Are we selling off gas resources too cheaply?

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This article is courtesy of the Prince George Citizen

Written by Paul Willcocks

Six months into the year, and the B.C. government has sold almost $1 billion worth of gas leases.
That’s just short of the record total for all of 2007.

Which on one level is good news. The $970 million collected so far will pay for services or be put toward the province’s debt.

On the other hand, we’re making a lot of money selling off non-renewable assets. It’s a bit like like a farm family who decide to sell more and more of the property to cover today’s bills, until there is nothing left for the next generation.

The companies will pay royalties to the province on the gas they pump out of the ground, if their search is successful.

But those too are finite – the money will only flow into the provincial coffers as long as the gas flows from the wells. Then what happens?

And the topic of royalties raises a whole other issue. One reason the companies are buying leases and licences in B.C. is because we’re selling off the gas more cheaply than Alberta, our main competitor. We’re charging about seven per cent less than our neighbour, according to one industry expert.

That’s because last year Alberta decided the public should get a larger share of the record profits energy companies are making.

After independent reviews found the province was not getting a fair price for the oil and gas under the ground, Alberta’s Conservative government raised its royalty rates.

B.C. had a similar royalty plan, perhaps a little more generous to the companies to encourage development. But the government hasn’t raised rates here to get a better deal for the public.

Last month, B.C.’s deputy minister for oil and gas told an industry conference in Calgary that the only changes B.C. is considering are incentives – royalty cuts – to encourage companies to invest in infrastructure and deeper wells. The comments won a round of applause.

One problem in all this is that governments face a conflict of interest. Natural gas royalties are forecast at $1.2 billion this year, on their way to topping corporate taxes as a revenue source. The industry provides a lot of good jobs.

All governments are always looking ahead to the next election.
That means there is always an incentive to sell off resources now, at the expense of the future. The lease sales are done by auction, so the companies are paying the going rate.

But setting royalty rates – the cut the government takes when gas is taken from the ground – is just as subjective as setting a price for a used car you want to sell.

Make them low, and you can encourage more development now.

But if they are too low, the resource is sold too cheaply and the public loses out. (There’s no need for haste. The gas is likely to get more valuable with each passing year.) That’s why Alberta raised its rates. The government received two public reports – one from an independent panel of experts and another from the province’s auditor general – that found it was selling off energy resources too cheaply, shortchanging the public by up to $2 billion a year.

The B.C. government hasn’t done that kind of review. As you read this, some communications staffer is probably writing a letter Energy Minister Richard Neufeld will sign that points out – rightly – that royalty cuts have resulted in much greater gas development.

The letter will also likely say that the Energy Ministry regularly reviews royalty levels to make sure they’re appropriate.

But if you ask to see those reviews, you won’t get them.
And there simply has not been an independent, open review like those the Alberta government conducted.
An independent royalty review would make good sense.

So would a heritage fund – a place to set some of these revenues aside for the future.
Partly, that’s simply prudent. These are non-renewable resources. It’s risky to build government spending on revenue that might not be there for our children.
And a heritage fund would reduce the temptation for governments to grab the cash and jobs now, even if it means selling resources too cheaply.

Footnote: A coalition of environmental groups called for the establishment of a heritage fund in 2004. And the B.C. Progress Board, a business-oriented body set up by Premier Gordon Campbell to provide advice, called for the province to look at setting up a heritage fund for a share of oil and gas revenues in 2005.
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