The Oil Drum

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.

N.S. premier urges revolt against federal budget

The 2005 Atlantic Accord, a deal signed by the then-Liberal government between the governments of Nova Scotia and Newfoundland and Labrador, protects those two provinces from having their offshore oil and gas royalties clawed back under the federal equalization plan.

However, to accept an enriched equalization deal, they have to abandon the accord.

Major Loss Of Gas Reserves Seen If ExxonMobil Scraps Pipeline

ExxonMobil's possible move to scrap natural gas pipelines in Alaska and Canada could amount to the equivalent of losing all the country's production in the Gulf of Mexico, an energy analyst said Thursday.

"It's the biggest energy story of the year," said Andrew Weissman of FTI Consulting.

Although natural gas and gasoline prices fell on Thursday following a rise in supply, Weissman said the market has yet to weigh the implications of ExxonMobil's (XOM) decision to possibly back away from building the Mackenzie Valley pipeline in Canada.

ExxonMobil Chairman and CEO Rex Tillerson told reporters after the company's annual meeting Wednesday that the $16.2 billion price tag for the delayed Mackenzie Valley pipeline is too expensive without more government subsidies.

"We are now in a situation where it's not economic at current costs," Tillerson said in an article published by The Globe and Mail. "It may just be that the project is going to have to wait for a different cost environment."

Why food costs more

Since the rise in agriculture started gaining altitude last spring, hedge funds have been pouring money into commodity exchanges, driving up prices and transforming backwater grain bourses like the Kansas City Board of Trade and the Winnipeg Commodity Exchange into highstakes casinos. Since 2005, corn has nearly doubled. Wheat is up 50% in the same period, while canola, one of the biggest crops on the Canadian prairie, has climbed 34%.

But the biggest effect of all the new hedge fund cash sloshing through the system is a major increase in volatility. Prices are on the rise but the upward trend has been anything but smooth.

"We are unaccustomed to this," said Mr. Gary, who adds that he hasn't seen this level of volatility since the 1970s when a group of big speculators briefly "muscled the markets around." But what's happening now is different, far more treacherous for traditional players.

Like many experts, Mr. Gary believes the markets have become disconnected from the fundamentals as prices rocket through peaks and valleys that have little to do with supply and demand.

Many of the hedge funds are trend players, who make bets based on the technical details around the direction they think prices are heading, moving in and out of the market with lightening speed. For them, volatility is an opportunity to make money.

The nuclear option

Sensing some reluctance from the crowd, Hawthorne later slips into passive-aggressive salesman mode. "I'm not here to sell you a nuclear plant. If you don't want a nuclear plant, I don't want to be here."

But he does want to be there, and he is selling something the idea that a nuclear renaissance is upon us, that emission-free atomic power will save local economies, keep global warming in check and pave the way to a nuclear-based hydrogen economy. The message in a nutshell: the construction of new nuclear plants in Canada is inevitable.

Nuclear power, once shunned, is back on the table in Canada and around the world. Its image as a risky, expensive, dangerous technology amplified by the Three Mile Island accident and Chernobyl disaster is clouding. Only emission-free nuclear power, proponents say, can keep global warming in check without hindering economic growth.

There's serious talk in Alberta about using nuclear power to reduce emissions during oil sands production. Behind the scenes, Prime Minister Stephen Harper has reportedly embraced the cause. And Ontario has already committed to building two new nuclear reactors totalling 1,000 megawatts in the province just the start, industry and political sources contend.

LNG beats pipeline

Treating delta gas as an LNG opportunity is much more attractive than the Mackenzie pipeline option. Maybe the big giants behind the backers -- Exxon Mobil, Conoco Phillips, and Royal Dutch Shell -- fear upsetting their global petroleum, natural gas and LNG apple carts by allowing their Canadian subsidiaries to start playing for the first time outside their Canadian sand boxes. It may be an intolerable horror for these multi-nationals to see delta LNG "washing up" at global LNG terminals, and competing with their own non-Canadian LNG delivered to U.S. and overseas LNG-terminals. Or might marketing delta gas globally snatch away the currently dominant fuel, gas, from the ravenous appetites of oilsands gas-guzzlers, forcing them to consider fuel options other than gas, and risking further delays, because they are also primary holders of Alberta oilsands leases.

Arctic Gas projects put on ice

New cost estimates that pushed up the price of the Mackenzie gas pipeline to $16.2- billion make Canada's Arctic natural gas among the most expensive on the continent, top explorers in the area said yesterday.

Executives at Devon Canada Corp. and Apache Canada Ltd. said they're putting exploration plans on ice until the project becomes a reality.

"When I see the welders show up and start welding pipe, that's when exploration will ramp up again," said Chris Seasons, president of Devon Canada, a subsidiary of Oklahoma City-based Devon Energy Corp., which spent more than $300-million looking for natural gas in the North this decade. "Certainly the delay to 2014, assuming the project goes ahead, is not helpful, and while we haven't seen any tolls on the mainline, just looking at the costs, it's going to make it amongst the most expensive gas in North America," he said.

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.

More Mexican labour needed in oil patch, executives say

Canada and Mexico should accelerate efforts to import temporary Mexican energy workers to alleviate the skills shortage in Alberta and other provinces as oil sands development ramps up, top North American CEOs will recommend today.

They will also call for Canada, the United States and Mexico to start work on harmonizing regulations and standards in three sectors: financial services, transportation, and food and agriculture, The Globe and Mail has learned.

The 30 chief executive officers make up the North American Competitiveness Council, formed last year to advise political leaders on strengthening economic ties between Canada, the United States and Mexico.

They're tabling a 63-page report with 51 recommendations today as top politicians from all three countries meet in Ottawa to advance a continental security and prosperity partnership first struck in 2005. They include U.S. Secretary of State Condoleeza Rice, Mexican Secretary of Foreign Affairs Patricia Espinosa, Foreign Affairs Minister Peter MacKay and Industry Minister Maxime Bernier.

A gas pipeline along the Mackenzie Valley has been discussed on and off for over thirty years, since gas was initially discovered in the area of the Mackenzie delta. However, the project has long been a bone of contention between the companies seeking to develop and sell gas reserves, environmentalists and First Nations people living in the regions through which the pipeline would pass. While gas supplies were plentiful, and prices therefore low, the companies were content to sit on the reserves, but renewed interest developed in recent years as natural gas prices increased against a backdrop of low interest rates and an investment boom in the gas-hungry tar sands.

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