Opinion: Are natural gas royalties capturing a fair public return for B.C.?

At $180 billion, B.C.’s debt has doubled since 2022, even with all-time highs in gas production and LNG exports.

One factor contributing to the growing deficit is low revenues from natural gas royalties, raising questions about whether these are capturing a fair public return. British Columbians own the resource, yet an almost entirely foreign-owned industry keeps most of the profit. Worse, we subsidize them to walk away with the wealth.

Energy companies pay royalties to the province in order to extract and sell natural gas that originates in the northeast’s Montney Formation, generating public revenue. Royalties are a lesser-known, but incredibly significant, policy that can contribute to paying for essential public services that we rely on, such as hospitals and schools.

In the wings is a new long-term royalty framework, following several years of a transitional system. Royalties under this new framework, used for projections in the B.C. budget, are forecast to generate only one per cent of total provincial revenue, annually, over the next three years, despite significant increases in gas production required to supply gas to LNG Canada — and soon to Woodfibre LNG, Cedar LNG, and Tilbury LNG — for subsequent export.

At roughly $1 billion a year, gas royalties are on par with the yearly cost of mitigating wildfires in B.C. They are about the same as the province’s three-year health-care expansion plan, on an annual basis, while lottery revenue continues to exceed them every year.

British Columbians are on deck to receive an 11 to 14 per cent royalty rate-of-return on natural gas, far below the province’s target of 50 per cent, a measure that only kicks in after producers have recovered their costs. This raises concerns about the financial underpinnings of the framework and who it benefits.

B.C. has already committed billions in taxpayer dollars to the LNG industry, and Ottawa recently created new “mega deductions” that include 100 per cent capital cost allowances for liquefaction equipment used in LNG facilities, and it halved the marginal tax rate from 13 per cent to 6.4 per cent for new gas pipelines to the lowest rate of any major economy in the world.

A weak royalty regime, particularly one with generous deductions, may incentivize industry and encourage proponents of LNG export facilities to reach final investment decisions, but it erodes the public benefits of continued gas extraction. It also fails to recognize unpriced externalities, including the climate and health consequences that arise from fossil fuel production, and which are paid for by people in Canada, not by energy companies, foreign investors, or their shareholders or citizens.

In 2021, economists Nancy Olewiler and Jennifer Winter conducted a government-commissioned independent review of B.C.’s oil and gas revenues to address public concerns. They determined the royalty system provided inadequate public returns, lacked transparency, and recommended a future framework that is “accountable, transparent, less costly to operate, promotes efficiency, and helps meet government and societal goals.”