An Evaluation of the Exploration Tax Credit

The paper evaluates the economic and fiscal impacts in Canada of the exploration tax credit introduced in December 1985. It has examined such issues as the extent of exploration directly attributable to the credit, the cost of the credit to the federal government in forgone tax revenue, the impact of the credit on findings of undiscovered resources, and the degree to which the credit has accomplished its original objectives. The analysis concludes that the exploration tax credit has provided little stimulus to exploration activity in the oil and gas industry due to the fact that exploration costs are a small percentage of overall costs in most offshore oil and gas projects, offshore oil and gas projects are highly risky, and the exploration tax credit is moderate and taxes are only one of the factors for budget exploration by many companies. Moreover, the incentive seemed not to be introduced solely out of concern about exploration in Canada. Providing assistance to accompany the phasing out of the Petroleum Incentives Program was indeed a main objective.