One sobering thing that shines through economist Tim O’Neill’s quick, partial review of B.C.’s budget process is that natural-gas-industry experts don’t have much of a clue.
The industry and industry-watchers on whom the government relies for a crucially important piece of information have been missing the mark for years. When it comes to projecting prices even as short as a year out, the industry has a habit of chasing the past, rather than nailing the future. Since the price is key to figuring how much revenue the industry will produce for government, it has created headaches for the Finance Ministry over the years.
People commonly assume it’s the government that makes revenue projections when putting together a budget.
The government takes the best guesses from a number of experts in each sector, throws out the high and the low ones, and relies on the average estimate. In the natural-gas world, when it comes to making the important prediction on what the price will do over the next year, the system doesn’t work.
All the experts are usually wrong.
O’Neill, brought in as a third-party validator to bolster the idea that today’s budget for the coming fiscal year is balanced, said forecasting natural-gas revenues is an acute problem.
Natural-gas revenues have been over-projected in five of the last eight years, he said. The average error is $584 million.
The actual benchmark price has been significantly overestimated in each of the last four years, and in six of the last nine years.
Those price and revenue figures are reached by using about 20 forecasts from industry experts. They throw out the high and low ones, then use the average of the remaining ones.
But even using that safety feature, estimates are mostly wrong. The experts have a tendency to “chase” prices on the way up or down. They underestimate on the upswing, and overestimate on the way down.
O’Neill gave the rest of the process his seal of approval, as expected. But in that one key sector, he saw a persistent pattern of overstatement on revenue.
His recommended fix is to shade the price estimate lower, so that it is below the median. In today’s budget, his recommendation means knocking the revenue estimate down by about $70 million. Finance Minister Mike de Jong said Monday that was done, and the gap was made up partly by reducing the surplus figure.
Royalties paid to the government slide according to price. So when the price drops, royalties decline. The same happens in reverse.
In normal times, the private sector’s poor track record on predicting its own future amounts to a degree of embarrassment.
But these are not normal times. B.C. is on the verge of going all-in on a brand-new industry, liquefying natural gas and shipping it to Asia. Billions of dollars are already invested in this concept, and billions more are coming. But the big wager is being made by people whose record of accuracy in guessing the future is pretty weak.
If they can’t even come close to estimating the price in the relatively confined North American domestic market, how will they fare when it comes to guessing the export price, once liquefied-natural-gas plants are up and running and the market is created?
It’s a hundred times more complicated because there are countless more global factors to take into account.
The B.C. Liberals have tied their entire economic plan to the natural-gas sector. The New Democrats have quiet hopes invested in it as well.
It’s all based on the fact natural gas sells in Asia for five or six times the North American price.
But the volatility and the poor track record in guessing what the price will do next makes you wonder about assuming anything when it comes to that resource.Tweets about "#bcbudget"