Thursday, October 22, 2009

Canadian Energy Trusts Slipping out of Canadian Hands

31 October 2007, updated 5 June 2008 & 22 October 2009

Today (October 31, 2007) is the anniversary of the day that Jim Flaherty, Canada's nominally conservative finance minister, destroyed Canada’s energy income trust sector by dismantling the income trust structure that had kept the majority of Canada’s stable natural gas and oil properties in Canadian hands.

News of foreign takeovers is swirling, and much more is likely still to come.

The market capitalization of the trusts has been cut in half, severely injuring the (mostly Canadian) investors who held these equities in good faith. With their reduced market value, these properties are ripe for takeover by moneyed foreign and corporate interests who are willing and able to wait the several years that may be required for natural gas assets to join the parade of other commodities in the present skyward move that is sweeping the natural resources sector.

Why is natural gas so slow to gain in value relative to other commodities?

The answer is easy. Oil only occurs geologically at very specific depths. If it is deposited in a location that is too deep or too hot, oil breaks down chemically to form natural gas. Thus, when drills go into the ground, natural gas is found much more easily than oil. As oil is easy to transport and use, and natural gas is difficult to transport and use, energy explorers continue to focus on oil, producing natural gas primarily as a byproduct.

This will change – and the change is coming soon. Why?

Natural gas is a better quality fuel than oil. It burns cleaner, with fewer carbon emissions. Natural gas is now being allocated increasingly (and massively) to oil sands production. In my view, this is probably a mistake, as we are burning clean natural gas in order to produce dirty and heavy oil from the Alberta oil sands.

All – yes – every bit – of Alberta’s (and British Columbia's) natural gas will be long gone before the oil sands can be converted to oil. It takes massive amounts of natural gas to produce oil from the sands, and all of it will be gone with only half of Alberta’s oil sands reserves in production. At present, natural gas is in surplus, keeping prices low, and keeping consumers happy. But the escalating demand for natural gas for oil sands development, as well as increased substitute use of natural gas as oil prices rise, will soon result in much more expensive natural gas.

The question is – thanks to Mr. Flaherty's narrowly-conceived, interventionist and socialistic initiative – will there be any natural gas left in Canadian hands when the price of natural gas begins to soar as a result of his short-sighted policies?

I fear that the answer will be no – and Mr. Flaherty, and his band of purported Conservatives in Ottawa – will be the ones to blame – though by that time, his role in the causation of the collapse of Canada’s energy income trusts will probably have been forgotten by a public unacquainted with history.

My advice – ask Mr. Flaherty this question now – as he offers the tax money he has seized from the energy income trusts to Canadians in his current giveaway pre-election federal budget.

My message to Mr. Flaherty and Stephen Harper’s so-called Conservatives?

I will not vote for any member of your party, or anyone associated with your party, until you straighten this one out.


Say no to the Conservative Party of Canada until they restore Canada’s income trusts to their former status (petition here).

Click here for "Mad as Hell Canada" (highly recommended).

Click here to send your message to any MP in Canada.

5 June 2008: Diane Francis of the National Post has written the ultimate critique of Mr. Flaherty's flawed and confiscatory income trust policy. Not only does Mr. Flaherty's about-face on this innovative Canadian investment vehicle fail to recover tax revenues, it in fact transfers the tax benefits from Canadian taxpayers to the large-scale international equity market, removing Canadian assets from Canadian hands, while also punishing Canadians for investing in Canadian assets (to the tune of $35 billion). As of December 9, 2007, 40 of the original 259 Canadian Income Trusts had already been dismantled. As Francis makes clear, the parties who have taken over these prize Canadian assets will be using the former (taxable) dividend stream to pay off their tax-exempt loans to make these acquisitions. This is the single worst federal fiscal policy ever formulated in Canada. Read Ms. Francis' incisive critique here. Click here for the post mortem on already deceased income trusts.

Click here for my recent study of the natural gas demands of Canada's booming oil sands.

22 October 2009: One of Canada's best energy trusts - Harvest Energy Trust - has now slipped out of Canadian hands. (It is being purchased by the
Korean National Oil Company.) Jim Flaherty gutted the company by removing the tax protection that had made investment in marginal energy resources profitable. Small Canadian investors will no longer have the option of owning a stake in this invaluable Canadian-based resource company. The taxable distributions ($2.7195 billion over the past 5 years) taken from capital as well as from cash flow will no longer feed into Canadian Federal and Provincial tax revenues. Jim Flaherty's, Stephen Harper's and Mark Carney's attack on small Canadian investors continues.

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