US Tax Package Cheered by American Producers, Canadians Concerned

US president Donald Trump’s $1.5bn Tax Cuts and Jobs Act, passed December 20 by both the Republican-controlled House of Representatives and Senate, is being applauded by independent oil and gas producers for putting “America’s energy needs first.”

Barry Russell, CEO of the Independent Petroleum Association of America (IPAA), which represents producers responsible for 90% of the oil and gas wells drilled in the US, cheered the tax package as “an historic step in modernizing the US tax code.”

“The U.S. oil and natural gas industry is a capital-intensive industry,” Russell said in a statement. “We’re pleased to see the final bill includes pro-growth measures that support the unique nature of our businesses, while allowing producers to continue investing billions of dollars back into American energy and the US economy.”

The bill, which was passed 224-201 by the House and 51-48 by the Senate, now goes to Trump for his signature. It contains, Russell said, important and meaningful tax policies like strong cost-recovery provisions, the ability to fully expense capital expenditures, the repeal of the corporate Minimum Alternative Tax and a reduction in the average corporate tax rate to 21% from 35%, a move that could be worth hundreds of billions of dollars to US corporations.

The measures “will help our member companies reinvest into new production and innovative technologies that will keep American energy affordable for U.S. consumers and create opportunities for the U.S. workforce,” Russell said.

North of the border, Canadian producers breathed a sigh of relief when an earlier proposal for a border adjustment tax (BAT), which would have added a 20% tax to US imports of oil and gas, including from Canada, was left out of the tax package. But they remain concerned that the tax concessions afforded US producers could seriously impact the ability of Canadian producers to attract capital investment.

“The (reform package) will have a substantial impact, particularly on the competition for capital between Canada and the US for oil and gas investments,” Ben Brunnen, vice-president, oil sands, economic and fiscal policy for the Canadian Association of Petroleum Producers (Capp) told NGW in an interview. “What this effectively does is put us at a disadvantage for a sector that is already struggling.”

High on Capp’s list of concerns, Brunnen said, is the decreased corporate tax rate and the fact that US producers can immediately deduct 100% of their capital expenses. Canadian producers, depending on the classification of expense, are only allowed to deduct 30%.

“The rapid amortization of capital is one of the key drivers of net present value of (oil and gas) projects,” Brunnen said. “When companies can get their money out quicker they can start generating positive cash flow and it makes US plays look better than Canadian plays, relatively speaking.”

The new tax reforms in the US, he added, could increase returns there by as much as 20%, which means that companies with the optionality of investing either in Canada or the US will now look to move even more of their capital south.

“That’s what we are looking at, and I think government is starting to see that, but I don’t think they fully appreciate how substantial those changes are going to be,” Brunnen stressed. “Creating a favourable investment climate in Canada is absolutely a top priority for us. Competitiveness is the biggest single issue confronting our sector in 2018.”

Gary Leach, president of The Explorers and Producers Association of Canada (Epac), which represents junior and intermediate producers, echoes Brunnen’s concerns over the relative competitiveness of Canadian producers with the US tax reforms in place.

“Epac’s view has been that the pro oil and gas agenda of the Trump administration (is) going to make it more challenging for Canadian oil and gas producers to compete for investment capital in a North American market,” Leach said in an email to NGW. “The bill passed in Congress to reform the US tax code of course drops corporate tax rates significantly, and will make the entire US economy a more attractive place for investors to put money for future growth.”

The removal of the BAT, he added, was welcome news, but the retention of some tax provisions that had been under attack when Democrats held sway in the House, such as percentage depletion and deduction of intangible drilling costs, will preserve the competitive advantage of US producers.

“Our friends and competitors in the independent US oil and gas sector, I think, will feel the Republicans in Congress have given them a very nice Christmas present,” Leach said.