CCPA calls on Auditor General to investigate stunning $1-billion annual increase in provincial natural gas-drilling subsidy program

May 31, 2018

VANCOUVER – An unprecedented increase in a special “credit” account set up by the BC government to subsidize the fracking industry should be immediately investigated by the province’s Auditor General, says the BC office of the Canadian Centre for Policy Alternatives. 

In November 2017, BC’s Minister of Energy, Mines and Petroleum Resources said the balance in the “deep well credit” account was $3.2 billion. But according to the BC Public Accounts, in March 2017 the balance was $2.15 billion

The increase is by far the largest ever recorded yet, to date, the ministry has declined to explain the sudden surge in the account balance. 

The increase is more than double the previous annual increase, leading the CCPA to ask BC’s independent Auditor General to investigate the unusual increase and whether or not figures published by the government on the account balances are accurate. 

The account represents the value of “credits” that the Province allows fossil fuel companies to deduct from royalty payments to public coffers. Fossil fuel companies use the credits to dramatically reduce the royalties they pay to the Province for the wells they drill and frack.

In the past 10 years, the Province’s credit programs translated into $4.9 billion in savings for those companies and correspondingly large foregone revenues to the Province. 

“The ugly truth is that in 10 years we’ve produced more fossil fuels than ever while the royalties we received went into the toilet,” says Ben Parfitt, a resource policy analyst with the BC office of the CCPA. 

“All of that foregone $4.9 billion, plus the foregone revenues in the $3.2-billion credit account, plus any future credits claimed by the industry translates into reduced services for school kids, hospital patients, transit users, people who are homeless, First Nations, you name it,” he explained. 

Largely because of those credits, revenues collected from fossil fuel companies have fallen steadily. In the last 10 years, as natural gas production in BC shot up 72 per cent, royalty revenues collected from fossil fuel companies went in the opposite direction. In 2007-2008, royalty revenues were $1.16 billion. By 2016-2017, they were just $147 million. 

That 87-per-cent decline in royalty payments meant that in the most recent year for which information is available, British Columbians received only 3.6% of the market value in royalties for the natural gas extracted in the province. By comparison, citizens in the United States saw a return of 12.5 per cent on gas produced on federally owned lands. 

The CCPA repeatedly asked the Ministry of Energy to explain why the credit account ballooned so quickly, but the Ministry’s eventual response raised even more questions than it answered. 

“It’s not due to expanded natural gas industry activity,” David Haslam, the Ministry’s director of communications, said in an email. Haslam added that the published credit account balance as reported annually in Public Accounts may, in fact, not fully capture the value of all outstanding credits. 

“The public accounts figure represents the most likely to be used in the future,” Haslam said. 

This response is inadequate, Parfitt said. 

“That is why we have asked the Auditor General to investigate this subsidy scheme and what lies behind the massive increase in the account this past year,” he said. “If the increase is not due to ‘expanded natural gas industry activity’, then what other explanation is there? This is a publicly owned resource. How many billions of dollars have we actually given away to these companies? 

“In addition, when the Ministry says that the published credit figures reflect those credits that are ‘most likely’ to be used, the clear inference is that someone in government is making a judgment call. How many more credits are out there that might be claimed? Why aren’t those other credits publicly accounted for? The Auditor General is best positioned to get the answers to such questions,” Parfitt said. 

Deep Well Credit Account Balance 

Year

Deep Well Credit Account Balance

Dollar Increase

Percentage Increase

2011-2012

$752 million*

 

 

2012-2013

$913 million

$161 million

21.4%

2013-2014

$1.241 billion

$328 million

35.9%

2014-2015

$1.398 billion

$157 million

12.6%

2015-2016

$1.918 billion

$520 million

37.1%

2016-2017

$2.148 billion

$230 million

11.9%

2017-2018

$3.200 billion

$1.052 billion

48.9%

*All dollar figures come from BC Public Accounts. In Public Accounts for years prior to 2012-2013, the deep well credit account balance was not presented as a stand-alone item. Starting in 2012-2013, the figure was presented as a separate item and included the figure for the previous year (2011-2012), which is reproduced here.

 For more information, please contact Jean Kavanagh at 604-802-5729, jean@policyalternatives.ca.

 Letter to Auditor General Carol Bellringer 

Carol Bellringer
Auditor General of British Columbia
623 Fort Street
Victoria, British Columbia
V8W 1G1 

May 30, 2018 

Dear Ms. Bellringer, 

I write to request that your office formally investigate what led to an unusually large increase in an account that is administered by the provincial government and which is used by fossil fuel companies to reduce their royalty payments to the Province.

Last November during the Estimates Debate, Michelle Mungall, Minister of Energy, Mines and Petroleum Resources, said the then balance in the “deep-well credit” account (claimed by fossil fuel companies when undertaking fracking operations) was $3.2 billion.

That meant that as of November of last year, the account balance had increased by an unprecedented $1.05 billion since the end of fiscal year 2017, with four months still remaining in fiscal year 2018.

At no point in the history of this account has an increase of such magnitude been recorded. The previously largest single-year increase occurred between fiscal year 2015 and fiscal year 2016 when the account balance jumped by $520 million. The most recent increase, then, is more than twice the previous record and is responsible for the account balance surging by 49% in less than one year.

Such an unusually large increase has significant economic implications for British Columbians. As you know, the Province’s “deep-well royalty program” was established to stimulate natural gas production in B.C. by offering financial incentives to fossil fuel companies to drill deep wells and horizontal wells. Companies that drill and frack such wells can then claim credits for doing the work. The credits are placed in the deep-well credit account and as the gas produced from qualifying wells comes on-line, companies can substantially reduce royalties they pay to the Province. 

It is in the interests of all British Columbians that the credits placed in that account are legitimately generated under the auspices of the deep-well credit program and that companies are not compensated for wells that do not or should not qualify for credits.

As someone who researches and writes on natural resource management issues and as a British Columbian, I question how an increase of such magnitude could have occurred, in part because a great deal of the area in which fossil fuel companies operate in the province is not being actively drilled at this time. Virtually no new drilling or fracking is occurring in the Horn River Basin, a very large operating area in and around Fort Nelson, and industrial activity in the region has been negligible in the past few years. Only the Montney Basin is really the centre of intense industry activity right now.

Of even greater concern is the Ministry of Energy’s failure to provide an explanation for why the unprecedented increase occurred.

On Friday, May 18, in response to questions I asked to understand why there was a $1-billion increase in the account, the Ministry’s director of communications, David Haslam, responded by saying that the rise is “not due to expanded natural gas activity.”

This is a non-answer in that it conveys what is “not” responsible for the rise while offering no explanation for what is.

We know that as qualifying deep wells and horizontal wells are drilled, credits are generated for doing so. Logic dictates that the more such wells are drilled, the more credits are generated. If a sudden surge in the deep-well credit account is not explained by “expanded natural gas activity”, then what is it explained by?

This is an important public policy and public accountability question.

Unfortunately, as matters now stand, the public will get no answers from Public Accounts. For example, the 2016-2017 Public Accounts report notes:

“The province offers credits for certain costs incurred by producers including the deep well, road, and summer drilling programs. Deep well credits of $2,148 million (2016: $1,918 million), road credits of $9 million (2016: $29 million) and summer drilling credits of $3 million (2016: $3 million) have been incurred by producers and will reduce future natural gas royalties when wells go into production.”

This information is only marginally helpful as it provides no detail on what expenses were incurred by producers, by well, per year. Such basic information would give the public much-needed and much-deserved information upon which to understand the economic implications of the credit program both now and in future years.

Lastly, I wish to draw to your attention another statement made by Mr. Haslam, a statement that suggests the figures as published in Public Accounts may not, in fact, actually capture all of the outstanding credits. If this is true, it is extremely problematic from a public reporting and public accountability perspective.

Mr. Haslam said of the published Public Accounts figures: “The public accounts figure represents the most likely to be used in the future.” Members of the public who read the Public Accounts will see that the government does not distinguish between credits that are likely to be used and those that are not. If only the most “likely” to be used credits are reported, what is the total figure for all potential credits? And what is the rationale for withholding that information from the public? 

In the last ten years alone, natural gas companies have used credit programs to reduce their combined royalty payments to British Columbians by just under $5 billion. The Energy Minister told members of the Legislature last year that future reductions in royalty payments of up to $3.2 billion could reasonably be expected. More credits are certain to be generated as new wells are drilled, which will reduce future royalty payments even more. And now there is an indication that the numbers as reported in Public Accounts may not, in fact, reflect the true credit picture. 

British Columbians deserve to know exactly what fossil fuel companies are receiving by way of public subsidies, especially when the natural resource being exploited is finite and will only provide economic returns to the province once.

An investigation into this matter would provide a valuable public service. 

Thank you in advance for considering this request. 

Sincerely, 

Ben Parfitt

Resource Policy Analyst, Canadian Centre for Policy Alternatives     

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