B.C. overhauls oil and gas royalty system by changing 'broken system' of subsidies

After a review of B.C.'s 30-year-old oil and gas royalty system, the province says it plans to phase out its current fossil fuel subsidies and introduce a new system for royalty payments. 

Since the current system was implemented in the 90s, natural gas production, market conditions and climate change concerns have changed dramatically, the province says.

"For too long, a broken system of fossil-fuel subsidies has failed to align with our climate goals or ensure people fully benefit from these resources," said Premier John Horgan from Victoria in prepared remarks at a news conference.

The Deep Well Royalty Program, the largest oil and gas subsidy in B.C., will be eliminated, as well as the marginal and ultramarginal programs and the low productivity subsidy program. Existing credits will expire in four years.

"This will give British Columbians a fair return and allow us to invest in their priorities — like improving services, bringing down costs and tackling carbon pollution," said Horgan.

The Deep Well Royalty Program was created in 2003, according to a statement from the province. It offsets higher drilling and completion costs incurred by wells that are considered particularly deep.

The new royalty system will apply to all new wells and will be phased in starting Sept. 1. 

The province says it expects the new program to be in full swing by September 2024, when a minimum royalty rate of five per cent will be in effect. Right now, the royalty rate is three per cent; the province says that increase will generate more funds to put toward public services and climate action.

"This will support vital public services, such as roads and hospitals while advancing continued environmental protection for British Columbians," said Bruce Ralston, the minister of energy, mines and low carbon Innovation.

Under the new system, companies will pay a flat five per cent royalty on revenue until they reach the amount the company spent to drill the well. Royalties could rise to up to 40 per cent, once drilling costs are recovered.

The province says it doesn't believe this new system will impact drilling in B.C., despite the higher costs for companies.

'Clear acknowledgement'

The changes follow an independent assessment of the existing royalty framework by Nancy Olewiler, director and professor for the school of public policy at SFU and Jennifer Winter, director of energy & environmental policy at the University of Calgary's school of public policy.

They concluded that B.C.'s natural gas royalty system needed to be completely reformed.

"The new system is a good start to simplify, modernize and eliminate outdated programs," said Olewiler in reaction to Thursday's announcement.

Conservationists also commended the changes to how B.C. subsidizes the oil and gas sector.

Stand.earth said in a statement that credits from the Deep Well royalty cost the B.C. government $1.2 billion in 2021.

It said the subsidy helped prop up fracking in the province, which, it says, creates a roadblock to the province meeting its climate targets.

"Today's announcement is a clear acknowledgement by Premier Horgan that fracking companies in this province have been getting a free ride at the expense of taxpayers and the environment," said Sven Biggs, Canadian oil and gas program director for Stand.earth.

"This is a step toward fixing that imbalance."

Stand.earth said the changes announced Thursday still include the creation of new fossil fuel subsidies that will continue to use public funds to encourage new fracking wells.

The organization is calling on the province to end all fossil fuel subsidies in order for the oil and gas sector to meet emissions reductions below 2007 levels by 2030.