Tuesday, August 31, 2010

Resource sales risk shortchanging future British Columbians

The provincial auditor general and the government are in a tussle, again, over the way more than $440 million in annual subsidies to the oil and gas industry are being handled.
It's tough to get people interested in accounting issues (until their RRSPs plummet because some company cooked the books and the auditors didn't provide the warning they were supposed to).
But the dispute raises broader issues, including the temptation for governments to hold a fire sale on non-renewable resources to pay the bills today and leaving future generations with nothing.
First, the accounting battle.
Auditor General John Doyle says the government is violating Canadian Generally Accepted Accounting Principles by failing to record the generous incentives to companies as expenses.
The government disagrees and says other provinces handle their incentives to lure companies in the same way.
I don't know who is right. My experience as a mid-level corporate guy was that the auditors had the last word. They were charged with certifying that the company was following the rules and the financial statements accurately represented reality.
If they expressed reservations about the financial statements - as Doyle has done - it was a bad thing and could even increase the cost of borrowing. Lenders and bond rating agencies like clean financial statements.
The accounting dispute raises more fundamental issues.
We own the natural gas resources under the ground.
The government of the day, on our behalf, sells companies the right to find and develop them. Leases are auctioned each month, giving companies the right to explore and develop.
If natural gas is found, the government, on our behalf, charges royalties on the gas taken from the ground. It's big money, about $1.2 billion this year.
Setting royalties is inexact. Try for too high a price and the energy companies head off - or threaten to head off - to Alberta or Montana or Nigeria.
The government is trying to be competitive enough to attract the energy companies, while ensuring that the owners - the people of B.C. now and in the future - get a good price for the gas we're selling.
But any government has a conflict of interest.
It wants the resource revenues - and the jobs and economic activity -now. There is unavoidable pressure to cut royalty levels to encourage companies to explore and develop gas wells as quickly as possible.
Even if the smart thing, in terms of the province's long-term interests, might be to keep royalty rates high and accept that development will take place over a longer term. That's especially true when natural gas prices are low, as royalties are based on the value of the resource.
The incentives - royalty cuts for deep wells and other harder to get gas, subsidies to help companies build roads and the like - apparently work. The government maintains each dollar in subsidies brings a substantial increase in royalties and drilling.
But the big winners are the energy customers, as jurisdictions cut the price of their resources to compete with each other. The Alberta government commissioned a review of its royalty rates and found they were too low; the public was losing about $2 billion a year. B.C. has never done such a review.
The big losers, arguably, are future generations.
We're selling a non-renewable public resource today and spending the money on ourselves.
When the gas - or coal or oil - is gone, the royalty revenue stops. A future generation will be left with government spending based on a revenue stream that no longer exists.
There is a simple solution. Other jurisdictions have set up heritage funds for all or part of non-renewable resource revenues.
That provides a cushion for the day the resource runs out.
And it reduces the temptation for governments to sell too cheaply in pursuit of short-term benefits.
Footnote: The outlook for natural gas prices is weak. The government based its budget on prices around $6.20 per gigajoule; prices have been more than $1 below that through the year. Each dollar that the price falls below the forecast means about $300 million in lost revenue.

1 comment:

Anonymous said...

you`d never know gas prices were dropping by terasens prices, always on the rise!