2003/04 – 2005/06 SERVICE PLAN Ministry of Energy and Mines

Strategic Context

Ministry Overview

Since 1874, the British Columbia Ministry of Energy and Mines has been the primary agency responsible for the long-term development of the province’s energy and sub-surface mineral resources. Today, the ministry’s primary responsibilities are to:

• Market and promote BC as a competitive location for resource industry investment;
• Enhance BC’s position as a key player in global energy, mineral and coal markets;
• Create a competitive regulatory environment that makes it easier and cost-effective for companies to do business in BC;
• Encourage responsible development of BC’s energy and mining resources;
• Ensure protection of the environment;
• Protect public and worker health and safety;
• Build relationships to facilitate First Nations’ participation in the energy and mining sectors;
• Build relationships with stakeholders to build ties with communities;
• Undertake assessments to determine BC’s resource potential;
• Develop policies to nurture new resource development opportunities; and,
• Manage the disposition of mineral and petroleum rights.

Highlights of Changes from the Previous Plan

This plan is the ministry’s second three-year rolling plan, and like all plans is a living document that evolves as circumstances change. Two new objectives have been added to reflect the ministry’s role in implementing government’s energy policy, and offshore oil and gas. In addition, as directed by Treasury Board, the ministry has added an objective with respect to implementing a funding mechanism for new revenue generation proposals.

One objective that appeared in last year’s plan has been dropped from this year’s plan: stimulate and facilitate initial coal-bed methane production. This objective is redundant as coal-bed methane activity is included in existing objectives for oil and gas investment and production.

In addition, the ministry’s core businesses have changed from those in the ministry’s 2002/03 – 2004/05 Service Plan. The previous core businesses were:

New Ventures Branch — responsible for oil and gas development initiatives;

Energy and Minerals — responsible for the management of the province’s oil and gas and geothermal resources, as well as coal, mineral and aggregate resources.

Resource Development — responsible for analysis, evaluation and policy development related to the province’s energy and mining resources; and

Corporate Services — responsible for providing finance, human resources and payroll services, as well as supporting the Deputy Minister’s office and providing communications services.

Under this plan, the New Ventures Branch and the Energy component of Energy and Minerals have been combined to create a new Resource Development core business responsible for development of oil, gas and geothermal initiatives, and the management of those resources. The Minerals component of the old Energy and Minerals core business has become a separate Mining core business responsible for coal, mineral and aggregate resources.

The previous Resource Development core business is renamed Policy and Legislation and continues to be responsible for analysis and policy development initiatives for energy and mining resources.

Corporate Services is renamed Executive and Support Services and continues to be responsible for providing support services, excluding communications services, which are now provided by the Public Affairs Bureau. A full description of each of the core businesses appears in Goals and Core Business Areas.

Two new core businesses have been added to reflect the fact that over 40% of ministry expenditures are largely outside of the ministry’s control, and are made in accordance with statutory or contractual requirements. A British Columbia Utilities Commission (BCUC) core business exists through which the ministry provides a $1000 vote to BCUC. Also, a Contracts and Funding Arrangements core business has been created to reflect the ministry’s legal obligations to make payments under a number of different agreements, including Columbia Basin Trust, Resource Revenue Sharing Agreements, and Vancouver Island Natural Gas Pipeline Agreement. A description of the payments made under these agreements appears in the Resource Summary.

Planning Context

The planning context is an assessment of external and internal forces that can have a significant impact on the ministry’s ability to deliver results. It provides the ministry with specific information to prepare for future actions. This section first identifies some key opportunities and challenges that will affect the energy and mining sectors. Also, this section identifies internal government factors that will affect the ministry’s operations, and external economic factors that impact industry, and so influence the attainment of ministry targets.

Key Opportunities

Coal-bed Methane: British Columbia has a huge coal-bed methane resource endowment of about 89 trillion cubic feet. To date, only small scale exploratory drilling has occurred. The degree to which this large potential energy resource is utilized will depend primarily on natural gas prices but will also hinge on government implementing an appropriate regulatory and competitive royalty regime. At this time, considerably more exploratory drilling and pilot production projects need to be implemented to determine which portions of the resource are economically recoverable.

Natural Gas and Oil: A growing North American demand for natural gas, combined with stagnant supply from Alberta and declining supply in the United States, will guarantee a continuing opportunity for growth in BC natural gas production. Additional gas supply potential has been identified from enhanced exploration for conventional gas and preliminary exploration of unconventional sources.

Offshore Oil and Gas: Although the extent of BC’s offshore resources is uncertain, its potential value as a source of provincial revenue and as an injection to coastal communities and businesses makes it a highly attractive resource development opportunity. Estimates by the Earth and Ocean Sciences Department, University of Victoria, show that offshore development could have a total value of $500 billion over a 30-year period, and could bring a direct revenue stream of $1 billion annually.

Flow-Through Shares: This incentive mechanism continues to play a critical role for companies raising risk capital to invest in exploration of BC’s mining resources. These shares allow companies to pass qualifying expenditures on to their investors as non-refundable federal and provincial tax credits until January 2004. With current market conditions, flow-through shares are a key element in attracting global investment to the province.

Mining Activity: The province’s mining industry has recently experienced considerable difficulty as weak market prices and uncertainty with respect to land access and First Nation concerns have contributed to lower levels of exploration. However, a more competitive climate and greater land-use certainty has the potential to attract industry back to BC and capitalize on significant growth potential for the coal, industrial mineral and metals mining sectors.

Electricity: British Columbia is integrated with transmission systems in the US Pacific Northwest and Alberta. This provides opportunities for economic purchases and sales, thereby optimizing BC’s system. Also, BC has a large undeveloped resource potential for electricity generation using natural gas and coal, and clean energy resources such as hydro, biomass, tidal and wind.

Clean Energy: The province already has a high level of existing expertise in many energy application areas including small and micro hydro, wind, solar light/heat, ocean waves/tides, biomass and geothermal. Many new clean energy technologies are also emerging such as fuel cells, bio-fuels, solar panels, turbines, nanotechnology and coal combustion technology.

Investment Promotion: British Columbia has some of the most abundant natural resource opportunities in the world, but these alone will not attract investment even in a strong economy. Information about the changes being made to ensure BC is more competitive needs to be aggressively marketed to the investment community.

Key Challenges

Natural Gas and Oil: Industry is facing a number of challenges, including concerns around regulatory impediments and delays for doing business in BC. Also, some of the more prospective unexplored potential gas supply areas are thought to be located in the Muskwa-Kechika area, a region which has world-class gas potential matched by world-class environmental values. Furthermore, proposed major pipeline developments from the Arctic Ocean will provide quantum jumps in North American gas supply when they come on stream. This means that BC has a limited window of opportunity to establish itself as a key link in the natural gas supply chain.

First Nations Issues: Recent court decisions have expanded the scope of the Crown’s obligations to consult with First Nations regarding resource tenure dispositions, and to accommodate First Nation interests in relation to those dispositions. These decisions have exacerbated the uncertainty arising from unresolved Aboriginal land claims and the lack of treaty settlements, and have further fuelled investor concerns about long term prospects.

Labour Shortages: In certain occupations and geographic locations in the province, employers in the energy and mineral sectors are finding it difficult to attract skilled workers such as heavy-duty mechanics and high-pressure welders. In the oil and gas industry, an increase in the number of drilling rigs has not been met by an increase in skilled labour needed to operate the rigs. As the industry grows, including northern pipeline development, the province needs to ensure that an appropriately trained workforce is available.

Land Access and Security of Tenure: Challenges facing the government in concluding land-use planning processes create a high level of uncertainty inhibiting economic activity.

Consolidation in the Oil and Gas Industry: In 1998, 4 of the top 10 BC producers were American subsidiaries/affiliates and accounted for 23% of all production in that year. By 2001, 6 of the top 10 were American subsidiaries/affiliates and accounted for 35% of BC production. Although investors continue to be interested in exploration and development opportunities in Western Canada, BC must strive to ensure visibility in American corporate head-offices to sustain interest in provincial resources.

International Policy and Regulatory Influences: Energy legislation being contemplated by the United States may accelerate the construction of the Alaska Highway pipeline, and through a price support mechanism may also exert downward pressure on the value of existing BC gas supplies.

Climate Change/Kyoto: Environmental issues such as climate change and the Kyoto Protocol have the potential to significantly reshape the Canadian economy, particularly the energy sector. British Columbia faces the need to respond to the national and international movement toward using less carbon-intensive energy sources, and to identify and implement emission reduction actions that maximize economic benefits for the province while fostering long-term sustainability.

Internal Factors

Reduced Resources: In order to deliver core business functions with reduced resources, it will be necessary for the ministry to change how business is done. The ministry will pursue alternate service delivery options, including public-private partnerships and results based regulations.

Attracting and Retaining a Skilled Workforce: The ministry operates in areas where a highly-skilled technical workforce is essential to fulfill core functions. However, the ministry is facing the double challenges of losing skills and expertise as its work force retires, and difficulty in attracting young professionals to public service.

External Factors

Oil and Gas: A broad range of external factors that are not controlled by the ministry or the provincial government may affect petroleum industry investment in oil and gas exploration and development in BC. The majority of oil and gas investment in BC is undertaken by corporations that typically direct investment to resource opportunities throughout the world. British Columbia must therefore compete against other global resource opportunities, and operating environments, for scarce capital. Other external factors which may affect oil and gas investment in BC over the service plan period include: the strength and volatility of North American energy prices; the lack of capital liquidity in the energy sector as a result of damaged investor confidence; the influence of weather and economic growth on North American energy demand; geopolitical stability; the short-term availability of new sources of gas supply such as offshore LNG; and, the timing of the winter freeze and spring thaw which determines the length of the winter drilling season in northeast BC.

Mining: Mineral prices are set on competitive world markets in US dollars. Current and expected mineral prices and the relative value of the Canadian dollar directly determine the profitability of investments in new or existing mines, the available cash flow mining companies have to invest and the economic attractiveness of exploration. Those factors require that the Ministry continue to work with the industry to ensure that Provincial policies and taxes are competitive with those in other jurisdictions.

Federal tax policies and legislation are major factors in companies’ ability to finance Canadian exploration and the expected returns and risks of investments in new or existing mines. The ministry will continue to work with federal officials and industry representatives to ensure that those policies and legislation are consistent with Provincial and industry needs.

Risk Assessment

Risk assessment addresses both the upside and the downside risks the ministry might face over the next three years in attempting to meet its objectives. The following factors will influence the degree to which the ministry achieves its objectives:

• Commodity price volatility;
• World economic growth, especially the growth of the US economy;
• Economic fundamentals such as interest rates, stock market performance, exchange rates, etc;
• First Nations issues and land access restrictions; and
• Concerns regarding the implementation of the Kyoto protocol.

Vision, Mission and Core Values

Vision

The Ministry of Energy and Mines serves as a catalyst and facilitator for developing thriving, competitive, safe and environmentally responsible energy and mining resource sectors, and for increasing their contribution to the provincial economy for the benefit of all British Columbians.

Mission

The Ministry of Energy and Mines promotes BC’s energy and mining investment opportunities, and fosters a competitive investment climate, which encourages responsible development of energy and mining resources, supports job creation, and ensures environmental protection and public and worker health and safety.

Core Values

The following values define the ministry’s management style and govern the way it makes decisions. They guide ministry staff in interacting with each other, other government agencies, the private sector and other stakeholders.