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Alberta to seek tax breaks for oil sands

Capital writeoffs for bitumen upgraders on wish list for struggling sector, as finance ministers prepare to meet

SHAWN MCCARTHY

00:00 EST Monday, December 08, 2008

OTTAWA -- The Alberta government is seeking federal tax breaks for the newly struggling oil sands sector, including accelerated capital writeoffs for upgraders, as sliding oil prices and high costs have caused companies to delay or shelve development plans.

Iris Evans, the province's Minister of Finance and Enterprise, plans to make the pitch next week at a meeting of federal and provincial finance ministers in Saskatoon, a spokesperson said.

"We want to talk about anything that will help stimulate the economy and encourage investment," spokeswoman Robyn Cochrane said.

Last week, Norwegian-based StatoilHydro ASA became the latest in a parade of companies to announce the delay or withdrawal of plans to build upgraders near Edmonton. Six months ago, there were as many as seven companies with such plans.

Virtually all those investments have now been put on hold.

StatoilHydro blamed lower oil prices, continued high costs in Alberta and regulatory uncertainty for its decision.

In his 2007 budget, federal Finance Minister Jim Flaherty announced that the government was phasing out a tax break that allowed companies to accelerate their writeoffs from their capital investment on the production side of the oil sands sector.

At the same time, Ottawa extended the so-called accelerated capital cost allowance to manufacturers and to renewable technologies.

In the runup to the next federal budget, set for Jan. 27, Alberta will be urging Ottawa to reverse that decision for oil sands production and to extend tax writeoffs to investment in upgraders, which process bitumen into synthetic crude oil.

The federal Finance Department estimated the tax break was worth $300-million at 2007 levels of activity.

Environmentalists had loudly called for its repeal, characterizing it as a subsidy for heavy greenhouse-gas-emitting projects.

But industry argues that government revenues are actually enhanced if the tax break allows companies to proceed with projects that would otherwise be shelved.

Aside from upgraders, companies have scaled back plans to expand bitumen production near Fort McMurray, Alta., but many projects are proceeding and Alberta now faces the prospect of shipping an increasing proportion of that production to the United States for processing.

Greg Stringham, vice-president of the Canadian Association of Petroleum Producers, noted the federal government has used the accelerated capital cost allowance in the past when it wanted to encourage investment.

"It's a tool that the federal government has been comfortable in using elsewhere," Mr. Stringham said.

"It's certainly something that may be helpful, and would be consistent with the thrust to keep upgrading in Canada," he added.

Robert Skinner, senior vice-president at StatoilHydro Canada, said there is no single factor that caused the delay of the upgrader but rather a combination of poor economic conditions and an uncertain regulatory environment.

Among the regulatory issues, he said, are pending climate change regulations in both the United States and Canada, as well as Alberta's soon-to-be-released energy strategy, which may include measures to boost processing of bitumen in the province.

Alberta remains a high-cost jurisdiction for major capital projects like upgraders - which can cost as much as $12-billion to build - and there is currently ample processing capacity in the United States, Mr. Skinner said.

Some 65 per cent of bitumen produced in the province is currently upgraded into synthetic crude oil, which can then be refined into petroleum products like gasoline and diesel.

Alberta doesn't expect all the bitumen produced in the oil sands to be upgraded in the province, and is just as keen to see further processing of the synthetic crude into higher-end products like gasoline and petrochemicals.

"Obviously, there is a concern when we see a number of projects delayed, deferred or withdrawn," said Jason Chance, a spokesman for Energy Minister Mel Knight. "But we're confident some of those projects will come back."

He said it was never clear that all of the upgraders that had been proposed could proceed without straining the capacity of the province's work force and environment.

The current pause should cool off the overheated labour market, which had contributed to making Alberta "a very high-cost place to do business," he said.

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