The Oil Drum: Canada

Trust tax linked to private equity buyouts

The income trust structure was a major impediment to private equity firms buying up pieces of Corporate Canada, the Finance Department was told one day before Ottawa slapped a crippling tax on the sector.

"Private equity firms generally find it difficult to compete against the income trust alternative, said an Oct. 30, 2006, memo sent to Bob Hamilton, senior assistant deputy minister of tax policy at the Finance Department.

The memo was obtained by The Globe and Mail under access to information law.

For anyone at Finance who knew the trust tax was imminent, one conclusion that's easily drawn from the memo is that taxing trusts out of existence would likely usher in even more private equity buyouts by Canadian and foreign investors, which is what happened.

What Price Victory? (scroll down)

It’s reasonable to assume that, as professionals operating within a government department nominally charged with understanding affairs of finance, the folks working for Flaherty would have some rudimentary understanding of the way key players in the private space—private equity, for example—operate.

That is private-equity firms find undervalued, cash-generating businesses, strip them down and load them up with debt. Interest expenses basically wipe out taxes owed. That’s the nutshell.

What was that about “tax leakage”?

Either the professionals have no clue about their business, or they engineered the destruction of the trust sector. Secretive, incompetent and stupid is no way to run a government.

Sands are shifting for oil supply

The world continues to run rapidly out of oil and natural gas, which points to dramatically higher prices in a handful of years.

That was the message from Henry Groppe, a lanky Texan who advises oil companies and investors around the world about the world of prices. His firm, Groppe, Long & Littell, is based in Houston and was founded after he did stints as a chemical engineer for Saudi Arabia's Aramco, Dow Chemical, Monsanto and Texaco.

"The fundamentals always prevail, which is that the minute you start producing, you are depleting your resource," he told an audience of investors last week at a conference sponsored by Calgary's Pengrowth Energy Trust.

He showed production curves in the North Sea and Mexico that are catastrophically sudden in terms of their declines.

"This has a huge impact on the economies of Britain and Mexico," he said. "Britain became an oil importer this year for the first time in decades."

Oil production worldwide peaked months ago, but figures and prices don't reflect that yet because the production of liquids stripped from natural gas has been filling the gap, he said.

Income trust imbroglio

On April 9, The Globe and Mail reported that Flaherty's tax changes, which were supposed to have brought Ottawa more revenue, are having the opposite effect. Not only is revenue lost instead of gained, Canada is losing ownership of its resources in the process, and investment in the energy sector is decreasing. "It would only take slightly more than 15 per cent of the trust sector to be bought out by foreign private equity, and non-Canadian firms, before Ottawa was losing annual tax revenue equivalent to what it said eluded its grasp before the trust tax."

In other words, Ottawa could lose $5- to $6-billion annually. The article quotes Sandy McIntyre of Sentry Select Capital Corporation: "If so-called tax fairness was intended to accelerate the sale of Canadian companies to foreign entities, then it is a success. If it was intended to increase Canadian tax revenues, it is a failure."

Trust bounty slips away

Most income trusts that have sold themselves -- since Ottawa decided to increase taxes on these investments to stem tax leakage -- have ended up in the hands of entities that don't pay Canadian taxes.

Twelve income trust deals with a total enterprise value of $7.3-billion, including yesterday's proposed sale of KCP Income Fund, are pending or have closed since the end of October. Nine of these transactions, worth $5.76-billion, are set to end up in the hands of foreign private equity shops, foreign corporations, Canadian private equity or Canadian pension funds -- all outfits that don't pay taxes into Ottawa's coffers. The findings were made by Chris Rankin, an analyst at Canaccord Adams....

...."We're seeing cash flow moving from taxable Canadian investors' hands to offshore investors and non-taxable hands," said Sandy McIntyre, a fund manager at Sentry Select Capital Corp.

Mackenzie Gas Project to cost $16.2B

"It's not that surprising, given what we've seen around the world," Steven Paget, analyst with FirstEnergy Capital, said. "In the end, it makes a lot of sense that costs have gone up that much."

Spending throughout the oilpatch has soared in the last two years on rising supply and labour costs, supported by a doubling in commodity prices. However, in the last year, natural gas prices have dropped from earlier highs.

While Broiles would not reveal forward pricing scenarios the consortium was basing the project's economic feasibility on, he did indicate the group was expecting competitive returns from the feds.

"We expect double digit returns on this kind of investment, and we're nowhere near that," he said. "This project needs to be competitive with other opportunities that each of the (co-venturers) have, and it's that simple," he said.

The Mackenzie Pipeline Group has been in discussions with the federal government on several issues, including cost sharing for infrastructure, things like roads and airstrips that residents of the Northwest Territories would also use.

Mackenzie Valley more valuable if left undeveloped: study

The Mackenzie River region in the Northwest Territories is worth 10 times more in its natural state than the value industrial development would bring, says a Canadian Boreal Initiative study released in Ottawa on Wednesday.

Entitled The Real Wealth of the Mackenzie Region, the study calculated the region's ecological goods and services to be worth $448 billion if left undisturbed.

In comparison, it estimated the wealth generated by industrial development such as the proposed Mackenzie Valley gas pipeline and related resource extraction to be $41 billion.

The report is the first watershed-based natural capital review ever conducted in Canada.

Trichet warns of 'unstable' financial markets

Conditions in global financial markets look potentially "unstable", suggesting investors need to prepare for a "repricing" of some assets, Jean-Claude Trichet, president of the European Central Bank, said over the weekend in Davos.

The recent explosion of structured financial products and derivatives had made it more difficult for regulators and investors to judge current risks in the financial system, Mr Trichet said. "We are currently seeing elements in global financial markets which are not necessarily stable," Mr Trichet said, pointing to the "low level of rates, spreads and risk premiums" as factors that could trigger a repricing.

"There is now such creativity of new and very sophisticated financial instruments ... that we don't know fully where the risks are located." He added: "We are trying to understand what is going on but it is a big, big challenge."

Mr Trichet's comments reflect a debate in policymaking circles about the implications of the growth in derivatives.

Many investment bankers and some regulators and economists argued at last week's World Economic Forum in Davos that the growth of the $450,000bn (EU350,000bn, £230,000bn) derivatives sector had helped reduce market volatility and made the system more resilient to shocks by spreading credit risk. But other officials fear these instruments may be raising leverage and risk-taking to dangerous levels and keeping the cost of borrowing artificially low, potentially increasing the chance of financial crises.

Senior policymakers admitted it had become hard to track the risks because the sector is opaque, much activity occurs in unregulated hedge funds, and products shift rapidly across markets and between the boundaries of national central banks.

Andrew Crockett, president of JP Morgan international, said: "These new instruments ought to make markets more complete. But there is a lack of transparency ... we don't know how much leverage there is in hedge funds, for example."

Canada won't follow Bush on reducing oil consumption: Harper

"President Bush's speech . . . when he talked about these things was really talking about it in the context primarily of energy security and the United States shortage of energy and their dependence on foreign supplies of energy," Harper said perching forward as he sat in his sun-filled Parliament Hill office.

"That's not a problem here. Canada is an emerging world energy superpower. We have an abundance of all forms of energy. We're an exporter of virtually all forms of energy."

"Our need and our desire to deal with these things and set targets is really in the context of environmental improvement and environmental preservation and less in terms of energy security."

Will Harper end up having to eat those words?

ASPO Canada: Schreyer leads new oil, gas study group

FORMER Manitoba Premier Ed Schreyer is leading a new organization that will educate, and warn, Canadians about dwindling petroleum reserves and global warming.
Schreyer and a distinguished panel of opinion leaders have formed the Canadian chapter of the Association for the Study of Peak Oil and Gas (ASPO), a global network that is studying both the state of oil reserves and the impact that oil and gas have on the environment.

Schreyer noted that 10 OECD countries have already established APSO chapters, and are in their own ways educating the broader public about the fact that oil and natural gas reserves are very likely more than half exhausted.

Information on Peak Oil can be found at ASPO Canada

Massive Quebec hydro project faces native opposition

Quebec Premier Jean Charest announced the start of construction Thursday for the province's biggest hydroelectric project in a decade, the $5-billion Eastmain -1-A in northern Quebec.

But what would have been a ground-breaking ceremony were it held up north in James Bay turned into a news conference in Montreal after rumours that Cree opponents to the plan were going to protest....

....Mr. Charest said hydroelectricity is an economic development tool for Quebec that will benefit all of its citizens, including the Cree.

Construction of the dams will be completed between 2009 and 2012 and will create thousands of direct and indirect jobs.

Chief Matthew Mukash of the Grand Council of the Crees, lent his support to the project but admitted he did so with some sadness.

“I know that a lot of Cree people are concerned today and it's probably a very sad day for a lot of people. It's a sad day for me,” he said.