Gas is flared as waste from a shale formation where gas and oil extraction using hydraulic fracturing, or fracking, takes place in California. Deep well and horizontal drilling is used extensively in fracking, which was used to extract natural gas from 98 per cent of wells brought into production in 2017, according to the B.C. Oil and Gas Commission.David McNew / Getty Images files

Credits issued by the provincial government to natural gas companies could cost taxpayers more than $2 billion in foregone revenue, according to the Canadian Centre for Policy Alternatives.

Between 2016 and 2018, about $1.2 billion in credits for deep-well and horizontal drilling were issued to gas producers, who can use them to reduce future natural gas royalty payments to the government when wells go into production.

B.C. collected $145 million in natural gas royalties in the 2017-18 fiscal year and $164 million in 2018-19, according to the budget and fiscal plan.

The deep well credit program has been in place for 17 years to compensate companies for the higher costs associated with so-called unconventional gas production, which is now so common that the credits are an embedded subsidy to the industry, said CCPA policy analyst Ben Parfitt.

Is the government lowering royalty fees and effectively propping up fossil fuel extraction that would otherwise be unprofitable? wonders a report by the CCPA, a progressive think tank.

The top three credit earners in the gas field in 2017-18 accrued $344 million in credits: Cutbank Encana Partnership, Painted Petroleum and Tourmaline Oil Corp. In all, 26 companies earned $703 million in deep well credits last year, the documents show.

Gas producers have $2.6 billion in credits already on the books, according to B.C.s most recent public accounts report.

These are revenues that are being foregone, said Parfitt, who obtained credit figures with a Freedom of Information request. Down the line, those credits are reimbursed in the form of lower royalty payments.

The program was initiated as an incentive to take on more expensive extraction projects, which Parfitt argues have now become mainstream.

Deep well and horizontal drilling is used extensively in hydraulic fracturing, which was used to extract natural gas from 98 per cent of wells brought into production in 2017, according to the B.C. Oil and Gas Commission.

Virtually all the new wells being drilled in B.C. are deep wells and horizontal wells for to extract natural gas and valuable liquids such as condensate, which is used to dilute bitumen, said Parfitt. But when it comes time to pay the province the taxpayers for those extracting those products, the royalties are reduced.

The governments three-year fiscal plan notes that the royalty rate is expected to decline in the next two years due to increased utilization of royalty programs and infrastructure credits.

What we would like to know is how much those (gas) companies are actually paying in royalties for a publicly owned resource, and its been like pulling teeth with this government, said Parfitt.

What forest companies pay for cutting trees on public lands is freely available to the public online, he noted.

Energy Minister Michelle Mungall defended the program earlier this year, noting that companies can only use credits to reduce their royalty rate, not to avoid royalties altogether. She added, many of the credits that (Green party Leader Andrew Weaver) speaks of will actually likely never be used as the wells are closed.

With a file from Vaughn Palmer

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Natural gas drilling credits eat up royalty revenue from extraction industry: report - Vancouver Sun