Despite soaring profits, oil companies don’t pay enough for their environmental damage

Ending the third-quarter reporting season in October, the Big Four oil sands producers continued to report record profits. Generally speaking, Cenovus, CNRL, royal oil and Sunscreen earned $5.8 billion in the third quarter and $23.1 billion in the first nine months of 2022. The average return on capital for the period was close to 25%.

the only minor glitch is Suncor’s Loss Report—mainly due to a non-cash loss costs of $3.4 billion against its Fort Hills property. Despite being wiped out, Suncor still spent $1 billion to buy Teck Resources’ stake in the Fort Hills oil project.

However, other than buying Suncor, these companies do not reinvest in their core businesses. This cash fortune has implications for Canadian consumers, government tax and royalty policy, and environmental policy.

Consumers are neglected

Different from the bank’s basic lending rate change every six weeks or soCanadians who rely heavily on their gas-powered cars or trucks face tough choices in balancing their budgets with higher housing costs.

Based on Statistics CanadaHousing accounts for more than 30 percent of a household’s costs and transportation 16 percent.

Annual inflation for gasoline in October 2022 is 17.8%. The homeowner’s replacement cost index, a proxy for new home prices, increased 6.9 percent. Mortgage interest expense up 11.4% from last year—the highest increase since February 1991.

Canadians with personal vehicles, those who rely on natural gas for heating and those with mortgages are under enormous pressure. Ontario and Alberta reduced gasoline taxes, but these are supportive short-term political measures fossil fuel industry by maintaining demand for gas and diesel.

Waiting time for trams up to a year in Toronto and also in 2024 for Buyers in Vancouver.

Oilsands shareholders, mostly foreigners, are enjoying huge profits while consumers are bearing the brunt of soaring energy prices.

Most stocks for Canada’s largest oil companies held by institutional investors. These Canadian institutional investors, such as TD Investment Management, hold from 3% of Imperial to nearly 20% of CNRL.

Big Oil does not reinvest profits

In the first nine months of 2022, $6.7 billion was paid out in dividends, with almost two thirds by CNRL. During the same period, $15.6 billion of shares were repurchased. This share buyback benefits shareholders because a reduction in the number of shares outstanding means higher earnings per share for shareholders.

These acquisitions also signal to the market that the company’s board and management feel these purchases are the best way to manage capital and cash flow. Notably, it also means that the company does not invest to increase or maintain operating cash flow.

In addition to share buybacks and dividends, Cenovus, CNRL, Imperial Oil and Suncor have collectively paid off $10 billion in debt. Based on their financial statements, I estimate $32.5 billion in available cash flow that hasn’t been reinvested in the business. In fact, in 2022, depreciation, depletion, and amortization of all four companies—a measure of the non-cash cost of aging assets—exceed capital investment by about $1.5 billion.

According to one Report of the ARC . Energy Research Institute, in 2015, the after-tax cash flow of Canadian industry was $30 billion and $55 billion was reinvested in asphalt and conventional resin production. In 2022, with an estimated after-tax cash flow of $152 billion, the ARC Energy Research Institute estimates that only $32 billion and $10 billion will be reinvested in conventional plastics production, respectively. and asphalt.

The government is benefiting

The federal and Alberta governments are enjoying a fortune due to higher taxes on profits and royalties. I estimate the Big Four paid about $15.2 billion in royalties to provincial governments this year.

I have estimated that these four companies will be responsible for at least a quarter of Alberta’s own source revenue (excluding federal transfers) during this financial year. Based on each oil company’s financial statements, I estimate their taxes, as a percentage of net income for the period, to range from 13% for Suncor (as a deduction) to 36% for Suncor. with Cenovus.

Some of the Big Four CEOs haven’t been shy about pointing out the amount of taxes and royalties they’re paying the government. CNRL President Tim McKay and leaders of Cenovus and Imperial Oil have also highlighted the size of their company’s contribution to the government budget.

The dependence of the Alberta treasury on royalties and taxes from just four companies is a big problem, as Alberta Premier Danielle Smith identified last year in a report. articles for public policy school when she head of the Alberta Enterprise Group. It will be interesting to see how Smith approaches this in the next February budget.

Environmental responsibility

As the oil sands industry dives, it hopes to have federal taxpayers—and possibly those in Alberta—pay the costs. subsidy for carbon capture and underground storage. This capital investment, now promised by Pathways Alliance invests 24 billion USDremains the industry’s only hope to continue operating beyond 2030.

At the same time, the industry has $10.6 billion in prepayment liabilities for the shutdown of oil and gas wells, pipelines and facilities. Have thousands of abandoned wells and pipelines stopped working exclusively in Alberta.

However, the Big Four’s annual spending to settle environmental liabilities is less than $1 billion and is not separately recorded in the expense report. There is a clear gap between the cost of environmental damage caused by these companies and the amount they have to minimize.

Based on June 2021 newsletter from Alberta’s auditor general: “After six years of analysis, the department has yet to decide whether and how security calculations should change.”

Auditor General also noticed a lack of clarity between the Department of Energy and the Alberta Energy Authority. The Alberta government reportedly “failed to apply a consistent rating system to contaminated sites to determine where to prioritize cleanup.”

The Government of Alberta has failed to ensure that its environmental liabilities are fully accounted for, and progress is being made to tackle the province’s large waste reservoirs made up of by-products from oil sands mining. Incredibly, when asked about the oil industry’s record cash flow and remedial debt, Former Energy Minister Sonya Savage announced:

“The current spike in oil prices is not reason enough to require the industry to spend more on cleaning up the tens of thousands of abandoned oil and gas wells in the province.”

As a recent Globe and letter article As pointed out, Alberta’s current fortunes are an illusion because the industry does not reinvest. This has serious ramifications for the rural economy of Alberta and the Fort McMurray area in particular.

The main driver of Alberta’s economy over the past two decades has been the oil extraction industry—if the future of asphalt is uncertain, so is Alberta’s economy.

Alberta, like a one-company town, faces a clear and present danger. Is there a Plan B to get Alberta out of its asphalt addiction? How will Smith reduce reliance on oil sands royalties? These are pressing questions the Alberta government must answer.

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