In His report The Path Forward, Dr. LaPierre made some useful suggestions regarding the regulation of New Brunswick’s fledgling petroleum industry. However, he also proposed that some of our Natural Gas production be reserved for the exclusive use of New Brunswick consumers. He used Alberta to make his case. His report states, “Like the highly successful Alberta ‘Heritage Pool’ of oil and gas, the reserved portion of shale gas would provide home-based users with a guaranteed, affordable and readily available supply of gas that is independent of foreign market price fluctuations“. Others, including the local newspaper have gone further, suggesting that this Heritage Pool should be available to New Brunswick at “preferential rates” to encourage economic activity. The New Brunswick Minister responsible, has made encouraging noises in support of the idea.

However, if support for a Heritage Pool stems from the the notion that,  it’s good for Alberta so it should be good for us, then we should be concerned because The “Alberta Heritage Pool” as described in Dr. LaPierre’s report does not exist and as far as can be determined, has never existed. Alberta has, instead, wisely set aside a $15b “Heritage Savings Trust Fund”. It holds a portion of resource revenues, not gas molecules, as a rainy day fund for future generations.

Nevertheless, thanks to Dr. LaPierre’s recommendation, New Brunswick now has another solution of sorts for its economic problems. We will spend value contained in our province’s nonrenewable natural resources to subsidize consumption. Of course, in doing so, we may well be throttling our goose before it lays the golden egg.

Using Crown revenues from natural gas production to subsidize consumers is rather like cashing in family treasures to buy a carton of smokes or for a trip to Vegas. It encourages wasteful consumption of energy and subsidizes inefficient or declining businesses. If we are going to profit from the development of our nonrenewable resources, conventional wisdom suggests it has to be in a way that maintains their current value for future generations. Yes, Like the “highly successful” Alberta Heritage Savings Trust Fund!

Clearly, selling resources today at any discount from the full market price doesn’t do what the Alberta Fund was designed to do. Natural Gas and the revenues it brings to government are not ours to spend or squander. On a rainy day, we may need to consume some of the wealth earned by these resources, the interest if you will. But we should never consume the principal.

What is a New Brunswick Heritage gas pool and how might it work?

We remember all to well the last time a “Heritage Pool” made headlines. It was the Graham Government’s plan to provide NB consumers with up to 14-terawatt-hours of electrical power at less than market rates. The subsidy in that case would have been paid for out of the residual value of NB Power as it was sold off to Quebec. There was nothing in the NB Power deal for future generations and the public made its displeasure known at the ballot box.

There are troubling similarities between holding the line on price for a Heritage Pool of electricity and reserving a Heritage Pool of natural gas at “preferred prices”. Inevitably, the difference between these preferred rates and the higher market rate has to be made up by somebody. Sadly, as with the NB Power deal, that is likely to be you and me and future generations. The beneficiaries, of course, will be the big power users.

Taking back gas that has been found and produced under license by a private natural gas company is tantamount to nationalizing petroleum production. That would be somewhat out of character for a Tory blue government promoting the benefits of private enterprise and free markets.

The Alward government hasn’t given us any details about how they might go about creating this pool of cheap gas or how they would actually manage the market for it. The devil, of course, is always in the details.

There are practicalities to setting aside a share of ongoing production. Gas has to pass physically from the producer to a local distributor and marketer to New Brunswick end users. How these transactions would occur or would be regulated, wasn’t contemplated in the LaPierre report.

If the Government simply directs a producer to sell the gas here in New Brunswick and that results in the producer getting less than full value, then that producer would have to be compensated, either through a direct subsidy or by the Province foregoing royalties on production for as long as it had to subsidize consumers or until the gas runs out.

If the Government takes a share of gas production in lieu of royalties, then production sharing agreements (PSA’s) would form part of the royalty regime of the province. PSA’s are used by some oil producing countries in Asia, the Middle East and Africa. Usually those countries have national oil companies with the expertise to receive the product and volumes are high.

In our case where volumes are likely to be quite small, the Government would have to consider an agreement with the gas producer to manage our interests, albeit for a fee. The alternative would require the province getting into the natural gas marketing and distribution business through a Crown corporation, with all the risks and challenges that entails. Either way, the government would have to hire additional expertise it currently doesn’t have.

Government Hasn’t Done its Homework

What ever the option, subsidizing today’s consumers is still a shortsighted and inefficient and inequitable way to redistribute our province’s resource wealth. No where in the unfolding statements from proponents of subsidized gas is there any indication that the practicalities or the wider implications of creating this NB Heritage Pool have been fully thought through and no indication that the underlying principles of wise resource stewardship and sound economic principles are guiding deliberations.

We might have had a little more confidence in this idea, had it been presented as part of a wider strategy to capture benefits for all New Brunswickers from the development of our natural resources, a discussion missing from the government’s policy-making  thus far. Instead, it’s beginning to look more like some of the kid’s arguing about how they are going to spend an inheritance while their healthy, but horrified, parents look on. Forgoing royalties and subsidizing prices benefits consumers at the expense of non-consumers and that’s not a good way to keep peace in the family.

Bandwagon or Busted Bus?

It will be interesting to see if the opposition parties regard this as a bandwagon gaining momentum or just another bus about to loose its wheels. In the meantime, the Goose, with its eggs, would be well advised to hide in the bushes until this political hunting season is over.