The latest provincial budget hinted at a start to the payoff on British Columbia's bet for developing liquefied natural gas, promising a revenue lift and an updated royalty regime to take effect on January 1, 2027. However, industry is pushing back against some of the province's proposals just as companies are considering major new LNG production facilities, including Phase 2 of the LNG Canada plant in Kitimat.
Background of the Royalty Overhaul
British Columbia began overhauling its natural gas royalty regime in 2022, aiming to streamline what was seen as outdated and complicated royalties. The previous system, based on regulations set in the early 1990s, included credits that companies earned for building infrastructure or as incentives for drilling deep wells. The new system is designed to be simpler, more transparent, and aligned with today's market, according to the Ministry of Energy.
Industry Concerns
Bloomberg News reported that a presentation to industry set off alarm bells over extra royalties that would kick in at higher gas prices. This came as a surprise to companies that had made drilling decisions without knowing the details. The objective, according to the Ministry of Energy, is to ensure British Columbians receive fair value for public resources while supporting economic development.
Revenue from Natural Gas Extraction
The province collects royalties for the amount of natural gas extracted from vast reserves in northeastern B.C. The previous royalty regime was sensitive to natural gas prices, causing provincial earnings to fluctuate. In recent years, earnings were as high as $2.3 billion in 2022-23 and as low as $191 million in 2019-20.
What Is Changing?
In 2021, the province commissioned a study of its royalties, which concluded that the system was outdated and contributed to a significant decline in the Crown's share of net economic value. In 2022, the government set a new framework with a transition period, grandfathering older producing wells at earlier rates. The new system adopts a 'revenue minus cost' model, according to energy economist Werner Antweiler of the University of British Columbia's Sauder School of Business. This formula accounts for drilling and infrastructure costs to calculate royalties. 'That's what all modern royalty regimes look like,' Antweiler said. 'You basically split the profits.'
The final details are still being worked out, but the regime is scheduled to take effect on January 1, 2027. Industry stakeholders are closely watching developments as they plan major investments in LNG facilities.
