August 2, 1946

PC

Douglas Scott Harkness

Progressive Conservative

Mr. HARKNESS:

I do not think there can be any question that wells are not being drilled to the extent that they might be. True, a certain number are being drilled, but there is no full drilling programme in operation, or a programme anything like there should be. As a matter of fact when I came to Ottawa to attend the sitting of parliament, twenty-eight out of thirty-two large drilling rigs in the Turner valley were sitting idle, and I am informed that condition still prevails. Most people who own probable drilling sites, and a large number -who have money enough to go ahead with the- drilling of wells, cannot see sufficient possibility of a return, under the present tax structure, and particularly in view of the subsidy which operates as an artificial depression of price to the extent of 75 cents a barrel, to go ahead with drilling.

This morning I was talking to a man who has an intimate knowledge of the oil business. The company with which he is connected has fifteen possible drilling sites. Those sites will at some time be drilled in t-he Turner valley, but they are not going to drill any of them

Income War Tax

until we get rid of the subsidy, or the tax situation is much improved so they can get a reasonable return from the oil for their shareholders. They believe it is much better to leave it in the ground than to take it out at the present time, because by taking it out they would simply be depleting their assets. It will be understood that once oil is taken from, the ground, the well is exhausted. Under the present circumstances they are much happier to leave the oil in the ground than to go into production. This is true of most of the oil companies.

Mr, ZAPLITNY: I admit at once that-I am no more an oil expert than is the minister, but I must say I am at a loss to understand what the hon. member for Calgary East is advocating. It seems to me he is admitting that no drilling is taking place, even though certain companies have sites, money and drilling equipment, simply because the return they believe they could expect will not be as great as they should like to have it. He also advocates removal of the subsidy and an increase in the price. I cannot see the logic in that, because it seems to me the whole reason for the subsidy has been to keep the price down in the west. We had an example of that earlier this year-

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LIB

Douglas Charles Abbott (Minister of National Defence; Minister of National Defence for Naval Services)

Liberal

Mr. ABBOTT:

Mr. Chairman, I objected to the hon. member for Calgary East discussing subsidies, and I feel I must do the same when the hon. member for Dauphin proceeds to do so.

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LIB

William Ross Macdonald (Deputy Speaker and Chair of Committees of the Whole of the House of Commons)

Liberal

The CHAIRMAN:

I would call the attention of the hon. member for Dauphin to the fact that an arrangement was made under which subsidies would not be discussed at this time. That comes under another item.

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CCF

Frederick Samuel Zaplitny

Co-operative Commonwealth Federation (C.C.F.)

Mr. ZAPLITNY:

My only reason for bringing it up was that it had already been brought into the discussion. However, if it is the wish of the committee, I shall desist. I would say this, however, that a while ago the minister pointed out that the government did not wish to go into the oil business. If what the hon. member for Calgary East says is true-and I have no reason to doubt it-I am quite sure the government eventually will have to get into the oil business, to produce oil. It is admitted that certain of these companies have sites, money and equipment, but they will not drill for oil unless they are assured of a certain return. That is not private enterprise. Certainly it is not true private enterprise.

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PC

Douglas Scott Harkness

Progressive Conservative

Mr. HARKNESS:

Apparently the hon.

member for Dauphin does not understand the situation at all.

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CCF
PC

Douglas Scott Harkness

Progressive Conservative

Mr. HARKNESS:

I do not believe he or anybody else would put money into an enterprise the resources of which were being exhausted, unless he could see some reasonable return on his capital, let alone to make any profit. That is essentially the situation. Under ordinary circumstances any enterprise is capable of operating at a loss for only a relatively short time before it goes broke. That is what has happened to many of the oil companies. Those which are still in operation and have drilling sites see no reason in the world why they should drill, spend a lot of money, and perhaps not even get a well, unless they have a reasonable return. But if they do get a well, they do not receive sufficient return to recoup themselves for the money they put into it.

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PC

Harry Rutherford Jackman

Progressive Conservative

Mr. JACKMAN:

I believe the hon. member for Calgary East has made a strong case for greater consideration of these companies which endeavour to bring more oil to the surface, so that we shall have a better supply of domestic oil for use in the west. The oil we buy from the United States requires payment of a 75-cent subsidy to get it here. One would conclude, therefore, that the Canadian price is 75 cents below the world or United States price, or the price which is considered necessary to get oil from the well-developed fields just across the border from our western provinces. It would therefore seem clear, even to one without great experience in this field, that the price in Canada is not sufficient to encourage drilling, or to encourage the supply of domestic oil. I should think that, with the government's other measures to protect our supply of United States exchange, it would do everything in its power to bring more Canadian oil to the surface, so that we should not have to buy in the United States, much less pay the 75-cent subsidy above the Canadian price in order to bring the oil here.

Undoubtedly the industry is a particularly hazardous one. I believe the present allowances do not go as far as they might to encourage production. Those allowances should be increased. While I do not wish to mention the subsidy again, yet it is so germane to the subject matter that it must be apparent to all hon. members that our oil producers are in a much more hazardous field than are the producers in the United States field across the border. Yet they do not get the price those producers get. At the same time we are not giving our producers as fair an increase in the depletion allowance as we should, in order to encourage them, especially

Income War Tax

when they have to work under a price level substantially lower than that which applies in the United States. Therefore I stand behind the suggestion made by the hon. member for Calgary East, in the hope that the government will give consideration to the fact that our price is so much lower than that of imported oil. If some relief can be given, through increased depletion allowance and tax drawback on the wells which are drilled, as well as the deep test wells, we shall greatly improve the Canadian economy and save United States exchange.

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Mr. M A CD ON N ELL@Muskoka-Ontario

I am sorry to -be so persistent when the minister is so gracious; nevertheless I still think we are in a very unsatisfactory position, and I hope the minister will have another look at it.

I wish to make one comment on what the hon. member for Dauphin has said. He pointed out that people who were in this business wanted to be assured of a return. I think we ought to try to speak accurately-and I think the hon. member does try. I believe if he will study the situation he will find that there is enough money lost to satisfy either him or anybody else who feels that those who are in private enterprise should make losses. I think he will find that there are plenty of losses.

Coming back to the minister, I repeat what has already been pointed out, that twenty-eight out of thirty-two rigs stand idle. It does not seem to me to add up if in one breath the minister says this is incentive legislation and in the next he takes no cognizance of the fact that apparently it is failing to act as an incentive. Either the government wishes to have oil produced, or it does not. Again I suggest to the minister that if that is a fair and full statement of the situation, that great numbers of developed rigs are being shut down, further consideration of the matter is called for.

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LIB

Douglas Charles Abbott (Minister of National Defence; Minister of National Defence for Naval Services)

Liberal

Mr. ABBOTT:

The position with respect to tax concessions to the oil industry can be summarized in this way. In the first place, the treasury bears 50 per cent of the cost of drilling unsuccessful deep test wells. Second, every oil company is allowed to write off the capital cost against profit and loss.

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PC
LIB

Douglas Charles Abbott (Minister of National Defence; Minister of National Defence for Naval Services)

Liberal

Mr. ABBOTT:

There is a 100 per cent write-off of the capital cost against profit and loss account; if it makes a profit it can write off a hundred per cent of the capital cost against profit and loss account.

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Mr. M A CD ON N ELL@Muskoka-Ontario

If there is any profit.

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LIB

Douglas Charles Abbott (Minister of National Defence; Minister of National Defence for Naval Services)

Liberal

Mr. ABBOTT:

The proposal of the government goes further than that, so far as incentive legislation is concerned. We will pay up to 50 per cent of the cost of drilling an unsuccessful deep test well. If the well is successful I assume that the operator would get back one hundred per cent of his cost. That is as far as the government felt it could properly go in the line of incentive legislation-. That judgment may be mistaken, but there are other reasons which result in failure to drill wells. The parliamentary assistant to the Minister of Finance has pointed out that he helped to finance the first successful oil well in the Turner valley. One of the greatest incentives to further drilling is the bringing in of a new well. The hon. member for Calgary East knows that as well as I. As I have said, the government feels that the present incentives are all that it can afford to offer under existing conditions.

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PC

Douglas Scott Harkness

Progressive Conservative

Mr. HARKNESS:

I think the minister is under a misapprehension when he states that the treasury bears fifty per cent of the cost of an unsuccessful deep test well. If a new company starts out in the oil drilling business and drills a deep test well, it gets nothing whatever from the treasury. The only case in which the treasury bears fifty per cent of the cost is where a well is drilled by a company having sufficient revenue. I think I can make my point clear by a simple example. If it costs, say $400,000, to drill a deep test well, and it proves to be a dry hole, a small company with an income of $100,000 per year from producing wells would get a tax concession of $19,000 on their $400,000 loss. In other words, they would have a loss in connection with drilling that well of $381,000. If the well was drilled by a large company with an income of $1,000,000 from producing wells, the tax concession on that particular well would be $190,000. In other words it would, cost that company $210,000 to drill the well. As you can readily see, the effect of this will be to discourage new capital. There is no incentive in this resolution for new capital to go into the oil business. There are several small companies in Calgary which have drilling rigs and the necessary money, but they know that if they spend from $300,000 to $600,000 on a deep test well they will get no help from the government under this resolution. They would lose their money and would be out of business. Considering the return that they would get if they did bring in a producing well, they decide not to drill at all.

Income War Tax

The only people that this legislation really helps are the large companies. One of my objections to it is that it does not encourage the small operator who is chiefly responsible for bringing in new oil fields. Once a field has been discovered the large companies come in and buy up the various leases and drill wells, but in most cases the new wells which have been discovered on this continent were discovered by the wild-catter who puts down a well at times in places where the geologists say there would be no use in putting one down. That is how the great oil development has taken place throughout this country. This legislation does not help the small man.

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CCF

William Irvine

Co-operative Commonwealth Federation (C.C.F.)

Mr. IRVINE:

From the point of view of capitalism I think the hon. member who has just taken his seat- has made a good point. Undoubtedly the smaller men are at a disadvantage, but if the government is going to bonus this industry I suggest it should bonus itself and take either the loss or the gain, as the case may be, and not just go out to bonus every Tom, Dick, and Harry who may want to go into the oil business.

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PC

Douglas Scott Harkness

Progressive Conservative

Mr. HARKNESS:

There is no question of the government bonusing the industry. What the industry is asking for is a fair deal in the matter of taxes. It is asking for an increase in the depletion allowance to bring it into line with its competitors in the United States, and to bring it into line with the concessions now made ito the mining industry. That is the only sort of concession that will help the small operator. Then it is asking for an extension of this fifty per cent provision on deep test wells to wells which are drilled in the plains area. I do not know why the government will not put that into effect, because an oil well that goes down two or three thousand feet is just as valuable to the country as one that goes down 40,000 feet. As far as present exploration goes it looks as though there might be a better chance, in the next two or three years, of developing oil wells in the plains than in the foothills area. They can drill three or four wells there in less time than it would take to drill one in the foothills area.

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Mr. M A CD ON N ELL@Muskoka-Ontario

We have had placed before us figures which I submit show the virtual failure of the present legislation as incentive legislation. I should like to ask whether the government in considering the adequacy of this legislation had before it those or similar figures. In other words, did the government consider the present situation as described by the hon. member for Calgary East in reaching this decision? If they did not, would it not be 63260-266

reasonable to ask the minister to allow this resolution to stand so that they could take another look at it? After all, we are trying- at least most of us, with the exception of the gentlemen immediately to my left-to arrive at a situation which would give a chance to the smaller man.

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LIB

Douglas Charles Abbott (Minister of National Defence; Minister of National Defence for Naval Services)

Liberal

Mr. ABBOTT:

I cannot say that we

know the number of drilling rigs which were actually idle, but the whole situation with respect to oil exploration in western Canada has been thoroughly considered. The hon. member for Calgary East knows that there has not been a single successful deep test well as yet. This legislation has resulted in substantia] write-offs by I think seventeen concerns who have availed themselves of the fifty per cent privilege. As I said a moment ago, the government feels that this is as far as it can go to-day. Answering the hon. member for Muskoka-Ontario directly, I would say that the government has had under continuous review the position of the oil industry in western Canada and the exploration that is being carried on.

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PC

John Thomas Hackett

Progressive Conservative

Mr. HACKETT:

The tendency of legislation arising from resolutions of this kind is to give legislative effect to the programme of the gentlemen who sit to our immediate left. Their enthusiasm for these resolutions and for the legislation which will follow is easily [DOT]understood.

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August 2, 1946