Financing Oil, Gas And Coal Operations: Current Trends In Taxation
Authors: Parsons Robert B. 
Published: March 2010

Constantly changing and increasingly complex lax laws are unwelcome fallout from the emergence of new and more innovative financing methods on the petroleum and coal scenes in Canada. The active interplay between financing techniques and tax legislation is in escapable, as operators and investors seek to minimize tax costs, while the tax collector struggles to mend perceived holes in his tax net.

Introduction

Current trends in financing practices are inextricably intertwined with taxation changes. Not only do financing methods react to tax amendments, but also tax rules recoil to new financing techniques, as both investor and tax collector compete for optimum returns from new projects and operations.

The fields of financing and taxation have witnessed accelerated rates of change in recent years, generally with mixed results. On the positive side, for example, the oil and gas or coal operator faces a wide range of new types of financing alternatives from which to choose. On the negative side, though, the more innovative financing developments of recent years have contributed in some measure to the increased complexity and instability of the tax legislation, as the federal and provincial governments seek to protect their tax base and try to mend perceived holes in the tax net.

The reasons for the high level of activity in devising new financing plans are as varied as the plans themselves:The economics of Canada's oil, gas, and coal industries often point to a need for mega-projects, which require massive injections of capital from a variety of sources. Such capital demands have triggered new ideas for "off-balance sheet" financing, flexible debt repayment terms, increased risk sharing, and so on.Interest rate instability has enhanced the appeal of variable rate debt and equity financing, and has opened up the practice of interest rate hedging.More sophisticated foreign exchange hedging is a direct result of relatively wide currency fluctuations in recent years.According to some observers, the arrival of the so-called " Schedule B" banks in Canada has forced the Canadian banking industry to be much more aggressive and imaginative in its financing roles.Of course, increased federal and government involvement in the petroleum sector, and to a lesser extent in the coal industry, has had a far-reaching impact on the economics of these industries.

For obvious reasons, any means of financing must have regard for various tax considerations. The success of financing proposals often depend critically on tax treatment, and as schemes become more imaginative and complicated, tax assessment usually becomes more difficult and uncertain. The following commentary provides a brief overview of recent trends in taxation relating to, certain typical financing arrangements for oil; gas, and coal projects.

Mega-Projects

It is often desirable, and sometimes imperative, that a single, highly capital intensive project be structured with some form of joint ownership. The Syncrude plant and the aborted Alsands project are examples of the new breed of jointly owned mammoth projects which are expected to make their presence felt on Canada's emerging petroleum and petrochemical scene.