The money rolls in for the Liberals as natural gas prices take off again

Vaughn Palmer
Vancouver Sun
June 12, 2008

VICTORIA - While surging oil prices will hurt consumers and business alike, they likely mean good news for the balance sheet of the B.C. Liberal government.

B.C. is not a big oil producer. It is a much more significant player in natural gas, which as a substitute for oil has racked up major price increases as well.

That means a windfall for the provincial treasury, because the price is already considerably higher than forecast in this year's provincial budget.

The lowballing wasn't deliberate. The finance ministry compiles natural gas forecasts from two dozen internationally respected sources and averages them into a comparable price in Canadian dollars.

The process, while independent, doesn't always produce flattering results on the bottom line. Last year gas prices ran about 20 per cent lower than forecast, producing a half-billion-dollar hit on provincial revenues.

This year the results are running in the opposite direction.

The budget forecast for natural gas royalties was predicated on a price of $5.65 Cdn per gigajoule "at plant inlet." That last bit refers to the base price used to calculate provincial royalties.

Currently, at-plant-inlet prices are running well ahead of the forecast. About $3.50 higher according to the most recent reckoning.

If natural gas prices remain high -- or go even higher as some analysts suggest -- then the province can look forward to collecting much more in the way of royalties over the year.

The finance ministry calculates that for each $1 rise in the price of natural gas over the forecast, the treasury collects an additional $300 million in royalties.

So if -- note the "if" -- the average price for the entire budget year were to be the current roughly $9.15 instead of the predicted $5.65, then the provincial treasury could look forward to a $1 billion top-up.

Nor is that the end of the potential revenue windfalls.

The treasury is also enriched by the sale of drilling rights, essentially up-front cash payments for the option to explore for natural gas.

Those sales have been running ahead of expectations as well. Better prices for the product means more interest in exploration, particularly where drilling involves greater financial risk.

B.C. benefits especially because some of its potential is locked up in shale gas deposits, which are more expensive to develop.

Expectations of a "land rush" were borne out in a May 21 press release from the energy ministry: "$441-million monthly rights sale largest ever."

Some 40 parcels of land covering 46,284 hectares fetched an average of $9,538 per hectare, three times the previous mark.

The record may not stand for long. When I mentioned the May sale to Energy Richard Neufeld recently, he said there's every expectation those returns will be exceeded in the next round.

B.C. is regarded as having the greatest untapped potential for gas exploration on the continent. Six of the 10 best sales of drilling rights in provincial history have been recorded in the past 12 months.

Accordingly, Neufeld's ministry has put up 99 parcels totalling 61,482 hectares for the June sale. If the bids are in the same range as last time, the take will exceed half a billion dollars.

The finance ministry, in its prudence, would ask me to note that not all of the benefit from increased sale of drilling rights will be registered in the current financial year.

The rights are a form of tenure. Companies buy in for a fixed period, usually five to 10 years.

Though the buyers commit cash up front, provincial accounting rules demand that the payments be apportioned over the length of the tenure, averaging eight years.

If the province collects $1 billion now -- as it may well do from the combined May and June sales -- only about $125 million will show up on the bottom line for the current year.

Still a tidy sum, and Neufeld notes a further benefit of the tenure system. "If they don't exercise those rights within the specified period of time, they revert to the Crown and we can sell them again."

Yes, as with the fabled hucksters of swampland, the government can sell the same plot of land -- or rather the drilling rights under it -- more than once.

All this good news from the gas sector has political implications.

With the forest industry battered, the tourism sector anxious and an election year approaching, the Liberals have good reason to worry about the health of provincial finances.

Any windfall in gas revenues will come in handy as they are squaring up the books and rolling out the goodies for a spring election campaign.

vpalmer@direct.ca