Low natural gas prices are shouldering the blame for the projected $1.14 billion deficit that British Columbia is facing in 2012-13.
Although land sales for natural gas exploration and production are also down, the main cause of the bulging deficit, according to the Ministry of Finance, is a natural gas price that is predicted to average just $1.41 per thousand cubic feet (mmcf) in 2013, not the $2.52 per mmcf noted in the original forecast or the $2.12 per mmcf mentioned in private sector forecasts.
Low natural gas prices are causing a decline in exploration and production activity in the province, translating to a royalty revenue shortfall expected to amount to $1.1 billion of a total $1.4 billion lost revenue from the natural resource sector over the next three years.
“Flaws in their policies,” said Bill Gwozd, vice president of gas services with energy sector consulting firm Ziff Energy Group, suggesting that the blame for the impending financial woes should actually fall on the shoulders of the provincial government.
“They have uniformly cut royalties across all [natural gas plays] in northeast B.C. from the plains to the deep foothills to the tight gas to the shale gas,” said Gwozd.
The idea behind reducing royalty rates is to encourage activity, but Gwozd isn’t impressed with the B.C. government approach.
“One-size policy does not work,” he said. “And the British Columbia leadership has shot themselves in their foot. Had they sought expert advice or expert advisors, the expert advisors would have quickly shown them that there’s different cost structures in the different areas. And, yes, their concept of spurring more development is technically correct, but you have to do it in different wedges.
“The Montney may need a little bit of assistance,” he continued. “The Horn River [Basin] needs more. But the deep foothills is a lost cause. Wash your hands and give up. Activity’s going to go down.”
Gwozd suggested that the government should have trained their eye to the bright future for natural gas in the province instead of focusing on the immediate troubles caused by low prices.
“[B.C.] is going to have more natural gas flowing than the province of Alberta,” he said. “So, this gets into long-term strategy development for the province of B.C.
“The current leadership that [is] giving these types of directions to the energy groups have the wrong vision. The British Columbia vision should be: we are going to grow and we want to position ourselves to have the right staff to do the right analyses.”
Royalty rates aren’t the only issue, however. Gwozd also points to a failure to promote “orderly development of infrastructure” in the natural gas producing regions of the province.
“Look at the broad picture. How big should the pipes be? How big should the plants be?” said Gwozd.
“The B.C. government has a clear financial interest in that activity because they have what’s called a B.C. Gas Cost Allowance (GCA),” he added. “When producers spend lots of money on facilities and process the gas, they’re not processing the B.C. gas portion for free – the royalty portion.”
The producers are given a credit by the government when they process that gas.
“But if there’s too many plants or plants that are too underutilized, the producers are capturing an incremental benefit that the B.C. government could get back if they were to manage it properly,” said Gwozd, remarking that better analysis of industry conditions could have allowed the Province to increase revenues simply by altering energy policies.
“But they do not have adequate staff or staff with the depth of knowledge,” he continued. “Because these ideas are new to them and they’re just growing into this area.
“In my professional opinion,” he said, “they need to hire key advisors that understand that area from a cost structure [perspective] and develop appropriate policies that industry would be receptive to, with the aim to increase the overall revenue that the B.C. government gets.
“Increase revenue rather than cut costs.”
However, the Ministry of Finance has indicated that they intend to make up the $241 million shortfall in 2012-13, the $389 million shortfall in 2013-14 and the $483 million shortfall in 2014-15 by cutting discretionary spending, freezing salaries for public sector management and freezing public service hiring.
"We are committed to delivering a balanced budget,” said Finance Minister Michael de Jong. “That's why we are taking additional steps to exercise greater fiscal restraint. This government respects taxpayers and we will not spend more of their money than we receive. We are looking for savings inside government, while protecting the programs and services B.C. families rely on."
Gwozd said, “They’re doing it with the wrong strategy.”