Outlook for Oil and Gas Prices in British Columbia

The petroleum industry is one of BC's biggest success stories. In 2003, industry invested approximately $3.8 billion in BC, and is forecast to contribute over $1.8 billion in government revenues from royalties, resource tax and tenures in 2004/05.

The northeast area of BC is the only area of the province currently producing commercial quantities of oil and gas. However, considerable natural gas and oil potential remain in other areas of the province.

Government Initiatives

A number of economic fundamentals have contributed to the rapid growth of the BC oil and gas industry over the last three years. These include higher natural gas prices and strong North American demand for energy – natural gas in particular, despite high prices. In addition, a number of government initiatives specifically designed to promote BC's oil and gas potential have contributed to a positive investment climate.

The topic box in Budget 2004 detailed BC's oil and gas resources and the Oil and Gas Development Strategy.

Further strategies and initiatives to be implemented over the next year include:

• a net profit royalty scheme and a new tight gas royalty to promote development of unconventional and remote resources in BC;
• continuation of the Resource Road Royalty Credit program which is expected to facilitate up to $60 million in road construction;
• up to $12 million expansion related to the Oil and Gas Training Centre of Excellence;
• staged updates to the Producer Cost of Service allowance¹; and
• increased oil and gas related research funding.

1	The producer cost of service reduces government's royalty to account for the producers' costs of transporting the crown share of natural gas from the well to the plant inlet.

 

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Industry response and market trends

The oil and gas industry has responded quickly and positively to market signals and government initiatives. In 2004, 1,277 wells were drilled, up 22 per cent from 2003 and almost double the 2002 activity. After rising 4.8 per cent in 2004/05, natural gas production is forecast to increase 4.0 per cent in 2005/06 and 3.2 per cent in 2006/07.

Natural gas is an important element in the total North American energy picture, and it influences and is influenced by other energy sources. After more than doubling over the last decade, natural gas prices have remained high, inducing more exploration and production throughout North America. Nonetheless, continental prices have increased as demand outstripped new production. US natural gas production estimates for 2005, range from flat (US Energy Information Administration) to declining production (Lehman Brothers – Cambridge Energy Research Associates), compared to approximately 1.0 per cent demand growth estimates. The North American natural gas supply-demand situation is expected to remain tight, supporting continued high prices. New natural gas sources (unconventional, frontier, or Liquefied Natural Gas) are not expected to be significant enough to have a meaningful impact on natural gas supply and prices in the near future.

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Crude oil prices have increased steadily since December 2001, reflecting strong demand growth worldwide, particularly in China and other developing countries. Other contributing factors include a tight supply situation, concerns about economic and political situations in the Middle East, Venezuela, Nigeria, and the former Soviet Union, and recent supply disruptions caused by weather events (Hurricane Ivan). The future path of crude oil prices is a key uncertainty facing global energy markets.

Increases in crude oil and natural gas prices have generated some substitution to other energy sources - like coal or electricity – but not all consumers can easily or efficiently switch. Coal and electricity prices have also increased over the last three years, influenced by the interdependence among energy sources. For example, as an increasing amount of electricity supply is generated from natural gas fired plants, electricity prices will be influenced by natural gas price swings.

Government revenue from energy and mineral sources is forecast to be over $2.0 billion annually in the 2004/05 to 2007/08 period as the forecast assumes continued tight supply and strong demand, resulting in higher prices over the forecast horizon.

BC royalty revenues are very sensitive to natural gas prices. A price change of C$0.50 per gigajoule results in a $120 million to $170 million revenue change. The Ministry of Energy and Mines uses private and public organizations as well as internal analysis to forecast natural gas prices. As shown in the attached table, BC's royalty price forecast is based on averages of private sector forecasts, adjusted for:
(1) conversion from market hub to Canadian dollars per gigajoule at plant inlet; and
(2) conversion from calendar year basis to fiscal year basis.
The ministry's forecast is selected to be in line with these averages.