Until something better comes along, the economy in western Canada will be built on natural resources.
Provincial governments in the West depend on resource revenue the way we all depend on oxygen. Whenever that expected cash flow is threatened it makes governing politicians sweat, sometimes a great deal. As oil prices plunge, for instance, you can sense the moist brows and clammy hands in Alberta's corridors of power.
It's no secret that the province's economy is built on the gooey black stuff in the ground. It relies on royalties from mineral extraction more than any jurisdiction in the country. It bases its budget forecasts on oil being a certain price per barrel. As things stand today, that number is about $15 a barrel less than the province was anticipating. That kind of variance can blow a pretty big hole in your budget. Those are dollars Alberta needs to meet the demands of tens of thousands of newcomers pouring into the province each year.
Alberta's neighbour to the west is also feeling the impact of a fickle energy market.
This week, B.C. unveiled the tax it intends to impose on companies considering exploiting the province's natural gas reserves. Those are the reserves, and the riches they would generate, that Premier Christy Clark spoke so confidently about during the last provincial election campaign. Back then, the nascent LNG industry was going to be a trillion-dollar cash cow that would not only wipe out the province's debt – now at more than $60-billion – but also infuse a new Prosperity Fund with potentially a $100-billion or more for future generations.
The premier stumped on this glorious vision everywhere she went. It no doubt played a large part in the miraculous comeback victory that she authored.
But a funny thing happened in the intervening months – the landscape of the LNG business changed. The healthy margins that appeared to exist back in 2013 shrank. And as they did, the royalty regime the government was talking about as it conjured its imaginary Prosperity Fund began to look different too. It took on an onerous hue.
Big-name proponents such as Malaysian energy giant Petronas weren't subtle when voicing concerns about the royalty targets B.C. was considering. Go ahead with them, Petronas's top executive said, and we're out of here. Outwardly, the government tried to happily slough the threats off as just being part of negotiations. Inwardly, it was scared witless. Governing politicians in B.C. know how high the LNG stakes are.
This week, we discovered just how far the B.C. government was prepared to cave in order to assuage proponents like Petronas. It effectively cut the royalty tax it first talked about in half. There was mention of that number climbing a couple of points at some point down the road, like 20 years down the road. But that, of course, is fiction. No one knows if there will even be an LNG industry in B.C. 20 years from now. In fact, no one knows how much of one there'll be in five years.
Even with half the royalty revenues it was expecting, B.C. can still anticipate bringing in a lot of cash from natural gas if three or four or five big companies set up shop in the province. It won't produce quite the economic miracle Ms. Clark once imagined on the campaign trail but it would help pay for a lot of infrastructure and government services. And this is money the government is counting on to do just that: it admitted as much in the recent throne speech.
The LNG industry reacted with cautious optimism to B.C.'s newly-considered royalty regime. But of course it would. It surely knew what was coming. Petronas and others would have signed off on the number the government finally settled on. But even with that concession, it's not a certainty these companies will make the multi-billion-dollar commitment that establishing operations in the province would entail.
And what if they don't? The B.C. government doesn't even want to discuss or imagine that scenario. Understandably so. When it comes to the future of the province's economy, there doesn't seem to be a Plan B. Exploiting the province's natural resources is it.