The government of British Columbia has extended more than $1 billion in the form of tax credits to largely foreign-owned oil and gas companies fracking vast expanses of northern B.C. over the last five years.
According to the B.C. auditor general's 2014 summary financial statements report, the province delivered $587 million in incentives to the fracking industry alone last year and $412 million in 2013. The payments were all deducted from royalties.
Shale gas producers such as the Malaysian-owned Progress Energy or Houston-based Apache now pay the province a modest fee or royalty for the right to mine B.C.'s northern gas fields, which are owned by the citizens and First Nations of British Columbia.
Given falling gas prices and the province's slowed liquefied natural gas ambitions, the government has quietly subsidized the indebted industry with lower royalties and a variety of credits for deep well shale gas fracking, road construction and summer well drilling. (Most gas wells are drilled in the winter when the ground is hard.)
Under the program offered by Premier Christy Clark's government, industry "can simply reduce the royalty amount that they owe government by the incentive amount that they are entitled to," explains auditor general Carol Bellringer in the report.
The province has extended so many drilling and construction credits to the cash-strapped industry that 30 per cent of all gross natural gas royalty income is now subtracted from the provincial ledger and given back to industry.
More unclaimed incentives
At one time, natural gas royalties generated nearly $1 billion in revenue for the province. But since 2008, the government has lowered royalties and increased incentives to compensate for falling natural gas prices.
As a result of these policies, the industry generated $385 million in government revenue last year. That's less revenue than created by forestry industry.
Public and industry records show that the government extends more credits to the shale gas fracking industry than it currently earns in revenue.
The auditor general also noted that the government has granted another $1.25 billion in subsidies to the industry to drill deep and costly shale gas wells this year.
As a consequence, shale gas developers "have incurred expenditures that will qualify for $1.25 billion in incentive credits, but have not yet produced enough oil or natural gas to claim these amounts," explains the report.
"When these producers claim their incentive credits, that money will be deducted from the royalties that they owe, thereby reducing the amount of money government will generate."
The incentives combined with lowered royalty rates explain why natural gas extraction in B.C. has risen from 25-billion cubic metres a year in 2002 to 45-billion cubic metres in 2013 despite depressed prices for natural gas.
Risky royalty regime?
B.C.'s royalty regime is different than most other jurisdictions in North America, and it's much riskier than most, according to a report by Cambridge Energy Resources Associates and published by the U.S. Bureau of Ocean Energy Management in 2011.
Most governments take a greater share of resource revenue early in the producing life of gas well to shield owners of the resource from the risk of market price volatility and rapid depletion rates.
The report ranks fiscal regimes in North America on the basis of revenue risk on a scale of zero to five.
Governments that earned a high percentage of revenue early in the life of producing wells, such as Texas and Alaska, earned scores of higher than four.
Jurisdictions that expect to earn money at the end of a well's lifecycle earned zero. B.C. earned a score of 0.59.