Even if the occasional bout of Canadian sanctimoniousness can make me want to try to bloody some noses, I am a huge admirer of the Great White North. Which is why, among other reasons, I am trying to figure out whether said country’s tax policy towards its oil and gas industry is too lenient, too onerous, or just right.
Statistics Canada publishes some very good statistics on the “conventional oil” industry, which, confusingly, includes natural gas but excludes the Albertan oil sands. Their numbers include operating costs, capital expenditures, and exploration costs. They also include taxes and royalty payments to provincial governments. (The Canadian constitution reserves authority over natural resources to the provinces.) You have to do some digging to get the equivalent numbers from the oil sands, including some figures from the Albertan Ministry of Energy that might not be entirely equivalent, but it can be done.
And the results? Well, Alberta produced C$79 billion worth of hydrocarbons in 2007, C$22,687 for every man, woman, and child in the province. Of that, conventional hydrocarbons made up C$55 billion. The companies that produced those hydrocarbons spent C$4 billion on exploration, C$17 billion on development, and C$10 billion on operation. That left them C$24 billion in net income, of which the government of Alberta took C$9 billion in taxes and royalties. Add in another estimated C$2 billion in income tax payments, and you have a total take around 65% of the industry’s net cash flow before financing, which is what the measure really is. Crushing socialism! Or, put another way, a sensibly high tax rate, since the royalties are structured in such a way as to essentially exempt new investments until the initial costs are recovered.
That fact, however, suggests that maybe net cash flow isn’t the right denominator. After all, income taxes are generally applied before investment expenditures. Alberta is trying to subsidize them. In that case, isn’t operating income the right measure? Okay ... using operating income as the denominator, the effective tax rate on conventional hydrocarbons in Alberta drops to 22%. That seems pretty low. And, of course, if you just use the government take as a percent of revenues for your calculation, then you get a rate of only 18%. That is almost tax-free compared to such left-wing hotbeds as Alaska.
The numbers for the oil sands are even stranger. On the one hand, taxes and royalties as a percentage of operating income was only 28%, and as a percentage of gross revenues were only 19%. On the other hand, if Statistics Canada is to be believed, the industry reinvested all of its operating profits and then some in 2007. Royalties came to 150% of net cash flows before financing. If the idea is to encourage investment despite low profits, then maybe the system is about as high tax as it can get.
So what’s the “right” number? Are taxes high or low? For what it is worth, other provinces, like Saskatchewan and Newfoundland, turn out to be even lower tax than Alberta ... but don’t have anything like the amount of investment. Companies there are taking the money and running.
Thoughts?
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