Should the B.C. government redo its budget in light of COVID-19 and crashing fossil-fuel prices?

This morning, I was scanning the provincial budget and in certain parts, it made for a surreal reading experience.

The risks to the provincial economic outlook didn't mention the novel coronavirus or COVID-19.

Rather, it highlighted such things as higher volatility in foreign-exchange, stock, and bond markets, as well as lower prices for lumber, pulp, and coal.

In this column, I'm going to focus solely on oil and gas.

I'll start with the section of the budget dealing with natural resources revenues.

The Ministry of Finance forecasts $207 million coming into the B.C. treasury in 2020-21.

That's up a whopping 35 percent over the previous year.

In the following two years, B.C. natural-gas revenues are expected to rise another 5.3 percent and 2.2 percent.

In reality—rather than in the cartoon world of the provincial budget—natural gas prices remain stubbornly low, falling sharply late this week.

At the Henry Hub exchange in the U.S., it's currently priced at US$1.71 per million British thermal units (BTUs).

That's after the price fell 5.84 percent on Friday (April 24).

In a commentary yesterday on CMEGroup.com, the managing director of Chicago-based KKM Financial explained why there was such heavy selling.

Dan Deming attributed part of this to some states delaying reopening their economies, which is reducing demand.

But he also noted that three times this year, traders have seen resistance for paying US$2.10 per million BTUs for natural gas.

"We saw it up there at the end of February, we saw it up there on March 11—I believe—and then another rejection here on Tuesday, April 22," Deming said.

Now, natural gas prices have settled back to the downside, which won't help the B.C. government's revenues.

What's more disturbing for provincial bean counters has been a "very substantial" downside movement at the front of the futures curve. 

This suggests lower natural gas prices in the coming months—which means less money coming into the provincial treasury.

However, Deming said that natural gas prices are holding up at the back end of the futures curve, presumably on the assumption of an economic recovery.

Deming did not make any mention of a second wave of COVID-19. If this were to occur in winter when demand for natural gas spikes, this could again drive down the price.

Oil markets in turmoil

But it's not just natural gas markets that are suffering.

The oil markets have been hammered by a sharp global reduction in demand. 

The B.C. government doesn't rely heavily on petroleum royalties—just $45 million came in last year, with $44 million anticipated this year.

But that's still more than the $38-million cost of running the office of the premier and the ministries of labour and mental health and addictions.

On Friday, Barbara Troner, the S&P Global Platts managing editor of American tanker markets, said that oil markets are experiencing "pandemic shifts".

That's because worldwide demand has plummeted by 18 million barrels per day in April and is expected to fall 17 million barrels per day in May as people stay home awaiting the end of the pandemic.

Global demand this year for crude oil, including biofuels, was previously expected to be around 101 million barrels per day in 2020.

That's no longer the case, of course.

In her commentary on the S&P Global Platts website, Toner said that OPEC is only cutting production by 9.7 million barrels per day in May and June.

This means that the flood of oil still being produced needs to be stored somewhere.

"And that somewhere is oil tankers offshore as onshore tank farms fill up fast," she said. "So floating storage is what will keep the tanker markets buzzing for a while."

She highlighted this as a "particular problem" off the east coast of Mexico but it's also a growing issue off the west coast of South America.

Troner didn't mention Canada.

But this news of growing offshore storage will likely alarm B.C. environmentalists.

For years, they've been worried about the seven-fold increase in oil-tanker traffic in the Salish Sea that will come with completion of the $9.3-billion Trans Mountain pipeline project.

Despite this news of a supply glut, oil prices rallied on Friday.

West Texas Intermediate crude is selling for US$16.94 per barrel and Brent crude is priced at US$21.44 per barrel, according to Oilprice.com.

Western Canadian Select remains at the rock-bottom price of US$1.10 per barrel, making it less expensive than the cost of beer.

Shell still loves natural gas

The low oil price is devastating for the Alberta treasury.

For B.C.'s ministry of finance, an even bigger issue is Royal Dutch Shell's finances.

That's because if this corporate giant were to ever run into serious problems due to crashing energy prices, it could reconsider the LNG Canada plant in Kitimat.

Shell is the plant's largest shareholder. Its minority partners are Mitsubishi and state-owned energy companies in Malaysia, China, and South Korea.

And LNG Canada is the cornerstone for a $40-billion private-sector infrastructure project, which includes the $6.6-billion Coastal GasLink pipeline.

The B.C. NDP government offered $6 billion in incentives to lure these investors, supported by the B.C. Liberals but opposed by the B.C. Greens. 

In the meantime, Royal Dutch Shell's ADR Class A shares closed on Friday at US$35.16 on the New York Stock Exchange.

That's up substantially from the 52-week low of US$21.26 recorded when markets plunged in March.

Shell still seems bullish on the long-term future of natural gas. On April 17, it made a final investment decision to proceed with the first phase of Arrow Energy's Surat gas project in Queensland, Australia.

Arrow Energy is a 50-50 joint venture between Shell and PetroChina, and it will result in 90 billion cubic feet per year of natural gas coming to market at peak production.

Shell, more than any of the other major investor-owned oil companies, has bet big on LNG.

On April 30, the energy giant is scheduled to announce its first-quarter results in 2020.

But British Columbians—and their provincial government—will likely have to wait a while longer to learn if the corporation's faith in their fossil-fuel reserves was misplaced.