Alberta least competitive energy hub: economist

Alberta is the least competitive of any oil- and gas-producing jurisdiction in North America, a new report by prominent economist Jack Mintz concludes.

Mintz, the public policy chair at the University of Calgary, released a paper Wednesday comparing the energy sectors in Alberta, Saskatchewan, British Columbia, Nova Scotia, Newfoundland and Labrador and Texas.

The report looked at federal and provincial corporate income taxes, sales taxes on capital purchases and other capital-related levies such as severance taxes and royalties in attempting to compare how attractive the area is for investing in new energy infrastructure.

"Contrary to some public perception, the oil and gas sectors, including the oil sands, are much more highly taxed than other sectors in the Alberta economy," Mintz said.

Provinces collect royalties from private producers as payments for the use of oil and gas deposits the provinces own, and the report takes particular aim at Alberta's royalty regime. 

The owner of a theoretical medium-sized oil well that produces 80 barrels of oil per day would pay 23.85 per cent of profits as royalties in British Columbia's current royalty regime, Mintz says. That same well in Saskatchewan would pay a 22 per cent royalty.

But because Alberta's royalty regime varies with the price of oil, that well owner would pay 29 per cent if a barrel of oil traded for $50 US, 40 per cent at $72 US per barrel or 47 per cent at $95 US per barrel.

Essentially, the higher the price of oil, the less competitive Alberta becomes, making it the least competitive region in North America, the report concludes. Alberta's royalty regime creates a burden on investment that is twice as high on oil and gas compared to other sectors, Mintz argues.

The paper advocates that the province return to a royalty system it used in the oil sands prior to 2009, whereby companies deduct current and capital costs from revenues. That system is similar to the one British Columbia uses in dealing with its large mining sector.

Other regions criticized

But Alberta is not the only energy-producing region of Canada to draw scorn in the Mintz report.

In the offshore Atlantic region, royalties on oil and gas production are assessed by the Newfoundland and Labrador and Nova Scotia governments. They are considerably more complex than those in Alberta, with different rates applying to net profits according to various tiers, the report noted.

In Newfoundland and Labrador, the basic royalty is between one and 7.5 per cent of gross offshore oil revenues. But there's also a net royalty to be paid after operating, capital and exploration costs are deducted. The first-tier rate is 20 per cent, but can rise an additional 10 per cent after that.

Essentially, "the royalty rate therefore rises as the return on capital invested in the project rises," Mintz said.

Nova Scotia also uses a profit-sensitive approach, but includes the federal Atlantic investment tax credit — essentially a 10 per cent tax credit on depreciable expenditures. In some cases, that credit actually makes the tax burden on offshore energy projects negative — "the tax savings from the combined depreciation deductions and tax credits offset any income tax paid on future earnings," as the report puts it.

"In my view, that’s just too distortionary, it’s not necessary," Mintz said.

Elsewhere in Canada, Saskatchewan and British Columbia are both more competitive environments than Alberta, with the latter getting a slight advantage because of its move to harmonize sales tax, which will remove the tax burden on capital expenditure, Mintz said.

In Texas, while the tax system is quite different, it is competitively structured, the report concludes.