Natural Gas

Fossil fuel producers mining gold in Victoria

British Columbia’s NDP government issued a press release in May 2022 that promised an end to fossil fuel subsidies. Politicians were concerned that consumers troubled by rising energy prices might also be disturbed to know royalty credit subsidies to natural gas producers soared from $654 million in FY 2021 to $1,517 million in FY 2022.

Changes promoted by the NDP government are more smoke and mirrors than a real attempt at reform.

Politicians wanted people to believe that subsidies in the form of royalty credits were ending. To March 2022, these credits have reduced government revenues by $14.4 billion (2022 dollars) since first reported in FY 2007. The government’s announced policy change implied that gas producers would be paying billions of dollars more into the provincial treasury. That’s worse than highly unlikely.

John Horgan was quoted in the government’s news release:

For too long, a broken system of fossil-fuel subsidies has failed to align with our climate goals or ensure people fully benefit from these resources. That’s why we’re fixing the outdated oil and gas royalty system by eliminating the largest fossil-fuel subsidy in British Columbia. This will give British Columbians a fair return and allow us to invest in their priorities – like improving services, bringing down costs and tackling carbon pollution.

In fact, the value of reforms is unclear. A government backgrounder notes that existing gas wells and those where drilling started before September 2022 will incur royalties based on the current framework until September 2024. Producers will continue to benefit from accrued royalty reduction credits.

According to March 2022 Public Accounts, the most recent disclosure available to the public, royalty credits owed producers totalled $2.9 billion. Those credits are not wiped out but will benefit producers for years to come. Credits not reducing payments to government can be repurposed for “land healing” and emission reductions. Given that energy companies’ profits are through the roof, it is surprising that taxpayers must continue paying for what ought to be operating expenses of gas companies.

Under the proposed system, royalties of 5 percent will apply until producers recover capital costs of a well. Afterward, rates will range from 5 percent to 40 percent. It is impossible to discern if the new royalty framework will benefit the provincial treasury any more than the current system. We may know in the autumn of 2027 when we can read Public Accounts for the fiscal year ended March 2027.

However, there is another way fossil fuel lobbyists have picked the pockets of taxpayers. Until February 2020, government held monthly auctions of petroleum and natural gas (PNG) rights that provide exclusive rights to explore for or produce Crown PNG resources. In the past three years, government held only two sales and these brought in less than $4 million. No further rights tenders are scheduled.

Revenue from PNG rights sales declined when Christy Clark’s Liberals were banking political contributions from oil and gas companies. However, provincial rights revenues plummeted even more after John Horgan’s BC New Liberal Democrats took power in 2017.

The BC government promoted royalty framework changes heavily, but these may or may not improve the public share of resource values. However, we found no press releases and heard no speeches announcing the end of monthly rights sales that once brought billions of dollars into the provincial treasury.

Note: Credits accrued but not used by gas companies ($2,855,000,000 as of March 2022) have never been reported as a provincial liability. Government declared that future uses of the credits were uncertain and that meant they should not be recorded on financial statements. Of course, $11 billion in current dollars had already been deducted from royalty payments and the remaining amounts are likely to be used for private purposes. Uncertainty is a dubious label.

Categories: Natural Gas

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