Thursday, August 24, 2006

Heritage fund makes for better energy decisions

VICTORIA - The NDP and the Liberals have been slagging each other over whether the government is selling off B.C. natural gas reserves too cheaply.
The NDP says royalty rate cuts worth about $240 million to oil companies since 2003 have been too generous. The Liberals say the New Democrats are “clueless” and the industry wouldn’t be as active without the special deals.
The whole affair is a reminder of why B.C. needs a heritage fund for a chunk of B.C.’s energy revenues.
The B.C. government cut the price of some of our natural gas reserves in 2003 to encourage companies to get the resources out of the ground quickly.
Across the country, Newfoundland Premier Danny Williams is raising prices on his province’s offshore oil reserves. If the energy companies don’t want to pay, that’s fine, he says. The oil will be worth more in the future anyway.
It’s a dilemma faced by anyone setting prices, even if you’re just trying to sell an old car. Too high and buyers may go elsewhere. Too low, and you give away money that you could have had. There's no easy formula.
The government put some of B.C.’s gas reserves on sale in mid-2003, cutting prices to encourage companies to step up their operations. The deals have cost taxpayers about $240 million. But the ministry figures that the activity they sparked was worth $900 million in additional revenue to the province — plus a lot of jobs in the northeast.
The discounts seem sensible. Companies got a lower rate for drilling deeper wells to get gas, for example, as an incentive to take on the challenge.
Another program cut royalty rates once the amount of gas coming from a well fell below a threshold. The idea was that companies would be encouraged to keep on pumping gas, instead of capping wells. Even at a lower rate, the province would get more money.
Based on the ministry’s analysis, the discounts worked.
But the Liberals’ claim the NDP was “clueless” for questioning the cuts looks shaky. This week the Alberta government announced it’s changing four royalty programs because oil and gas companies aren’t paying enough. The changes will bring in an extra $186 million a year.
Alberta’s equivalent of the deep-well and low-volume well discounts that I just described are getting an overhaul to increase the amount the oil companies pay. Alberta’s Conservative government and the NDP are on the same page.
Ultimately government has to makes the pricing decisions based on the best advice of professional staff.
But there is a built-in conflict of interest.
These are non-renewable resources that will appreciate in value. It may be in the overall public interest to hold out for the best price, even if that means waiting.
But governments face short-term pressures. They may be tempted to cut royalties to get cash quickly to pay tor today’s problems - even if it’s not in the province’s long-term interest.
A heritage fund reduces that pressure. If a chunk of oil and gas revenues are going into a fund to cushion future economic bumps, then governments face less temptation to cut royalties in a bid for quick cash.
A heritage fund also helps prepare for the day the oil and gas run out. There’s been a steady growth in identified gas reserves, but B.C’s. known reserves only support 16 more years of production at current rates. The government’s natural gas revenues were $100 million a decade ago. This year they will be $2.3 billion. In 20 years, no one knows.
And a fund would acknowledge that these resources should be creating benefits for future generations, not just for the people who happened to around while they lasted. It’s not a wacky idea. The BC Progress Board said last year the government should be looking at a heritage fund.
Now is the time to start.
Footnote: Neufeld says the measures have worked. More than 1,400 oil and gas wells were drilled in B.C. last year, more than double the 2002 total, the last full year before the royalty cuts. But it’s difficult to isolate the effect of the discounts. Natural gas prices were almost four times higher in 2005 than they were in 2002, a large factor in companies’ eagerness to develop the resource.

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