On April 9 I wrote to Finance Minister Morneau on the urgent matter of extending support to oil and gas workers similar to what is being contemplated for other industries, like airlines, but with specific solutions for this industry.
April 9, 2020
The Honourable Bill Morneau, P.C., M.P.
Minister of Finance
House of Commons
Ottawa, Ontario K1A 0A6
I write you with the utmost urgency, as I and so many others in Canada await your announcement regarding the details around financial assistance that your Government will offer to the oil and gas industry (and associated industries) in the midst of the current demand destruction and supply glut.
You are keenly aware of the state of our Canadian oil and gas industry, and the hurdles it has encountered (unlike the industry in the rest of the world) in coming out of the last period of low commodity prices – over five years ago. While prosperity has arrived in so many jurisdictions, Canada’s unique constraints have contributed to that prosperity not being shared by exploration and production and service companies operating in Canada. The total amounts associated with the unjustified discount (differential) accorded to Canadian resources’ cross-border trade would rival the Government of Canada’s fiscal deficits. Add to this the foregone taxes, royalties, employment, and reinvestment opportunities, and it would gall any informed patriot.
The current cratering of world oil prices, caused by several international factors, has arisen outside the control or foresight of any management team in any industry. We know that the Government of Canada must act, in so many ways, to avert the collapse of several industries that have been hit by our current crisis. We accept that supporting our industries in these unprecedented troubled times is a far better approach than watching them collapse, only to have them re-start from a weaker base after this crisis ends.
We need to take the same approach with our oil and gas industry. I ask you to consider the similarities of helping the middle-class Canadians employed in our country’s historically largest export industry and largest contributor to public accounts with the same spirit of support that will be required for our essential service industries going forward. In this respect, the oil and gas industry is the first of many industries that will require government intervention in this difficult time in order to emerge as a healthy contributor to our nation’s economy after the COVID-19 crisis. Let’s treat this vital sector with the same concern and respect we treat all Canadian industries.
An advantage we can use with leading this support for the oil and gas industry is the flexibility in the options available at this point. I have examined a few solutions worth considering. As there are different concerns in various parts of the industry, I would like to recommend we examine two very plausible ways of extending assistance.
Exploration and Production (E&P) Companies
I extrapolate from public company data and arrive at a value of approximately $100 Billion in tax pools available amongst the E&P companies – mostly held by the mid-cap producers. It is important to note that these tax pools (amongst their various categories: Canadian Exploration Expenses; Canadian Development Expenses; Canadian Oil and Gas Property Expense; Undepreciated Capital Costs, and Non-Capital Losses) arise from an industry that has expended these funds in bringing a valuable resource to market, and paying royalties and leasehold bonuses to the taxpayer owners of that resource in the effort of making a profit.
In short, funds have been spent by management making economic decisions, despite a constrained domestic industry. Without government action to see these companies through this crisis, the losses associated with the earlier efforts will neither be created nor destroyed, but transferred to the new owner of the assets. Much will be lost in the process – the livelihood of people, the costs of insolvencies, and the cascading liquidity issues that will impact suppliers, financial service companies, and all tertiary support – that could be reasonably avoided with an assistance package that recognizes the industry’s health, going forward, is of fundamental importance.
E&P Practical Solution:
In this light, I will join with the explorers and producers in requesting a financial solution that will resonate with all Canadians. The tax pools are assets on the companies’ balance sheets; they are available for compensation; and Canadian taxpayers would benefit from these tax pools being removed (as a liability) from any go-forward deductions, as the industry becomes more profitable. This is a win for the Canadian taxpayer, avoids significant and unnecessary costs, and will allow our world-leading resource industry to be well-positioned as we emerge from the COVID crisis.
There are $100 billion of tax pools the Government of Canada can pre-fund – and apply a risk-weighted cost of capital to the advance. The beauty of this approach to the Canadian taxpayer is the virtual certainty of repayment. There is all upside in this scenario.
You will have noted the publication indicating that a large portion of ‘marginal’ barrels of oil production in the world comes from Canada. My opinion is that such analysis ignores the consideration of the long-term sustainability of our competitors in North America – but that is another matter. What is important to note in that analysis is the cost burden of Canadian producers – costs which include regulatory burden, world-leading environmental practices, taxes and royalties, and some of the highest-quality, well-treated work force on the planet. This social contract that we have constructed does not come cheap – and we are proud of it. Let’s sustain it.
Petroleum Service Companies
These companies are at a critical point. The nature of their work involves committing funds, people, and equipment to perform services for oil and gas producers. In Canada, often, the winter period is the most intense drilling period, so these companies have been as busy as they will be all year – until the collapse. Although people will be sidelined, unfortunately, for some time (due to the cutback in capital expenditures by E&P companies facing a world supply glut), the financial asset at risk is the balance sheet. Every one of these companies has accounts receivable owed by the producers – and if the producers can’t pay their bills, these firms will all be financially at risk of failure – no matter what operational actions they take. Please recognize that funds only flow when funds are available.
Service Company Solution:
In a normal world, all the accounts receivable on the balance sheets are collectible. The issue will be having those funds delivered in a timely manner. As long as the E&P companies are financially stable and can pay their payables, the service companies will survive – albeit in a reduced capacity for the near future. But please recognize the important contribution this sector adds to our economy: it is part of the technological leading edge of an evolving world industry. If we lose all these important value-adding, competitive, technological companies to other jurisdictions, our ability to influence the oil and gas industry’s direction going forward – particularly with respect to environmental adaptation – will leave Canada on the outside looking in on a world of change. Maintaining this sector is essential.
The petroleum service industry has a tax pool base much smaller – less than $1 Billion – yet getting funds to these companies is critical. The better solution would be to ‘factor’ their receivables – which would get funds directly to these companies as quickly as possible – without the time lag of moving the funds through the E&P companies to pay their invoices. The Government can thus act as the collector of these invoices, and spare the insolvency (and again, the requisite costs of this process) of a crucial Canadian industry.
Please recognize the cascade of value destruction any inaction or further delay will cause:
1. E&P companies will become insolvent
➢ Costs of insolvency
▪ Insolvency professionals WILL get paid (before financial services)
➢ Employees will lose their livelihood
▪ Government programs will be further strained
▪ Mortgages will not get paid
• Financial service providers will suffer
▪ Families will be strained
➢ Service companies will not be paid by E&P companies
❖ Service companies will become insolvent
• Insolvency professionals WILL get paid
❖ Employees will lose their livelihood
• Government programs will be further strained
• Mortgages will not get paid
o Financial service providers will suffer
• Families will be strained
❖ Suppliers will not be paid
• Suppliers’ will become insolvent
o Insolvency professionals WILL get paid
• Employees will lose their livelihood
o Government programs will be further strained
o Mortgages will not get paid
▪ Financial service providers will suffer
o Families will be strained
This will continue unless we intervene. I am confident our intervention will be short-term in nature, as in less than two years.
Oil and gas and its related industries are globally significant. Inasmuch as our oil and gas and service sector is facing the economic slowdown associated with the COVID-19 crisis, it is also the victim of a manipulation of world prices for its resource – undertaken by world players that have no regard for the well-being of Canadians, nor do they share our views on environmental concerns or social equity. We yield the field to these manipulators at our own future peril. Ceding our place in the world order is not something to which Canada should benignly acquiesce.
For your colleagues who have shown reluctance to help Canadians in our oil and gas industry, I suggest that you ask them to consider why the hundreds of thousands of middle-class taxpaying Canadians in this sector do not deserve the same approach to preserving their livelihoods that we will provide to some of our other industries. Airlines come to mind. The cost to the country of allowing airlines to fail, to have new entities start over in their place to meet the eventual demand, is recognized as a destruction of net value. The oil and gas sector deserves exactly the same consideration. To do otherwise would display selective prejudice unbecoming of a Government that is working for all Canadians. Please remind them.
The Prime Minister’s calls for a ‘Team Canada’ approach to our current crisis. This is an issue with which I can provide significant help.
Canada cannot wait on this. The cost of delay is huge.
Greg McLean, M.P.
cc: The Honourable Seamus O’Regan, P.C., M.P.
The Honourable Pierre Poilievre, P.C., M.P.
Shannon Stubbs, M.P.