Shock and anger, sense of betrayal in the oil patch

CALGARY -- Alberta's trust-laden oil patch vented its anger and sense of betrayal at the Tory government yesterday after Ottawa moved to impose new taxes on income trusts.

"This is not the way to go about making good policy," said John Brussa, a top tax lawyer at Burnet Duckworth & Palmer LLP and one of pioneers of the energy trust structure two decades ago.

Don Gray, co-founder of Peyto Energy Trust, said Prime Minister Stephen Harper's government wasn't living up to a fiscally conservative mandate.

"They chose to increase the tax burden as opposed to decrease it, which really doesn't say a lot about a Conservative government," Mr. Gray said. "Harper's core supporters, they really have to be wondering who is representing them?"

Such sentiments ran rampant around Alberta, especially in Calgary, which is headquarters for six of the 10 largest trusts by market value. Trusts play a bigger role in oil and gas than in any other sector.

The Toronto Stock Exchange's capped energy trust subindex plunged 13 per cent yesterday. Among all trusts, $20-billion of value was wiped out.

Still, not everyone was angry. Murray Edwards, vice-chairman of Canadian Natural Resources Ltd., said the government did the right thing, even if the move was imperfect. And, financially, Mr. Edwards felt some pain yesterday as the largest unitholder of Penn West Energy Trust. "This has been an expensive day for me, too."

"[But] for some time, I've advocated that there had to be a levelling of the field of tax rates between trusts and corporations," Mr. Edwards said.

"Ideally, that would have been achieved by lowering tax rates on corporations . . . but that just wasn't doable politically or economically, from the point of funding our social programs.

"I think the government made the best decision in a tough situation."

Mr. Edwards, a federal Liberal supporter, also felt that the move doesn't necessarily doom the Conservatives in the next election, saying many Canadians don't own trusts and voters could see the government as decisive and forthright.

While Mr. Edwards took a broad view, many Calgarians focused on the immediate ramifications. Anger was widespread.

"Harper will never raise a penny in Alberta. He has shocked and disappointed a lot of people," one oil patch insider said.

Mr. Brussa likened the tax move to the Liberal government's introduction of the National Energy Program in 1980. It was aimed at protecting Canadians from surging energy prices, but was regarded by energy-rich Albertans as a massive intrusion.

"The NEP, when applied to reality, failed miserably," Mr. Brussa said. "It was the classic disconnect between economic theory and practicality. This is another NEP for this city."

Another oil executive who asked to stay anonymous spoke of eroding trust in Mr. Harper: "If he is prepared to do business like this, what else does he have up his sleeve?"

John Dielwart, CEO of ARC Energy Trust, questioned the government's thoughtfulness and honesty.

"They repeatedly said to us, 'We're not going to attack the trusts' -- and they did," Mr. Dielwart said.

"The government has taken a one-dimensional look at a multi-dimensional situation and is ignoring the ripple effect on everyone from seniors to pension funds and charitable organizations."

Jim Dinning, the front-runner to replace Ralph Klein as premier, also worried about seniors and other individual investors who rely on the high monthly payouts from trusts.

"Let's make sure the federal finance department, as they go after extra taxes, that they're not destroying wealth creation at the same time. Don't lose 100 yards to just gain 5," Mr. Dinning said.

Trusts avoid taxes by paying out the bulk of their profits to unitholders. This fact drove the Conservative government to act, worried that if companies such as Bell Canada and Telus Corp. became trusts, far less money would be invested by businesses in Canada.

Dave Johnson, chairman of Progress Energy Trust, said the government appeared confused on the difference between a business trust -- such as the kind Telus and Bell were to become -- and an energy trust. Energy trusts, which also pay out the bulk of their profits, have been widely credited with working marginal oil and natural gas assets that were no longer wanted by large corporations.

"The returns we get on a dollar invested are not as high today as they were before," Mr. Johnson said. "By coming out with this policy, the government is underestimating how much money is being invested in the basin because the trust structure makes the economics work."

Bill Andrew, CEO of Penn West, agreed that the government failed to see the good energy trusts have accomplished.

"The one thing I found most distasteful was being categorized as a tax avoider by the Minister of Finance, like some sort of criminal," Mr. Andrew said. "As a sector, we've operated these assets more efficiently and provided a yield vehicle for a lot of unitholders, yet we're demonized by the Minister of Finance. His brush was much too broad and much too simplified."

Mr. Andrew worried about junior producers, who often sell their firms to trusts once they grow a bit larger. Some entrepreneurs might just take the money they've made, pack up and leave, he said.

"That would be a tremendous shame," Mr. Andrew said. "We've got a hugely vibrant economy and I worry about the ramifications."

RBC Dominion Securities said in a note to clients that Canada's energy trusts could find themselves "at the mercy of opportunistic private equity funds, hedge funds and foreign corporations."

As prices fall, it will provide "an opportunity, perhaps of a lifetime, to acquire great Canadian businesses at potential fire-sale prices.

"In particular, Canadian oil and gas trusts, some with incredible assets, could find themselves very, very vulnerable," the note said.