If there is a legacy component to Christy Clark’s platform for re-election in May, it is surely the Prosperity Fund. Just days before tabling a tough-love budget that involved both tax hikes and spending cuts, the B.C. premier announced that the proceeds of liquefied natural gas (LNG) development would be directed into a new fund meant to preserve the benefits of the province’s natural gas bounty for future generations.
So far, so good. While critics were quick to accuse the Liberal leader of counting her chickens before they’ve hatched—the first LNG exports to Asia from B.C.’s northwest coast won’t happen until at least 2015—a fund set up before the dollars really start flowing could go a long way to averting the inflationary effects of so-called Dutch disease, by diverting money away from public-sector spending. At the same time, it would address the issue of intergenerational equity in liquidating a non-renewable resource windfall, something no Canadian government has so far succeeded at doing.
The experience of similar funds set up by oil-and-gas-rich governments in Alberta, Alaska, Norway and some Persian Gulf states shows a lot depends on how a sovereign wealth fund is structured and subsequently managed. In B.C.’s case, the province says LNG development is poised to trigger about $1 trillion in cumulative gross domestic product over the next 30 years and create at least 39,000 jobs over a nine-year construction period. That forecast assumes five LNG plants get built by the end of the decade, out of six so far proposed. Increased royalties coming out of the province’s barely tapped northeastern gas fields (which include some of the world’s largest shale gas finds), combined with a new LNG export tax, would funnel an estimated $100 billion into the fund.
Clark says her top priority for the Prosperity Fund is to pay down B.C.’s $56-billion debt. But the opposition New Democrats promptly attacked the whole idea as being too optimistic, pointing to the Liberal government’s shaky track record when it comes to forecasting revenue. Certainly long-term projections around natural gas prices have to be considered speculative at best. To be fair, though, if the stated revenue does not materialize, little has been lost; rather, it’s a plan for best managing the upside.
What troubles the industry about the Prosperity Fund is the notion of an export tax, which LNG proponents hadn’t anticipated and could potentially squeeze margins. “No one likes a new tax, but government has promised to make it competitive, and we’re going to work with them to achieve our common interests,” says Geoff Morrison, manager of B.C. operations for the Canadian Association of Petroleum Producers. The province’s own review concluded that B.C.’s main competitor is Australia, which also has an export tax and royalty regime that is up to one-third higher than B.C.’s.
Coming up with the right revenue formula will require a deft hand, given market conditions and potential costs, says Peter Howard, president of the Canadian Energy Research Institute. “There’s a risk of capital cost overruns,” he says. All the while, competition in LNG is intensifying, from new and established exporting regions.
Should the fund prosper, government may also be tempted to raid it. In a recent analysis comparing North America’s two pre-eminent sovereign wealth funds, the Fraser Institute found Alaska’s Permanent Fund was better run and amassed wealth largely due to legislated contribution requirements and rules around how and how easily the money can be spent. In contrast, there are no such constraints to the Alberta government’s management of the Heritage Savings Trust Fund, says Jason Clemens, executive vice-president of the Vancouver-based think-tank.
From 1977 to 2011, the Alberta fund’s cumulative net income was $31.3 billion, while the amount transferred out of the fund by the legislature to support government spending was $29.6 billion, or 95% of earnings. By contrast, less than 1% was drawn from Alaska’s fund over that same period. “In principle, it’s a good idea,” says Clemens. But, he adds, “We need to limit the discretion of the government in terms of its requirement to put a certain percentage into the Prosperity Fund.”
The fund’s first test will be surviving the election. Barry Munro, Canadian oil-and-gas leader at Ernst & Young, says no matter who forms the government, an election creates uncertainty. “People do not like uncertainty when they’re making massive capital-allocation decisions,” he says.