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Launching ‘fantasy’ fund BC government makes initial C$100M deposit from budget surplus into Prosperity Fund it hopes will grow to C$100B from LNG revenues GARY PARK For Petroleum News
Fifteen months away from its next election, the British Columbia government has resorted to sleight-of-hand to deliver on the biggest promise that kept Premier Christy Clark in power in 2013.
At that time she held out the hope of a Prosperity Fund that, over 30 years, would grow to C$100 billion from the tax revenues of at least five LNG plants, with the LNG windfall also seen as British Columbia’s best chance to eliminate its debt, now nudging C$68 billion.
Instead, Finance Minister Mike de Jong, in releasing the 2016-17 budget, has created what critics have labeled the Fantasy Fund from an initial deposit of C$100 million.
And even that token amount needed a helping hand outside of the LNG sector, which is years from generating its first dollar of revenues and, in the view of some, will never happen.
Carole James, the finance spokeswoman for the opposition New Democratic Part, noted the contribution just happens to match the amount of additional revenue the government will collect from its latest increase in medical service premiums.
“The premier is looking for a way out of her embarrassment of not having an LNG plant up and running,” James said.
“That’s C$100 million of taxpayers’ dollars. The public shouldn’t be paying for this. This is the premier’s fantasy fund.”
No LNG income De Jong conceded the initial transfer of C$100 million owes nothing to any LNG income beyond claiming that potential LNG investors have spent billions of dollars laying the groundwork for LNG projects, mostly by acquiring natural gas producing assets in British Columbia.
Having introduced his fourth straight surplus budget, and at a time when British Columbia is leading Canada’s 10 provinces in economic growth, de Jong said it was proper to take “a small amount from the chequing account, as it were, and transfer it into a savings account.”
That’s a big step down from October 2014 when he said the ability to establish a Prosperity Fund would be tied directly to the generation from an LNG industry of royalties, sales taxes and other tax measures collected from natural gas used for LNG, plus corporate income taxes.
De Jong remains confident LNG investments will eventually form the backbone of the Prosperity Fund even though most of the 20 project proposals on the table are stalled because of the downturn in global LNG demand and, in some cases, delays in the regulatory process.
Even the forecast budget surplus of C$264 million for the upcoming fiscal year can be credited to a bookkeeping change from 2005 when the government’s then-auditor general argued that the hundreds of millions (briefly the billions) of dollars collect from the annual auctioning of oil and gas exploration rights should be spread over the average 9-year term of those rights.
Projected drilling rights sales Now, although the scramble to accumulate natural gas exploration prospects has long faded with gas sales expected to reap a mere C$151 million for the current budget year which ends March 31, the proceeds from the sale of drilling rights is earmarked at C$704 million.
If the government had ignored the advice of its auditor-general in 2005, de Jong would be recording only C$18 million (nine times C$2 million) in sales this year, not C$704 million.
In its peak land sales year of 2008, British Columbia sold rights to 750,000 hectares (1.85 million acres) at an average price of C$3,500 per hectare. In 2015, the auctioned land was barely 75,000 acres at an average C$200 a hectare.
The deferred returns are rapidly winding down, with combined proceeds forecast at just over C$200 million at the end of the current 3-year budget cycle, giving added impetus to the Clark government’s desire to see LNG enter the construction phase.
A recovery of natural gas prices, which are forecast to decline by 7.2 percent in the coming fiscal year, is also vital if British Columbia is rebuild its budget surplus to the C$1.7 billion it achieved in 2014-2015.
Rethinking LNG wealth For now, the government has been forced to “step back and maybe rethink what’s possible in terms of LNG resources and LNG wealth,” said Shahin Dashtgard, an associate professor of earth sciences at Vancouver’s Simon Fraser University.
He said the government’s initial LNG promises were too ambitious, although he suggested LNG could still be a reliable contributor to British Columbia’s economy.
A similar upbeat message came from Mary Hemmingsen, global head of LNG at KPMG in Canada, who said the British Columbia government was right to place so many expectations in LNG because the industry will yield long-term profits.
“It is a very long-term industry and there is significant demand,” which has received an added lift from the climate change agreement in Paris before Christmas and the commitments Asian countries have made to achieve clean energy, she said.
Hemmingsen said it is too late for British Columbia to take advantage of current LNG demand, but there is still a chance for Canada to be the leading North American supplier of LNG.
“We have an approval process that provides a 40-year supply and sets us apart in terms of long-term secure supply for buyers of LNG globally,” she told the Canadian Broadcasting Corp.
She said the key to British Columbia’s LNG prospects will be tied to investment decisions that some of the big proponents make this year.
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