CAPP Urges Canadian Government Support for Development

Canadian producers traveled to Ottawa last week to try shaking the Canadian capital out of its largely passive approach to the supply "crisis" threatening the continent, and "make energy resource development a national priority."

The Canadian Association of Petroleum Producers (CAPP), which accounts for 95% of the nation's output, urged the Liberal administration of Prime Minister Jean Chretien to go to work on development issues "to ensure Canadians benefit from free access to North American markets."

CAPP chairman Ray Woods, COO at Shell Canada, delivered a wish list of more than 30 actions it would like to see initiated in Ottawa. The list starts with resolving a year-old grievance against the national corporate tax system. CAPP wants the federal government to stop excluding the oil and gas sector from a phased reduction now under way in corporate taxes to 21% from 28% over four years.

Industry officials estimate the exclusion will generate a tax windfall of C$3-$4 billion for Ottawa --- and a corresponding impairment of industry investment and fund-raising capabilities --- at current oil prices and a gas market averaging US$4.50/MMBtu. The exclusion from the tax reduction, generated by federal budget surpluses and applied to all other sectors, is seen as a holdover from the bad old days when Canadian authorities singled out the energy sector as a mostly foreign-owned "cash cow." And so far, Chretien and his finance minister, Paul Martin, have attributed the decision to withhold the benefits to a legacy of those times.

The Liberals, maintaining they already gave, point to a 27-year-old system of corporate income deductions known as the resource allowance. It was introduced in partial compensation for a 1974 budget decision by a previous Liberal government, to forestall a threatened hemorrhage of the federal purse by ending a tradition of allowing the industry to deduct from its taxable income its royalty payments to provincial governments. The action provoked an intense federal-provincial-industry fight, and the policy is no more popular in the gas-producing provinces today. In Ottawa, the government received the CAPP submission politely, but made no commitments beyond previous promises at least to give the issue further study.

The rest of the Canadian industry's agenda resembles the breaks that its American counterpart hopes to obtain from the Bush Administration's energy initiative in the United States. The key targets are access to resources and a simplified, accelerated regulatory system. The area that needs the regulatory simplification the most is the Arctic, where the scene is remains a maze of federal, territorial and aboriginal jurisdictions, agencies and unresolved claims.

While the Canadian map of gas-drilling targets is much less broken up by official regional moratoriums than its counterpart in the United States, the industry warns that other aspects of the northern scene are having the same "chilling" effects on development. From the industry's point of view, one of the tallest hurdles in Canada is increasing willingness of regulators to pay attention to environmental interventions in areas that were thought to be open.

CAPP, urging federal authorities to take the lead, says Canadian policy should be explicit: "Make it clear when an area is opened to oil and natural gas exploration and development that a policy decision favouring development has been made, and that the remaining decisions relate only to how the activity will take place responsibly."

On one front, the Canadian gas producers want their country to become much more like the United States - less inviting to competition. CAPP is urging a departure from a long-standing Canadian tradition of governments collecting and making available to all comers technical information generated by drilling. The tradition stems from the century-old Canadian practice of retaining ownership of mineral rights in the Crown's hands and only "leasing" them to resource developers in trade for rentals, bonuses and disclosures of drilling results within a year or two, so that newcomers can be enticed into exploration and development campaigns.

Private mineral rights account for less than one-fifth of gas properties in the oldest, most established Canadian fields, and virtually none on the industry's northern and offshore frontiers.

The industry has generally accepted the tenure and disclosure system for work on land in the western provinces because the rules include "tight-hole" provisions that let discoveries be kept secret for a year or two, or long enough for properties to be acquired and drilling campaigns to be developed. But the system still rankles in offshore areas and in the north, where the industry says it much longer periods to secure competitive positions and move discoveries into development.

CAPP urged the Chretien administration to "review government practices that have a significant chilling effect on industry such as releasing valuable industry exploratory data filed with the Canada-Newfoundland Offshore Petroleum Board, the Canada-Nova Scotia Offshore Petroleum Board, and the National Energy Board to competitors. This practice fails to recognize that industry will only invest if it believes it can capture the full value of its investment, including selling exploration data to other companies."

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