Oil downturn complicates taxation

Rural life in Alberta is an entanglement of the oil and gas industry and agriculture. There is no separating the two.

Generations of development have left most families with a foot in both sectors.

On a municipal government level, COVID-19 has laid bare decades of imbalance between the two.

During a six-year downturn in oil and gas, industry has scrimped on every line of the expense ledger, save one — taxes paid to counties and rural municipalities.

To preface, while the industry was developing fields across the province during the natural gas boom up to 2008 and oil boom up to 2014, the burden of rural infrastructure development and maintenance was, fittingly, the responsibility of oil and gas producers. This was only fair. Industry increases traffic volumes and then industry pays to upgrade roads.

However, while provincial coffers grew through royalty payments, municipal bodies were left with only one lever — property taxes on oil and gas assets — to bear the infrastructure development and maintenance costs.

Industry did not balk at this at the time. From the producer side, it was “go along to get along.”

For context, in 2018 oil and gas property taxes comprised 71 percent of the operational budget in the Municipal District of Wainwright compared with two percent coming from provincial transfers. Industry paid $2.57 per barrel of production in property taxes while the MD received six cents per barrel from the province. Meanwhile, the province received 100 percent of royalty revenue from more than 24,000 barrels per day of production within the MD.

The theme of this imbalance is the same as most Albertans’ thoughts on the federal equalization formula. Rural governments bear the costs and impacts of enriching a higher level of government’s coffers for an inequitable return.

At present, there is a cap of $60,000 for assessed value for a quarter section of farmland within Alberta. For those unfamiliar, some arable quarters can sell for 10-fold of this capped value. Meanwhile, the assessed values for oil and gas assets remain comparable to 2014 levels despite the market value of the wells being $1 in some cases.

Two factors are combining to bring this imbalance to the fore.

Firstly, there have already been oil and gas producer bankruptcies caused by municipal tax bills. One producer even tried to barter wells to the county to pay the bill. The market effects of the COVID-19 pandemic will accelerate financial insolvency for weaker producers.

Secondly, changes in oil and gas liability regulation will provide producers the latitude to focus asset retirement spending on higher cost jurisdictions. These two factors will permanently erase the tax base in higher cost municipalities, either through insolvency or reclamation.

I believe it is commendable that the current provincial government is trying to address this imbalance. There is no political win for them on this issue. Both sides of their perceived base are at odds. They will not gain votes no matter the resolution.

My respect for them on this issue is based on looking the hard issues of governing in the face rather than focusing on the impacts to opinion polls.

On a rural level, no one on either side of the industry-agricultural divide is looking for a public knife fight over this issue, most obviously because many of us are on both sides of it.

Adam Waterman is president of the Lloydminster Oilfield Technical Society.

About the author

Adam Waterman's recent articles

explore

Stories from our other publications