Natural gas overtaking forestry as top contributor to B.C. government’s resource revenue

Mar. 7, 2024

Revenue from forestry has topped natural gas royalties in 12 of the past 13 fiscal years, but the sector will likely play a supporting tole in the foreseeable future with reduced timber supplies

The natural gas industry is poised to take centre stage in British Columbia’s economy and overtake the forestry sector as the largest contributor to the province’s resource revenue.

The provincial government is counting on rising revenue from the royalties paid by producers of natural gas in northeastern B.C. to soften the blow of a stagnant forest industry.

Annual government revenue from forestry has exceeded natural gas royalties in 12 of the past 13 fiscal years. But with reduced timber supplies, forestry is expected to play a supporting role in the economy, trailing natural gas for the foreseeable future.

Key discoveries of natural gas more than 20 years ago in northeastern B.C. and advances in fracking technology helped set the stage for the role reversal.

LNG Canada, which is building an export terminal in Kitimat, is gearing up to start shipping liquefied natural gas to Asia by mid-2025.

As a result, the province’s producers are planning to boost their output. Natural gas, originating from geological formations such as the prolific Montney basin in northeastern B.C., will fill the Coastal GasLink pipeline and make the journey across the province to LNG Canada, which will supercool the fuel into liquid form.

In the current fiscal year, which ends March 31, forestry revenue is expected to reach $691-million, while natural gas royalties should come in at about $684-million.

The government is banking on slumping lumber prices to rebound, so forestry revenue is forecast to reach $789-million in the 2026-27 fiscal year. But the province expects to reap much greater rewards from natural gas royalties, as much as $1.43-billion in the 2026-27 fiscal year, the result of both higher production volumes and increased fuel prices. By way of comparison, in the 2012-13 fiscal year, natural gas royalties chipped in just $169-million.

B.C.’s economy will benefit from growing exports, notably LNG shipments, credit rating agency Morningstar DBRS said in a research note.

LNG Canada’s $18-billion export terminal will be the country’s first facility for exporting LNG in ocean-bound tankers.

“With Phase 1 of the LNG Canada project now more than 90 per cent complete overall, we’re preparing for safe start-up activities,” LNG Canada CEO Jason Klein said in a statement. “We expect to ship our first cargoes of lower-carbon, made-in-B.C. LNG by the middle of 2025.”

By contrast, the annual harvest level from Crown forests across the province is set to decline over the next several years.

The B.C. government controls the number of trees that producers chop down on Crown land.

Linda Coady, the president of the BC Council of Forest Industries, said the annual allowable cut has dropped 42 per cent in recent years, from 60 million cubic metres in 2018 to 35 million last year.

The sector continues to feel the impact of the mountain pine beetle, which decimated the province’s Interior for a dozen years, beginning in 1999. Wildfires – especially those in 2017, 2018 and 2023 – further eroded supplies of wood fibre.

Forestry consultant David Elstone, managing director of Spar Tree Group Inc., noted that the B.C. government’s budget released on Feb. 22 is forecasting that tree harvesting could flatten at 32 million cubic metres annually from the current fiscal year until 2026-27.

In his latest newsletter, Mr. Elstone said the province’s outlook for the annual allowable cut to become static “seems hard to believe” given the downward trend in harvest levels.

Tree harvesting in the province peaked at nearly 90 million cubic metres in 1987, according to statistics compiled by the B.C. government. From 2006 to 2015, it fell to an average of 74 million cubic metres a year and has dropped further in recent years.

Given the price volatility in cyclical commodity markets, there have been outlier years when natural gas royalties surpassed government revenue from forestry. For example, in the 2008-09 fiscal year, those royalties far exceeded forestry’s contribution.

The initial export capacity of the LNG Canada project has been set at 14 million tonnes a year. The project has a 40-year export permit.

While environmental groups have criticized the federal and B.C. governments for providing large subsidies to LNG Canada, B.C. Premier David Eby’s government has estimated that the province stands to collect $23-billion in revenue over the life of the Shell PLC-led joint venture.

Greater hydroelectric capacity will be required for future LNG projects to reduce their carbon dioxide emissions and help them comply with provincial environmental standards. The government said in January that BC Hydro’s 10-year capital plan will have nearly $36-billion in investments, but industry observers say the expansion of hydroelectric capacity will still fall short of what will be required to boost proposals for LNG and green hydrogen.

London-based Shell and the other four co-owners of LNG Canada are considering whether to pursue an expansion once the Kitimat terminal’s initial phase of construction is complete.

In January, the White House announced President Joe Biden’s decision to pause new export permits for LNG, citing concerns about climate change, including issues such as potent methane emissions during the production of natural gas through fracking.

Seven U.S. LNG export terminals are already operating, and another five are likely to open by 2028.

Shell forecasts that global LNG demand could jump more than 50 per cent over the next 16 years, but the Institute for Energy Economics and Financial Analysis (IEEFA), a U.S.-based research group, sees challenges ahead.

“Despite the U.S. pause, Canadian LNG projects face an unstable future with increasing market risk, given the dwindling prospects for global demand growth and looming oversupply,” the IEEFA said in a new analysis this week.

Woodfibre LNG is among only a handful of remaining prospects in B.C. hoping to export natural gas in liquefied form. Other export possibilities include Cedar LNG, Ksi Lisims LNG, Tilbury LNG and the small-scale Port Edward LNG. Kitsault LNG, Summit Lake PG LNG and an unnamed project near Anyox are on the list of B.C. proposals that face high hurdles.

Critics of B.C. LNG include climate activist groups and Indigenous leaders such as hereditary chiefs from the Gitanyow First Nation and Wet’suwet’en Nation.

A group of Wet’suwet’en hereditary chiefs has led a campaign opposing Coastal GasLink, which completed construction in October of the 670-kilometre route from northeastern B.C. to the LNG Canada terminal in Kitimat.

The Skeena Watershed Conservation Coalition also slammed plans by B.C. LNG proponents. “This industry is still trying to dupe the public, and our elected leaders are letting them get away with it,” the coalition said in a news release.

[Top photo: One of the massive modules to liquefy natural gas at the LNG Canada plant in Kitimat.Nelson Bennett, BIV]