New U.S. tax rules and regulatory reforms are helping to lure capital investment away from Canada and to the United States, according to the Canadian Association of Petroleum Producers (CAPP), a leading industry association.
Tim McMillan, Chief Executive Officer of CAPP, said the sector is seeing companies, including Canadian firms, looking at allocating more capital dollars in the U.S. while investment in Canada is decreasing. In fact, Canada's top energy customer is now its leading energy competitor, he said.
“That's almost adding gasoline to a fire that's already burning," Mr. McMillan said of the recent U.S. tax reforms. “They are beating us on regulatory times. They are beating us on tax policy, on capital cost write offs. It is across the board.”
Mr. McMillan made the comments Monday at a press conference in Ottawa where the industry lobby group said Canada is falling behind in the global competition for oil and natural gas investment. The latest hit came in the form of U.S. Tax Cuts and Jobs Act, which signed into law late last year by President Donald Trump.
American legislators dropped the overall corporate income tax rate to 21% from 35%. They also made favourable changes that allow for tangible property — such as drilling costs, well equipment and pipelines — to be fully deducted over a much shorter time frame.
“It changes the economics of the big projects,” said Ben Brunnen, CAPP's vice president of oilsands.
That could prove particularly tough on the oilsands, he said, and benefit investment in offshore opportunities in the Gulf of Mexico as well as in the refining and petrochemical industries. CAPP is also watching to see whether U.S.-based companies will bring their earnings back home as the tax changes reduce the tax burden on repatriating capital.
But even before the U.S. tax reforms, investment in America's energy industry had surged ahead of Canada. Total capital spending on Canadian oil and natural gas was $45 billion in 2017, down 19% from 2016. Capital spending in the U.S. sector last year increased to $120 billion, up 38% from a year earlier.
Though controversial, the U.S. administration has introduced regulatory reforms aimed at spurring more growth in industrial activity. Investment in the U.S. shale sector is also booming with strengthening oil prices. Canada's oilpatch, meanwhile, is selling its oil at a steep discount due to shipping constraints and a lack of pipeline capacity. The energy sector has also complained of a slow-moving regulatory process, though some environmental groups believe that process has been biased toward approval. Ottawa announced an overhaul of the project assessment process earlier this month.
Calgary's ARC Energy Research Institute expects the Canadian oil and gas industry to spend about five per cent less in 2018 than in 2017. Separate analysis of the U.S. sector predicts about a 40% increase in capital spending.