June 27 & August 2 Exchange Of Letters By Alta Premier & Prime Minister, Final Four In Resoruce Battle
Following are complete texts of correspondence exchanged between Alberta's Premier Lougheed and Prime Minister Trudeau prior to the November 18th, Turner Budget. These letters, as well as two previously recorded in the D.O.B. were made public by both Government officials on November 25th. They have been recorded in the Bulletin to give our subscribers some in sight into understandings of the Government officials and thus an indication of their reaction to the Increased friction between the Provincial officials on resources revenues. Both men have stated publicly that they will not back down from their announced positions.
JUNE 27, 1974
Dear Mr. Prime Minister:
The Alberta Government has now completed its assessment of the proposed federal tax measures of May 6, 1974, particularly in so far as they affect the petroleum industry with its base in Alberta. The conclusion we have reached is that these tax measures would seriously jeopardize the Canadian petroleum industry and the livelihood of many Canadians. If the measures are implemented we anticipate a significant decline in exploration and hence a reduction in Canadian reserves of both oil and natural gas. The consequence could well be an energy shortage in Canada in about 8 years.
The proposed tax measures are so drastic and extreme as to go far beyond anything contemplated during our discussion last March regarding federal corporate income tax. They completely reverse the historical and traditional reliance upon deduction of provincial royalties in computing a taxpayer's income. Thus, the tax measures strike at the very foundation of Alberta's basis of acceptance of the March 27, 1974 Interim oil pricing arrangement.
In order to explain this conclusion, it is necessary to trace chronologically a series of events:
- On September 14, 1973, I expressed publicly and on October 3. 1973 directly to your Minister of Energy, Mr. Macdonald the deep concern of Albertans that the federal exports tax on crude oil was discriminatory against out province. This position was reiterated in my opening statement to the First Ministers' Conference on Energy in Ottawa on January 22. 1974.
- Last November 14, 1973 your Mr. Macdonald, appearing before the federal House of Commons Committee on Natural resources, stated that the Alberta oil royalties were too low and should be increased to give a greater return to the Alberta people. This federal view was consistently expressed to Ministers and officials of the Alberta Government last fall during numerous energy discussions between our Governments.
- On December 14, 1973 the Alberta Legislature passed two important bills. One act eliminated any maximum late of gross royalty on oil production from Alberta Crown leases. The other act established the Alberta Petroleum Marketing Commission. Therefore, as of April 1st, 1974, the oil producers no longer received the Crown's (i.e. Alberta Government's) share of oil production as in the past and the Alberta Government now receives its share of oil production as oil rather than as dollars.
- During the First Ministers' Conference on Energy on January 22, 1914 your Federal Minister Mr. Macdonald presented a proposal to the Conference which attempted to divide revenues from oil production between the Federal Government, the producing provincial governments, and the petroleum Industry. our immediate reaction to the proposal was adverse because its net impact upon the producing provinces would have been equivalent to approximately an average price of only $5.60 per barrel to the Alberta Government and the Alberta based petroleum industry. Shortly after the Energy Conference we confirmed by letter on February 1st, 1974 that this proposal was totally unacceptable to Alberta. The proposed tax measures of May 6. 1974 appear to be an attempt to circumvent the accord of March 27, 1974 and revert to the rejected federal proposal of last January.
- During our luncheon discussions of March 4, 1974, I advised you that the Alberta Government considered royalty revenues from our depleting natural resources as capital receipts for assets sold and that we were therefore in the process of restructuring our budgetary treatment of natural resource revenues. I further advised you that the Alberta Government was considering a plan to place approximately 50%-75% of any incremental oil royalties in a capital trust fund rather than directly into the general revenue account of the Provincial Government. I believe I said that we felt we should make this change because these funds were truly capital receipts. Royalty revenues are different from tax revenues because they represent a return from a depleting capital asset. They do not reoccur, as is the case with tax revenues which are based on income not ownership.
- Also, during our luncheon discussion on March 4, 1974 I advised you that it was the Alberta Government's intention to increase its royalty on oil production by an average of 65% of the incremental revenues of any price increases over the existing average wellhead price of $3.80 per barrel. which was the frozen price that had been in effect through the voluntary cooperation of the petroleum industry and the producing provinces since September 1973. The result of such a new Alberta Royalty structure was to increase our average royalty rates from 22% to 40% of gross production. This allowed us to take approximately 40% of the gross production as royalty in kind through the Alberta Petroleum Marketing Commission as of April 1, 1974.
- During our various discussions of March 4th, 25th, and 27th you advised me that the data you had received from the Federal Department of Energy, Mines and Resources was that the Federal Government would require 100% of the revenues from the export tax on crude oil in order to have adequate federal revenues to subsidize the oil importing provinces of Canada. I recall advising you that our officials in Alberta believed that this data might be inaccurate and that a surplus could accrue to the federal treasury. You will recall that you were adamant that the federal treasury should receive 100% of the crude oil export tax revenue, However, in your letter of March 12, 1974 you mentioned that if a surplus of revenue over the cost of the cushion did in fact accrue that you would be willing to have the disposition of any surplus be the subject of further consultations between the Federal Government and the producing provinces. I suggest our officials now meet to obtain current information as to how the crude oil export tax proceeds are being applied and whether any federal surplus is accruing.
This all brings me again, Mr. Prime Minster to the important luncheon meeting of March 27, 1974 with the First Ministers of Canada. You will recall, in view of the Federal Government's insistence of taking 100% of the crude oil export tax revenue that I attempted to convince other First Ministers that the producing provinces should receive a higher price for oil.
I was unable to convince you and the other First Ministers from the non-producing provinces to reach an accord on the price higher than $6.50 per barrel, although world prices were then averaging about $10.50 per barrel. I reluctantly accepted the price of $6.50 per barrel in the interests of Canada with the belief that Albertans would support my decision. It is difficult for Albertans to accept what amounts to an annual subsidy of over $1.7 billion per year for depleting. Alberta-owned natural resources to the rest of Canada by virtue of the crude oil export tax alone; I was only able to obtain general Alberta public support for my decision by emphasizing substantial additional funds. This would be through our new royalty rate structure which was designed to leave sufficient revenues for the petroleum industry to maintain its activity in Alberta and assure the job security of many Albertans directly or indirectly dependent upon continued exploration by this basic Alberta industry. It would also still leave significant additional corporate tax revenue to the Federal Government based upon existing tax provisions. Without being able to maintain our new royalty rate structure and at the same time assure the continued viability of the oil industry, Albertans would have had difficulty accepting our decision of March 27, 1974 with subsequent and serious repercussions for Canada.
All of this has now been threatened by the proposed federal tax measures of May 6, 1974.
The proposed tax measures will damage the confidence and strength of the petroleum industry in Canada. The proposition of attempting to deem the Crown' ownership share of crude oil as income to the producer Is in our view both punitive and unfair. It proposes to tax a producer on money or property he neither owns nor receives. I cannot over stress the adverse psychological impact upon a taxpayer who may be losing money and yet still required paying federal income tax. It Is extremely unfortunate that these tax measures appear to be even more damaging to the small and Independent companies who have limited cash flow for future exploration and limited capacity to finance as compared with large multinational corporations. Therefore, the proposed tax measures seriously affect the oil and natural gas reserve assessment of our province and jeopardize our capacity to meet future Canadian needs.
Further, we are advised the Federal Government have told petroleum representatives since May 6, 1974 to look to the Alberta Government for relief by pressuring the Alberta Government to reduce the provincial royalties on oil. This federal response is clearly a breach of the entire concept that created the accord of March 27, 1974. Our acceptance, as stated, of the $6.50 price of oil per barrel for 15 months was predicated firstly upon Alberta's royalty rate structure being maintained and secondly, the petroleum industry remaining viable. Both of these foundations for Alberta's agreement are now threatened by these proposed tax measures and by the subsequent responses given to the petroleum industry by the Federal Government.
I doubt that Albertans would continue to accept subsidization by Alberta resources to the rest of Canada to the extent of in excess of $1. 7 billion per year unless, for their part, the Federal Government is prepared to take the necessary steps to assure that the Alberta based petroleum industry remains strong and healthy and that the Alberta royalty rate structure can be maintained in accordance with our Constitution and the spirit of our accord reached March 27, 1974.
I would welcome our officials meeting to explore ways and means to adjust or modify your proposals. Perhaps the full implications of our Alberta Petroleum Marketing Commission's operations as they affect the producers are not fully understood by your Department of Finance. It may then be necessary for further ministerial meetings and I am naturally always willing to meet with you personally should it appear helpful.
The impact of these May 6, 1974 tax proposals would be to effectively reduce the aggregate benefit of the oil price increase to Alberta and the Alberta-based petroleum industry from an average wellhead price of $6.50 per barrel down to what amounts to a price of $5.60 per barrel.
August 2, 1974
My dear Premier:
I am writing in response to your letter of June 27, 1974, in which you commented upon the federal government's budget proposals of last May as they apply to the taxation of the petroleum industry.
In general, I have no difficulty with your chronological outline of the record of relevant events which have taken place over the past year, but there are a number of your interpretations of the federal position at various stages of the chronology with which I differ. Perhaps it would be helpful if I began this letter by commenting upon some of the important points you made.
You recalled, in your paragraph (b) that the Minister of Energy, Mines and Resources and his officials in their discussions with Alberta Ministers and officials last fall urged an increase in Alberta oil royalties. It is fair to say however, that their primary concern at that time was to design an acceptable plan for a gradual ending of the emergency freeze on domestic oil prices and to ensure that the benefits from the prospective increased prices would accrue to the public and not exclusively as wind-fall profits to the industry. Allthough they urged an i ncrease in Alberta royalties as one means of ensuring this, they were certainly not attempting to make an ultimate judgment as to the division of public revenues between the federal and Alberta governments. Fundamentally moreover, the increase in oil prices up to that time had been relatively small and far less than the increases that subsequently occurred or could have been forecast.
Concerning your paragraph (d), I think I should emphasize that in no sense were the budget proposals of May 6, 1974, as you suggest, "an attempt to circumvent the accord of March 27, 1974, and revert to the rejected federal proposal of last January". The federal objective at the January Conference was to consult with all the provinces on a comprehensive energy policy for Canada. We made suggestions concerning prices and concerning possible revenue shares for the provincial governments, the federal government and industry. However, no agreement was reached at that time or later concerning the level or proportion of revenue that governments should seek. In this connection, the accord of March 27 was, above all else, concerned with crude oil price. The question of governmental revenue was largely left open at that time. You and I, however, as you acknowledge, did exchange views on this subject and you will recall that I expressed the feeling that the level of taxes proposed by provinces was probably too high to permit us to insure a reasonable federal share of the total income under the corporation income tax. Having proceeded as you then did, I think you ought not to have beef surprised when the federal government, in its turn, felt it had to act to redress the situation.
Turning to your paragraph (f), our concern about the erosion of the federal corporate tax base in the resource industries was not limited to Saskatchewan, as suggested in your letter, but rather was a general concern about the emerging pattern of provincial tax and royalty measures across the whole non-renewable resource sector. Moreover, while it is quite correct that we were concerned about the erosion of the federal tax base by what we considered was an extremely high Incremental royalty or tax rate In Saskatchewan wan, I thought I had mad it quite clear that the level to be imposed by Alberta in its new oil royalty proposals was also of great concern to us. It was for this reason that I included in my letter to you of March 12, 1974, the paragraphs which you have quoted on pages 3 and 4 of your letter and said, In particular,
"I must make clear that any action that you may decide to take in respect of royalties would have to be without prejudice to our freedom of action as regards federal taxation. "
Again, with regard to paragraph (f) of your letter, you say that you interpreted my comments in my letter of March 12 to refer to "the taxation of actual profits of the petroleum industry". This is indeed what I meant and this is precisely what the budget proposals attempt to do. I appreciate that arguments have been put forward, particularly by industry, that provincial royalties are a cost of doing business. However, it is our view that royalties are no more a cost of doing business than are corporate taxes. As you know, each province and the federal government may choose to obtain the public's share of the revenues to be derived from natural resources exploitation by a wide variety of techniques, including royalties, taxes, fees, etc. I think you would agree that each government should be free to impose its levies as it deems appropriate and that the action of one government should not be directly dependent upon the actions of another. Therefore, it is not inappropriate that each level of government should base its respective levies on an income figure which should be calculated before other governments' charges are taken into account.
Finally, in your paragraph (f) you suggest that the proposal to disallow all provincial royalties was developed after March 27, 1974, You are quite right that the details of the May budget proposals were fleshed out in the weeks following our meeting of March 27. In this regard, my letter of March 12 was intended to indicate that some action to protect its tax base should be expected from the federal government. In deciding on this matter we had to consider not only the several provincial approaches to the setting of royalties for oil and gas, but also the trends developing in a number of provinces towards major changes In the nature of the royalty systems and levels previously applying across the mineral resources field generally. We concluded that to protect federal access to reasonable levels of revenue and to avoid the enormous complexities that would be involved in trying to recognize some part of provincial royalties, the best course was to move to complete "non expensing" of provincial royalties. As you will appreciate, however, this is only one of the factors which determines the impact of the federal corporation tax on industry and the other factors which enter into the computation of corporation tax may well prove to be more flexible avenues for reconsideration.
In sum, it seems to me that the proposals contained in the May 6 budget were consistent with the need to protect the federal corporation tax base; a need to which I had drawn your particular attention in my March 12 letter our reasoning, in this connection, was elaborated upon in considerable detail by the Minister of Finance, both in his budget statement and in his speech to the petroleum industry in Calgary on June 21.
With regard to your reference to the crude oil export charge and the possibility of a surplus arising after payment of the compensation to eastern refiners, our respective officials have now met and I assume you will have received a report on the situation as it now stands. Although we still cannot be certain, we currently expect that export tax receipts collected during the period of the interim accord will be required substantially in full to meet the cost of the compensation program, including the liabilities that seem 1 likely to arise on a retroactive basis, due to the actions of the main exporting countries. However, I shall bear your remarks in mind and we will keep the situation under review. This is a matter which our officials will be prepared to re-examine with your officials towards the end of 1974.
Let me conclude my comments on your letter by emphasizing that we are concerned, as you are, about the extent to which the combination of fiscal measures now proposed by both levels of government might damage the confidence and strength of the petroleum industry in Canada. Our respective officials have already commenced discussions in this regard and are exploring ways and means to arrive at solutions to whatever problems may exist.
Naturally, we both shall be concerned to follow these discussions closely, as will our respective Ministers. I remain ready to meet with you and soon if that is your wish. However, it is my hope that our officials and Ministers will make progress in the complex discussions already begun and that they will develop solutions reasonably acceptable to both of us. If the process does not achieve this, we could then discuss what other steps could be taken and whether our personal intervention could be of help.
I should indicate, on a separate but related issue, that we are most anxious to carry on with the discussions among officials and Ministers leading towards an agreement on natural gas pricing. While several provinces are involved, Alberta is by far the largest producer and we would like, therefore, to begin the next round of discussions with renewing contacts with your Ministers and officials concerned. I expect that federal officials will be ready to commence these discussions about midAugust and I under stand that a meeting of Alberta and federal officials is tentatively scheduled for about that time.
I will be keeping in close touch with my Ministers throughout these discussions, and, no doubt, you will do the same. We could, therefore, get together quickly, if the need should arise.
I look forward to receiving your reaction to my suggestions regarding the process of the proposed discussions as well as to any comments you may wish to make about other matters dealt with in this letter."
