By Scott Simpson, Vancouver Sun, February 22, 2012
Ramp-up to LNG production, increased overall demand is bullish for government revenue
The British Columbia government is anticipating a substantial recovery of natural gas royalty revenues over the next three years.
The money it annually collects as royalties from natural gas producers has fallen a long way in recent years, from $1.9 billion in 2005/2006 fiscal year to $313 million in 2010/11 - due mainly to a long-term decline in gas prices on North American trading markets following widespread adoption of more sophisticated extraction technology.
An exceptionally mild winter across North America dampened demand this winter, pushing prices down to their lowest level in a decade.
In addition, other fossil fuels are mixed in with gas recovered in some underground basins around the continent, such as the Montney Formation in northeast B.C.
Those relatively valuable "liquids" are supplementing drillers' revenue and generating profit from otherwise marginal resources.
But that's expected to change.
B.C. projects gas royalty revenue to edge up to $398 million in the 2012-13 fiscal year, rising to $846 million by 2014/15.
There is a host of reasons. One is straightforward - as the price of gas rises, so does the size of the royalty collected on each unit of gas that's produced.
Also, the government anticipates gas production volumes will grow by about 20 per cent in the next three years - particularly as gas producers gear up for an anticipated demand boom that will emerge as a result of the government's decision to transform the province into a major exporter of liquefied natural gas, or LNG.
Natural gas demand will also grow across North America as electricity producers phase out aging, inefficient coal-fired generating plants.
Finance Minister Kevin Falcon said the government's gas price projections are averaged out from expert forecasters in the sector.
Gas prices will also benefit from a "switchover" from oil to gas - which is substantially cheaper than oil for the same volume of energy.
"You start to see increase fleet switches ... large truck fleets for example start to switch over to natural gas. You start to see more demand be realized as a result of the marketplace changing to take advantage of very low prices.
"The experts in the sector believe there is going to be some ramp-up in the pricing. We have to take their word for it."
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