved, but it had to compete with the coronavirus pandemic and nationwide demonstrations supporting those opposing the Coastal GasLink pipeline.

But when it comes to demanding more money from the oil industry after five years in the dumpster, pick a number.

Starting in 2014, the first major stakeholders to suffer were equity investors, the owners. Hundreds of billions of shareholder value has been destroyed. Many public companies have seen nearly all their equity value evaporate.

The next group clobbered was the workers as the industry laid of tens of thousands of their employees and contractors. Many remain out of work. Many more have abandoned the industry out of economic necessity.

Next in line were suppliers, the vast equipment and services network that either didn’t get paid or had to reduce prices to keep working. Capital spending on new oil and gas development in 2019 was $46 billion lower than in 2014, a 57% reduction. This has devasted the service and supply sector and all the communities it works from. Many outfits went broke and billions of dollars of equipment is worthless.

Before surface rights holders and municipalities were squeezed the other parties that didn’t get paid, or didn’t collect as much as they used to, included landlords, bankers and government payroll and corporate tax collectors of all types at all levels. The reduction in provincial land sales bonuses and production royalties should be well understood. It is called the deficit.

As is common with today’s understaffed media, the story came and went without a single news outlet investigating how much the industry did pay in property taxes and surface leases. Finding all this data in one place isn’t easy, but here’s what can be found if you choose to look.

The most recent Alberta budget reported total provincial and municipal property taxes (provincial education property tax plus municipal property taxes) in 2018 was nearly $10 billion; over $2.4 billion provincial and over $7 billion municipal. This includes all types of property in all locations. No breakdown by asset class or owner is published. The province reports that from 2008 and 2018, municipal property taxes almost doubled, from $3.8 billion to $7.4 billion. In the same period the population grew only 19%, from 3.6 million to 4.3 million.

Alberta publishes a Linear Property Assessment Annual Report. The 2018 version covers wells, pipelines, electric power systems, electric power generation and telecommunication and cable distribution assets. The value of the assets in 2018 was $69.3 billion of which 39% were wells and 35% pipelines.

The total number of wells for linear property tax purposes was 253,068. Their total tax value actually increased by 1.3% in 2018 from 2017 even though there were 4,299 less wells and natural gas was at record low prices. There was a total of 253,553 separate pipeline assets totaling 410,959 km. Exactly what each asset pays by municipality or the rate charged was not disclosed.

The report reveals total linear taxes for the year were $1.1 billion. Based on the foregoing, about $780 million would be from wells and pipelines.

Property taxes and fees can be gleaned from ESTMA reports, introduced into Canadian law in 2014. Public companies disclose them. The purpose of the Extractive Sector Transparency Measures Act is, “….to deter corruption in the global extractive sector by making government revenues from natural resources transparent to the public.”

Fascinating reading to understand what it costs to operate in Alberta. The following chart highlights the 2018 ESTMA filing for several large Alberta operators. All figures are in millions of Canadian dollars.

  1. Includes First Nations. Most ESTMA reports for rural municipalities and First Nations state the name and countries but not the provinces in which they are located. Every attempt has been made to only report Alberta.
  2. Includes First Nations. Most ESTMA reports for rural municipalities and First Nations state the name and countries but not the provinces in which they are located. Every attempt has been made to only report Alberta.
  3. Includes Fort Hills Energy Limited Partnership.

These six companies paid $1,270 in municipal taxes and fees to their “landlords”. The total contributions to governments at all levels for the right to continue to operate in Alberta in 2018 was $5.8 billion.

This is the same industry that is routinely described by its critics as receiving “subsidies” from governments.

The individual numbers are significant. CNRL paid $158 million to the Regional Municipality of Wood Buffalo in 2018 for its oil sands operations. Suncor paid $118 million, Imperial $81 million and Cenovus $19.5 million.

Pipeline operators pay a lot in property taxes and donations to keep their lines operating and their neighbors happy. TC Energy’s total for 2018 was $569 million, not all of it in Alberta. On its website it attempts to remind the reader the taxes are for “…essential government services, such as schools, roads and hospitals, as well as investments in local non-profits and charitable organizations.”

Enbridge figures for Alberta were $73.7 million in property taxes for pipelines and facilities plus $15.9 million in payroll, carbon and fuel taxes. It reports, “This revenue can be used for school, infrastructure (roads and bridges), health and wellness, recreation, transportation and other services that can help strengthen the fabric of the community.”

And what about farmers and ranchers? So-called “surface rights holders” are routinely portrayed as reluctant participants in oil and gas development. The province leases the subsurface mineral rights to E&P companies which must then negotiate and pay for surface access. These figures are even harder to aggregate, but your writer’s research reveals the following.

A typical surface leases includes an access road, an area for the well and on-site processing facilities, and usually a buried flowline taking the production off the property. An average surface lease is about 4.5 acres and the average annual rental fee is about $3,300. The works out to $733 per acre for the landowner, almost entirely profit except for the cost of farming around it. Many surface leases for long-life producing assets include payments for the entire 4.5 acres even if the farmer cultivates or the livestock grazes right up to the wellhead and access road.

The Government of Alberta Agricultural Statistics Yearbook for 2017 reports there were 40,638 “farms” in the province based upon the 2016 federal census. These farms comprised 50.3 million acres of which 25.3 million acres were classified as “land in crops”. Total receipts from farms that year – $14.1 billion – was comprised of about half crops and half livestock. Gross revenue per acre averaged $280.

This is before expenses. The reported “net farm income” after all operating expenses was $2.2 billion or an average of $44 per acre. For the mathematically challenged, this is 6% of a surface lease. Everyone who understands this process knows why most farmers don’t object to or complain about having oil and gas assets on their land. Because there is nothing they can grow or raise on per acre basis as profitable as an access road, oil or gas well, production facility or pipeline.

The issue for the vast majority of farmers is not having industrial assets on their property. The problem is the prolonged economic downturn has caused the cash to quit flowing.

This is hardly a unique problem in today’s oilpatch.

Surface leases to private property owners are private transactions between the landowner and the tax department and therefore are not reported in aggregate.

Many of Alberta’s active wells are not on private property but on Crown land. Using the linear tax active well base of 253,068 from above, how many are on farmland? If 1/3 of these wells were on private land and using the $3,300 per lease average, total surface rights payments would be $278 million annually, a tidy sum for a sector that only earned $2.2 billion in total in 2016 on their livestock and crops. If 50% of the wells were on private land, this figure rises to $418 million.

The rising cost of property taxes and surface leases has long been a problem, but $100 oil and $10 gas covered a lot of mistakes and justified many unsustainable arrangements. Nearly four years ago CNRL publicly raised the issue and asked municipalities for 30% across-the-board tax reductions to help keep the industry alive. CNRL stated its property taxes had increased five times more than its revenue per barrel of oil from 2004 to 2014.

Rural administrations have long enjoyed the ability to collect taxes on an industry with seemingly bottomless pockets to provide better services for its citizens without raising residential taxes or other levies. But the party is over. How this has affected Calgary as the downtown office towers suffer from higher vacancy rates and lower property values is well understood.

This is not to say that all industry operators are being fair and transparent. Some who could pay may indeed be withholding, which has been alleged. Extracting cash from already bankrupt operators seems unlikely. How much last year’s landmark Supreme Court decision over the Redwater case which put well closure liabilities ahead of secured lenders has affected the industry’s behavior is not known, nor was it mentioned. There’s a lot of competition for producer cash flow nowadays.

Facing challenges on multiple fronts, the industry is looking at all its major expense buckets for relief and property taxes are high on the list. In one of the articles a CAPP spokesman said, “We are in a place where we need to recalibrate our municipal tax burden if we are to emerge and derive investment back into this province and jobs.”

Alberta’s UCP government is aware of the problem but is not overly sympathetic. To help struggling gas produces Edmonton has already introduced property tax relief, but that will not solve the problem. The industry is adamant the asset values upon which property taxes are based are outdated and don’t reflect the capital market values of the assets they are taxing or the cash flow the assets are generating.

Hurting the most is the plains areas of central and southeastern Alberta which is primarily natural gas. Most of the well-publicized insolvencies are related to natural gas. Many of the suspended wells are shut-in because of low gas prices so the revenue with which to pay taxes and leases is zero.

The RMA rejects that collapsed gas prices and shut in wells were the problem, stating, “The assessment and taxation model for shallow gas infrastructure is not the cause of or solution of the industry’s challenges. Until government and industry are successful in making fundamental changes rather than blaming long-term, fixed cost such as municipal taxes for the industry’s struggles, this uncertainly will continue.”

Nothing to see here folks. Solve the problem, quit complaining and pay up.

How much do total property taxes and related fees cost each year? Some estimates are that oil and gas operations in rural Alberta pay well over $3 billion annually in taxes and access fees. The linear tax levy report and the ESTMA filings for the above six operators alone totals over $2 billion, making $3+ billion hardly an unreasonable figure. This makes the missing $173 million 6% of the total.

This situation is highly regrettable. But everyone is going to have to make concessions and adjustments to keep the great Alberta oilpatch cash machine financially sustainable. Most already have.

David Yager is a Calgary-based oil service executive, writer, energy policy analyst and author of From Miracle to Menace – Alberta, A Carbon Story. He has been serving as Interim President and CEO of Winterhawk Well Abandonment Ltd. since October of 2019.

 Learn more about From Miracle to Menace – Alberta, A Carbon Story or purchase a copy at www.miracletomenace.ca.

 

 

 



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