Government Subsidies and the Oil and Gas Industry
A look at Strathcona Resources Ltd.
Does the Canadian government subsidize companies operating in our oil and gas sector? According to research by science and technology journalist Emily Chung, between $4.5 billion and $81 billion of public funds are spent each year for assistance to the industry. But Chung notes how ambiguous definitions (what exactly is a subsidy?) mean that those numbers come with serious caveats.
I thought I’d make this discussion a bit more manageable by focusing on just one industry player: Strathcona Resources Ltd.
Strathcona is big. They produce around 185,000 barrels of oil equivalent each day and the company is currently ranked 98th among publicly traded companies in Canada in terms of market cap ($5 billion) and 88th for operating margin (21.59%).
What Is a Subsidy?
In the context of their report on the fossil fuel industry, the Department of Finance Canada asserts that “subsidies” can include:
tax expenditures,
grants and contributions,
government loans or loan guarantees at favourable rates,
resources sold by government at below-market rates
research and development funding
government intervention in markets to lower prices
The report defines tax expenditures as:
A type of tax measure, such as a preferential tax rate, exemption, deduction, deferral, or credit, with which the government aims to achieve public policy objectives through the tax system.
In the specific context of Strathcona, I could find no evidence that they’d received any direct public funding or “bailouts”. The government did recently announce a billion dollar partnership with the Canada Growth Fund (CGF) to build carbon capture and sequestration infrastructure, but that’s clearly an investment and not a subsidy. CGF is a Canadian arm’s-length crown corporation whose investments are managed by the Public Sector Pension Investment Board.
Strathcona’s 2023 Annual Report includes a reference to only one loan liability, but that had already been paid off and, in any case, wasn’t guaranteed by any level of government.
What Tax Benefits Does Strathcona Receive?
Many. The company’s annual report discusses its $6.1 billion “tax pool”. The pool is made up of deductions and credits that it can’t use this year, but that can be deferred for use in future years. Here’s how those break down:
The “Other Tax Deductions” item includes the Scientific Research and Experimental Development (SRED) deduction. That represents amounts spent on SRED-eligible research that companies can deduct from their payable taxes.
What Grant Funding Does Strathcona Receive?
Open Government data reports that only two federal grants were awarded to Strathcona, both in 2023. The first, worth $3.2 million, came from Natural Resources Canada as part of their Energy Innovation Program. Its purpose was development of Lindbergh Semi-Closed Cycle Flue Gas Recirculation and Carbon Capture.
The second grant was worth $12.5 million. It involved Environment and Climate Change Canada looking for an Orion Organic Rankine Cycle Waste Heat Recovery and Power Generation Project.
What Benefits Do Governments Receive From Strathcona?
Government subsidies don’t exist in a vacuum. As a rule, it’s assumed that subsidies to the private sector work as an investment whose primary payback is in profitable economic activity. Governments can also enjoy direct benefits.
In 2023, for example, Strathcona paid more than $405 million in crown royalties to provincial governments. They also spent $2.4 billion as operating expenses that included labor, energy costs, transportation, processing, and facility maintenance. Most of that money was spent in Canada.
A very rough estimate would suggest that total annual personal income taxes generated by people employed by Strathcona would be somewhere around $14 million. Vendors might pay another $13 million in corporate taxes.
There are also indirect benefits. For instance, those with jobs around the oil patch are, obviously, not unemployed and receiving EI benefits.
We could also take into account the larger impact Strathcona has on the general economy. Think about the food, shelter, clothing, and entertainment spending done by the families of Strathcona (and their vendors’) employees. That money, too, performs important social and economic service.
So does Strathcona receive more from government subsidies than the money they feed back into government accounts? Well, the $405 million in crown royalties are likely annual payments, as are the $27 million paid as income taxes. That’s what governments get. On the other side of the balance sheet, there is the $6.1 billion in deferred taxes and $16 million in grants. Those will probably be amortized over multiple years.
But does the word “subsidy” really describe tax benefits in any useful way? After all, there’s no company in all Canada - my own company included - that doesn’t deduct legitimate business expenses. And each and every Canadian receives similar benefits whenever they file their T1. For illustration, a Canadian whose total income happened to match the national average ($55,600) pays around $5,600 less in taxes each year due to various deductions and credits - including the basic personal amount.
Does that mean we’re all receiving government subsidies? There’s nothing wrong with thinking about it that way, but it does kind of strip the word of any real meaning.
Now you could reasonably argue that $6 billion is an awful lot of deferred tax, especially for a company with a 22% operating margin. And you could look to the tax code’s complexity for answers as to how this could have happened. But that’s not a subsidy in any coherent sense.
Think the tax code should be reformed? The line forms right behind me. However, the problem with playing around with the tax code is that changes apply to everyone, not just Strathcona or some other preferred target. Successfully anticipating how that might play out in dark and unanticipated ways isn’t the kind of thing for which governments are famous.
Now, as to the definition of subsidies. And various stuff.
I am familiar with various (non) "authorities" decrying massive tax subsidies to resource companies. I am a retired accountant and had to deal with various of the "subsidies" over a forty odd (some very odd) year career.
I absolutely agree that, as with many Canadian businesses, the resource sector does receive subsidies. I won't bore you (really, it would be boring!) with various considerations, blah, blah, blah. I would simply request that any reader consider whether, in calculating taxable income a company should be able to deduct ALL the costs that it incurs to earn or gain revenue.
Put differently, if a company needs to pay, say, $1,000 to drill an oil well (a bargain amount, to be sure!), should that $1,000 be an immediate deduction or should it be deducted over time or should it never be deductible? Consider that question and a large part of the complexity of taxation of not only the resource industry but also any other business in Canada becomes more clear.
My point is that clearly there are subsidies that businesses of all types might have available to them. Before folks argue that subsidies per se are good or bad it is necessary to understand them. So, are subsidies to encourage climate this, that or the other good or bad? My answer is yes and yes and no and no. It is a complex area and I applaud you for tackling the it.
The complicated nature of a company that uses a public and finite resource is worth thinking about. You can make an argument that companies who get private benefit from oil reserves, mines, forests, etc could possibly benefit from the resource being under priced. There is a difference between renewable resources and finite ones. I'm not an accountant. But I would imagine it quite complicated to determine if these prices have been set to maximize the value for the public.
I don't really understand why our taxes allow deductions for business expenses. I think it would be much simpler to tax revenue but at a lower rate. Then a business has less conflicting incentives. Keep costs low, because you can't use an expense to offset taxes.
Also, we do need to consider the problem of extractive industries and delayed costs. There are costs incurred for environmental cleanup after extraction and for the impact of fossil fuels to our climate. The nature of these costs is that they become known after the activity is over, so how can you price them into the activity? I think that there should be cash (not insurance premiums or other hypothetical guarantees) that are set aside to pay for damage to lands, environment and climate. If the costs of cleanup are less than what is set aside, that money goes back to the company. That incentives the company to keep the damage of their activity to a minimum.
Last point is around the economic impact of any company. Of course, we do need employers. However, to give a company credit for their economic impact is interesting. I think you could flip it to say, these workers have contributed their time and labour to help the shareholders of Strathcona make a profit. There seems to be this odd credit given to companies because they employ people, as if they were doing it for charitable purposes, as opposed to profiting from that labour. It's like a myth we all believe, even though we also talk endlessly about the market.
Thanks for this article!