Federal tax favoritism of trusts north of the border is expiring at the end of this year, changing the fundamentals of what these oil and gas producers can and will own in the future. Until now, the trusts have mainly held assets in Canada, as income from assets elsewhere, such as the U.S., are subject to taxes in those jurisdictions, diluting a Canadian trust’s distributions till.

During the growth of the trust era of the past decade, resulting in more than 30 in the oil and gas business alone, most U.S. E&Ps divested their holdings at record premiums, while so many of the hungry, exploit-and-produce trusts competed for domestic properties. The North American oil and gas industry became bifurcated, both geographically and geologically: Canadian E&Ps became primarily exploitation-only, Canada-only companies, while most U.S. E&Ps have continued heavy investment in exploration and in almost any region of the world but Canada.

Crossborder deal-making may resume soon in force, though.

John Dielwart, chief executive officer of ARC Energy Trust and ARC Resources Ltd., says, “Today we are a distribution-paying trust but, in nine months, we will be a dividend-paying corporation.” Dielwart participated in a Q&A session with Hart’s Developing Unconventional Gas 2010 conference attendees in Fort Worth in March. Some trusts are converting to non-dividend-paying models, thus will spend all of their cash flow as a traditional E&P company does, so this will result in some increased spending on E&P north of the border, he says.

New technology will be deployed rapidly in the country, both in British Columbia’s Montney shale-gas play as well as in Alberta’s tight-oil reservoirs, he adds. The trusts have chewed up a lot of oil and gas producing properties over the years that remain ripe for new exploration efforts, especially using the latest horizontal and completion technologies that have exploded upon the U.S. market in the past decade.

And, there is another development that is expected to further open exploration in Alberta, in particular, to new domestic and crossborder investment: “Thankfully, the Alberta government recently fixed the mess they made of our royalty structure.”

And, oil plays are especially important now. “We will continue to advance our tight-gas plays, but every opportunity we have to use this same technology in oil, we as an industry will be doing that, and that’s where you’ll see a lot of companies moving some of their capital.”

New, crossborder investment will represent competition for assets, but also partners and endorsements, he adds.

“The fact that Shell could spend its money anywhere in the world and it chose to spend $7 billion entering the area we’re in (in the Montney) is wonderful. They are helping to advance delineation of this play much quicker than we could as a company of our size.”

More partners, and with global ties, may help Canadian producers find more markets for their gas, he notes. “The challenge the area has is that it’s the furthest distance from (the leading U.S.) market. It’s not like being in the Marcellus or the Utica, where the market is right there. We have to worry in Canada about diversifying our markets because we’re captive to the U.S. right now.

There is a hope that the Kitimat, British Columbia, LNG facility will be built. “The Apaches of the world are strongly stepping behind it for (marketing) their Horn River Basin production, and it’s a very good thing: If the bigger companies can come in and get that infrastructure built, it will help all of us.”

As for new Canadian E&P investment south of the border or elsewhere, Dielwart notes that Enerplus, which has been a Canadian trust, recently bought into the Marcellus play in Appalachia.

“The players are looking for a resource play because, if you’re not in a resource play today, the market doesn’t really care much about you.”

Prepare for more competition for U.S. assets in the coming months and year. And, pack a bag ready to shop again up north.

–Nissa Darbonne (ndarbonne@hartenergy.com), E-Editor, Hart Energy Publishing; Oil and Gas Investor, A&D Watch, Oil and Gas Investor This Week, OilandGasInvestor.com Today, OilandGasInvestor.com, A-Dcenter.com, UGcenter.com, UGcenter.com Today, EPmag.com, E&P Buzz, PipeLineandGasTechnology.com, PGT News, HartFUEL.com, FUEL.