I know the term “Banana Republic” is overused, but….

Giving it all away

True or False?   Our common heritage, the natural resources of the province, is being managed in a competent manner by the government.   Recently, I looked at the money being received by the province from natural gas production. Here are the results of my investigation.

A royalty is a payment to the owner of an asset for its use.  For example, if you pay rent of $900 per month on an apartment that is worth $80,000 per unit, that’s effectively a royalty of 13.5% per year that you pay for the use of that asset.

To develop a natural resource, governments often assign a block of land based on a bidding process, prospective sites are drilled by a company, connected to a pipeline and the gas produced is sold until the wells are empty.

So the valid questions seem to be – First, are we getting a fair price for our non renewable gas resource? Secondly, how fast is the resource being depleted and will there be any left for our children and grandchildren?  In other words, are we using the resource in the best possible manner?

In the years from 2003 to 2010, the major producer of natural gas in New Brunswick, Corridor Resources paid royalties of between .5% and 8.2% when expressed as a percentage of natural gas revenue.  The average over the period has been 5.3%.    Typically, one would compare royalty regimes with other jurisdictions as a basic sanity check.

For example, Alberta collected $5.8 billion in natural gas royalties in 2009 – that’s 17% on sales of $34 billion, with a sliding royalty scale of 5 to 36% depending on various factors.  Nova Scotia’s on-shore royalty is similar to New Brunswick.  Generally speaking, if you collect higher royalties, you are better off.

The New Brunswick regulation reads, “The royalty on natural gas shall be ten per cent of the actual selling price or fair market value at the time and place of production, whichever is the greater, free and clear of any deductions”

The key phase being “place of production” (being the wellhead), is interpreted to mean the company can deduct many things (amortization of processing equipment and connection pipeline, and transportation tariffs to Boston), prior to its 10% calculation.  10% of a reduced figure can be quite small.

Worse, the North American price is exceptionally low this year and will be into the future, due to a North American glut of gas caused by increased production by horizontal fracking of shale gas in many areas.  In 2010, the company expects to pay New Brunswick less than 2% of the value of sales as a royalty. (Roughly $500,000 on $26M).   In fact, the amount due to the province will be less than stock based compensation given to executives of the company.

Corridor certainly isn’t complaining about its royalty conditions.  A report entitled “Global Petroleum Survey 2010” by the business-friendly Fraser Institute surveyed the differing investment climates based on corporate responses to royalties and other factors.   New Brunswick isn’t even mentioned, unlike NS, NFLD, Que, Man, Sask, AB, BC and the rest of the world.

The nature of the natural gas exploration business means that once you have committed many millions of dollars to drilling, you almost have to sell no matter what the price.  Selling at a loss at least gives some cash to hold on for better times.

The 3rd quarter results of Corridor Resources shows each unit of gas (1 million Btu’s) sent through a pipeline all the way to Boston for a $1.46 tariff, the gas sold for $3.50 per unit.  The company lost $2.17  on each unit of energy delivered, and New Brunswick received a 3 cent royalty.   Put another way, the typical home uses 100 million Btu’s to heat it, so Corridor is selling the energy wholesale for $350 per home in Boston and losing $217. The New Brunswick government received the princely sum of $3 per home as a royalty.   Can it get any worse for the government or Corridor?

New Brunswick has the downside of extremely low royalties when the market price is low or production is low, and just plain low royalties when prices are high.

When a tenant can’t pay the rent, he gets thrown out.  Here in New Brunswick, we’ve designed the royalty of natural gas to go so low that nobody gets evicted.   We seem to be happy to give the resource away, just to have a few truckers hauling fill for roads or water for fracking the well.

We don’t seem to realize that we can have both – a decent royalty and jobs.  Horizontal drilling of shale gas is the last hurrah before the end of natural gas.  We can set the terms and companies will eventually come to a viable resource. But it will take creative thinking to devise a win/win situation.

The story of natural gas continues in the next installment of this series.

Roy MacMullin is the energy critic for the Green Party of New Brunswick and a writer on energy topics.