Skip to main content

A TORC Oil & Gas pump jack is seen near Granum, Alberta, Canada May 6, 2020.

Todd Korol/Reuters

Jeremy McCrea, CFA, is director of energy research at Raymond James

On Monday, Ottawa delivered its second billion-dollar aid package with the impetus in helping the oil and gas sector. Similar to the first package a few weeks ago, the announcement was environmentally themed with less discussion on the more politically unpalatable nature of the lending programs.

Export Development Canada and Canada Development Investment Corp. will both now provide lending support to most names in the sector. Although these loan protections will help prevent bankruptcies, they do little to inject new capital into businesses and merely replace one lender with another.

Story continues below advertisement

As such, perhaps a different kind of bailout should be available for industry, but also taxpayers this time.

Ottawa should consider its position on tax pools. These are tax deductions that all companies, regardless of industry, earn from investing in new projects. Since the income trust era that ended in 2006, most conventional oil and gas companies have yet to pay any corporate taxes. This is a function of weak profitability because of insufficient pipeline capacity and low Canadian oil prices. It’s also because of the billions of dollars sitting in accumulated tax pools.

What if there was a way to eliminate these? As government-owned pipelines are constructed, Canadians should want to be sure energy companies will not only survive but also pay corporate taxes. Today, these tax pools are an asset for a company, with the government taking the offsetting liability. If there was an opportunity to buy these pools from companies for pennies on the dollar, the government’s tax collection of oil and gas revenue will increase meaningfully in future years.

In the current crisis, the federal government’s borrowing rate has dropped to 1 per cent, whereas most conventional energy companies will borrow at 15 per cent or higher today. This is the crux of the problem and why EDC and CDEV stepped in – to provide a more reasonable lending rate. Conventional borrowing is the equivalent of having to renew a mortgage on the credit card and, as such, would force any homeowner to start liquidating the furniture or any asset that could be sold.

For the mid-sized oil and gas sector, accumulated tax pools for public companies add up to $63-billion today. Given current commodity prices and the high cost of borrowing, however, most companies could likely be persuaded to sell their tax pools at about seven cents on the dollar. If the government has the ability to buy out these tax pools at distressed pricing, being $4.4-billion, given their low cost to borrow as well, there should be a strong incentive to do so.

Assume oil companies were willing to sell their tax pools for seven cents on the dollar. How effective could this be in resolving balance sheets for mid-sized operators? On average, companies could reduce their outstanding debt by 25 per cent. This would likely allow businesses to remain solvent and keep jobs in place, but also have new capital to reinvest when commodity prices improve. There is likely an opportunity to put new caveats in place for operators who sold tax pools as they relate to abandonment and emission standards as well.

Unfortunately, time may be of the essence, though. The super majors – multinational oil companies – still pay tax in Canada. The crisis has left many mid-sized producers vulnerable to takeover, and these better funded foreign entities may look to take advantage of the downturn and acquire these tax pools for themselves (through corporate acquisition) at very attractive prices.

Story continues below advertisement

Over all, the government has an opportunity to buy tax pool assets at distressed pricing today. Doing so would help the mid-sized oil and gas sector but would also prevent the $63-billion in tax deductions from being fully utilized by the world’s largest energy companies. As the old adage goes, you have to spend money to make money and buying back the tax pools could create a win-win situation for both taxpayers and the Canadian industry. It would also look a lot less like a bailout.

Your time is valuable. Have the Top Business Headlines newsletter conveniently delivered to your inbox in the morning or evening. Sign up today.

Your Globe

Build your personal news feed

  1. Follow topics and authors relevant to your reading interests.
  2. Check your Following feed daily, and never miss an article. Access your Following feed from your account menu at the top right corner of every page.

Follow topics related to this article:

View more suggestions in Following Read more about following topics and authors
Report an error Editorial code of conduct
Due to technical reasons, we have temporarily removed commenting from our articles. We hope to have this fixed soon. Thank you for your patience. If you are looking to give feedback on our new site, please send it along to feedback@globeandmail.com. If you want to write a letter to the editor, please forward to letters@globeandmail.com.

Welcome to The Globe and Mail’s comment community. This is a space where subscribers can engage with each other and Globe staff. Non-subscribers can read and sort comments but will not be able to engage with them in any way. Click here to subscribe.

If you would like to write a letter to the editor, please forward it to letters@globeandmail.com. Readers can also interact with The Globe on Facebook and Twitter .

Welcome to The Globe and Mail’s comment community. This is a space where subscribers can engage with each other and Globe staff. Non-subscribers can read and sort comments but will not be able to engage with them in any way. Click here to subscribe.

If you would like to write a letter to the editor, please forward it to letters@globeandmail.com. Readers can also interact with The Globe on Facebook and Twitter .

Welcome to The Globe and Mail’s comment community. This is a space where subscribers can engage with each other and Globe staff.

We aim to create a safe and valuable space for discussion and debate. That means:

  • Treat others as you wish to be treated
  • Criticize ideas, not people
  • Stay on topic
  • Avoid the use of toxic and offensive language
  • Flag bad behaviour

Comments that violate our community guidelines will be removed.

Read our community guidelines here

Discussion loading ...

To view this site properly, enable cookies in your browser. Read our privacy policy to learn more.
How to enable cookies