Natural Gas

BC Government hides fossil fuel subsidies

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

21 replies »

  1. The question to ask is, who remains in a position of influence through both the Liberals and NDPs government? Who is influencing the influencers?

    Too many things are happening that don’t add up. Gross incompetence or massive corruption (possibly a mix of both), is the only way I can make sense of this.

    The beauty of the situation is that the mismanagement is at such a grand scale and information is so complicated and obfuscated that the general public don’t know what’s going on and they don’t believe you when you present them with the facts. To believe you would shake their whole belief system in the Liberals/NDP as the heroes/villains of our province. The fact is that the system itself breeds both incompetence and corruption. Elections are irrelevant until the bad apples in the system are removed…. the rot will spread.

    Liked by 2 people

    • Resource extraction licences should require comprehensive environmental performance bonds up front. The terms of the bonds should be set by the Province, not the bond issuer. This is not intended to throttle industry, but to safeguard our environment. Think about soil loss, landslides, erosion, chemical pollution, abandoned wells and structure, setc. Always remember Mount Polley.

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      • Tried that option around 2004 with a letter to Premier Campbell directly.

        No reply then or ever, even though he knew who I am from earlier movies.

        Erik

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    • Yes, you are very precise and right to the point as always, about what is happening and why it is happening to our tolerant liberal democracy, as it does with others democracies because of corruption and incompetence and how the rot spreads until possible tyranny or oligarchy finally takes over.
      The big question is what antidote or combinations are needed to stop the poisoning. So far it does not seem to be enough.

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  2. Good commentary. A stunning article by N. Farrell revealing increasingly deep incompetence/corruption in the provincial government’s mismanagement BC’s fossil fuel sector. Reflecting on the 1969 national bestseller “The Peter Principle” (why things always go wrong) by Dr. Laurence Peter and Raymond Hull, it’s hard not to believe that incompetence isn’t involved to a major degree. “In a hierarchy, every employee tends to rise to his level of incompetence.”

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    • When Rafe and I had ganged up on BC Hydro it was plain that I was not a “team player” (to use thoughts from Walley Gabbler ).

      The Vancouver establishment did not like the conclusion that I held that some folks were either financial illiterates or worse.

      BC Hydro’s Director of “forecasting demand” admitted to me at a public meeting in Victoria that he was under orders to get his future population and GDP values from a specific un-named consultant.
      My questioning was prompted by an inclusion of twice the population growth rate in the 2011 BC H Forecast of demand, than the growth rate then being used by Stats. Canada , BC and the provincial credit rating agency.

      The fix was in to satisfy NERC interests using the fitness of the Provinces credit rating and maybe other pledged assets.

      Cheers ,Erik

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  3. It should be interesting to see if there has been a huge turn-over in the civil service and in particular, at the senior level. An acquaintance of mine has a daughter who was a senior servant in the Liberal era in both the Ministry of Finance and also in Health. She got so disgusted with the waste and incompetence she quit. Don’t forget she was a career senior civil servant. These people don’t quit their jobs on whim. With her experience she had no problems finding a new job with better pay and with a lot less stress.

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    • There has not been enough of a turnover. Civil service is captured by corporations and powerful people.

      I have known many ethical employees like your friend’s daughter. They either leave in disgust or are packaged out and silenced. Only the compromised are left. Just do some digging to see who has been promoted on the back of a project failure. These people are experts at taking a failure and turning it into a success on their resume (e.g. $2M budget to create an app; $5M and 2 years late, no app. Resume states ‘managed $5M app development with 5 years of experience’)

      Only thing we can do is continue to speak the truth and expose the facts… I have little hope for positive change, but I do know I will die will my conscience and ethics intact.

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  4. Hi Norm; Thanks for posting the facts about Royalties that are not being collected but should be. . It is about giving away the assets belonging to the citizens of BC.

    Some while ago, when working as economist at the Canadian Transport Research Agency, we had the good fortune to be guided by Jack Pickersgill.

    He mostly left us to float our ideas in an unstructured way. The one bit of foundational advice he did give us was not to promote transport projects that would transfer substantial benefits to buyers from outside Canada. This was his way of telling us not to propose projects that would subsidize non-Canadian interests.

    The merits of this concept seem to have escape today’s politicians. They have signed Canada up to NERC so we can be talked into financing un-needed electricity generation at $100 per MWhr or greater costs, so we can sell at $40 per MWhr or less; they have signed us up to help finance an LNG facility when North American natural gas sales struggle to stay above US$ 2 per unit volume.

    As a Nation, Canada continues to behave as a colony.

    Keep up your great work. There are folks who are paying attention

    Cheers from Erik

    Liked by 1 person

  5. What concerns me is that there only 5 people (out of a population of 4 million!) that are concerned enough to post a comment. Okay, half that many are juveniles/seniors who are not vested or haven’t learned to write, but you get my point! We should be storming the bastille, or whatever its modern day replacement is!

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    • Sadly it may have to come too that in future, if the entitled and corrupt minded hand full of elites, plutocrats and oligarchs think they can just stay behind their gates whilst ruining everything we hold dear just so they can wave the power wand. Sooner or later it usually catches up. The entitled idiots never learn.

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  6. John says: “What concerns me is that there only 5 people (out of a population of 4 million!) that are concerned enough to post a comment.”

    Apart from the fact that even tens of thousands don’t frequent this site (though they should): this is a BIG story. I suspect hundreds will read it and stagger under the load. After getting half way through, I felt like I’d visited the buffet twice and was considering how I was going to fit in the dessert, without popping my buttons.

    It’s a challenge for Norm, I’m sure, to present the case in ways that will make the uninterested layman sit up and take notice — then repeat the details to their friends. Maybe Facebook memes would get the flow going.

    Liked by 1 person

  7. Adding to Norm’s review of the AG job numbers, readers (and voters) should be aware that a of O&G workers in BC are actually Albertan, working in BC on a transient basis. The large drilling and fracking companies are almost exclusively headquartered in central AB and do the majority of their hiring there, with crews often rotating in and out of work camps along the provincial border. So, most of the related provincial income tax related to these operations is not remitted to BC, especiaply considering the flat 10% rate in AB which is generally lower than the equivalent BC rate for above-average incomes.

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  8. While you are at it, the trucking industry is heavily subsidized by the public. Those massive semi’s literally pound roads into pieces, then the coast of keeping roads clear in snowy weather.

    For the BC Liberals, the trucking industry is one of their great sponsor’s and for the NDP it is all about union jobs.

    Let us face it, government doles out billions of dollars to political friends in the form of rebates, subsidies, weak laws, and/or deferred taxes.

    It is the Canada/BC politic, some sheep are subsidized and the common sheep just pay more.

    Like

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