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Bay Street Week Ahead-Another Green Battle for Oil Patch

Date: 12-Feb-07
Country: CANADA
Author: Jeffrey Jones

The ruts are well-worn, but the difference now is that the perceived offensive on the oil industry's financial health is from a supposedly friendly Conservative government with deep Western Canadian roots, not a Liberal crowd from the East.

The fear stems from Prime Minister Stephen Harper's minority government's new push to persuade skeptical voters, especially in Eastern Canada, that it cares about the dangers posed by greenhouse gas emissions and global warming.

Environment Minister John Baird has promised new emissions targets for the oil and other industries in coming months. He started consultation with energy bosses in Calgary Friday.

Emission cuts don't come cheap. So what does it mean for Bay Street, which has so far escaped big environmental restrictions on energy and ridden an unprecedented boom?

So far, stock prices haven't reflected new environmental cost burdens.

"Everybody's talking about it quietly, but there are more questions than answers. That's what it boils down to," said Martin Molyneaux, FirstEnergy Capital Corp.'s managing director of institutional research.

The S&P/TSX composite index closed on Friday at 13,084 points, off a record high set on Tuesday. Much of the strength in Canadian stocks has been due to the energy boom. In the past two years, the TSX's oil group is up 45 percent.

Analysts say it's impossible to layer costs of emission cuts on to their financial models for energy firms and oil sands developers because the Harper government has offered few hints of its plans.

One thing the government has been clear about is that it will steer away from Canada's commitment under the international Kyoto climate-change accord, which was to cut emissions to 6 percent below 1990 levels by 2012.

Harper, who used to openly question the scientific basis of global warming, has said greenhouse gas emissions are so far above the target that trying to meet it now would cause major damage to Canada's energy-intensive economy.

That has led environmentalists and opposition politicians to question his desire to get tough on industrial emitters, especially oil sands projects that are the target of more than US$100 billion in planned investments.

For Harper, who faces a tough battle to win a majority in the next election, carbon taxes or other major new costs would represent a huge political risk where he has the most support.

That's especially true with the income trust issue still top-of-mind.

Many Westerners were hopping mad when Finance Minister Jim Flaherty said in late October that he will tax trusts in four years, leading to major drops in energy trust unit prices. Some threatened to tear up their Conservative membership cards.

"You want to be able to develop the resources economically and it's hard enough as is," said Jeff Fiell, analyst with Octagon Capital Corp. "With further disincentives, it's only going to hurt projects and it's only going to hurt employment in Alberta."

There are ways to limit the impact. During a previous green battle between the oil patch and Ottawa in 2002, when former Prime Minister Jean Chretien signed on to Kyoto, he capped cost of emissions cuts for the oil industry at C$15 per tonne.

In addition, some energy firms, such as Penn West Energy Trust and ARC Energy Trust , have proposed building multimillion-dollar pipelines to carry carbon dioxide from oil sands plants and refineries for injection into old oil fields to boost production.

But until the Harper government comes clean with a detailed tight-rope act for cutting emissions, while protecting the competitiveness of the country's most lucrative industry, the impact on stock prices will stay murky.

(Bay Street Week Ahead appears weekly. Comments and Questions e-mailed to jeff.jones@reuters.com)

(US$1=$1.18 Canadian)

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