Canadian Energy Trusts Appeal Government Tax Decision

CALGARY, Dec 22, 2006 (Dow Jones Newswires)

Representatives from Canadian energy trusts continued Wednesday to demand an exemption from the Canadian government's plans to make existing income trusts pay corporate tax from 2011.

If an exemption isn't granted, energy trusts will be less likely to continue current rates of investment in developments such as enhanced oil recovery projects at marginal oil and gas fields, likely leading to lower Canadian production in the future, they said at a press conference held by the Coalition of Energy Trusts.

"Exempting energy trusts from the proposed tax changes is the only sensible course of action for our members, unit holders and Canadians," said John Dielwart, chief executive of ARC Energy Trust (AET.UN.T) and co-chair of the Coalition of Energy Trusts.

An income trust is a Canadian investment vehicle that has little taxable income at the corporate level and pays out most of its income to unit holders in monthly distributions. Nearly 60% of Canada's income trust sector is comprised of energy trusts, which typically shy away from expensive exploration activities and focus their resources on squeezing every last drop of oil and gas out of mature properties. Trusts produce around 20% of Canada's daily crude output.

The Canadian government announced in late October that new income trusts will be taxed starting in 2007, while existing trusts will be taxed starting in 2011. The decision slashed about C$35 billion of market value from the energy trust sector, cutting some firms' share prices by as much as 20%.

The trusts have been vociferous in their condemnation of the proposed tax change, arguing that they play a vital role in Canada's energy sector by acquiring maturing assets that larger firms would likely consider marginal, and ensuring maximum production from them.

"We do not believe the government has factored into its decisions our unique role in Canada's energy industry," said Sue Riddell Rose, chief executive of Paramount Energy Trust (PMT.UN.T)and co-chair of the Coalition of Energy Trusts. "It has overlooked the value we provide Canadians."

Output To Fall?

One mooted consequence of the government tax decision is that some trusts might cut back on their capital spending as investment becomes less profitable. That could translate into lower Canadian oil and gas output as firms become less aggressive about pursuing drilling in marginal regions.

"We produce around 20% of Canadian oil and gas production at present," said Bill Andrew, chief executive of Penn West Energy Trust (PWT.UN.T). "Around half of that figure would be considered by others to be marginal, and so would be at risk."

ARC's Dielwart said that without the trusts, it's likely that not only will maturing oilfields are abandoned earlier than they would have been previously, but that the decision could put at risk attempts by trusts like ARC and Penn West to implement enhanced oil recovery efforts, whereby old reservoirs are flooded with carbon dioxide to force out more crude, as the financial incentives are no longer there to encourage such efforts.

"There is tens of thousands of barrels a day of production potential there in these mature fields," he said. "But the projects that we were considering would probably (now) be delayed."

The coalition now plans to embark on a media campaign in an effort to "educate" Canadians about the adverse potential effects of the tax decision for income trusts, which the coalition claims will have a negative impact on Canadians' wallets as it hits areas like retirement savings plans. It hopes that public opinion will result in the proposed legislation being dropped, or not being passed into law.

"We are here to assure you that this is not over," said Gordon Kerr, chief executive of Enerplus Resources Fund (ERF). "Our voice must be heard."

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