Race to the Bottom

The false economy of BC’s natural gas royalty reductions

The BC budget may try to hide the figures, but there is no getting around the facts, the BC Government is getting less and less for our Natural Gas. The royalty rates for this year are expected to hover around 13% down from 23% just three years ago. If you drill a new well your rate will be as low as 2%.

This isn’t only bad news for those of us who would rather see our province supporting energy conservation instead of fossil fuels, it’s also bad for the economy. The actual cash BC collects on its natural gas is equal to the volume of gas times the price times the royalty rate. As the price for gas has dropped BC has attempted to up the volume by cutting the royalty rated to fire-sale levels.  Here they have been successful. Gas production in BC is at an all time high. But at what cost?

The Minister of Finance seems to think he is on to a winner, claiming to make $2.50 from increased production for each $1 in royalty credits he gives to the gas industry, but really he is just in a race to the bottom. Gas prices are currently at a seven year low, and by adding to North America’s glut in natural gas, BC is pushing prices even lower.

Ministry staff have admitted to Dogwood privately that the purpose of the gas royalty subsidies is to make BC more attractive for drilling than Alberta. But is stealing production from our neighbor with giveaways, good policy? And what about the climate implication of the ramped up drilling?

BC is getting only pennies on the dollar compared with what it could get for it’s gas when prices recover. Subsidizing industry during a glut is just bad policy.

Of course the BC government has its reasons. BC needs a quick cash fix. Unlike most jurisdictions that recognize that commodity prices are inherently unstable and that eventually the gas will run out, BC pours all its gas money into general revenue instead of keeping a good chunk aside for a legacy or transition fund like Alberta or Alaska.  In the good times tax cuts sound better than rainy day savings.

Lets hope the recession teaches us something.

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