Moratoriums On Fracking Are Counter-Productive

Commentary, Energy, Joseph Quesnel

Unnecessary and populist-driven moratoriums on hydraulic fracturing (“fracking”) are denying “have not” provinces much needed jobs and revenue. Inadvertently, these moratoriums are also denying over-taxed citizens opportunities to relieve their tax burden.

British Columbia is the latest victim of the frenzy against fracking, a technique used to extract oil and gas from rock formations that has been safely used in Western Canada for over 40 years. The B.C. government has just announced that it will appoint an independent panel for fracking to meet the highest safety and environmental standards.

One hopes B.C. doesn’t follow the lead of Nova Scotia, New Brunswick, and Quebec. All these provinces have imposed moratoriums on fracking activities. It is interesting and tragic that all three are “have not” provinces, meaning that they receive annual equalization payments that come from the “have” provinces.

Make no mistake that foregoing opportunities in shale gas development is costing “have not” provinces, like Nova Scotia, Quebec, and New Brunswick, big time.

The independent Wheeler report in Nova Scotia found that unconventional oil and gas development could bring benefits to the provincial economy to the tune of $1 billion a year and create between 740 and 1,480 jobs during the development phase. The report also said that royalties to the province would peak at $200 million annually around 40 years after drilling starts and deliver about $6 billion over 60 years.

And this is before a recent discovery of billions of dollars worth of new onshore shale gas, so those numbers would, more than likely, have to be adjusted upward.

Former New Brunswick Premier, Frank McKenna, was quoted saying that development of the shale gas industry in that province – which contains the thickest shale gas reservoir in North America – could result in $7 billion in royalties and tax revenues a year.

A 2013 study by the Canadian Energy Research Institute found that Quebec was missing out on major economic opportunities and jobs in both Quebec and the rest of Canada by denying shale gas development. The study found that extracting shale gas in the St. Lawrence Valley could potentially add about $112 billion to the Canadian economy, with about half that amount staying in Quebec.

Moreover, Quebec and other “have not” provinces could greatly benefit from potential reductions in their personal and corporate income taxes because of the royalties that would go to the provincial government from shale gas producers. 

In effect, taxpayers in highly taxed “have not” provinces are missing out on opportunities to reduce their tax burden because fellow residents of their province have adopted a Nimbyist (Not-in-my-backyard) attitude towards shale gas fracking.

The Quebec premier has admitted as much when he told the Montreal Gazette in 2016 that: “it is not the government, but citizens who will block shale gas projects in the St. Lawrence Valley.”

Across Canada, populism is creating bad public policy and has prevented the spreading of economic benefits to all citizens. These governments are responding only to certain vocal groups.

Fortunately, there are signs that the Liberal government in Quebec is open up to the possibility of fracking, but doing it with great care.

Critics point out that the current equalization formula may be creating perverse incentives in the way that natural resource are developed in “have not” provinces.  Under the present formula, “fiscal capacity” excludes either all or 50 percent of a province’s natural resource revenues.

Joe Oliver, Canada’s former minister of finance, pondered in the Financial Post in 2016 whether this reality “brings us to the highly contentious issue of whether a province that could generate resource revenue, but decides not to, should see transfer [payments] reduced accordingly.”

Oliver also pointed out the temerity and hypocrisy of “have-not” provinces that “believe it is perfectly acceptable to receive transfers derived from resource development in other provinces, and yet improper to develop their own resources” so they can provide for themselves.

So, perhaps a re-jigged equalization policy could induce politicians in “have not” provinces to ignore the populist Nimby voices and develop their shale gas resources through fracking.

But, regardless of whether the formula is changed, politicians in “have not” provinces with moratoriums need to re-think these policies if they want to provide jobs and economic opportunities for their citizens, not to mention substantial revenue from royalties and taxes.

For the have-not provinces, the status quo only means continued dependency and poor economic performance.  It also means these provinces are leaving the competitive field in oil and gas development to other provinces with more jobs and industry going to regions without moratoriums.

Not a very inspiring vision for Canada’s future.