This is Part 3 of a three-part series on how rural municipalities are being impacted by oil and gas companies reneging on their property taxes.
MLA Nate Horner says there is no “magic bullet” for solving the budget crisis facing rural municipalities owed millions of dollars by defunct oil and gas companies, but change needs to happen fast.
“We’re going to have to draw a line in the sand,” Horner, the UCP MLA for Drumheller-Stettler, said.
The Rural Municipalities of Alberta (RMA) – an advocacy group representing the interests of Alberta’s 69 counties and municipal districts – estimated the tax tab oil and gas companies owe to rural municipalities has ballooned to $173 million.
That debt is growing at what the RMA described in a press release as an “alarming pace,” more than doubling since the organization conducted a similar survey in March 2019.
According to the RMA, many oil and gas companies are unable to pay because languishing oil and gas prices and continued issues with market access have decimated their profit margins.
“A number of shallow gas producers in particular are in a negative cash flow situation,” said Alberta Premier Jason Kenney, addressing the issue on Jan. 21.
But other companies still operating are unwilling to pay their taxes because they know rural municipalities have little ability to force them to square their debt, and even less ability to collect from bankrupt companies, the RMA suggested.
“If Alberta’s property tax system is not amended to prevent oil and gas companies from refusing to pay property taxes, many rural municipalities will struggle to remain viable,” said RMA president Al Kemmere.
'Nothing to go after'
Kenney, however, warned the solution isn’t as simple as forcing companies to pay up: “You can’t wring money from a stone.”
“We will work with the municipalities to address this ... but the bottom line is we need to get those companies into a positive cash flow so they can pay their tax bills," Kenney said.
“The best solution, in our view, is to create a future for those companies that are struggling," he added.
PART ONE: Starland County struggles to survive as oil and gas companies go under
PART TWO: Rural counties cut budgets 'to the bone' as oil and gas companies shirk tax debt
When oil and gas companies go bankrupt – like Trident Exploration Corp. did in April 2019, abandoning thousands of well sites and $329 million in reclamation liabilities on top of millions of dollars in unpaid property tax debts to the rural counties and municipalities it operated in – the Alberta Energy Regulator and the Orphan Wells Association collect first.
The Alberta Energy Regular (AER) is tasked with overseeing and regulating responsible energy development in Alberta. The Orphan Wells Association, operating under the authority of the AER, is responsible for taking care of wells abandoned by defunct oil and gas companies.
Rather than allow orphan wells to rot into the ground, potentially wreaking environmental havoc on the surrounding environment – including private farmland – the AER collects an annual orphan well levy from oil and gas companies that is supposed to help cover the cost of reclaiming such abandoned sites.
But while the AER collects hundreds of millions of dollars in orphan well revenue, estimates on the actual cost of cleaning up Alberta’s oil and gas sites have reached tens of billions of dollars. The Auditor General is also conducting a review of the AER’s funding formula, expected to be complete in 2021.
The Alberta Liabilities Disclosure Project estimates it will cost it will cost 1,500 companies nearly $65 billion to meet their cleanup obligations.
Often, insolvent oil and gas companies go bankrupt without enough value in their assets to pay what they owe to the AER and the Orphan Wells Association, let alone municipalities they owe taxes to.
“There is nothing to go after,” said Kenney.
Horner said one solution could be requiring companies to attach a bond to new oil and gas sites that stays with the site if it transfers ownership, ensuring the money always stays with the well.
Otherwise, he says, the fluid structure of these companies will continue to allow them to dodge responsibility.
“You can move assets around, you can go bankrupt, that executive can pop up on another oil company the next month,” Horner said. “It appears to me that a great many never had any intention of reclaiming, they were just playing the game.”
He also called for a moratorium on transferring assets to companies before they can be reviewed by the new AER board to stop companies in dire fiscal straits from compounding the issue by picking up new oil and gas sites they can’t afford to responsibly sustain. The UCP government replaced the AER board in September and said it would review the agency’s entire mandate and structure.
These suggestions, Horner admits, are forward-thinking but will do nothing to solve the growing reclamation deficit that has been building over decades that, if left unaddressed, could leave taxpayers picking up the tab.
Unpaid property tax bills are just one factor putting pressure on rural budgets, Horner said.
Mounting pressure
Margins in farming are getting thinner, and increased automation has increased the size of farms and decreased the amount of human labour required to run them, leaving rural populations smaller and more spread out.
“That just ripples out in every direction," Horner said.
At the same time, the provincial government is downloading extra financial responsibilities onto municipalities, leaving county councils feeling squeezed.
One such expense is a new police funding model that will force rural counties and municipalities – which traditionally haven’t paid for policing – to cover a portion of increased rural RCMP costs under the Provincial Police Services Agreement, starting in April.
The provincial government is also no longer helping municipalities recoup losses under the Shallow Gas Tax Relief Initiative, which offers struggling shallow gas companies a 35-per-cent break on their property taxes as a way of encouraging them to pay something rather than nothing.
“They are having a hard time, they are wondering when it’s going to end and see how they are going to balance their books,” Horner said.
Economic shift
Lindsay Tedds, an associate professor of economics with the University of Calgary’s School of Public Policy, said rural Alberta’s property tax collapse is a symptom of the beginning of a major economic shift as over-reliance on oil and gas-related tax revenue becomes unsustainable.
“This is economic transformation, this is an economic shift moving away from one kind of industry – we have not yet shifted into another kind of industry," Tedds said.
While it’s “awful,” Tedds said this is not unique to Alberta’s oil and gas industry, and similar economic shifts have happened following collapses of British Columbia’s pulp industry and Ontario’s manufacturing sector.
Tedds said Alberta’s municipalities have become over-reliant on business property tax revenue models that don’t work in a modern context.
For example, Tedds said companies are moving away from “bricks and mortar.” When businesses can exist almost totally digitally, they don’t have property to tax.
Tedds suggested municipalities will have to examine their entire funding models, not only looking at what new revenue streams are available but also at what goods and services can reasonably be provided to ever more isolated areas of the province.
“When you have these kinds of collapses, you start thinking about why do we have this reliance, is this a healthy reliance?” Tedds said.
Horner agrees there needs to be a significant shift in how Alberta’s rural municipalities are funded.
“I think it’s worth investing in rural Alberta maybe in ways we haven’t thought of before," Horner said.
'Right to the top'
But while economists and provincial politicians mull these questions, rural municipalities are in dire need of answers.
“I hope the province realizes that we’re serious out here about this problem. They need to help us make it right,” said Steve Wannstrom, reeve of Starland County, who says his county council had to write off more than $6 million in unpaid property tax debt owed by oil and gas companies – four insolvent and two still operating – last year, knowing they would never be able to collect.
Horner said he is taking the reeves from Starland and Stettler counties, two areas hit hard by the collapse in property tax revenue, to meet with the ministers of Municipal Affairs and Alberta Justice at the beginning of the legislature’s next session.
“We are going to lay it out on the table and show them what the actual impact is of the police funding model coupled with the shallow tax gas relief, the unpaid taxes and the impending assessment change. The reeves need to know it’s going right to the top,” Horner said.
Meanwhile, the Federation of Canadian Municipalities’ new Western Economic Solutions Taskforce – made up of rural and urban elected officials from Manitoba, Saskatchewan, Alberta and British Columbia – is bringing the call for help to the federal level.
“We see people losing their livelihoods, their homes and, importantly, their hopes for the future,” said Randy Goulden, a Yorkton, Sask., city councillor and chair of the task force, ahead of a meeting with Deputy Prime Minister Chrystia Freeland and federal Minister of Economic Development Mélanie Joly in Edmonton on Monday.
The task force is hoping to get federal support to address issues crippling western rural Canadian economies, such as rail backlogs, trade agreements hindering farmers’ ability to get their products to market, and federal carbon pricing that hits farmers hard who have been weathering states of agricultural disasters for the energy used in drying their grain.
While the task force’s members are optimistic they will be able to find federal support to keep western Canada’s rural economies viable in a time of industrial transition, AnnLisa Jensen, councillor for Parkland County and vice-chair of the task force, said talk needs to turn into immediate action.
“Conversation is just the first step,” Jensen said. “Communities like mine need solutions and we can’t wait.
Claire Theobald covers civic matters under the Local Journalism initiative, which is funded by the Government of Canada