The Oil and Gas Sector in British Columbia

The petroleum industry is one of BC's success stories. Since 2001, employment in oil and gas extraction has increased by 44 per cent. In 2003/04, the industry is forecast to invest approximately $3.5 billion in the province, and is forecast to contribute over $2 billion in government revenues through royalties, resource taxes and tenures.

British Columbia's oil and gas industry began to grow significantly during the 1950's. Major discoveries in northeastern BC focused industry development efforts in that area including the construction of pipelines to gather and transport gas to markets. Since deregulation of gas markets in 1985, BC natural gas has played a growing role in domestic and international markets and recent growth in the industry has been especially rapid. In 1992, the number of wells drilled in BC was 157. By 2002, this number was 643 (821 for fiscal year 2002/03). In 1993/94, government revenues from oil and gas were $393 million; by 2002/03, they had grown to $1,506 million.

Currently, BC is in the midst of one of its strongest drilling seasons ever. As of January 30, 2004, there were 162 drilling rigs active in the province, compared to 124 at the same time last year. The Oil and Gas Commission has issued almost double the number of drilling permits this year as at the same time last year. Over 1,144 wells are expected to be drilled during 2003/04, and provincial revenues of about $2 billion are forecast.

Government Initiatives

There are a number of economic fundamentals which have contributed to the growth of the oil and gas industry in BC. These include higher natural gas prices, consolidation in the Canadian petroleum industry which has brought expertise and investment strategies of major international petroleum companies to Canada, and the high-profile natural gas discovery at Ladyfern. However, a significant driver for the recent rapid growth of the industry in BC, has also been a changing investment climate and a number of government initiatives designed to promote BC's oil and gas potential, and attract industry investment.

In addition to ongoing activities to support oil and gas development, over the past several years, the provincial government has:

• cut the corporate tax rate from 16.5 per cent to 13.5 per cent;
• eliminated the Corporation Capital Tax on non-financial corporations;
• eliminated the sales tax on production machinery and equipment for the oil and gas sector;
• maintained a six-year $103 million program to improve roads accessed by the oil and gas industry; and
• strengthened the Oil and Gas Commission, providing a single window access to regulatory approvals for oil and gas activities.

In 2002/03, the Ministry of Energy and Mines embarked upon a concerted effort to attract additional oil and gas investment to BC. This included:

• new marketing efforts targeted at Canadian and United States producers;
• development of targeted tenure and royalty changes;
• promotion of coalbed methane development;
• more in-depth evaluation of BC's oil and gas reserves and enhancement of the province's resource mapping capabilities;
• promotion of public-private partnerships for road infrastructure;
• ensuring an adequate supply of aggregate for Northeast BC oil and gas roads; and
• enhancement of services such as those in the Fort St. John Core Lab, a ministry facility which stores drilling samples and is used by industry to research BC's resource potential.

In 2003/04, the provincial government built on the work conducted in 2002/03 and launched the Oil and Gas Development Strategy. This strategy is a comprehensive program that develops and expands the province's service sector supporting the oil and gas industry, addresses resource and community road infrastructure, aims to reduce and streamline regulation, and targets royalty incentives to encourage increased exploration and resource development. Specific measures included:

• $10 million annually in road infrastructure royalty credits. These are royalty credits that are matched by industry contributions towards road infrastructure. The province is also assessing the business case for a further $20 million annually in road royalty credits based on industry proposals;
• support for a public-private partnership model for financing upgrades to the Sierra-Yoyo-Desan road near Fort Nelson;
• new royalty initiatives to encourage the development of marginally economic resources, exploration for deep resources, and expanding summer drilling activity; and
• initiating research into a net profit royalty regime for unconventional resources and new basins.

Further, as part of the Oil and Gas Development Strategy, the Ministry of Energy and Mines is implementing recommendations from the Regulatory Best Practices Advisory Group and the Service Sector Strategy Committee, both with industry cooperation. The ministry has also launched the Skills Development Partnership with industry to enhance employment opportunities in the oil and gas industry for British Columbians. This partnership will support $1 million in training initiatives annually over the next three years. Further, in order to support higher levels of activity, the ministry has now initiated a comprehensive rewrite of oil and gas legislation and regulation to complete transition to a single-window, best practices regulatory environment.

First Nations involvement has also been an essential element of accelerated oil and gas development. The Oil and Gas Commission has entered into consultation Memoranda of Understanding with Treaty 8 First Nations which provides funding to allow First Nations to meaningfully consult on each drilling application submitted to the Commission. Revenue sharing agreements are already in place with respect to developments on the Fort Nelson and Blueberry-Doig reserves, and the province is exploring broader revenue sharing options regarding development in the Treaty 8 First Nations' traditional territory. The province has also initiated a number of projects in consultation with Treaty 8 First Nations designed to ensure that the First Nations heritage and cultural sites in the Northeast are preserved as oil and gas development continues, as well as providing funding from the First Nations Economic Measures Fund to facilitate Treaty 8 First Nations' participation in oil and gas related opportunities. In emerging new basin areas, the Ministry of Energy and Mines is consulting with First Nations to engage their participation in the oil and gas industry prior to tenure sales. Further, the province is developing innovative partnerships with First Nations, government and industry to increase First Nations employment and business involvement in the industry. This will help ensure that First Nations communities can receive long-term benefits from development.

Industry response to the Oil and Gas Development Strategy has been positive. The September 10, 2003 sale of petroleum and natural gas rights reached an all-time high of $418 million. Of this record-setting land sale, $370 million was in response to new deep gas royalties introduced as part of the Oil and Gas Development Strategy. Summer drilling in 2003 was more than double that in 2002, in response to the new summer drilling incentives. Winter drilling activity is also up almost 40 per cent over last year.

Other Onshore Oil and Gas Resources

British Columbia is clearly on the right track. Development is increasing, as are industry investments, employment and government revenues. However, the province's work is not done with respect to promotion of BC's resources. Currently, commercial production only takes place in the northeast corner of the province, and is focused on conventional resources. Much of BC's potential oil and gas growth lies in under-explored horizons (underground layers) underlying traditionally productive horizons, in geographically remote areas, in under-explored basins, or with unconventional resources. For example, more than 55 per cent of BC's remaining marketable gas is located in under-explored horizons. Interest in exploring for these resources is on the rise in part due to the targeted incentives components of the Oil and Gas Development Strategy.

The province is also formulating a strategy for expediting development of the under-explored onshore basins such as the Bowser and Nechako basins. BC's under-explored onshore basins have a combined estimated conventional in-place resource potential of 18 trillion cubic feet (Tcf) of natural gas, and approximately 7.7 billion barrels of oil (BBO). For comparison, northeast BC has potential of 50 Tcf and .7 BBO.

Further growth of BC's resources will also be influenced by increased development of unconventional resources such as coalbed methane (natural gas sourced from coal seams), as well as shale gas (natural gas sourced from shale beds) and tight gas (natural gas sourced from formations with very low permeability). The province has implemented a special coalbed methane gas royalty to encourage development, and is currently working to develop a net profit royalty regime applicable to tight gas and shale gas development projects. Industry leaders in these types of plays are already considering BC for development of these unconventional resources.

Offshore Oil and Gas Resources

In addition to under-explored and under-developed resources onshore, BC also boasts substantial offshore oil and gas resource potential. This potential is estimated at 9.8 BBO and approximately 42 Tcf of gas. However, due to federal and provincial development moratoria, which were put in place to respond to environmental concerns in the 1970's and 1980's, these resources have not yet been developed.

As announced in the July 2001 Speech from the Throne, the BC government appointed a scientific panel to ascertain whether offshore resources could be extracted in a way that was environmentally responsible and scientifically sound. In 2002, this panel released its report and concluded that "there is no inherent or fundamental inadequacy of the science or technology, properly applied in an appropriate regulatory framework, to justify a blanket moratorium on such activities."

Government has established and funded a dedicated offshore oil and gas team to investigate potential offshore development in BC, and to work with the federal government, First Nations, local communities, and industry on the issue. The team is working with these groups to identify issues and concerns, and is researching possible fiscal and regulatory frameworks. The province has also granted $2 million to the University of Northern British Columbia to advance the state of knowledge pertaining to offshore oil and gas issues in British Columbia.

In March 2003, the federal government announced that it would proceed with a three-part review of offshore oil and gas development in the Queen Charlotte Basin. This review involves a scientific review panel, public hearings and a First Nations engagement process. The release of the scientific review panel report, the initiation of public hearings, and the initiation of the First Nations engagement process are expected by mid-2004. British Columbia is not formally part of the federal review process, but is providing advice and cooperation where possible.

In the long term, development of offshore oil and gas resources could produce substantial job creation, revenues and economic benefits to the province. However, the province has stated that it will only pursue offshore development if it can be done in an environmentally responsible and scientifically sound manner.

Summary

BC has been blessed with considerable oil and gas potential. Market conditions and recent government initiatives have combined to make the industry one of the province's success stories. Growth in the Northeast of the province is expected to continue, and looking towards the future, BC will increasingly see the development of unconventional resources, and interest in the under-explored basins. Further, if BC's offshore oil and gas potential can be developed in an environmentally responsible and scientifically sound way a whole new industry could develop around BC's offshore resources. As is already the case in the northeast, First Nations and local community involvement will be a key element of oil and gas development elsewhere in BC.