A New Regime For The Frontier

Abstract

Abstract It's a new ball game for the oil and gas industry in the frontier. On October 30, 1985, Energy Minister Pat Carney released a package of measures which will replace virtually all of the measures contained in the now defunct National Energy Program insofar as exploration, development and production in the frontier is concerned. No aspect of doing business in the frontier will escape untouched by the wide range oj proposals in the new regulatory framework. Introduction It has taken the present Federal government less than one year to demolish the former government's much loathed National Energy Program. As reported in the last edition of Tax Topics, the March 1985 Western Accord and subsequent Federal and Provincial budgets started the demolition process, virtually revamping all aspects of the NEP except for he rules applicable in the frontier. In ctober this year, Energy Minister Pat Carney drove the final nails into the NEP's coffin upon announcing a new set of incentives and tax and other regulatory provisions for operations in the frontier. A 19-page paper entitled "Canada's Energy Frontier" describes the Federal government's aspirations, plans, and new rules and regulations for oil and gas in the frontier. There seems to be unanimity in the oil patch that the complexion of such future operations will be notably different under the new regime. Incentives The proposed changes to the incentive system for exploration in the Canada Lands will probably have the most dramatic effect on the way of doing business in the frontier in the future. Under the NEP's Petroleum Incentive Program (PIP), an enterprise with a minimum 75% Canadian ownership rating was entitled to cash grants equal to 80% of eligible exploration expenditures. A less than 50% Canadian owned entity could obtain cash PIP grants of 25% of exploration costs. This meant, for example, that the after-tax cost to a wholly Canadian owned corporation of exploring in the frontier was $.10 on the dollar, while the comparable after-tax cost to a non-Canadian corporation was $.37 1/2 on the dollar. Two phenomena of the NEP era are clearly attributable to this cash grant system. First, the relatively cheap after tax cost of frontier exploration led to a remarkable shift in exploration spending rom the conventional provincial lands to the frontier. Second, the preferential treatment accorded Canadian ownership gave rise to some interesting bedmates, with non-Canadian owned multi-nationals entering into highly complex and convoluted arrangements with smaller Canadian owned concerns in order to optimize the utilization of PIP grants. Over-all, the result was considered by many to be a politically driven exploration business, as compared to a market driven one. One of the evident goals of the proposed new incentive system is to restore the exploration decision-making process to the market. Under the new system, PIP grants will be replaced by a royalty and tax credit system. The first $5 million of eligible exploration costs per well will be eligible for a 25% royalty credit.