With a debt that has grown beyond $80 billion and billions more in pandemic-related deficits ahead, the B.C. government is moving to overhaul an outdated natural gas royalty program that has left the province with diminished revenue from selling its key natural resource.
While the B.C. Green Party fought against “fossil fuel subsidies” in the minority government of 2017-20, John Horgan’s NDP doubled down on tax incentives to close the deal for LNG Canada’s $40 billion gas export project from Northeast B.C. gas fields to a shipping terminal now under construction at Kitimat. A dedicated export tax imposed by former premier Christy Clark was scrapped and Horgan’s government exempted LNG Canada from sales tax on construction, costing the province an estimated $6 billion over the 40-year life of the Shell-led project.
Now the province is turning to the sale of gas itself, agreeing with the Green Party that it is subsidizing the industry through a complicated set of royalty discounts that go back to the early days of shale gas drilling. A report by Simon Fraser University and the University of Calgary economists shows the 30-year-old B.C. royalty system urgently needs an update similar to what Alberta has already completed.
“Government takes this situation very seriously and will work toward an overhaul of the current system that eliminates outdated, inefficient fossil-fuel subsidies and ensures British Columbians get a fair return on our resources,” Energy Minister Bruce Ralston said as he released the report Oct. 7.
The next step is consultation with industry, Indigenous people and other stakeholders, with a target of February 2022 to recommend a new royalty system for selling B.C. natural gas.
The review by University of Calgary’s Jennifer Winter and SFU’s Nancy Olewiler describes a 1992 system with layers of incentives put in place over the years. There are royalty breaks for well age, low monthly production and deep drilling, with Crown-owned gas being sold for diminishing returns in a system disconnected from the actual value of the product.
Different rates for the methane gas and associated liquids and condensates produce a costly, complex system for both government and industry that assesses royalties on the raw resource entering processing plants, rather than on the value of refined products.
“Moving to the plant outlet, as in the Alberta system, for the point of determining gross royalties is a potential solution by having more of the costs (and prices) market-based, and their determination more transparent and auditable,” Winter and Olewiler wrote.