About Bill 10, Income Tax Amendment Act, in the BC Legislature, March 26, 2019:
I’d like to start, because it’s at the beginning of my speech, with what I believe is an incredibly important letter that I received from a civil servant in the province of British Columbia, a civil servant who worked in this government’s oil and gas provincial registry, who has resigned. He has resigned because of what’s going on in B.C. with respect to the LNG royalty regime.
Let me read this letter. This letter was mailed to the Premier, accessible by FOI, and it says the following.
I am resigning today as a public servant and would like to draw attention to certain issues in our province’s gas royalties program and administration. With four years experience as a royalty analyst for the province, five years of field experience in upstream oil and gas operations and undergraduate economics training, I offer my somewhat informed perspective below with the hope of catalyzing increased transparency and perhaps improvement to B.C. gas royalty policy.
Conflict of interest in policy control
The Ministry of Finance and the Ministry of Energy, Mines and Petroleum Resources, EMPR, jointly govern and administer natural gas royalty policy. However, policy is largely controlled by EMPR, with Finance tasked with administering the corresponding royalty calculations based on monthly production data.
Gas production and technology has changed rapidly, along with the economics of this industry, over the past 15 years, during which time our gas royalty policy has remained largely unchanged, with the said extension of the deep-well credit to shallow wells being added.
In my opinion, much of our royalty policy is not functioning as originally intended, leading to unwarranted ballooning of industry subsidy amounts. This expensive subsidy growth is hidden by complexity and less-than-transparent public-facing information.
EMPR has become responsible to promote the B.C. natural gas and LNG industry internationally, as well as creating a policy that encourages gas sector growth and profitability.
Stop right there. I’ll come back to the letter. The EMPR has become responsible to promote the B.C. natural gas and LNG industry internationally. Hang on. Right there is the first flag.
EMPR is the regulator, not the promoter — the regulator. When the regulator becomes the promoter, we have what’s called capture, and we have perceived, real or not, conflict of interest.
We need to ensure that the public’s interests are always front and centre, and this can never be trusted when we have the regulator captured by also being the promoter.
These are aren’t my words. These are the words coming from this ministry analyst, who has since resigned. I continue.
The ministry closely collaborates with gas producers on a variety of initiatives.
However, there is a natural conflict of interest between promoting gas producers profitability and ensuring the B.C. public receives a fair royalty for the private extraction of our shared natural resource.
A segregation of duty should exist between policy makers and industry promoters but, from my perspective and experience, clearly does not.
Consequently, there is no unbiased champion for the B.C. taxpayer’s rights at the policy table, and the costly consequences of this absence are hidden behind complexity.
I continue with the letter. “Billions of direct subsidization disguised as drilling incentives” is the next headline.
The deep-well credit program, originally designed around now outdated assumptions of drilling technology, represents an ongoing, eye-watering transfer of the provincial tax burden from natural gas producers to the B.C. taxpayer.
This program, originally devised in 2003, has directly reduced gas producers’ existing and future royalty liability to the Crown by nearly $6 billion Canadian today.
The subsidy continues to grow. In each of the last fiscal years the Crown has issued more offsetting deep credits than it collected in actual total oil and gas royalty revenue.
Put simply, the Crown is giving out $2 in available royalty tax rebates for every dollar in royalty tax payables.
I’ve been raising this in this Legislature for what must be two to three years now and seem to be hitting deaf ears. Frankly, the legislative press gallery have been caught up in the hoopla of the LNG promises and have really not been exploring the scale and level of this giveaway either
Let’s continue with this letter.
The deep credit program does not achieve any measurable behavioral impact on industry or benefit society other than increasing the profitability of gas production at the expense of the public.
When the program began, only a small fraction of new wells would qualify for credits. A single deep well produces more gas than many shallower wells. Therefore, fewer total wells are needed to be drilled, with less surface equipment and road-building reducing costs and environmental harm.
However, in the past four years, 99 percent of all new wells qualify for the program. An industry would drill these types of wells regardless of our policy, due to the inherent cost savings and productivity gains that arise from horizontal fracking versus vertical fracking and profitability achieved by this modern, commonplace type of well construction.
Royalty tax reduction programs should be employed to change behaviour and solve specific problems, rather than a complex and misleadingly labeled subsidy.
The cost of drilling and completing a deep gas well in B.C.’s main formations has declined drastically over the past decade. Yet our royalty discounts per new deep well remain fixed.
The total producer cost of service allowances offset Crown revenue annually by over $100 million. In my opinion, the unfair and illogical way the allowance is granted to producers overcompensates them by many tens of millions of dollars per year at the expense of the B.C. public.
…The policy rewards high-cost operators while disincentivizing industry behaviours that might lower costs or increase efficiency.”
The above is from Hansard.
In recent years, IN-SIGHTS has often focused on two subjects: giveaways to private power producers (IPPs) and vanishing revenues from natural gas, despite substantially increased production.
The Horgan Government commissioned the Davidson report on IPPs. It reflected much of the information about IPPs that IN-SIGHTS readers have known for years. Rightly, it pinned the blame for this disastrous program on BC Liberals. That was politically convenient for the NDP.
However, while BC Hydro ratepayers are burdened by billions of dollars lost, the government has done nothing more than slow growth of payments to private power companies, most owned outside BC.
By messages to me and statements in the Legislature, members of government credited this site for drawing attention to excessive payments to IPPs. There has been no applause for me raising the other issue.
Excepting BC Green Party leader Andrew Weaver, politicians on both sides of BC’s Legislature are reluctant to discuss natural gas policies. This week, the BC NDP raised gas subsidies. That’s unfortunate because climate change is a critical threat to the world we live in and fossil fuels are a prime cause.