In 2019, BC’s Auditor General concluded natural gas operators were not required by government to decommission or restore inactive well sites. Furthermore, that funds collected from operators were inadequate to cover restoration costs for wells “orphaned” by gas company bankruptcies.
The Auditor General found that because of these deficiencies, the BC Government had not effectively managed the environmental and financial risks of non-operating oil and gas sites. In 2019, taxpayers were on the hook for $3 billion in cleanup costs, an amount that has grown larger in 2020.
Like the hundreds of millions of dollars BC Hydro is spending to deliver below-cost electricity to gas producers and processors, relieving the industry of restoration costs is another hidden subsidy of fossil fuels.
Like BC Liberals before them, the BC NDP misleads the public about the value of this industry. The Auditor General used this misinformation to soften its findings, stating:
The industry provides B.C. with 10,000 jobs and, in 2017, was expected to contribute $13 billion in provincial government revenues over the next 11 years.
According to the Employment by Industry report available from BC Stats, oil and gas extraction provided an average of 4,550 jobs in the four years 2016 to 2019.
Instead of providing an annual average of $1.2 billion in government revenues, the province has received no net revenues from natural gas royalties and rights sales during the last five years, despite record levels of production.
Royalty reduction credits accrued by industry since 2007 amount to $10 billion. These are reported not by the energy ministry but as footnotes to audited statements issued once a year. Thirty percent of the credits remain unused and will reduce future royalties.
The $3 billion of outstanding credits are not recorded as a provincial liability because government makes the fatuous assertion that credits may or may not be used. In fact, during the last six fiscal years, an annual average of more than half a billion dollars of credits have been taken.
Yet there are other revenue reduction programs little known outside the industry. A former BC civil servant described the situation to me:
As a BC taxpayer, and as an inhabitant of Earth’s atmosphere, what strikes me as alarming is that while royalty/tax discounts caused by the Producer Cost of Service program are disclosed in the Public Accounts, a similar royalty reduction program – in both scale and purpose – is absent.
In my opinion, the cost of the “Gas Cost Allowance” program, being a significant royalty reduction program, needs to be disclosed.
Here are the BC Government’s definitions: The Gas Cost Allowance (GCA) offsets the capital and direct operating costs associated with processing and transporting the Crown’s share of raw gas.
The Producer Cost of Service (PCOS) allowance offsets the cost of moving the Crown’s share of natural gas from the wellhead to the inlet of the processing plant.
Digging further into the GCA program, it becomes apparent that this program must have a very significant effect on lowering gas royalties, because GCA rates directly reduce the gas unit price upon which royalty rates are charged. The GCA is deducted from the producer’s monthly producer price and is used to value the crown’s share of royalty volumes.
Without disclosure, how are we to know if the program is only compensating gas producers for the “Crown’s share” of their cost, and no more? How do we know if the costs claimed for processing are reasonable – given that gas producers have a clear incentive to report inflated processing costs?
After all, based on public-facing policy descriptions, this program has been significantly reducing Crown revenue for decades.
Natural gas production once contributed billions of dollars a year to British Columbia’s provincial treasury. Then a neoliberal point of view took hold.
It was that revenue from natural resources should belong to the private sector and the public should provide subsidies and absorb infrastructure and environmental costs.
I am not surprised that BC Liberals established the current system. That party deposited millions of dollars in contributions from corporations and people involved in natural resource extraction. Pay-to-play was the rule.
I am shocked that John Horgan’s Government has continued the policies and even accelerated benefits provided resource companies. This is an astounding reversal of long established NDP principles.
As the Irish Rovers sang, “Johnny I Hardly Knew Ye.”
Management of Non-Operating Oil and Gas Sites, BC Auditor General, March 2019:
Oil and gas …introduces environmental risk and potential financial liability for government. Contamination from oil and gas activities can affect water and air quality, human health, wildlife, livestock and ecosystems.
…Decommissioning and restoration are the operator’s responsibility, but in cases where sites are ‘orphaned’ by bankrupt or absent operators, the OGC becomes responsible for the work…
[The BC Oil and Gas Commission] OGC had not reviewed the effectiveness of its joint oversight of high-risk contaminated sites with ENV [Ministry of Environment and Climate Change Strategy]…
While decommissioning wells and restoring sites mitigates environmental risks, even wells decommissioned to current standards could still pose long-term risks to the environment if, for example, well casings or cement were to fail. Further, legacy sites that were decommissioned and restored to previous standards could also present ongoing environmental risks...
We found that the OGC’s Liability Management Rating program was not acting as an effective incentive for industry to manage its liability obligations. We also found that securities that the OGC had collected from recently bankrupted operators did not cover the cost of restoring the orphan sites…
As of May 2018, B.C. had 27,526 oil and gas wells, with 7,474 inactive wells that had not been decommissioned, and a further 3,198 decommissioned wells on sites that had not been restored. This means that 10,672 non-operating well sites in B.C. had not been restored to mitigate environmental risks (see Exhibit 6). The OGC estimated that operators of oil and gas wells and facilities in the province were liable for a total restoration cost of $3 billion, as of February 2019.
The number of inactive wells in the province almost doubled—from 3,800 to 7,474—between 2007 and 2018. Over the years, operators have not restored sites as quickly as they have developed wells, resulting in an increase in the number of inactive and decommissioned wells on sites that have not been restored.
Categories: Natural Gas