B.C. extends deficit horizon to 4 years

Gary Park

For Petroleum News

More than ever, the thinking behind British Columbia’s drive to make its natural gas industry competitive is becoming apparent.

Just last winter, as the global economy started its tailspin, Finance Minister Colin Hansen said his province was “doing remarkably well. … We will not be running a deficit in British Columbia.”

By February, when the 2009-10 budget was unveiled, Hansen was forced to admit that his government’s balanced-budget law, introduced in 2002, would have to be revised.

“It will be necessary to run a temporary deficit, for the next two years only,” he said, in forecasting a C$495 million shortfall. “By the third year, we will once again be back enjoying balanced budgets.”

Premier Gordon Campbell repeated that figure during a June election campaign, which saw him capture a third term in office.

A new budget will be tabled on Sept. 1, by which time the deficit will have ballooned to about C$3 billion, Hansen admitted.

And that will be the first of four deficit budgets.

The impact of the economic slump on British Columbia’s revenue stream “has been far beyond what we had previously anticipated,” he said.

As a result, legislation will be introduced this fall allowing the government to run deficits for four years.

Hansen told reporters that revenues over the past three months dropped by about C$2.2 billion from budget forecasts and expenses grew by C$400 million.

One of the leading contributors has been the price of natural gas, which has fallen to a seven-year low of about C$3 per gigajoule, compared with the budget estimate of an average C$5.87.

Every C$1 decline translates into a revenue loss of C$275 million to C$325 million.

Rather than closing its eyes, blocking its ears and hoping for a miracle rebound, the government has decided it is better to spur even greater activity in its shale gas region, which could hold as much as 1,000 trillion cubic feet.

Energy Minister Blair Lekstrom said the Horn River and Montney plays are the foundation that could turn British Columbia into an “energy powerhouse” and, even more importantly in these tough times, generate revenue to invest in health care and education.

And, without the latest package of royalty cuts and drilling incentives, companies that have spent C$3.65 billion locking up land rights since 2006 would have no reason to start exploration.

Mike Graham, president of EnCana’s Canadian Foothills division, told the Vancouver Sun that the B.C. government has taken the right steps to make the province “more competitive” by thinking long term.

But the immediate outlook is grim, given that there is now several months’ worth of gas in storage.

“I’ve seen it a few times in my career, where storage gets very full and you can get some brutal pricing in late summer and fall,” Graham said. “This is going to be one of those years.”

The question now facing the B.C. government is whether it can apply even more stimulus to create jobs and revenues at a time when North America is awash in gas and industrial demand has declined.