Oil and Gas Prices

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.

The impacts of Hurricane Katrina on the medium-term outlook for energy prices and North American economic growth are uncertain. Due to the massive disruption in production, refining and distribution, oil and natural gas prices can be expected to remain high and volatile in the short-term. The duration of restricted supplies and higher prices depends on how quickly the damaged infrastructure can be repaired or replaced. The natural gas price forecast underlying the September Update natural gas royalty projections was prepared in late July and therefore does not include any effects on prices and markets due to Hurricane Katrina. Natural gas prices are forecast to average over C$6.00 per gigajoule (plant inlet) in the three-year plan.

Government revenue from energy and mineral sources is forecast to be about $2.8 billion annually in the 2005/06 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 $130 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:

• conversion from market hub to Canadian dollars per gigajoule at plant inlet; and
• conversion from calendar year basis to fiscal year basis.

The ministry's forecast is selected to be in line with these averages.