Oil and gas spending drop linked to competitiveness gap with the United States

CALGARY — Canada’s competitive disadvantage with the United States is being reflected in lower spending plans by oil and gas producers, and Tuesday’s budget does nothing to change that trend, oilpatch observers say.

In a report released Wednesday, Statistics Canada said capital spending to extract oil and gas will fall for a fourth straight year in Canada in 2018.

Spending is expected to be about $33.2 billion, down 12 per cent from 2017, with the biggest declines in the oilsands sector where spending will fall by a fifth to $10.2 billion, the federal agency said, citing a survey of investment intentions.

It said the largest spending decline is anticipated in Alberta, down 12 per cent to $22.5 billion, but spending will also fall off in Newfoundland and Labrador, by 31 per cent to $1.7 billion; in British Columbia, by 8.7 per cent to $4.6 billion; and in Saskatchewan, by just under one per cent to $3.9 billion.

The numbers are falling because big projects are wrapping up and not being replaced, a trend that also points to Canada’s failing competitiveness with the United States, said CIBC chief economist Avery Shenfeld in an interview.

“The bigger picture is some Canadian companies are looking south of the border,” he said. “They’re seeing the bottlenecks in the ability to get product to the market, the lighter regulatory environment in the U.S. and the disadvantage in spreads between U.S. and Canadian oil benchmarks — all are reasons to devote capital elsewhere.”

In Tuesday’s federal budget, the government said more analysis was necessary before considering tax cuts to match the U.S., which announced in December it would drop its federal corporate tax rate to 21 per cent from 35 per cent.

“The finance minister says he wants to see evidence that Canada is losing its share of the corporate investment dollar to the U.S. and, if these numbers pan out, that could be part of the evidence that Ottawa needs to think about a response,” said Shenfeld.

Canada had a tax advantage over the U.S. until recently but that has evaporated, said University of Calgary tax expert Jack Mintz, adding there was “absolutely nothing” in the budget to address the issue.

The decline in spending is also being seen by the Canadian Association of Petroleum Producers, which estimates the industry will spend $45 billion this year, down about one per cent from 2017, and representing the fourth year of decline after $81 billion was spent in 2014. (CAPP’s numbers include spending on exploration lands and other costs that Statistics Canada doesn’t measure.)

The four-year decline in oilsands spending in particular is the worst since the early 2000s and can be linked to uncertainty related to market access, the regulatory burden and competitiveness with the rest of the world, said CAPP vice-president Ben Brunnen.

“There are jurisdictions around the world that are actively trying to attract capital. Canada is not one of those,” he said.

Brunnen said U.S. tax reform includes allowing immediate 100 per cent deductibility for certain capital expenditures, a move expected to spur investment in oil and gas, liquefied natural gas facilities and refineries — high-cost projects that compete directly with the oilsands for funding. Canada allows 30 per cent deductions for similar investments, he said.

Depressed Alberta natural gas prices and Canadian oil prices that haven’t kept up with increases in the U.S. are forcing Canadian producers to cut spending plans this year, said Jackie Forrest, senior director of research at ARC Financial Corp. in Calgary.

She said adjustments made over the past several weeks mean that she is changing her spending forecast for 2018 from a decline of two per cent to a drop of five per cent compared with 2017.

Patrick O’Rourke, managing director of institutional research at AltaCorp Capital in Calgary, said executives at the energy companies he covers are more frustrated with increased regulation, carbon taxes and delays in building pipelines than income taxes.

He said Tuesday’s “do-nothing” budget failed to address any of those concerns.

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