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“Who will stand up for Alberta’s persecuted billionaire community” the headline of a popular political blog site sarcastically blared after the story broke last month about how Calgary entrepreneur N. Murray Edwards had apparently relocated his residence to London for tax reasons. The article opened with the sentence, “A billionaire is moving from Calgary and we should all be worried, the newspapers tell us.” Obviously, some don’t think this is a problem.
The story broke in the
Calgary Herald on March 24 after publicly traded Magellan Aerospace Corp., a company controlled by Edwards, disclosed in its annual year-end filings its chairman resided in London, England, not Calgary / Banff as had previously been the case. A few days later in its Annual Information Form, oil and gas producing giant Canadian Natural Resources Limited (CNRL) released the same information about its executive chairman.
The Herald wrote, “Two sources familiar with the situation who asked not be identified said Edwards is switching his residency to the U.K. for tax reasons.”
The increasingly reclusive Edwards has yet to publicly confirm or deny his departure from Calgary. But it is illegal for listed companies like Magellan and CNRL to knowingly publish false information in their regulatory filings. Therefore, it is safe to assume Mr. Edwards has indeed physically left Calgary. Whether rising corporate and personal income taxes are the reason is only speculation. However, it is not speculation to observe wealthy and successful entrepreneurs like Murray Edwards pay very close attention to tax rates. That’s why they are wealthy and successful.
Canada’s battered oilfield services (OFS) sector should certainly be worried when a serial entrepreneur and wealth creator of Murray Edwards’ reputation concludes for whatever reason Calgary is no longer his preferred place of residence. Besides CNRL, Edwards has been a driving force behind one of Canada’s most successful oilfield service companies, drilling giant Ensign Energy Services Inc., plus other high-profile investments like the Calgary Flames hockey team and Resorts of the Canadian Rockies.
In the past 20 years Calgary has become the hub for headquarters of every major Canadian exploration and production (E&P) company and the majority of the larger OFS companies. In turn, Calgary has attracted or developed a massive financial, technological, legal and administrative support infrastructure to allow these companies to support domestic and global operations from a city once best known for its annual rodeo. This century, Calgary has grown into one of the world’s most important oil and gas centres and is now comparable to places like London and Houston. When one of Calgary’s most important company builders and dealmakers decides to leave, everyone in the oilpatch should wonder why.
When people talk about how the Canadian oil and gas industry began a near-continuous 20-year growth spurt in the mid-1990s, the most obvious reference point is commodity prices. While oil didn’t do that well until the 21st century, natural gas certainly did. Deregulation of gas and the opening up of U.S. export markets through the construction of new pipelines unlocked opportunities for all participants. Oil got more attention with rising prices and oilsands expansion early last decade. While there were small dips in 1989-99, 2001-02 and 2008-09, the general trajectory for Canada’s oilpatch was upwards until last year.
Another big growth driver was major changes to Alberta’s corporate and personal tax regime in the early 1990s. Following nearly 15 years of difficult times following the National Energy Program of 1980 and the oil price collapse of 1985, Alberta was in tough shape. Deficits had skyrocketed. The economy was stagnant. There was little, if any, capital flowing into Alberta.
To improve the economy, the government of Premier Ralph Klein reduced corporate tax rates, introduced a flat personal income tax rate and slashed provincial government spending. The message to the world was Alberta was a great place to invest. Taxes for corporations and executives would be low and very competitive. Two major royalty reviews – 1991 for conventional oil and gas in 1996 for oilsands – ensured this key element of the fiscal regime was globally attractive. With government spending under control, investors could be confident the fiscal regime would remain competitive and stable.
The program was called “The Alberta Advantage.” While it was not certain at the time it would work, what followed can only be described - and would frequently be described – as a modern economic miracle.
The first sign this strategy would be successful occurred in 1996 when venerable Canadian Pacific Railway Limited (CP) - the ribbon of steel across Canada that helped create Calgary and arguably Canada’s longest established major corporation - moved its head office to Calgary from Montréal. This decision was precipitated by the actions of two provincial governments. Alberta was selling itself as open for business, while Québec was governed by the Parti Québecois, which had barely lost a referendum to separate from Canada October 30, 1995.
Another major move that further legitimized The Alberta Advantage was the 2004 decision by Imperial Oil Limited (IOL) to move its corporate head office to Calgary from Toronto. Montréal and Toronto have long considered themselves Canada’s urban cultural epicenters while Calgary has long been regarded by both cities as a redneck cultural backwater. But when the executives of CP and IOL learned they would earn the same salary but pay lower personal income taxes and no provincial sales tax, most accepted they ought to at least give Alberta a try. Most came to like Calgary and Alberta very much and are still here.
Alberta’s oil boom continued to the point that some started taking it for granted. In 2007 the Alberta government concluded it could substantially raise oil and gas royalties without affecting business decisions or investment. The ill-fated New Royalty Framework was all but entirely reversed by mid-2010 spurring another round of growth and investment. At the same time it tried to raise royalties, the province abandoned fiscal probity and the province hasn’t balanced the budget since. Ultimately, all these things matter to keep the prosperity train on the right track.
Which brings us back to Murray Edwards and 2016. The new NDP government won the provincial election in May of 2015 led by premier Rachel Notley who said many times, “When times get tough, those who are profitable should be paying a little bit more.” The corporate tax rate was increased by 20% on July 1, 2015. People in upper income brackets also faced higher taxes. The 10% flat personal provincial tax rate that worked so well for so long is now 50% higher at 15% for those earning $300,000 per year or more, a target group of The Alberta Advantage in the 1990s.
Campaigning on a similar strategy of supposedly helping lower and middle income earners by raising taxes on the more successful, the new Liberal administration in Ottawa has jacked its rate on higher incomes from 29% to 33%. This means Alberta’s marginal tax rate for top earners has jumped from 39% to 48%, a 23% increase. While defenders of Alberta’s tax hikes continually cite how the new rates are still lower than in other provinces, those in favour of higher taxes are not asking if the new rates are still low enough to justify moving the entire head office and executive team and uprooting families from all across the country. You need every tool in the toolbox to make these decisions attractive and minimize risk.
This has been tried before in other jurisdictions and ultimately the costs have been greater than the perceived benefits. One of the better-known countries to raise taxes and spending but ultimately reverse them out of economic necessity is Sweden. Back in the 1970s, that country had cranked its marginal tax rate to 70% or more, causing well-known individuals like tennis star Bjorn Borg and filmmaker Ingrid Bergman and pop band ABBA to flee the country as tax refugees. As result, Sweden collected significantly less tax revenue than central planning had forecast. According to a 2012 article in Forbes magazine, in the hundred years from 1850 to 1950 Sweden’s productivity growth was the highest in the world. Forbes wrote, “By 1995, Sweden had fallen to sixteenth place – the most dramatic relative decline of any affluent country in history.” Sweden began to reverse its high tax course in 1980 and since has recovered significantly.
What does this mean for OFS? Again, while we can only speculate why Mr. Edwards relocated to London, it is much easier for one rich executive to move than the head office of the company. But at some point, when the fiscal regime which attracted major corporations and capital to Alberta is removed, head offices will leave and capital inflows will stop.
Having and keeping E&P company head offices in a Calgary is incredibly important to OFS. As the Petroleum Services Association of Canada has demonstrated on multiple occasions, the OFS supply chain is much broader than drilling rigs, trucks and construction equipment in the field. It also includes products and services primarily used only in the E&P head office such as software, technology, data processing and business support and professional services.
The combination of the downturn and the myriad of new taxes and programs being introduced by the NDP caused an unprecedented written plea on March 15, 2016 by 15 major business associations in Alberta for the government to immediately meet to discuss the precipitous decline in the economy. This included the Canadian Association of Geophysical Contractors, the Canadian Association of Oilwell Drilling Contractors and the Petroleum Services Association of Canada. Other groups included road builders, homebuilders, manufacturers, retailers and restaurants.
While the letter admitted Edmonton wasn’t responsible for the oil price collapse the groups wrote, “… We have also seen the rapid deployment of a series of ambitious government policies that have further undermined business confidence and competitiveness. Rising corporate personal taxes, a costly carbon tax and historic increase to the provinces minimum wage are impacting Alberta’s economy when it most needs a boost.”
If Murray Edwards moving to London was the only piece of bad news besides collapsed commodity prices, this event would be immaterial. But it is not. What is occurring is a steady and systematic reversal of the major fiscal and economic policy changes in the early 1990s which helped create the oilpatch as we know it as recently as a year ago.
With WTI back on the wrong side of US$38 in mid-day trading on April 6, it remains difficult to be optimistic the back of the oil supply glut is truly broken. However, three different recent news reports illustrate more people are beginning to believe the worst may be over and better times lie ahead.
On March 23, Bloomberg news carried a story indicating the International Energy Agency (IEA) is now worried current spending cuts may leave to future supply shortages. The opening line of the article reads, “An oil shock may be lurking around the corner as the price bust has hampered investment into future supply, according to the IEA.” The agency figures the world needs to spend about US$300 billion a year to sustain current output and there have been major investment reductions in significant non-OPEC oil producing countries like the U.S., Canada, Brazil and Mexico. The article stated, “There will be barely any supply to meet demand if investments don’t resume in the next one or two years. Apart from Saudi Arabia and one or two other Gulf State Nations there is little spare capacity around the world.”
Credit Suisse Group AG Global Energy Economist Jan Stuart was reported on March 28 by Bloomberg news to be forecasting higher growth in demand this year than the 1.2 million b/d forecast by the IEA. In a research note Stuart wrote, “Oil demand growth is alive and well. We think that with hindsight, this winter will look like a dip in an otherwise still unfolding fairly strong growth trend that is partly fuelled by the ongoing economic recovery in North America and Europe and longer standing trends among key emerging economies. We forecast modestly re-accelerating demand growth over the course of this year, so long as recession continues to be avoided. We projected the fact that oil demand should continue to outperform historic correlations with industrial production.”
Based on demand growth, spending cuts and production declines, Credit Suisse concludes world oil prices could reach US$50 a barrel by May.
On March 30, the
Calgary Herald carried a Bloomberg story about a hedge fund manager who successfully predicted the oil price collapse and now forecasts a bull market for oil prices. Pierre Andurand, head of London-based Andurand Capital Management LLP, last September figured crude oil would fall to US$30 or even US$25 a barrel. He was right. Now he believes market fundamentals have changed sufficiently to the point crude oil could reach US$60 to US$70 later this year and US$80 in 2017. In a note to investors February his fund wrote, “Large spending cuts are taking a toll on operational maintenance. After having been in an oversupplied market we expect inventory draws to start in a few months and accelerate quickly. It is possible that the Saudi’s are now less worried about short-term downside risk than medium term large upside risk.” The kingdom does not want crude prices to spike but current market conditions have “created a significant supply gap in the years to come.”
FOR FURTHER INFORMATION ON OILFIELD SERVICES CONTACT:David Yager, National Leader, Oilfield Services
Client Groups:Oil ＆ Gas
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