The combination of limited pipeline access and high government-related costs put oil producers in Alberta, Canada's biggest petroleum-producing province, at a significant disadvantage to their U.S. counterparts, a study by the Toronto-based C.D. Howe Institute found.
Alberta producers face costs caused by government policies of about C$770,000 on an average oil well, more than double what their U.S. counterparts pay, the study found. When the government burden is added to lost profitability because of pipeline constraints, the costs total about C$5 per barrel in lost revenue, the non-partisan, economic think tank said.
While emissions restrictions and taxes have taken the spotlight in Canada, it is the lack of market access and the taxes on investment that are stifling competitiveness, according to the study, titled "Death By A Thousand Cuts? Western Canada's Oil and Natural Gas Policy Competitiveness Scorecard."
Of three large Canadian pipelines that have been proposed to boost oil exports, Enbridge Inc.'s 525,000-barrel-per-day Northern Gateway was scuttled by regulators, TransCanada Corp.'s 1.1 million bbl/d was scrapped by the company after the scope of permitting hearings was changed, and Kinder Morgan Inc.'s 590,000 bbl/d Trans Mountain expansion faces resistance from local governments. Because of limitations in the existing pipeline grid that flows to the U.S., Canadian crude prices have struggled in comparison to world benchmarks.
Higher corporate taxes and provincial royalties are among the costs that Canadian producers face. Most provinces and municipalities levy property taxes on energy facilities, with Alberta leading all other provinces in local tax burden. In North Dakota and Pennsylvania, which are also large petroleum-producing jurisdictions, local governments are barred from charging property taxes on oil and gas production, the report said.
Royalties are an issue because most mineral rights in Canada are held by governments. In Alberta, the government takes a portion of most of the oil and gas produced within its boundaries, making it one of the larger sellers and shippers of oil in the nation. While Canada has historically been competitive with the U.S. on taxes, the recent changes to tax laws in that country have highlighted the need to examine Canadian costs, the study said. Canada's biggest oil producers, Suncor Energy Inc., Exxon Mobil Corp.'s Canadian units and Canadian Natural Resources Ltd., get the bulk of their output by extracting tar-like bitumen trapped in sand in northeastern Alberta.
Canada's oil producers have faced gridlock as production growth from oil sands projects has outstripped increases in pipeline capacity and regulatory difficulties have erased the hope of substantial gains before 2020. Enbridge is doubling the capacity of its Line 3 network and expects to have the link between Alberta and Wisconsin completed in late 2019. That project has been slowed by state regulators in Minnesota who are requesting extensive environmental studies on the line replacement. TransCanada is still developing its Keystone XL pipeline which would boost capacity out of Canada by more than 800,000 bbl/d, but has yet to make a final decision on the project.
TransCanada's control room which monitors the Keystone oil pipeline network. Source: TransCanada Corp. |
Kinder Morgan Canada Ltd's Trans Mountain expansion, which was originally slated to be in service in 2019, has been pushed back at least a year. The company has slowed development of the line amid court challenges to its permits and proposed rules by the government of British Columbia that would limit growth in oil sands crude transportation in the province. Prime Minister Justin Trudeau on Feb. 1 reiterated his government's support for the line and said it would be built.
Emissions levies imposed by Alberta have not added major competitiveness costs to Canadian producers, the study found. Instead companies have an incentive to reduce emissions and those with below-average output are actually better off under the system.
"Policymakers now need to take steps to ensure that approved new pipelines get built and to reduce the burden of corporate income, royalties, and property taxes, especially in light of recent U.S. tax reforms," Benjamin Dachis, author of the study, said in a Feb. 1 statement that accompanied its release.

