B.C. gas royalties, land sales falter

Unseasonable weather takes bite out of revenue pie, but government counting on quick recovery; offshore regime being developed

Gary Park

For Petroleum News

Having feasted off its energy industry over the last few years, the British Columbia government is adjusting to new realities.

Its natural gas royalties are forecast to take a 26 percent slump in the budget year that ends March 31, while land sales — like those in neighboring Alberta — are waning.

The province’s latest budget estimates gas royalties for the current fiscal year at C$1.4 billion, down C$500 million from 2005-06, but still C$100 million ahead of forests revenue, once British Columbia’s economic mainstay.

Gas prices for the current fiscal year are expected to average C$5.65 per gigajoule, well wide of the original budget forecast of C$8.55 and off 25 percent from 2005-06.

The commodity prices were dealt a double blow by a milder winter and cooler summer, lowering demand for heating and electricity generation.

However, the government is holding out hope for a recovery to C$1.7 billion in 2007-08, based on its prediction of gas prices at C$6.50 and a return to more normal winter temperatures.

It is also counting on a further slight gain in 2008-09 to C$6.70, bumping royalties up by another C$100 million to C$1.8 billion, reflecting tight supply markets.

But the province underscored the volatile nature of gas royalties. Each C$1 change per gigajoule causes a C$325 million shift in revenues.

The government remains optimistic about the sale of drilling rights, budgeting for an average price per hectare (2.47 acres) of C$863 in 2006-07, rising to over C$1,000 for each of the next three years.

But land sales for the first two months of 2007 may have dented that outlook.

So far this year the government has raised just under C$64 million from the auction of 55,782 hectares (137,334 acres) compared with C$105 million from 140,185 hectares (346,397 acres) over the same period of 2006.

On the upside, per-hectare averages in January and February rose to C$1,145 from C$748 a year ago, although the latest sale eased to C$822 per hectare.

Industry reaction biggest unknown

Until the initial details of that program are unveiled in March, companies are unwilling to indicate whether their plans will be altered.

In the meanwhile, several large producers — as they have in Alberta — are scaling back drilling activity this winter in response to softer gas prices, high service costs and reduced profits.

But the 2007-08 budget underscored the rich prospects in British Columbia, with onshore oil and gas resources estimated at 50 trillion cubic feet of conventional gas, 84 tcf of coalbed methane, upwards of 250 tcf of shale and tight gas and 7.9 billion barrels of oil.

The government said its oil and gas division is continuing to review its policies and programs to fine tune the regulatory regime in an effort to attract greater investment in the sector.

The division is also continuing to work on identifying the “potential benefits and risks of offshore development” to draft a comprehensive fiscal and regulatory regime and advance scientific knowledge of offshore activity.

It is researching management and regulatory regime in other jurisdictions to establish best practices for B.C. offshore development.

The division is teaming up with the province’s universities to build environmental baseline data to support responsible exploration and development of the offshore.

It has also negotiated a protocol agreement with the Nisga’a Nation to cooperate on offshore issues and is giving financial help to a project that will collect and distribute information to the Nisga’a on the risks and benefits of offshore development.

There are also plans to bring coastal community and First Nations leaders together to tackle a number of offshore matters, including regulatory frameworks, benefits, risks and opportunities.