Budget Bulletin: Budget Sets Energy Strategy in Motion

In 2001 the Province of Nova Scotia released a long-range strategy to take advantage of energy opportunities. The 2002-03 budget reflects the government's commitment to implement the strategy and advance Nova Scotia's interests on many energy fronts.

Funding for Energy Department:
Planning for the creation of a new Department of Energy is well advanced. The search for a deputy minister to manage the department and to implement the strategy is under way. Funding for the new department is included in the 2002-03 budget. Budget estimates show a rise in Petroleum Directorate funding from $5 million (estimate 2001-02) to $7 million in 2002-03. Additional funding for energy-related matters is included in the budget estimate for the Department of Natural Resources.

Implementing the Energy Strategy:
Energy is recognized as a critical component of Nova Scotia's economy. Opportunities exist in offshore and onshore exploration and development; new electrical generation; renewable energy; natural gas distribution; and industrial growth through value-added processes. To gain maximum advantage in these areas, the government is revamping training programs; funding the development of a more competitive electricity market; and pressing for Nova Scotia benefits from offshore development. The energy strategy also highlights the need to promote conservation and address the challenges posed by global climate change. Funding is provided in this budget for new initiatives in each of these areas.

Energy Training:
The Petroleum Directorate budget estimate for 2002-03 includes approximately $500,000 for training initiatives. Approximately $300,000 is from within existing budgets and $200,000 is new funding. This includes support for a revised and expanded student co-op program and funding for new training. The student co-op program will now include training in all energy sectors, including opportunities in the offshore and renewable energy.

Electricity Competition:
The Petroleum Directorate budget estimate for 2002-03 includes approximately $200,000 to cover the cost of designing a more competitive electricity market. Electricity sector stakeholders have chosen their representatives on the Electricity Market Governance Committee. The committee will recommend new rules to encourage limited competition in electricity markets as outlined in the energy strategy.

Advancing Nova Scotia's Offshore Interests:
A substantial portion of the additional funding included in the Petroleum Directorate's budget estimate for 2002-03 is required to ensure that the province is able to properly advance Nova Scotia's offshore development interests in the Deep Panuke Project. Additional funding will assist in the development of a new geological estimate of Nova Scotia's offshore potential based upon most recent drilling results and seismic data.

Responsible Energy Use:
The Nova Scotia energy strategy committed the province to ensuring that our energy resources are used wisely and responsibly. The new Department of Energy will have a broad mandate that includes responsibility for energy conservation and efficiency, as well as for managing the province's interests in reducing the greenhouse gas emissions that cause global climate change. Approximately $400,000 in funding is included in the Petroleum Directorate budget estimate for 2002-03 for these initiatives.

Offshore Revenues:
The recent rebound in North American natural gas prices supports a positive outlook for offshore royalty revenues to the province. Royalty payments from the offshore are estimated to reach $10 million in 2002-03, consistent with the 2001-02 forecast. The royalty rate on the Sable Offshore Energy Project (SOEP) is fixed at one per cent of revenues for the first three years of the project. Accordingly the rate cap will be removed at the end of 2002. The government expects project owners to have recovered a significant portion of the investment at this time. The minimum royalty payment for 2003 will therefore be two per cent of gross revenues.

Royalty rates increase as the owners' investment is recovered and project returns accumulate. After a reasonable return is achieved, rates will switch from being calculated on gross revenues to being calculated on net revenues. Net revenues are the gross revenues from the project less the direct expenditures.

The current long-term projection of $1.6 billion-2.3 billion in royalties from SOEP recognizes the inherent uncertainty in natural gas prices. The projection includes a variability in natural gas prices of plus or minus $0.50 U.S. per million btu.

Natural gas price assumptions are based upon NYMEX futures market prices, royalty estimates, historic movement in commodity prices, actual sale proceeds, and the terms of sale contracts. At the time of preparing the budget estimate, the NYMEX natural gas futures prices were $2.50 U.S. for 2002 and $3 U.S. for 2003. On a full-year basis a shift of $0.25, plus or minus, would change royalty revenue by approximately $1 million.

NOTE: For further 2002-03 budget information, visit the Department of Finance Web site at www.gov.ns.ca/finance .