Thank you.
The Small Explorers and Producers Association of Canada, or SEPAC, represents more than 400 junior oil and gas companies across Canada. I use the word “junior” because it's an important distinction in the oil and gas world. When I talk about junior oil and gas companies, I'm talking about companies that produce anywhere from zero up to 10,000 barrels of oil equivalent per day. We need to make that distinction before I get into the recommendations, because it's an important one.
We've had many challenges over the years, the first of which has been pricing, for natural gas specifically. Junior oil and gas companies are predominantly natural gas producers, and approximately 75% of their production comes from natural gas. Of course, it's no secret that right now, today, we live in a world of very low natural gas prices.
The second challenge we've had, which has become highlighted especially in the last 12 months, is the credit crisis. We rely heavily on bank financing, and credit lines have been cut drastically. We need other means of raising capital in a very capital-intensive industry.
The three proposals that I have before you relate specifically to the flow-through share program. It's not a new program; it's been in the Income Tax Act for more than 20 years. What we're looking for is changes to it.
The first one is that for a limited time period, to deal with the current situation, a 30-month period be provided for converting Canadian development expenses into Canada exploration expenses. This is for a temporary period. The proposal is jointly made with the Canadian Association of Petroleum Producers, which made it in a submission to the Minister of Finance this past summer. SEPAC comes into play in that we have said we would put our weight behind this recommendation as well, but we would want these expenditures eligible for flow-through share renunciations.
The second is similar to the first. It is that the first million dollars of Canadian development expenses, which gets a lower writeoff rate in the Income Tax Act, be eligible to be converted to Canadian exploration expenses, which have a 100% writeoff. The level of re-characterization has not been revisited since 1996, and it has not kept up with the costs to explore and to develop the resources. In fact, it was reduced from $2 million to $1 million back in 1996 to reflect the health of the industry. Things have changed quite a bit since then, especially in the junior world—and the flow-through share program is only relevant to the junior oil and gas world, not to the senior producers.
The third recommendation goes hand in hand with the second one. Access to the million-dollar re-characterization of development expenses to exploration expenses is limited to companies that have $15 million of capital on their balance sheets. This is far too low, and we find that very few of our members can actually participate in this program for that reason. We would like the limit raised from $15 million to $50 million.
We'd be remiss in not talking about what this might cost the government. As anybody who is familiar with the flow-through share program will know, it's really a timing issue. The junior oil and gas companies are foregoing their tax deductions and passing them off to the individual investors. So really, there's no permanent tax cost; the only tax cost there might be lies in the present value of the writeoffs. We've given a numerical example analyzing that. We think that on $100 of renounced expenditures, the cost to the government would be less than $2.
In summary, we're not asking for anything new here. What we are asking for is an enhancement of what's already in existence. This is an excellent program for the junior world. It's unique to the entire world. We just need the amounts updated to reflect current standards.
Thank you.