By: David Yager, MNP, National Leader Oilfield Services
Originally published in MNP's Oilfield Service News on November 11, 2015.
sub·si·dy: (sŭb′sĭ-dē) n. pl. sub·si·dies 1. Monetary assistance granted by a government to a person or group in support of an enterprise regarded as being in the public interest.2. Financial assistance given by one person or government to another
The oil and gas industry is suffering through a severe and prolonged slump due to collapsed oil prices resulting in the loss of hundreds of thousands of jobs worldwide and the destruction of billions, if not trillions, of dollars in shareholder value. Governments in oil-producing jurisdictions, including Alberta, find themselves in severe financial difficulty because cash flow generated by first natural gas and now oil production has plummeted. This includes royalties, corporate taxes, payroll taxes and the sale of future development rights.
Alberta is expected to amass massive deficits until oil prices recover. The collapse in oil prices allegedly drove the entire Canadian economy into recession in the first half of the year. Every oil producing jurisdiction in the world depending upon this resource to fund government operations is struggling.
So you are forgiven if you don’t understand how anyone can claim this industry is heavily subsidized by governments. That’s right, subsidized. Using the dictionary definition of the word subsidy at the top of the page, the oil industry allegedly benefits enormously from government generosity. Motor fuel taxes alone contributed $14 billion to federal and provincial treasuries last year, yet allegations persist this industry is on the dole.
How can it be this great cash cow is, in fact, a welfare recipient? This is yet another battle – along with pipelines, oilsands and hydraulic fracturing – the petroleum industry is losing. It just has not received the attention it should. But as the world’s leaders head towards the Paris Climate Change Conference (PCCC) at the end of November, this subject will again be in the news. Keep an eye on it. It is important.
There are three different definitions of subsidies to the oil industry.
The first is direct government cash through reduced commodity pricing. Numerous oil and gas producing countries, all with state controlled production, sell fuel to their domestic economies below the market price. Some even import oil at the world price and sell it to their own citizens well below cost. In 2011 in Iran, for example, that country provided oil to its citizens for about $40 billion less than it would have received had the crude been sold on world markets or if the state oil company had charged consumers the world price. Other countries which sell domestically produced or imported oil to their citizens below global market price include Saudi Arabia, India, China, Egypt, Iraq, UAE, Indonesia Mexico, Algeria, and Kuwait. This is done at great expense to the treasury. The Organization for Economic Cooperation and Development reported last year 40 countries subsidized the cash cost of motor fuel by a whopping US$548 billion in 2014. Gasoline prices in Venezuela, Saudi Arabia, Iran, UAE, and Indonesia averaged only $0.31 a litre.
And it’s tough to change. When these governments suggest domestic oil – and natural gas – prices should rise to approach market levels, the reaction of consumers is universally negative. Think riots. Usually governments back down and low prices persist. This should come as no surprise. Every time the price of fuel rises anywhere in the world, the people who buy it are unhappy. Canadians react the same way. This method of reducing the cost of fuel certainly meets the dictionary definition of subsidy.
The second definition of subsidy is taxes not collected. This newer derivative includes depletion and capital cost allowances, accelerated or otherwise. Depreciation deductions against income taxes payable not restricted to oil and gas. Historically, corporations which invest capital in property, plant or equipment to create future revenue streams, employment, and corporate and personal taxes have been permitted under the tax act to deduct some portion of such investments from current income taxes. This tool to help businesses more quickly recover invested capital has been around forever because it usually results in employment, corporate and personal taxes that would not otherwise exist. Unlike the cash subsidies in case one, this is usually considered a tax deferral because what governments forfeit today is collected tomorrow, often several times over.
Canada provides a good example with the generic oilsands fiscal regime negotiated by oil companies, Alberta and the federal government in the mid-1990s. At that time, oil prices were low and the development of this massive resource was regarded as an asset, not a liability. Included in the fiscal package was an accelerated capital cost allowance for developers which reflected the enormity of the upfront capital required to make these investments take place and ultimately economic.
And it worked. Not right away, but early in the 21st century the oilsands took off due to several factors, one of which was the generic oilsands fiscal package. Meanwhile, critics of fossil fuel consumption began to classify taxes uncollected from oil and gas developers by governments as a subsidy. This was certainly a new twist in the application of the word.
The government of Canada, co-creator of the generic oilsands regime, bought into this argument. In 2007 the federal government ended the accelerated capital cost allowance for oilsands development. The official announcement read,”...the Government is committed to improving the fairness and neutrality of the tax system across sectors of the economy and to supporting the commitment by G–20 Leaders to rationalize and phase-out over the medium term inefficient fossil fuel subsidies. With the oilsands sector vibrant and growing, Budget 2007 announced the phase-out of the accelerated capital cost allowance for tangible capital assets in the sector.” That the success in oilsands growth was due in part to the tax treatment the government terminated was not mentioned.
The suggestion that depletion or depreciation deductions on income from investments that might not otherwise exist is a subsidy is a remarkable interpretation of the rules of accounting and the English language.
Meanwhile, in February this year the federal government announced the introduction of an accelerated capital cost allowance deductible from income for the purchase and construction of LNG assets. This was introduced after developers made a convincing case it was essential for LNG projects to be economically viable. This was done without apology or reference to future carbon emissions.
The third and furthest stretch of the definition of subsidy comes from climate change activists who claim health and environmental damages caused by the consumption of fossil fuels which may be borne by future governments are a subsidy to companies and industries which produce and market petroleum, coal and natural gas. This includes health costs to people harmed by air pollution as well as the effects of floods, droughts, and storms caused by carbon-induced climate change. The subsidy allegation includes events which have not occurred yet but surely will, so long as fossil fuels remain the primary energy source for the world’s economy. The world’s hapless consumers who buy and burn this stuff for survival, comfort, convenience and entertainment not required to bear any responsibility for their actions.
The International Monetary Fund (IMF) estimated earlier this year global fossil fuel subsidies had reached $US5.3 trillion, a figure highlighted at $US10 million a minute to make the number more tangible. The driving force behind this concept of subsidy is Nicholas Stern, a climate economist at the London School of Economics. The IMF called the huge number ”extremely robust” and the conclusion “shocking.” Stern said, “This very important analysis shatters the myth that fossil fuels are cheap by showing just how huge their real costs are. There is no justification for these enormous subsidies for fossil fuels, which distorts markets and damages economies, particularly in poorer countries.”
To illustrate exactly how egregious this problem is, the IMF said fossil fuel subsidies are greater than the total spending on healthcare by all the world’s governments. If fossil fuels were not so cheap then renewable energy alternatives would no longer require government subsidies (this appears to be a tacit acknowledgement the tax incentives and legislated higher costs of renewables are indeed a subsidy, except they resemble definitions one and two).
The IMF also includes traffic congestion and vehicular accidents as a fossil fuel expense and therefore a subsidy. The only conclusion is cars must be parked. If Joe Public doesn’t want to willingly pay more for fuel, imagine how people will react when they are advised they can only travel by public transit, bicycle or on foot. It would appear this definition of success is massive reductions in or the ultimate termination of the use of fossil fuels as an energy source.
But as governments which truly do subsidize the consumption of hydrocarbon energy have learned from their citizens, this radical change in how the world moves and operates is unlikely to survive a public opinion poll.
What does this mean for Canada’s black and blue oilpatch? Not much, really. With Alberta’s corporate tax rate increased by 20% this year, large emitter carbon levies set to double, another four cents per litre added to fuel and Edmonton running record deficits until oil prices rise, the idea this province’s tax cow is in fact heavily subsidized is unlikely to register in the minds of managers trying to keep their companies afloat and oil workers hoping to stay employed. It certainly means nothing to those who have lost their jobs.
However, the argument clearly demonstrates how much traction the anti-fossil fuel movement is gaining in the media and among governments regulating the fiscal regime under which the oil and gas industry operates. Keep an eye on this issue and the PCCC.