B.C. started overhauling its natural gas royalty regime in 2022, but final details being worked out before its implementation on Jan. 1, 2027 have caused concern in industry.
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The latest provincial budget hinted at a start to the payoff on B.C.’s bet for developing liquefied natural gas, promising a revenue lift and an updated royalty regime to take effect next Jan. 1
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But industry is pushing back against some of the province’s proposals just as companies are now considering major new LNG production facilities, including Phase 2 of the LNG Canada plant in Kitimat.
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The objective is to “ensure British Columbians receive a fair value for public resources while supporting economic development,” according to the Ministry of Energy.
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FP West: Energy Insider
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The province set terms for a revised royalty system in 2022 aimed at streamlining what was seen as outdated and complicated royalties, which were offset by credits that companies earned for the cost to build infrastructure or as incentives to take on the expense of drilling deep wells.
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But Bloomberg News says a presentation to industry set off alarm bells over extra royalties that would kick in at higher gas prices, which came as a surprise to companies that had made decisions on drilling plans before knowing the details.
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No one from the ministry was available for an interview, but an unattributed background document said the modernized royalty regime would “be simpler, more transparent and aligned with today’s market.”
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What revenue does B.C. earn from natural gas extraction?
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The province collects royalties for the amount of natural gas that private companies extract from the vast reserves in B.C.’s northeast. Its previous royalty regime was based on regulations set in the early 1990s. Credit programs were added in the early 2000s as incentives to encourage industry to build infrastructure and offset higher costs for drilling difficult wells.
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Royalty rates were already sensitive to the price of natural price, so the province’s cut has increased or decreased depending on whether the sector is in a boom or a bust, despite a substantial increase in natural gas production over the past decade. In recent years, provincial royalty earnings have been as high as $2.3 billion in 2022-23, and as low as $191 million in 2019-20.
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What’s changing?
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In 2021, the province commissioned an study of its royalties. It concluded that the system was outdated, its regulations piecemeal, and overall “contributed to a significant decline in the Crown’s share of the net economic value” from its resources.
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In 2022, the government set a new framework to start taking effect over a transition period, which grandfathered older producing wells at the earlier rates.
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The new system that B.C. has adopted is a “revenue minus cost” model, according to energy economist Werner Antweiler. It uses a formula that accounts for the cost of drilling wells and building infrastructure to calculate royalties.
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“That’s what all modern royalty regimes look like,” said Antweiler, an associate professor in the University of B.C.’s Sauder School of Business. “You basically split the profits.”
