How far will B.C. go to fix oil and gas royalties? ‘The devil will be in the details’

A majority of British Columbians agree the province’s oil and gas royalty framework is in need of comprehensive reform and say B.C. needs to develop a new system as quickly as possible that accounts for impacts to the environment, increases the economic value of the sector and reduces dependence on fossil fuels, according to the results of a provincial survey published last week.

More than 75 per cent of respondents to the Ministry of Energy, Mines and Low Carbon Innovation request for input said the current system is ineffective and noted “environmental protection” should be the highest priority when finalizing changes to the current regime.

“The message is clear: What may have worked 30 years ago does not work today and a new approach is essential for our future,” Bruce Ralston, Minister of Energy, Mines and Low Carbon Innovation, said in a statement.

The engagement process — which took place from Nov. 10 to Dec. 10, 2021 — consisted of an online survey and an open call for written submissions. Most of the respondents live and work in the Lower Mainland or on Vancouver Island, with only five per cent from the northeast and four per cent out of province. Most of those who said they live and work in the northeast or outside of B.C. were associated with an oil and gas company or industry group.

The province cautioned the results of the survey could be skewed given the voluntary nature of participation (which required participants to be aware of the process and make their way to the website.) This means respondents likely have strong views on the topic, whether for or against. 

B.C.’s royalty programs, developed more than three decades ago, were the subject of an independent assessment, commissioned by the province in 2021. The damning review found the credit programs deeply flawed and noted they may be propping up extractive and emission-intensive operations that would otherwise be uneconomical. 

The independent assessment also noted “piecemeal changes” to the credit programs over the years led to an overly complex system that became onerous and costly for the government to administer.

To date, B.C. has doled out credits to oil and gas producers through its royalty programs to the tune of more than $7 billion. Those credits, of which $3.75 billion remain on the books, reduce the revenue B.C. would have otherwise received from the extraction of fossil fuels, a public resource. 

It’s no surprise, then, that the general public is dissatisfied with the province’s oversight of the sector.

“It’s a regime that basically subsidizes production and doesn’t provide a good return to the treasury and is contrary to our climate and environmental goals,” Marc Lee, senior economist with the Canadian Centre for Policy Alternatives, told The Narwhal in an interview.

Donna Forsyth, former legislative advisor with the province, who worked on the Oil and Gas Activities Act in the mid-2000s and more recently helped draft the Water Sustainability Act, compared the current situation to making the minimum payment on a credit card.

“You’re technically doing something but you’re ignoring this exponentially increasing problem down the road,” she said in an interview. “It’s time to start paying down the debt.” 

The ministry told The Narwhal in an emailed statement it is reviewing the results in consultation with First Nations.

“A public announcement on next steps is expected in the coming months.”

Royalty review provides B.C. with opportunity to end fossil fuel subsidies

The results summarize more than 5,000 responses to the province’s engagement process — 91 per cent of which came from members of the general public. Of the 4,632 emails the province received, only 123 were unique compositions and the rest were part of letter-writing campaigns, nine opposed to the oil and gas sector and one in support of the industry. 

Forsyth said the lack of responses from the people who are most impacted — residents of the northeast — is noteworthy.

“Even that community is not going to necessarily step up and support the industry the way they could have,” she said.

As well as support for increased royalty rates, a system that disincentivizes new production and protects the environment, respondents called on the province to require companies to pay fees for “the use of water in operations that leave the water contaminated, such as fracking” and for methane leaks.    

Lee said he was pleasantly surprised by the overall results and is hopeful the government will respond in good faith.

“I think they could be setting themselves up to be able to say, ‘We’re eliminating fossil fuel subsidies as part of our commitment to climate action,’ and that would be a really good thing,” he said. “Obviously, the devil will be in the details around exactly what they’re eliminating, and how they do it and what kind of timelines those are all on, but I think they’re in a position to be on the side of the angels on this one.”

In its summary of the responses, the province noted most respondents favoured a new system that does not include credits for capital recovery. Under the current system, producers can apply for discounts to offset the initial costs of drilling of new wells before paying out any dividends on profits made. 

The authors of the independent assessment, economists Jennifer Winter and Nancy Olewiler, said this system created an environment where companies could use the government credits and subsidies to generate profits on projects that would otherwise be uneconomical, noting in their report the credit programs can “encourage extensive development beyond what would occur in their absence.” 

Under a system with no capital recovery, companies would only be able to develop high-yield operations that promise a healthy return on investment.

Industry respondents, which the provincial report noted represent two per cent of survey responses, argued for a system that retained the upfront credit, citing reasons such as a need to be “cost-competitive with other jurisdictions” and higher costs associated with extraction and transportation.

“B.C. needs to ensure it does not get left behind in the global push to grow natural gas supply and develop a competitive environment that attracts investment here rather than to countries that do not match our high environmental standards,” Geoff Morrison, B.C. manager at the Canadian Association of Petroleum Producers, wrote in a statement provided to The Narwhal. “The royalty review offers an opportunity to do just that.” 

Morrison said the association and its members provided feedback on the review to the province and will continue to work with the government to “enhance competitiveness for the industry while balancing the objectives of economic development and environmental protection as well as continuing to provide a fair return to British Columbians.”

Forsyth said she’s glad to see the province acknowledge the issue of water contamination but stressed the importance of ensuring companies are held financially responsible for their impacts on water — and that the fee structure should serve to decrease contamination.

“Previously, government’s response to ‘Should water be part of the royalty review?’ was, ‘In the independent assessment, they made no link between water and royalties,’ so I give them credit for now putting in the water issue as an assessment that needs to happen,” she said. 

But she noted an important point was overlooked in the province’s analysis of public responses — much of the water used in fracking is never going to be treated. 

“It basically infers that [companies] are going to remediate the water and they don’t  — they shove it underground. That’s a huge cost savings to the industry at the expense of potential risks to groundwater, and also the earthquake issue.”

Backlog of credits could continue to decrease B.C. government revenue for years  

While Lee remains hopeful the province will take this feedback from the public and create a new royalty framework, he warned that B.C. could still face years of fossil fuel development with few benefits to the economy.

“We still have this backlog that is tantamount to ongoing subsidies which diminish the revenues that we get back,” he said. “The government can raise the royalty rate, but the credits are kind of like money in the bank for the companies until they get production underway.”

More than half of the respondents said they felt the government should find a way to recoup those credits already on the books.

Andrew Gage, a lawyer with West Coast Environmental Law, said there could be legal options for the province to reclaim those credits but noted doing so would require new legislation and could raise issues with international trade agreements. Instead, the province could factor in outstanding credits when setting new royalty rates, he said.

“The government has pretty broad discretion to set royalty rates,” he wrote in an email to The Narwhal. “They could set a royalty rate that is moderately higher than they would otherwise set, reflecting the fact that there are a lot of royalty credits in circulation. The credits would then likely be used in the near future in order to keep production economical, with the available credits dropping in future years and the price of production increasing at that time, which could fit well with a transition strategy.”

Lee said it’s important the province factor in feedback on water usage in fracking and added he would like to see B.C. apply higher royalty rates to an often overlooked product: natural gas liquids. Those liquids and condensates are mostly exported to Alberta and used to dilute bitumen, he said. 

“They help bitumen flow through the pipeline, so it’s a pretty important and economically rich part of production,” he said, noting these liquids represent 20 to 25 per cent of B.C. production.

“Companies won’t drill a site that’s just natural gas — it’s got to have a certain content of these natural gas liquids, because that’s where they’re getting more economic value. I think that the B.C. regime is not recognizing that so we’re getting a low amount of royalties associated with that production.”  

New regime should reflect ‘true cost’ of B.C. oil and gas extraction

The province’s review process could be of great consequence for the management of land, water, wildlife and communities in the gas-rich portion of northeastern B.C.

The recent landmark B.C. Supreme Court case found the province infringed on Blueberry River First Nations’ treaty rights by giving a green light to so much industrial development in the region that the Indigenous communities could no longer trap, hunt and fish on their own territory. Fracking operations, which are growing to support both oil production in Alberta but also a growing liquified natural gas export industry on B.C.’s coast, have also encroached on farmland in the province’s northeast.    

Forsyth said she’d like to see the province bring more people to the table when creating a new royalty framework, noting that representatives from the Ministry of Environment, Ministry of Health and independent scientists would contribute valuable and important perspectives.

“I strongly feel that this absolutely clear division between what the people want and what industry wants has to be addressed,” she said. “Unless they bring in parties with unbiased expertise in these issues, where are they going to get the input?”

For Lee and others, the review of the system is an opportunity for the province to take a more holistic view of the impacts of the industry held against socio-economic benefits.

“We need a regime that fundamentally raises royalty rates, reflecting the true cost of taking those fossil fuels out of the ground, all the way from local health impacts up to global climate change.”