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Let's Talk About British Columbia

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Let's Talk About British Columbia LET’S TALK ABOUT BRITISH COLUMBIA British Columbia is one of Alberta’s main competitors when it comes to natural gas. The Panel is looking at BC not only because it competes with Alberta for capital investment for natural gas production, but because it: Shares similar geographic constraints, Has a similar resource ownership structure, Competitively auctions leases to develop the resource, similar to Alberta, Has similar tax structures, Has a royalty structure similar to Alberta’s, and Offers similar royalty programs as Alberta. Geology and Geography The northwestern edge of the Western Canadian Sedimentary Basin (the source of Alberta’s oil and gas reserves) is located within northeast BC. This area has understandably been the main source of energy development in the province for some time. In recent years, several natural gas discoveries have been made in this region. This includes several areas containing shale gas and tight gas including the Horn River Basin, the Cordova Embayment and the Montney formation (part of which is also found in Alberta). The Montney and Horn River areas have attracted particular attention. In 2008, 90% of the mineral rights sold by the BC government were for these two shale gas plays. While other resource basins are known to exist in other parts of BC, these have seen limited development. For example, there has been some interest in the Bower Basin in BC’s central interior, which contains coalbed methane resources, and the Nechako Basin, which contains conventional natural gas and petroleum. The province also has offshore oil and gas basins, but there is a moratorium on their exploration and development. The same technologies that have been used to unlock shale gas deposits in the United States – such as horizontal drilling and hydraulic fracturing – have been used in BC to help unlock greater volumes of natural gas. As of December 2014, there were over 2,000 active gas wells in BC’s Montney formation, virtually all of which are horizontal wells drilled post-2005. Today, the majority of BC’s natural gas production comes from unconventional gas resources (i.e., shale gas and tight gas). In 2013, BC’s average natural gas production was approximately 3.7 billion cubic feet (Bcf) per day; of this, about 2.7 Bcf per day came from shale and tight gas sources. (By comparison, Alberta’s average natural gas production in 2014 was 9.9 Bcf per day, and the vast majority of this came from conventional gas sources.) Between 2010 and 2014, BC saw an average of 518 new natural gas wells drilled per year, 85% of which targeted shale or other tight rock formations. In comparison, over the same period Alberta saw an average of 1,376 new natural wells drilled per year, but only 3% of these targeted shale formations. Over the past five years Alberta’s natural gas drilling has declined significantly (for example, 2,585 new natural gas wells were drilled in 2010 but only 921 new natural gas wells were drilled in 2014). However, the percentage of horizontal drilling in Alberta has increased substantially (23% of new natural gas wells were horizontal in 2010, compared to 76% in 2014). On the other hand, the amount drilling in BC over the past five years has stayed relatively constant, and almost all of this drilling has been horizontal. In this way, Alberta’s resource development economics are becoming more direct competitors (at least in type of technology) with B.C.’s. Geographically, BC has some advantages compared to Alberta, but they are limited given that BC’s geology lends itself mainly to natural gas production and natural gas is difficult to export overseas. As a jurisdiction with coastal access, BC can more readily move its energy products to tidewater for export to customers and markets around the world. However, for natural gas to be exported it must first be converted into liquefied natural gas (LNG). As it stands now, BC does not have an LNG facility. This means that, like Alberta, BC’s natural gas is largely confined to North American markets. Also like Alberta, BC is located a great distance from the largest consuming U.S. markets of natural gas. This adds transportation costs to BC’s natural gas. Structure of the Industry BC has a stable democracy, the rule of law, and an open market economy. However, as only one province in a larger country, BC (like Alberta) does not have exclusive authority over all things that impact energy development. For example, BC cannot decide all by itself when and where an LNG terminal could be built. Also similar to Alberta, the energy industry in BC is comprised of private companies undertaking the actual exploration, production and sale of the resources. (The government is not directly involved in developing the resources through any kind of state-controlled energy company.) Many of the same companies that operate in Alberta also operate in BC. The BC government leases mineral rights to private companies for development and production through an auction-style system, with the winner paying a “bonus bid” for the rights. Companies are given a defined period of time to prove productivity of the resources, or the mineral rights are handed back to the Crown. This is the same general process that Alberta uses. As in Alberta, the majority of BC’s oil and gas resources are owned by the Crown (i.e., the people of BC). Energy companies operating in BC and developing Crown resources must therefore pay royalties to the BC government. Fiscal Framework Similar to Alberta, although the actual formulas are different, the BC government collects royalties on oil and gas resources that are owned by the Crown and levies a tax on freehold production. For natural gas, BC’s royalty rates are on a sliding scale, sensitive to commodity prices. Different formulas are used depending on when a well was drilled. BC also uses two broad classifications for calculating natural gas royalties: conservation gas and non- conservation gas. “Conservation gas” is natural gas that has been produced as part of oil production, which is conserved and marketed, instead of flared off to atmosphere. (All other gas is considered “non-conservation gas”.) Since companies are forced to capture and market conservation gas, the BC government compensates them with a lower base royalty rate. BC also offers adjustments that reduce the royalty rates payable for wells that have low productivity. BC offers a number of royalty programs. These include: Royalty credits for the construction of roads and pipeline infrastructure to support resource production; A special royalty regime to encourage coalbed methane production; Royalty credits and incentives for drilling deep wells, deep re-entry wells, and deep discovery wells; Lower royalty rates for low productivity gas wells; and A net profit royalty structure for special developments that are remote from existing infrastructure or technically complex. BC has also entered into a negotiated long-term royalty agreement with the North Montney Joint Venture, with Progress Energy leading exploration and production activities. The long-term royalty agreement specifies the royalty rate owed to the Province as well as other production terms. BC assesses a provincial corporate income tax of 11% (compared to 12% in Alberta). Energy companies in BC also must pay the same 15% federal corporate income tax as in Alberta. Sources: Government of British Columbia; BC Oil and Gas Commission; Alberta Energy; Natural Resources Canada. .
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