bc2007: B.C. needs to review natural gas royalties

B.C. needs to review natural gas royalties

Don Cayo
Vancouver Sun
October 27, 2007

I was thinking of writing a "get over it" kind of column aimed at all those energy companies and investors who've been whinging about Alberta's royalty review.

But it seems they've beaten me to it. Late Thursday, Alberta Premier Ed Stelmach announced a 20-per-cent royalty increase -- about three-quarters of what his province's Royalty Review Commission said it ought to be -- and on Friday the stock market barely blinked. Canada's major index, the TSX, was up smartly. And energy stocks, after starting the day down a hair, finished up about one quarter of one per cent.

So much for the dire warnings that raising royalties was a multi-billion-dollar blunder, that it would spell, if not death, at least debilitating disease for a formerly healthy energy industry. But, hey, with oil at $90-plus a barrel, did you really think players in the energy patch would pick up their marbles and go home?

Natural gas prices, of more interest to B.C. than oil, fluctuate to a different drummer. But gas supply contracts eventually reflect the price of oil, and over time their consistent price curve is up. While price volatility can cause short-term cash-flow problems for businesses and governments alike, any place with a lot of recoverable gas is ultimately sitting on a treasure trove.

And B.C. has lots of recoverable gas, certainly in the northeast where it's being pumped now, probably elsewhere in the Interior and, if political hurdles can be crossed, offshore as well.

The question is, are the people of B.C., through our government, getting -- and will we get -- paid what it's worth for a resource that can never be renewed? As I've argued previously, the outcome of the Alberta review suggests we very possibly are not.

Royalties are not a tax -- they're the sale of a public asset (energy in the ground) to a company that will transform it into something that can be consumed. Our asset is clearly appreciating in value. Thus, market principles suggest, so should its price.

Yet royalties are far too variable from place to place, far too complex in structure, and far too tailored to individual geographies for any simple comparison to stand. Some gas fields cost more to tap into than others. Some -- and this is a deal-breaker in parts of the world -- are so far from markets they're uneconomical without special breaks and/or prices. Some jurisdictions try to encourage faster or slower exploitation or, in B.C.'s case, year-round exploration instead of only in winter when access is cheaper. And costs can be driven by factors like the need to mitigate environmental damage.

A key factor Alberta looked at -- and B.C. will have to consider, as well -- is how its royalty structure stacks up against the rest of the world's. Alberta, with gas production four times greater than ours, is a particular benchmark we have to keep an eye on.

But if the industry can function there with higher royalties, odds are it can do so here as well. And if Alberta's gas is worth more than they've been getting, odds are that so is ours.

It would be naive for B.C. to simply raise its royalties in lockstep with Alberta. But it would be irresponsible for our government to not give the question some detailed study and thought. Something along the lines of Alberta's Royalty Review Commission is clearly called for.