Tax changes could squeeze municipalities

By Sean Feagan, Local Journalism Initiative Reporter

While proposed changes to the tax assessment model for oil and gas infrastructure could be a big blow to the county, locally operating producers say change is needed for the industry to survive.

Unlike residential properties that are assessed based on market values, “linear” designated industrial properties, including wells and pipelines, are assessed through an equation that considers several factors, such as base costs, depreciation, production (for wells) and land value. The government of Alberta has reviewed this model for oil and gas developments, reported as an effort to enhance industry competitiveness.

The review yielded four scenarios (A to D), which are sets of proposed changes to the assessment model, with each resulting in different impacts to municipalities and industry stakeholders. The scenarios differ by such factors as to how base costs are treated and how depreciation is calculated. Also, some of the models include breaks for certain types of infrastructure (scenario C applies an adjustment factor to SAGD wells and to pipelines with a diameter greater than 10 inches, for example).

If adopted, each scenario has a different impact on industry (through changes to owed assessment amounts) and municipalities (through altered tax revenue).

According to the Rural Municipalities of Alberta (RMA), an independent organization comprising Alberta’s 69 counties and municipal districts, all four scenarios reduce the overall assessment values of properties across the province, ranging from seven per cent (scenario A) to 20 per cent (scenario D).

While some municipalities could gain tax revenue under certain scenarios, for most, the change would mean a loss of revenue – and for some, drastically so. Under scenario D, the scenario reported to be the one largely favoured by the oil and gas industry, the average rural municipality will lose over 12 per cent of its revenues in 2021, and 10 municipalities will lose over 20 per cent of their revenue.

These projected losses are for the first year of adoption only, as no multi-year analysis was provided by the province, according to the RMA.

The RMA has been vocal against the changes.

“By attempting to use the assessment system to enhance industry competitiveness, the 2020 review and subsequent changes to how these regulated properties are assessed has compromised the objectivity of the regulated assessment model, and will result in serious fiscal impacts to municipalities, while actually compromising the competitiveness of many small oil and gas companies,” according to a RMA position statement.

While Wheatland County did not provide an estimate as to how much it is poised to lose in tax revenue should the changes be adopted, the proposed changes are “frustrating,” said Division 1 Councillor Jason Wilson. 

“Over the last three years, we’ve done a good job of trying not to let the current economic downturn and increased service costs affect our rent,” he said. “We’ve looked at the budget over and over again.”

In doing so, the county has “cut the extra fat off the budget” and delayed capital projects.

The changes would not leave many options on the table, added Wilson. “Right now, we’re running as fiscally responsible as we can – we don’t have a lot of other choices right now other than taxation.

“Municipalities like us are looking at a 200 to 300 per cent rate increase to make up for that (lost revenue).”

Municipalities could also reduce service levels, if possible, and revise or cancel intermunicipal agreements – or otherwise face non-viability, according to the RMA.

The province should leave municipal issues and revenues up to the municipalities, said Wilson. “We’re closer to the people and decide where the money goes, and if we want to, we will give rebates to businesses to make sure that they come back.”

According to Doug Dafoe, president and CEO of Ember Resources, the review was necessary because the assessment model is antiquated.

“The current system was devised in the 1980s,” he said. “The whole industry has changed dramatically in the last 10 years, but the assessment didn’t adjust to the industry at all.”

Many of the gas wells around Strathmore are shallow-gas “mature wells” that were drilled in the 1980s and 1990s. Under the current assessment model, mature wells are overvalued because of how the current model handles asset depreciation: it considers depreciation up to 67 per cent of the original value of a well.

“Effectively, you’ve got three years worth of depreciation up front – and then no more depreciation,” explained Dafoe.

In effect, there is no mechanism within the assessment model to reflect true depreciation, meaning it overvalues assets.

“Why wouldn’t you continue to depreciate it? Because the value depreciates,” said Dafoe. “In the case of Ember, for example, our assessed value in totality across municipalities was $1.9 billion – not even close to the value of the asset.”

Oil and gas companies are looking for a fair and transparent assessment of value, said Allen Bey, president of Lynx Energy, which also operates shallow gas wells throughout Wheatland County.

“In the case of Lynx, we have a large number of mature assets that have been on for a number of years – 10 to 15 years – since they’ve been drilled and will be (operational) for another 15,” said Bey. “We’ve got a total assessed value of $738 million, but the present value of the company’s assets, as determined by independent engineers, is about $140 million, so there’s really a disconnect in value versus the taxation assessment.

“We’re not looking for a handout,” he added. “We’re not looking for a tax deferral or anything like that – we’re just saying the system needs to be modernized, so it fairly reflects the value (and) so that the people with the assets are contributing appropriately.”

If the changes are not adopted, the long-term viability of many producers will be challenged, said Bey. “If we don’t get this right, some could start to go into bankruptcy, move wells to the OWA (Orphan Well Association), and lose jobs.”