It's a red-ink equation: Less from more.
British Columbia tabled a budget yesterday afternoon that forecast three more years of deficits-and a glaring part of the reason is that the massive new fields of natural gas in the province's northeast won't save the treasury in Victoria.
The government predicted royalties on natural gas will almost triple to $1.25-billion in 2012-13 compared with a gutter low of $464-million in the fiscal year ending this month. The big gains are due to large forecast production increases, output of 1.7 billion cubic feet a day of gas by 2012-2013, up more than half from 1.1 billion this year.
In the three years before the price of gas plunged, royalties averaged $1.22-billion and peaked at $1.31-billion in 2008-09.
Development in the prolific Horn River and Montney fields underpin the production surge and royalty rebound-and can be credited/blamed for the equation of less from more. The two neighbouring regions in the rugged northeast are part of the North American shale gas revolution, which has severely undercut prices with ample new supply.
What it means-for governments, as well as companies-is all the new gas likely won't make as much money for anyone like the commodity did during the brief periods last decade when tight supplies helped spiked prices for natural gas at times to more than $10 per thousand cubic feet, producing huge windfalls. The price through the 2000s averaged about $6-triple the $2 registered in the 1990s when gas was also bountiful.
"We're not going to see windfalls," said Jock Finlayson, executive vice-president of the Business Council of B.C. "And the province will have to work harder to generate the revenue. We have a good product but we're a long way from the market."
B.C.'s citizens, the owners of the resource, are already paying a lot for companies to drill in the northeast. In the ever-more competitive natural gas business-with everyone from veterans Louisiana, Texas and Alberta battling newcomers New York State and even the province of Quebec-governments provide generous incentives to invest, with B.C. among the most generous.
The province is also forging ahead on the harmonized sales tax-a blend of the provincial sales tax and the federal GST. It's widely unpopular among citizens but the government says it will cut costs for new business investments by 40 per cent.
In his budget speech, Finance Minister Colin Hansen declared: "[It is]the single most important step government can take to strengthen our economy."
Specifically in natural gas, the government's royalty breaks and road/pipeline-building credits (for the barely developed northeast) cost $168-million in the year ending this month, more than doubling by 2012-13 to $363-million-equal to 30 per cent of the $1.25-billion predicted to be actually paid to government.
The "implicit average" royalty rate is about 13.5 per cent through the period, budget documents indicate, far below Alberta.
This sort of gamesmanship will be parsed carefully in the province on the other side of the Rocky Mountains. Alberta has constantly been rethinking its terrible mistake in 2007 to significantly increase natural gas royalties, making numerous adjustments since then for the product that fuels the provincial treasury.
While the natural gas numbers appear to tell a somewhat stark story, the price of the commodity-even if it seems it's been mired at a relatively low level for a long time-is radically volatile. A $1 change in the price can increase or decrease royalties by $300-million.
(The forecast for the coming fiscal year is $4.29, after the commodity has been taken from the ground and arrives at processing plants.) When prices spiked to record levels in September, 2005, after Katrina destroyed New Orleans and gas infrastructure in the Gulf of Mexico, B.C. saw $1.92-billion in royalties pile in on the same volume of production that exists today.
While gas in B.C. is a story of less is more, forestry is much worse-and it doesn't look like it'll ever recapture its status as the bedrock of the B.C. economy.
After a forests-revenue low of $345-million in the fiscal year ending this month, on a harvest of 41-million cubic metres, revenue is predicted to rebound to $603-million in the next three years as the amount of timber cut on the coast and in the interior rebounds more than 20 per cent to 50-million cubic metres.
Still, it is less than half the $1.3-billion and 69-million cubic metres in 2006/07, at the end of the house-building boom in the United States.
And while the province is watching its mining sector percolate with new mines under construction, no immediate flood of cash to the treasury is predicted. Coal and other minerals and metals are forecast to generate $295-million in the fiscal year ending this month and average only a little bit more in the next three fiscal years, $301-million.
All in, the resource/export dependent B.C. economy is set to convalesce slowly, and modestly, from the recession. After a 2.9 per cent decline in 2009, a gain of 2.2 per cent is predicted for 2010, with 2.3 per cent in 2011, 2.7 per cent in 2012 and 2.8 per cent in 2013. The estimates are slightly below an average of private-sector forecasts assembled by the finance department.
David Ebner