Oilpatch investment lured south as U.S. overhauls tax and regulatory regime, industry group says

Canada's energy industrystruggling with pipeline constraints and a costly oil glut says new American tax rules and regulatory reforms are helpingsiphon away capital investment to the United States.

Tim McMillan, chief executive of the Canadian Association of Petroleum Producers (CAPP), said the sector isseeing companies, including Canadian firms,looking at allocatingmore capital dollars in the United States while investment in Canada is decreasing.

In fact, Canada's top energy customer is now its leading energy competitor, he said.

"That's almost adding gasolineto a fire that's already burning,"McMillansaidof the recent U.S. tax reforms.

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"They are beating us on regulatory times.They are beating us on tax policy, on capital cost writeoffs. It is across the board."

McMillanmade the comments Monday following a press conference in Ottawa where theindustry lobby group said Canada is falling behind in the global competition for oil and natural gas investment.

The latest hit came in the form ofU.S. Tax Cuts and Jobs Act, whichsigned into law late last year by President Donald Trump.

Legislators dropped the overall corporate income tax rate to 21 per cent from 35 per cent.

They also made favourable changes that allowfor tangible property such as drilling costs, well equipment and pipelines to be fully deducted overa much shorter time frame.

"It changes the economics of the big projects," said Ben Brunnen, CAPP's vice president ofoilsands.

That could prove particularly tough on theoilsands, hesaid, and benefit investment in offshore opportunities in the Gulf of Mexico as well as in the refining andpetrochemical industries.

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CAPPis also watching to see whether U.S.-based companies will bring their earnings back homeas the tax changes reducethe tax burden on repatriating capital.

But even before the U.S. tax reforms, investment in America's energy industry had surged ahead of Canada.

Total capital spending on Canadian oil and natural gas was $45 billion in 2017, down 19 per cent from 2016. Capital spending in the U.S. sectorlast year increased to $120 billion, up 38 per cent from a year earlier.

Though controversial, theU.S. administrationhas introducedregulatory reforms aimed at spurring more growth inindustrial activity. Investment in the U.S. shale sector is also booming with strengthening oil prices.

Canada's oilpatch, meanwhile, is selling its oil at a steep discount due toshipping constraints and a lack of pipeline capacity. The energy sector has also complained of a slow-moving regulatory process, though some environmental groups believe that process has beenbiased towardapproval.

Ottawa announced an overhaul of the project assessment processthis month.

MarkSalkeld,president of the Petroleum Services Association of Canada (PSAC), which represents many of the companies do frontline workin the oilpatch, said he's already seen investment moving south.

He said he knows PSAC members that are selling off their older, used equipment in Canada and investing in other opportunities in the U.S.

"It's advantageous to go down there," Salkeld said.

BP's chief executive said this month the British energy giant would boost spendingin the U.S. after it lowered tax rates. Exxon Mobil recently announcedplans to invest $35 billion over five years, pointing to corporate tax cuts as a factor.

Calgary's ARC Energy Research Institute expects the Canadian oil and gas industry to spend about five per cent less in 2018 than in 2017. Separateanalysis of the U.S. sector predicts about a 40-per-cent increase in capital spending.

However, Jackie Forrest, director of research at ARC, doesn't believe U.S. tax reforms are the main driver.

"The reason the U.S. is spending more money than us in the oil and gas industry is because ... their companies have capital, they have wells that are economic and they're drilling those wells," Forrest said.

"And that is mostly dictated by the productivity of the wells, the capital costs.And tax rates were kind of well down the list in terms of what's driving the economics there."

Forrest also said that while the U.S. cut their corporate tax rate significantly, the movehad the overall affect of levelling the playing field with Canada, which had a clear advantage before.

In fact, she said one unintended consequence of the U.S. rate cut could be to spur other nations to follow suit,meaning the U.S. won't really have a long-term competitive advantage.

"We've already seen some discussions in Russia, China and Japan along those lines," she said.

"Canada could join that group."