In the annex to the federal budget, there is an analysis of a “high-impact scenario” in which the invasion of Ukraine does not end quickly, and the reduction in Russian energy exports leads to an even greater increase in world oil prices. and gas. . This would cause the price of North American oil, currently just below US$100 per barrel, to reach US$180 before the end of June.
This would contribute to a number of undesirable outcomes, including weaker economic activity and higher inflation. Even for Canada’s oil and natural gas industry, which would initially benefit, high prices would cause a collapse in demand by 2023.
But you wouldn’t know that this scenario is even a possibility based on much of the budget text. The Liberal budget, released Thursday, has a prewar feel, particularly in addressing the now crucial issue of energy security. The international drive to avoid dependence on Russian oil and natural gas, and the financing of death and displacement in Ukraine, is mentioned but not addressed in any substantive way.
There is still a strong focus on the green transition, which Finance Minister Chrystia Freeland accurately described on Thursday as “essential” but also “very, very expensive.” Key to Canada’s oil and gas sector are details of a tax incentive for carbon capture, utilization and storage, to be taken up by industry players in Alberta and Saskatchewan, who have the corporate clout to participate. in these large-scale projects. As of this year, it is expected to cost Ottawa $2.6 billion over five years.
This budget also contributes to the longstanding liberal promise to get rid of fossil fuel subsidies, what some call tax incentives, with the complete elimination of the continuous participation regime for the oil, gas and coal industry. But the change, which takes effect in 2023, will actually affect smaller players more than oil majors.
Under direct flow share regimes, resource exploration and development companies can issue shares at a premium foregoing their tax deduction in favor of investors. Those investors then reduce their own tax burden. Direct flow equity structures have been a lifeline for those small resource producers who would otherwise have difficulty raising capital and have historically helped build Western Canada’s scarce energy sector.
In an age of high prices and a very small cohort of junior oil and gas companies, this will matter less. But it still matters. And at the same time, the government is increasing tax incentives for companies that install clean energy equipment or extract the minerals needed for the production of technological devices and electric vehicles.
Beyond the contrast in tax treatment of a conventional oil well and a lithium mine presented here, there is a whole series of conflicts that could arise between the requirement of stable supplies of non-Russian oil and natural gas and climate policies. from Canada. .
In a pre-budget interview, Natural Resources Minister Jonathan Wilkinson said it’s possible to walk and chew gum at the same time, stressing that it would be grossly irresponsible to abandon climate change policies, even as the world churns over the Russian aggression.
At the same time, he said it would be wrong for Canada to tell Europe: “We are not going to respond to your urgent needs in a time of crisis. We’re just going to let you effectively freeze in the dark.”
A graph in the budget shows how Europe’s already high price of natural gas is up an impressive 57 percent since the start of 2022, while still beholden to Russia for supply. Mr. Wilkinson announced last month that Canadian producers will provide a small boost of oil and natural gas to free up supplies in the US and elsewhere, so those countries can, in turn, divert the fuel to Europe. .
Maybe there is more to come. Mr. Wilkinson said he will travel to Germany again in a month to talk more about how Canada can help Europe wean itself off Russian oil and natural gas, without building a series of assets that are eventually stranded by climate policies.
But there is little in Thursday’s budget to suggest that Ottawa believes energy security will remain a critical issue this year, let alone for years to come.
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Reference-www.theglobeandmail.com