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1.31.2011

New Brunswick: A banana republic*?

By Roy MacMullin

True or False? Our common heritage, the natural resources of the province, is being managed in a competent manner by the government. Recently, I looked at the money being received by the province from natural gas production. Here are the results of my investigation.

A royalty is a payment to the owner of an asset for its use. For example, if you pay rent of $900 per month on an apartment that is worth $80,000 per unit, that’s effectively a royalty of 13.5% per year that you pay for the use of that asset.

To develop a natural resource, governments often assign a block of land based on a bidding process, prospective sites are drilled by a company, connected to a pipeline and the gas produced is sold until the wells are empty. So the valid questions seem to be – First, are we getting a fair price for our non-renewable gas resource? Secondly, how fast is the resource being depleted and will there be any left for our children and grandchildren? In other words, are we using the resource in the best possible manner?

In the years from 2003 to 2010, the major producer of natural gas in New Brunswick, Corridor Resources paid royalties of between .5% and 8.2% when expressed as a percentage of natural gas revenue. The average over the period has been 5.3%. Typically, one would compare royalty regimes with other jurisdictions as a basic sanity check.

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