B.C. commits to reviewing oil and gas royalties as experts find system in need of ‘comprehensive overhaul’

The B.C. government is moving forward with a long-promised review of its decades-old oil and gas royalty program — a system described as “broken” in an independent expert assessment published on Thursday.

Commissioned by the province, the expert assessment found the outdated royalty system isn’t consistent with broader government and societal goals, including B.C.’s commitments to reduce greenhouse gas emissions that cause climate change.

“It is our view that nothing short of a comprehensive overhaul of the royalty system will ‘fix’ it,” concludes the report, written by Nancy Olewiler, a Simon Fraser University economist, and Jennifer Winter, an economist at the University of Calgary.

Over the course of the last three decades, a series of changes were made to the royalty regime to address changing market conditions and technology, Winter explained in an interview with The Narwhal. But without a more comprehensive review, those changes led to an overly complex system that’s costly for the government to administer.

At the same time, she said, the royalty system was created at a time when there was less concern about climate change.

What’s needed now is a “very broad conversation about how to maximize value for British Columbians, and that’s both the people and the firms operating in B.C., and how the royalty system interacts with other policies and other concerns,” Winter said.

“Little tweaks are not going to cut it.”

Energy, Mines and Low Carbon Innovation Minister Bruce Ralston acknowledged in a news release that a comprehensive review of the royalty system is “long overdue.”

“Government takes this situation very seriously and will work toward an overhaul of the current system that eliminates outdated, inefficient fossil-fuel subsidies and ensures British Columbians get a fair return on our resources,” he said.

As part of the review, the province will publish a discussion paper in early November and seek public feedback on options for a new royalty regime, with a goal to implement a new system by March 2022.

Environmental and other civil society organizations have long called for comprehensive changes to B.C.’s oil and gas royalty system and will be watching closely as the review unfolds.

“The whole regime is a mess,” Marc Lee, a senior economist with the Canadian Centre for Policy Alternatives, told The Narwhal in an interview. 

“It doesn’t make sense in terms of climate, and it doesn’t make sense in terms of good revenue policy,” he said.

Royalties are meant to be the public’s share of the profit that private companies earn by pumping oil and gas from public lands. But through a complex system of royalty credits, the public’s share of those earnings has been significantly eroded.

“Essentially, what we’ve been doing is allowing companies all of these really generous credits for digging deep wells and fracking and associated infrastructure, that negate the royalties that they then pay back to the people,” Lee said. “So, we have basically been getting almost nothing for the resource.”

In their report, Olewiler and Winter note that “the credit programs may be contributing to or possibly overcompensating” for the costs of developing oil and gas in B.C.

For instance, B.C.’s production rate reduction incentives, which offer lower royalty rates for products pumped from less productive wells, “may be encouraging continued extraction from wells that should have reached their economic end date,” the assessment says.

“Encouraging the production of more gas supply, particularly from less productive wells, when natural gas markets are oversupplied, adds downward pressure on prices and increases greenhouse gas emissions that might otherwise not have occurred,” it continues.

Olewiler and Winter also raise concerns about the infrastructure credit and deep well royalty credit, which has so far reduced royalty payments by $3.56 billion and could reduce payments by a further $3.755 billion if all existing credits are used. 

“If there were no deep well credits or infrastructure credits, it is likely fewer wells would be drilled,” they write in their assessment.

The credit programs have ultimately served to reduce the economic benefit to the public of B.C.’s oil and gas resources over time, the report notes.

Sven Biggs, Stand.earth’s Canadian oil and gas program director, said in a statement to The Narwhal, that the expert assessment confirms what the environmental organization has said repeatedly — “the B.C. royalty system for natural gas and oil is broken.” 

He raised concerns, however, that the report focused too heavily “on cutting red tape for the industry rather than addressing the broader goals of the B.C. government, including securing a fair return for B.C.’s natural resources, meeting our climate goals and reconciliation with Indigenous Peoples.”

As B.C. moves forward with its royalty review, observers say climate change must be a central consideration.

Lee said the B.C. government should not only stop issuing new oil and gas leases, it should also establish a program to begin buying back leases from companies to slow down fossil fuel production.

Royalty rates should be increased and fossil fuel subsidies, including the deep well and infrastructure credits, eliminated, he said.

Ultimately, “it should be much more expensive to take fuel out of the soil of British Columbia and put it in the atmosphere where it’s heating up the planet,” he said.