RBC: Oil and gas companies poured $48 billion into government coffers


That could reach $64 billion in royalties and taxes in 2023 if oil prices stay high

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Windfall revenues from energy royalties and corporate taxes are pouring into public treasuries, offsetting the need for a Canadian version of a “windfall tax” on oil and gas companies that is high on the political agenda in Europe and elsewhere, a Royal Bank of Canada analyst argues in a new report.

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Soaring energy prices have propelled taxes and royalties paid by Canada’s state-owned energy companies to around $48 billion this year, a 200% year-over-year increase, analyst Michael Harvey at RBC Capital Markets, the investment banking arm of Royal Bank, calculated.

Harvey estimated that the contribution of publicly traded Canadian oil and gas companies to federal and provincial revenues will rise to $64 billion in 2023. This should deter politicians from following the UK’s lead and demanding an additional share of soaring energy prices.

“The mechanisms are already in place — in royalty and tax systems — to provide windfalls to governments when prices are high,” Harvey said in an email.

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In his research note, which was sent to RBC clients on July 19, Harvey said rising crude and natural gas prices are boosting corporate profitability and setting the stage for royalties, taxes and fees. higher energy-related issues at all levels of government.

“We present these numbers to contextualize the ‘fallout tax’ that we consider to be already established, and to help frame the conversation regarding the impact of Canadian energy policy decisions on Canadians,” Harvey wrote in the note to investors.

The $64 billion in royalties and taxes projected in 2023 are based on the bank’s assumption that North American benchmark West Texas Intermediate (WTI) crude could average $114 a barrel next year. This estimate could be low, as Harvey’s figures exclude taxes paid by private companies and international majors outside of RBC’s coverage universe.

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Oil and gas royalties are generally based on sliding scale formulas which see rates increase significantly at higher commodity prices.

The war in Ukraine, which has prompted international efforts to curb Russian energy exports, and a surprisingly strong global recovery from the COVID recession have driven prices higher because demand has exceeded supply. Tar sands royalties have also been supercharged because a number of major projects have reached “payment” status, where rates increase after capital costs have been recovered. In Alberta, where 90% of royalties are payable, the province could potentially see provincial budget surpluses top $15 billion, Harvey wrote.

“It’s hard to underestimate the importance of rising incomes for Alberta,” said University of Calgary economist Trevor Tombe. “The reversal of (Alberta’s) budget balance from deficit to fairly massive surplus that we are looking at this year is easily, by far, the biggest change in the provincial budget balance in Canadian history – and it is entirely because of the variation in resource royalties.

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Canadian energy companies are also expected to pay about $9 billion in federal corporate taxes this year, representing 13% of the federal government’s total corporate income tax forecast, Harvey said.

The RBC Capital Markets analysis comes as governments around the world experiment with temporary tax regimes on oil and gas companies’ windfall profits amid rising inflation and soaring energy costs.

The UK government introduced a temporary 25% tax on oil and gas profits in May to help pay for a multi-billion dollar emergency aid package aimed at offsetting the rising cost of living. Italy implemented a similar single tax this spring, and Spain followed Italy’s lead earlier this month.

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Progressive lawmakers in the United States have been pushing for an additional tax on profits made by US oil and gas companies since prices began to soar last year. In June, NDP Leader Jagmeet Singh proposed taxing excess profits from the oil and gas and other sectors and redistributing the money directly to Canadians.

So far, Prime Minister Justin Trudeau’s government has avoided a windfall tax on the oil industry, despite imposing a 15% tax on major banks and insurers on revenues over $1 billion in 2021 to help cover pandemic recovery costs.

Some economists say windfall fiscal measures are blunt instruments that can sometimes exacerbate the conditions they are meant to alleviate. Critics warn that windfall oil and gas taxes will only discourage capital investment in the sector at a critical time when energy is in high demand globally.

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Admittedly, this argument is less compelling during the current price spike, as companies deploy their profits for buyouts and dividends, rather than capital projects.

Still, the most reasonable approach for governments looking to raise resource revenues is to raise the cap on corporate tax rates or royalty frameworks, Tombe said. “We already have in the royalty system a tax rate that increases as oil prices rise,” he said. “So in a way it feels like ‘windfall taxes’ – it’s just not done in an ad hoc way. It’s explicit, it’s formula-based, it’s transparent.

“Therein lies, I think, the problem (with a windfall tax): the fact that a government enacts an ad hoc tax out of nowhere based on what it thinks the rate should be – it’s problematic because it creates uncertainty,” Tombe said.

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Past oil price spikes have tempted the federal government to impose taxes that have angered industry and oil-producing provinces, particularly Alberta.

During the energy crisis of the 1970s, Pierre Trudeau’s government introduced a budget provision that made provincial resource royalties a non-deductible expense for federal income tax purposes, inflaming relations between Ottawa and the provinces of the Prairies about resources.

The infamous National Energy Program (NEP) of 1980 saw a series of new taxes imposed directly on oil fields, including an 8% oil and gas revenue tax. The program lasted five years, diverted billions of dollars from Alberta and fueled western alienation for decades.

Alberta Energy Minister Sonya Savage said last month that if Ottawa enacts a one-off oil and gas tax, it would be seen as an “extreme act of aggression” against the authority. provincial constitutional.

Twitter [email protected]: @mpotkins

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