Skip to main content

MEI

FacebookTwitterLinkedIn
MEI in the Media

Publications

19 October 2017October 19, 2017

Canada’s Oil and Gas Sector at Risk? How Excessive Taxes and Regulations Undermine Our Competitiveness

Research Paper analyzing Canada’s position relative to the U.S. in the oil and gas sector, in order to assess the dangers that could emerge in terms of competitiveness

Canada’s Oil and Gas Sector at Risk? How Excessive Taxes and Regulations Undermine Our Competitiveness

Canada’s oil and natural gas sector is currently going through hard times. Donald Trump, meanwhile, has repeatedly promised to improve the business environment in the United States by reducing the tax and regulatory burden, especially as it affects this sector. As Canada’s competitiveness in oil and gas development depends almost entirely on its position relative to that of its powerful neighbour, it is important to understand what is going on right now in the United States and the effects of U.S. policy on our economy.

Media release: Energy sector competitiveness: The United States breaks new ground, Canada loses ground
 

Related Content

200,000 reasons to help our oil and gas sector (Toronto Sun, October 19, 2017) Interview (in French) with Germain Belzile (Radio-Canada International, October 19, 2017)  


Research Paper prepared by Germain Belzile, Senior Associate Researcher at the MEI.

Highlights

Canada’s oil and natural gas sector is currently going through hard times. Donald Trump, meanwhile, has repeatedly promised to improve the business environment in the United States by reducing the tax and regulatory burden, especially as it affects this sector. As Canada’s competitiveness in oil and gas development depends almost entirely on its position relative to that of its powerful neighbour, it is important to understand what is going on right now in the United States and the effects of U.S. policy on our economy.

Chapter 1 − Reasons for Concern about Canada’s Competitiveness

 

  • With the third-largest proven oil reserves in the world, Canada ranks fifth among the major oil-producing countries, behind the United States, Saudi Arabia, Russia, and China. When it comes to natural gas, Canada is also in fifth place among producing countries.
  • The oil and natural gas sector, which accounts for three-quarters of primary energy produced in Canada, directly generated nearly $100 billion in GDP in 2015, employed 191,415 people, and contributed $20.3 billion to government coffers.
  • Thanks in large part to the development of shale oil and shale gas, many experts now expect the United States to become self-sufficient in oil and natural gas over the next 20 years.
  • Following a sharp reduction in investment in the oil and gas sector in Canada since 2014, with capital spending falling from $78.4 billion to $38 billion, a slight recovery was seen in the first two quarters of 2017.
  • However, the recovery is nowhere near the same magnitude as in the United States, where capital expenditures in the oil and gas sector in 2017 are expected to increase by 38% compared to 2016, versus a 19% increase in Canada.
  • Alberta in particular is experiencing a dizzying downturn, and the regulatory burden seems to be primarily at fault, since it is estimated that its cost will rise by between 12% and 21% in the near future, and even more after 2023, when the carbon tax will be applied to the oil and gas sector.
  • The slowing of investment in Canada is evident from the large number of projects that have been suspended or cancelled—four large projects worth a total of $84 billion this year alone.


Chapter 2 − The Tax System That Applies to Oil and Gas Development

  • Overall, the United States has a lower tax burden than Canada and the other G7 countries as a share of GDP, 26.4% versus 31.9% for Canada.
  • However, the statutory U.S. corporate tax rate is high in comparison to that of other industrialized countries, averaging 38.9% versus 26.7% for Canada.
  • While the effective corporate rate in the United States is generally much lower than the statutory rate, Canada nonetheless maintains a tax advantage in this regard, albeit a smaller one.
  • Governments also collect oil and natural gas royalties, reflecting the fact of public ownership of the exploited resources; even in the case of private land in the U.S., the states collect special taxes that are equivalent to royalties.
  • Overall, Alberta’s royalty regime is seen as being competitive and able to attract new investment.
  • In both Canada and the United States, the tax system also takes into account the particular nature of resource development, notably the fact that this economic sector has an activity cycle that is spread over many years.
  • In terms of taxation, Canada appears competitive when it comes to oil and gas activities, but less so than at first glance, and a major reform of corporate taxation by the U.S. government would change the situation significantly.


Chapter 3 − Comparing Regulatory Environments

  • While a recent study evaluated the overall cost of regulation across all sectors at $37.1 billion in Canada, it amounted to $205 billion in the United States, which represents a far lower average cost per employee than in Canada.
  • According to another study, from 1980 to 2012, economic growth was reduced by 0.8% a year in the U.S. due to the overall regulatory burden, which means that American GDP could have been nearly 25% higher than its current level, or the equivalent of $13,000 more per capita.
  • In the United States, a compilation of regulatory restrictions ranks oil and gas extraction 9th among the most heavily regulated industries, and the refining of oil and coal into derivative products at the very top.
  • Even though the Canadian Constitution grants the provinces jurisdiction over natural resources, the federal government in Canada is more heavily involved than its counterpart in the United States, where there is no national energy policy to speak of.
  • Alberta is considered to be a region having regulations that are as stringent as those in North Dakota, and among the most stringent in an international comparison of leading oil and gas producing regions.
  • Alberta now stands out from the two U.S. states examined here (North Dakota and Pennsylvania) with its adoption of a plan to fight climate change, which is broadly in line with a basic trend over the last two years: Canada’s regulatory burden is becoming increasingly onerous.
  • Recent and expected changes are increasing investor uncertainty, especially since there might be a long wait before knowing what direction the Canadian government will take in its revision of regulatory and environmental processes.


Chapter 4 − The Trump Administration’s Reforms: Lowering Taxes and Cutting Regulations

  • As governments in Canada increase the regulatory burden and corporate taxes in the oil and gas sector, the Trump administration’s actions generally favour increased economic activity in these sectors by making the United States a more attractive destination for investment.
  • After just 10 days in office, the new administration had already issued 37 different resolutions through Congress aimed at repealing dozens of regulations.
  • Trump re-launched two pipeline projects, Keystone XL and Dakota Access, and issued an executive order expediting infrastructure projects seen as priorities, especially in terms of environmental rules.
  • Growth in U.S. domestic energy production, due mostly to the hydraulic fracturing revolution, has also alleviated fears of reliance on imports, and the ban on exporting oil produced in the United States to anywhere except Canada, which had been in effect for 40 years, has been lifted.
  • President Trump signed an executive order stipulating that two regulations had to be repealed for each new regulation adopted, and the costs of compliance with new regulations will also be evaluated and capped.
  • It is possible that the staff, budget, and scope of the Environmental Protection Agency (EPA) could be trimmed considerably in the coming years.
  • The flagship tax measure, with the greatest potential impact on the ability of the United States to attract investment, consists of lowering the corporate tax rate from 35% to 20%.
  • The Trump administration also seeks to open more federal lands to oil development, including offshore areas in the Arctic and the Atlantic.


Chapter 5 − Ways to Boost Canada’s Competitiveness

  • Reduce the Tax Burden: A particularly effective reform option would be to adopt a proportional tax rate of 10.5% for all businesses, instead of this rate being reserved for SMEs and a higher rate of 15% applying to large companies, as is now the case.
  • Reduce the Regulatory Burden: A permanent body should be entrusted with the job of eliminating regulations that achieve little and cost a lot, and ensuring that processes are as simple and as quick as possible.
  • Ensure Predictable and Reasonable Timeframes: The federal and provincial governments should agree on maximum timeframes within which a project would receive all necessary authorizations so as to avoid unreasonable delays.
  • Delimit the Notion of Social Licence: Consultations should be limited to the communities directly affected and not open to all organized pressure groups that wish to insinuate themselves into the debate.
  • Minimize Arbitrary Political Decisions: The ability of elected officials to interfere in formal project approval processes must be curbed.
  • Reconsider the Imposition of a Carbon Tax: While in theory, imposing a carbon tax is an efficient mechanism for reducing GHG emissions, it should not be added on top of an approach of economic micromanagement by the government, and it should be adopted universally.


Introduction

Canada is a vast country with abundant natural resources. Much of its economy relies on the development of these resources, with oil and natural gas playing a central role. Unfortunately, these sectors are currently going through hard times due to a difficult Canadian and global context.

Late 2014 was marked by a significant and enduring drop in crude oil prices. Production growth in the United States, which is now able to export oil to world markets, partly explains the global context of this price decline, together with the strategy of the Organization of Petroleum Exporting Countries (OPEC).

In November 2016, American voters elected Donald Trump, the Republican presidential candidate who has repeatedly promised to improve the business environment by reducing the tax and regulatory burden, especially as it affects the oil and gas sector. Some of these promises have already been implemented, while others remain merely intentions for the moment.

While Canada alone cannot alter world crude oil prices, it can however pay attention to the changes taking place in the United States. This is all the more crucial given that Canada’s competitiveness in oil and gas development depends almost entirely on its position relative to that of its powerful neighbour. It is therefore important to understand what is going on right now in the United States and the effects of U.S. policy on the Canadian economy.

The purpose of this Research Paper is to analyze Canada’s relative position in the oil and gas development sector in order to assess the scope of the dangers that could emerge in terms of competitiveness. The significance of this issue is enormous, given the considerable weight of oil and natural gas in our economy, detailed in Chapter 1. This chapter also looks at some worrisome indicators suggesting that Canada is already losing some ground in terms of competitiveness.

Chapter 2 deals with taxation, comparing the relative positions of Canada and the United States. Federal taxes, as well as state and provincial taxes, both need to be taken into account. For the oil and gas sector, royalty regimes also play a central role.

Chapter 3 makes a similar comparison, this time looking at regulation. This complex topic merits careful attention, since its economic impacts are considerable, especially for the oil and gas sector, which is heavily regulated. This chapter also covers recent regulatory changes in Canada and Alberta.

Chapter 4 examines reforms adopted in recent months in the United States. It sets out both the actions and the intentions of the Trump administration, which are generally in the direction of greater competitiveness. Major changes have already occurred just in the last few months.

Finally, Chapter 5 concludes with a look at possible solutions. Based on Canada’s current situation with regard to competitiveness, federal and provincial governments can react, re-examining how things are being done so as to improve them. Above all, it is important to acknowledge that the challenge facing governments is an urgent one.

Read the Research Paper (in PDF format only)...

Research Paper prepared by Germain Belzile, Senior Associate Researcher at the MEI.

Highlights

Canada’s oil and natural gas sector is currently going through hard times. Donald Trump, meanwhile, has repeatedly promised to improve the business environment in the United States by reducing the tax and regulatory burden, especially as it affects this sector. As Canada’s competitiveness in oil and gas development depends almost entirely on its position relative to that of its powerful neighbour, it is important to understand what is going on right now in the United States and the effects of U.S. policy on our economy.

Chapter 1 − Reasons for Concern about Canada’s Competitiveness

  • With the third-largest proven oil reserves in the world, Canada ranks fifth among the major oil-producing countries, behind the United States, Saudi Arabia, Russia, and China. When it comes to natural gas, Canada is also in fifth place among producing countries.
  • The oil and natural gas sector, which accounts for three-quarters of primary energy produced in Canada, directly generated nearly $100 billion in GDP in 2015, employed 191,415 people, and contributed $20.3 billion to government coffers.
  • Thanks in large part to the development of shale oil and shale gas, many experts now expect the United States to become self-sufficient in oil and natural gas over the next 20 years.
  • Following a sharp reduction in investment in the oil and gas sector in Canada since 2014, with capital spending falling from $78.4 billion to $38 billion, a slight recovery was seen in the first two quarters of 2017.
  • However, the recovery is nowhere near the same magnitude as in the United States, where capital expenditures in the oil and gas sector in 2017 are expected to increase by 38% compared to 2016, versus a 19% increase in Canada.
  • Alberta in particular is experiencing a dizzying downturn, and the regulatory burden seems to be primarily at fault, since it is estimated that its cost will rise by between 12% and 21% in the near future, and even more after 2023, when the carbon tax will be applied to the oil and gas sector.
  • The slowing of investment in Canada is evident from the large number of projects that have been suspended or cancelled—four large projects worth a total of $84 billion this year alone.


Chapter 2 − The Tax System That Applies to Oil and Gas Development

  • Overall, the United States has a lower tax burden than Canada and the other G7 countries as a share of GDP, 26.4% versus 31.9% for Canada.
  • However, the statutory U.S. corporate tax rate is high in comparison to that of other industrialized countries, averaging 38.9% versus 26.7% for Canada.
  • While the effective corporate rate in the United States is generally much lower than the statutory rate, Canada nonetheless maintains a tax advantage in this regard, albeit a smaller one.
  • Governments also collect oil and natural gas royalties, reflecting the fact of public ownership of the exploited resources; even in the case of private land in the U.S., the states collect special taxes that are equivalent to royalties.
  • Overall, Alberta’s royalty regime is seen as being competitive and able to attract new investment.
  • In both Canada and the United States, the tax system also takes into account the particular nature of resource development, notably the fact that this economic sector has an activity cycle that is spread over many years.
  • In terms of taxation, Canada appears competitive when it comes to oil and gas activities, but less so than at first glance, and a major reform of corporate taxation by the U.S. government would change the situation significantly.


Chapter 3 − Comparing Regulatory Environments

  • While a recent study evaluated the overall cost of regulation across all sectors at $37.1 billion in Canada, it amounted to $205 billion in the United States, which represents a far lower average cost per employee than in Canada.
  • According to another study, from 1980 to 2012, economic growth was reduced by 0.8% a year in the U.S. due to the overall regulatory burden, which means that American GDP could have been nearly 25% higher than its current level, or the equivalent of $13,000 more per capita.
  • In the United States, a compilation of regulatory restrictions ranks oil and gas extraction 9th among the most heavily regulated industries, and the refining of oil and coal into derivative products at the very top.
  • Even though the Canadian Constitution grants the provinces jurisdiction over natural resources, the federal government in Canada is more heavily involved than its counterpart in the United States, where there is no national energy policy to speak of.
  • Alberta is considered to be a region having regulations that are as stringent as those in North Dakota, and among the most stringent in an international comparison of leading oil and gas producing regions.
  • Alberta now stands out from the two U.S. states examined here (North Dakota and Pennsylvania) with its adoption of a plan to fight climate change, which is broadly in line with a basic trend over the last two years: Canada’s regulatory burden is becoming increasingly onerous.
  • Recent and expected changes are increasing investor uncertainty, especially since there might be a long wait before knowing what direction the Canadian government will take in its revision of regulatory and environmental processes.


Chapter 4 − The Trump Administration’s Reforms: Lowering Taxes and Cutting Regulations

  • As governments in Canada increase the regulatory burden and corporate taxes in the oil and gas sector, the Trump administration’s actions generally favour increased economic activity in these sectors by making the United States a more attractive destination for investment.
  • After just 10 days in office, the new administration had already issued 37 different resolutions through Congress aimed at repealing dozens of regulations.
  • Trump re-launched two pipeline projects, Keystone XL and Dakota Access, and issued an executive order expediting infrastructure projects seen as priorities, especially in terms of environmental rules.
  • Growth in U.S. domestic energy production, due mostly to the hydraulic fracturing revolution, has also alleviated fears of reliance on imports, and the ban on exporting oil produced in the United States to anywhere except Canada, which had been in effect for 40 years, has been lifted.
  • President Trump signed an executive order stipulating that two regulations had to be repealed for each new regulation adopted, and the costs of compliance with new regulations will also be evaluated and capped.
  • It is possible that the staff, budget, and scope of the Environmental Protection Agency (EPA) could be trimmed considerably in the coming years.
  • The flagship tax measure, with the greatest potential impact on the ability of the United States to attract investment, consists of lowering the corporate tax rate from 35% to 20%.
  • The Trump administration also seeks to open more federal lands to oil development, including offshore areas in the Arctic and the Atlantic.


Chapter 5 − Ways to Boost Canada’s Competitiveness

  • Reduce the Tax Burden: A particularly effective reform option would be to adopt a proportional tax rate of 10.5% for all businesses, instead of this rate being reserved for SMEs and a higher rate of 15% applying to large companies, as is now the case.
  • Reduce the Regulatory Burden: A permanent body should be entrusted with the job of eliminating regulations that achieve little and cost a lot, and ensuring that processes are as simple and as quick as possible.
  • Ensure Predictable and Reasonable Timeframes: The federal and provincial governments should agree on maximum timeframes within which a project would receive all necessary authorizations so as to avoid unreasonable delays.
  • Delimit the Notion of Social Licence: Consultations should be limited to the communities directly affected and not open to all organized pressure groups that wish to insinuate themselves into the debate.
  • Minimize Arbitrary Political Decisions: The ability of elected officials to interfere in formal project approval processes must be curbed.
  • Reconsider the Imposition of a Carbon Tax: While in theory, imposing a carbon tax is an efficient mechanism for reducing GHG emissions, it should not be added on top of an approach of economic micromanagement by the government, and it should be adopted universally.


Introduction

Canada is a vast country with abundant natural resources. Much of its economy relies on the development of these resources, with oil and natural gas playing a central role. Unfortunately, these sectors are currently going through hard times due to a difficult Canadian and global context.

Late 2014 was marked by a significant and enduring drop in crude oil prices. Production growth in the United States, which is now able to export oil to world markets, partly explains the global context of this price decline, together with the strategy of the Organization of Petroleum Exporting Countries (OPEC).

In November 2016, American voters elected Donald Trump, the Republican presidential candidate who has repeatedly promised to improve the business environment by reducing the tax and regulatory burden, especially as it affects the oil and gas sector. Some of these promises have already been implemented, while others remain merely intentions for the moment.

While Canada alone cannot alter world crude oil prices, it can however pay attention to the changes taking place in the United States. This is all the more crucial given that Canada’s competitiveness in oil and gas development depends almost entirely on its position relative to that of its powerful neighbour. It is therefore important to understand what is going on right now in the United States and the effects of U.S. policy on the Canadian economy.

The purpose of this Research Paper is to analyze Canada’s relative position in the oil and gas development sector in order to assess the scope of the dangers that could emerge in terms of competitiveness. The significance of this issue is enormous, given the considerable weight of oil and natural gas in our economy, detailed in Chapter 1. This chapter also looks at some worrisome indicators suggesting that Canada is already losing some ground in terms of competitiveness.

Chapter 2 deals with taxation, comparing the relative positions of Canada and the United States. Federal taxes, as well as state and provincial taxes, both need to be taken into account. For the oil and gas sector, royalty regimes also play a central role.

Chapter 3 makes a similar comparison, this time looking at regulation. This complex topic merits careful attention, since its economic impacts are considerable, especially for the oil and gas sector, which is heavily regulated. This chapter also covers recent regulatory changes in Canada and Alberta.

Chapter 4 examines reforms adopted in recent months in the United States. It sets out both the actions and the intentions of the Trump administration, which are generally in the direction of greater competitiveness. Major changes have already occurred just in the last few months.

Finally, Chapter 5 concludes with a look at possible solutions. Based on Canada’s current situation with regard to competitiveness, federal and provincial governments can react, re-examining how things are being done so as to improve them. Above all, it is important to acknowledge that the challenge facing governments is an urgent one.

Read the Research Paper (in PDF format only)...


EMAIL FACEBOOK TWITTER LINKEDIN

910 Peel Street, Suite 600
Montreal (Quebec) H3C 2H8
Canada


Telephone: 514-273-0969
E-mail: commentaires@iedm.org

to the top of the page

© IEDM 2017