DAVID EBNER, Globe and Mail, Mar. 03, 2010
Province predicts three more years of deficits as Horn River and Montney fields' cash output undermined by lower gas prices
It's an equation that's written in red ink: Less revenue from more gas.
British Columbia tabled a budget yesterday afternoon that forecast three more years of deficits - and one big reason is the massive new fields of natural gas in the province's northeast won't save the treasury in Victoria.
The government predicted royalties on natural gas will rise to $1.25-billion in 2012-13, primarily because of large production increases.
B.C. forecasts output of 1.7 billion cubic feet a day of gas by that year, up more than half from this year's 1.1 billion.
The catch: even with all that new gas coming out of the ground, royalties will still be lower than the peak year of $1.31-billion in 2008-09.
Development in the prolific Horn River and Montney fields underpin the production surge and royalty rebound--and can be blamed for the equation of less from more. The two neighbouring regions in the rugged northeast are part of the North American shale gas revolution, which has severely undercut gas prices with ample new supply.
What that means for governments, as well as for companies, is that all the new gas likely won't mean the revenue windfall that happened during the brief periods last decade when tight supplies caused prices to spike to more than $10 per thousand cubic feet.
"We're not going to see windfalls," said Jock Finlayson, executive vice-president of the Business Council of B.C. "And the province will have to work harder to generate the revenue. We have a good product but we're a long way from the market."
B.C.'s citizens, the owners of the resource, are already paying a lot for companies to drill in the northeast. In the ever-more competitive natural gas business - with everyone from veterans Louisiana, Texas and Alberta battling newcomers New York State and even the province of Quebec - governments provide generous incentives to invest, with B.C. among the most generous.
The province is also forging ahead on the harmonized sales tax, a blend of the provincial sales tax and the federal GST. It's widely unpopular among citizens but the government says it will cut costs for new business investments by 40 per cent.
In his budget speech, Finance Minister Colin Hansen declared: "[It is] the single most important step government can take to strengthen our economy."
The government's gas royalty breaks and road and pipeline-building credits (for the barely developed northeast) cost $168-million in the fiscal year ending this month and will more than double by 2012-13 to $363-million--equal to 30 per cent of forecast royalties that year.
The "implicit average" royalty rate is about 13.5 per cent through the period, budget documents indicate, far below Alberta.
This sort of gamesmanship will be parsed carefully in the province on the other side of the Rocky Mountains. Alberta has constantly been rethinking its decision in 2007 to significantly increase natural gas royalties, and has made numerous adjustments since then for the product that fuels the provincial treasury.
While the natural gas numbers appear to tell a somewhat stark story, the price of the commodity - even if it seems it's been mired at a relatively low level for a long time - is highly volatile. A $1 change in the price can increase or decrease royalties by $300-million.
(The forecast for the coming fiscal year is $4.29, after the commodity has been taken from the ground and arrives at processing plants.) When prices spiked to record levels in September, 2005, after Katrina destroyed New Orleans and gas infrastructure in the Gulf of Mexico, B.C. saw $1.92-billion in royalties pile in on the same volume of production that exists today.
While gas in B.C. is a story of less is more, forestry is much worse--and it doesn't look like it'll ever recapture its status as the bedrock of the B.C. economy.
After a forests-revenue low of $345-million in the fiscal year ending this month, on a harvest of 41-million cubic metres, revenue is predicted to rebound to $603-million in the next three years as the amount of timber cut on the coast and in the interior rebounds more than 20 per cent to 50-million cubic metres.
Still, it is less than half the $1.3-billion and 69-million cubic metres in 2006/07, at the end of the house-building boom in the United States.
And while the province is watching its mining sector percolate with new mines under construction, no immediate flood of cash to the treasury is predicted. Coal and other minerals and metals are forecast to generate $295-million in the fiscal year ending this month and average only a little bit more in the next three fiscal years, $301-million.
