It’s blindsided everybody’: New U.S. border tax could shut out Canadian oil
Claudia Cattaneo | January 17, 2017 | Last Updated: Jan 17 6:36 PM ET
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Bloomberg
Canadian oil and gas producers happy to see the end of the Obama era are quickly coming to the realization that the imminent Trump presidency could be even more challenging if he moves forward with the adoption of a border adjustment tax.
While other Canadian sectors have been vocal in condemning the proposal, “no sector … will be more affected than petroleum,†according to Colorado-based energy expert Philip Verleger, who has been studying the recommended U.S. tax code changes since last summer.
Verleger, principal of consultancy PKVerleger LLC, believes Canadian exporters of oil and oil products are in for a nasty surprise.
“Bluntly speaking, for oil the law’s passage is pure mercantilism. Exporters from Mexico, Canada, and the rest of the world could be shut out,†Verleger writes this week in a report to clients. “As Woody Allen would say, ‘Sorry, suckers’.â€
The border tax proposal is part of a tax reform spearheaded by Paul Ryan, speaker of the House of Representatives, and Kevin Brady, chairman of the House Ways and Means Committee.
Under the proposal, businesses that rely on imported inputs would lose the ability to deduct their costs in computing their taxable income.
The reform would effectively increase the cost of imported goods by 25 per cent, push up the price of oil produced in the U.S. and of U.S. petroleum products, and depress the price of imported oil, Verleger said in a paper for The Brattle Group, a U.S. consultancy.
The reform would slam Canadian oil producers hard because they export more oil to the U.S. — three million barrels a day — than any other country. Canada imports about 300,000 barrels a day from the U.S. to supply refineries in Central and Eastern Canada.
Bluntly speaking, for oil the law’s passage is pure mercantilism.
Surging U.S. oil production from tight oil discoveries means Canadian oil is not as vital as it used to be to meet U.S. demand. This month, the U.S. Energy Information Administration said in its 2017 energy outlook that the U.S., a net energy importer since 1953, is on a path to become a net energy exporter in the next decade.
The tax could could change oil flows between the two countries completely, Verleger said. U.S. producers would have the incentive to sell at home and no incentive to export.
The proposed changes and their impacts are just now beginning to dawn on the Canadian oil industry.
“It’s blindsided everybody,†Verleger said in an interview. “Canadian producers should be worried.â€
Among the most impacted could be New Brunswick-based Irving Oil Ltd., which refines oil in Saint John and exports it to the U.S. East Coast, as well as Canadian oilsands companies with refineries in the U.S.
The tax would make Trump’s promised approval of the Keystone XL pipeline to link the Alberta oilsands with U.S. coast refineries less attractive, since the refineries would lose the incentive to buy imported Canadian oil.
Indeed, Verleger said KXL would make sense under the new tax regime only if it continues as a pipeline to export Canadian oil from the U.S. Gulf.
A senior Canadian oil executive said the prospect of the border tax means a new layer of uncertainty.
Already, Canadian oil and gas companies are struggling to stay competitive with U.S. producers due to new carbon taxes in Alberta, a cap on oilsands emissions and methane reduction regulations that Trump is unlikely to match.
Recognizing the major impacts, U.S. President-elect Donald Trump told the Wall Street Journal Friday that the border adjustment provision is “too complicated.â€
Martin King, the director of institutional research at Calgary-based GMP FirstEnergy, said Tuesday the economic implications of such a tax are likely to dissuade Trump, as consumers would ultimately push back against rising consumer prices.
“It’s unclear how that’s going to shakeout, and the U.S. is still very dependent on Canadian crude oil imports, it’s still very dependent on natural gas imports from Canada,†King said. “That’s going to have to be clear to them, that it’s just going to make prices higher for everyone in the United States.â€
There are other dangers for the U.S. in relying so heavily on domestic production. Tight oil reservoirs are prolific and costs are decreasing, but production history remains short and whether production will continue to grow is a big question mark. U.S. companies have invested heavily in Canada and its energy infrastructure to the U.S. The tax would boost U.S. energy costs and discourage the repatriation of manufacturing. Environmental opposition to fracking is fierce.
Even if the border tax goes ahead, the proposal re-enforces that Canada needs to double-down to separate itself from U.S. politics, and its first step is to build Kinder Morgan’s TransMountain expansion so it can export its oil to Asia.
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ccattaneo@nationalpost.com
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Claudia Cattaneo | January 17, 2017 | Last Updated: Jan 17 6:36 PM ET
More from Claudia Cattaneo
Bloomberg
Canadian oil and gas producers happy to see the end of the Obama era are quickly coming to the realization that the imminent Trump presidency could be even more challenging if he moves forward with the adoption of a border adjustment tax.
While other Canadian sectors have been vocal in condemning the proposal, “no sector … will be more affected than petroleum,†according to Colorado-based energy expert Philip Verleger, who has been studying the recommended U.S. tax code changes since last summer.
Verleger, principal of consultancy PKVerleger LLC, believes Canadian exporters of oil and oil products are in for a nasty surprise.
“Bluntly speaking, for oil the law’s passage is pure mercantilism. Exporters from Mexico, Canada, and the rest of the world could be shut out,†Verleger writes this week in a report to clients. “As Woody Allen would say, ‘Sorry, suckers’.â€
The border tax proposal is part of a tax reform spearheaded by Paul Ryan, speaker of the House of Representatives, and Kevin Brady, chairman of the House Ways and Means Committee.
Under the proposal, businesses that rely on imported inputs would lose the ability to deduct their costs in computing their taxable income.
The reform would effectively increase the cost of imported goods by 25 per cent, push up the price of oil produced in the U.S. and of U.S. petroleum products, and depress the price of imported oil, Verleger said in a paper for The Brattle Group, a U.S. consultancy.
The reform would slam Canadian oil producers hard because they export more oil to the U.S. — three million barrels a day — than any other country. Canada imports about 300,000 barrels a day from the U.S. to supply refineries in Central and Eastern Canada.
Bluntly speaking, for oil the law’s passage is pure mercantilism.
Surging U.S. oil production from tight oil discoveries means Canadian oil is not as vital as it used to be to meet U.S. demand. This month, the U.S. Energy Information Administration said in its 2017 energy outlook that the U.S., a net energy importer since 1953, is on a path to become a net energy exporter in the next decade.
The tax could could change oil flows between the two countries completely, Verleger said. U.S. producers would have the incentive to sell at home and no incentive to export.
The proposed changes and their impacts are just now beginning to dawn on the Canadian oil industry.
“It’s blindsided everybody,†Verleger said in an interview. “Canadian producers should be worried.â€
Among the most impacted could be New Brunswick-based Irving Oil Ltd., which refines oil in Saint John and exports it to the U.S. East Coast, as well as Canadian oilsands companies with refineries in the U.S.
The tax would make Trump’s promised approval of the Keystone XL pipeline to link the Alberta oilsands with U.S. coast refineries less attractive, since the refineries would lose the incentive to buy imported Canadian oil.
Indeed, Verleger said KXL would make sense under the new tax regime only if it continues as a pipeline to export Canadian oil from the U.S. Gulf.
A senior Canadian oil executive said the prospect of the border tax means a new layer of uncertainty.
Already, Canadian oil and gas companies are struggling to stay competitive with U.S. producers due to new carbon taxes in Alberta, a cap on oilsands emissions and methane reduction regulations that Trump is unlikely to match.
Recognizing the major impacts, U.S. President-elect Donald Trump told the Wall Street Journal Friday that the border adjustment provision is “too complicated.â€
Martin King, the director of institutional research at Calgary-based GMP FirstEnergy, said Tuesday the economic implications of such a tax are likely to dissuade Trump, as consumers would ultimately push back against rising consumer prices.
“It’s unclear how that’s going to shakeout, and the U.S. is still very dependent on Canadian crude oil imports, it’s still very dependent on natural gas imports from Canada,†King said. “That’s going to have to be clear to them, that it’s just going to make prices higher for everyone in the United States.â€
There are other dangers for the U.S. in relying so heavily on domestic production. Tight oil reservoirs are prolific and costs are decreasing, but production history remains short and whether production will continue to grow is a big question mark. U.S. companies have invested heavily in Canada and its energy infrastructure to the U.S. The tax would boost U.S. energy costs and discourage the repatriation of manufacturing. Environmental opposition to fracking is fierce.
Even if the border tax goes ahead, the proposal re-enforces that Canada needs to double-down to separate itself from U.S. politics, and its first step is to build Kinder Morgan’s TransMountain expansion so it can export its oil to Asia.
Financial Post
ccattaneo@nationalpost.com
twitter.com/cattaneooutwest
Find Financial Post on Facebook
Featured Contributors
Claudia Cattaneo
Western Business Columnist
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