Federal Tories' Achilles heel may be oil sands

Posted December 20, 2006 in [Energy]

What might bring down the Conservative government? Income trusts probably won't do it. The NDP supports the trust clamp-down and the Liberals, in their ham-fisted way, tried to kill the market last year. Afghanistan? Unlikely, unless the body count soars. How about the oil sands? Now there's a file that could blow up in Stephen Harper's face and bring on an election.

For the opposition parties, the beauty of the oil sands is that you can point to them. The visuals are appropriately disturbing. You can see the gaping holes in the earth, you can measure the water flows, or lack thereof, as the projects drain the Athabasca River. You can measure the soaring carbon dioxide output and the consumption of natural gas, the clean fossil fuel that is being used to produce a dirty fossil fuel. You can ask the question: All this to keep American SUVs on the road?

The NDP, emboldened by the oil sands "traffic jam" warnings of former Alberta premier Peter Lougheed, would love to see development slowed, even stopped, until a green-tinged energy program is put in place. They want to end the tax breaks to oil sands projects. Stéphane Dion, the new Liberal Leader, has said the tax breaks should go only to projects that significantly reduce their carbon dioxide output and water consumption. The Pembina Institute estimates the industry reaps $1.4-billion or more in federal tax goodies every year. You might think oil prices above $60 (U.S.) a barrel would be enough incentive to dig the goo out of the ground, but the oil industry thinks otherwise.

Stephen Harper's Tories apparently have no plan to rein in their beloved oil sands players (to their credit, they have yet to satisfy Imperial Oil's yearnings for freebies to build the Mackenzie gas pipeline). The oil industry itself knows the Tories are vulnerable on the oil sands front. Its lobby group, the Canadian Association of Petroleum Producers (CAPP), is already on the offensive. But even it underestimates the resolve of the NDP and the Liberals to force the oil sands to clean up its act. The nine provinces that didn't have the dumb luck to sit atop a sea of tar know what's good for Alberta is not necessarily good for the rest of Canada.
CAPP's campaign was more or less outlined in a presentation before the House of Commons natural resources committee a month before Mr. Dion flew to fame on his magic green carpet. It centres on extolling the virtues of burgeoning oil and gas investment (total "employment impact" of 500,000 in Canada!) while trying to shred the Pembina Institute's claim that the taxpayer is subsidizing reckless oil sands expansions.

The main development incentive is the ACCA -- the accelerated capital cost allowance -- which, since 1996, has applied to both surface and underground mining in the oil sands. It allows the individual oil sands projects, though not the parent company itself, to write off all of their capital costs before they start to pay income tax. If the project's revenue is $1-billion (Canadian) and the capital expenditures are the same amount, the ACCA deduction can be $1-billion.

CAPP argues that the ACCA is a tax deferral, not a subsidy. That may be true, but it is nonetheless generous. Conventional oil and gas projects qualify for a 25-per-cent ACCA. It also argues the accelerated allowance is available to renewable-energy investments, so why not the oil sands? The answer is that it's in Canada's best environmental interests to speed up the development of green energy. Speeding up development of the oil sands is not.

There is a solution to this potential standoff between the oil industry and the federal and Alberta governments, on one side, and the opposition's green warriors on the other, and that's an ambitious energy policy that rewards clean, or cleaner, projects, and punishes dirty ones.

The ACCA should die. The oil sands need no artificial incentives to expand. The oil sands are vast and unique. Oil prices are high and there's a guaranteed market in the form of the United States. If the ACCA did not exist, the projects would still have been built. Any savings from eliminating the tax deduction could help fund research to find ways to reduce the oil sands' voracious gas and water needs and carbon dioxide output.

Alberta could do its part by raising the province's absurdly low royalty rates (1 per cent on new projects) and devoting some of the extra income to renewable energy R&D funds, oil sands technology development, home insulation programs and the like.

The CAPP members are open to all these ideas. But instead of reacting to them, they should propose them with zeal. As they say, the best defence is a good offence. The outcome could be sweet. It would deprive the opposition of some anti-oil-sands ammunition, and give the ruling Tories room to manoeuvre. Even sweeter, it would do the environment a favour.12th December 2006

Eric Reguly, GLOBE AND MAIL