Resources continue to be the foundation of BC's economy

The resource sector is the foundational stone upon which the BC economy was built, and it is as important today as ever

This article by Resource Works senior research fellow Marlyn Chisholm is adapted from the BC Check Up, a publication the Chartered Professional Accountants of BC joint venture, on behalf of ICABC, the Certified Management Accountants Society of BC, and the Certified General Accountants of BC. A link to that full report (in PDF format) is here. Reproduced with permission

Article originally published on June 22, 2015 by Resource Works; can be obtained on their website at this link.

What we've forgotten

BC has witnessed profound changes in its economic structure and trade patterns since the beginning of the 20th century. During this time our province has transformed from a “hewer of wood and drawer of water” primarily reliant on the export of commodity lumber and minerals, to one with a far more diversified economy, dominated by a rapidly proliferating service sector.

But how did this all begin? From its inception, BC has been a resource producer and exporter, starting with the fur trade in the mid-18th century, and timber and gold in the 19th century. Subsequently, coal, energy, other minerals, and agricultural products have also emerged as key BC exports. Over the past 150 years, the provincial economy has grown and built on these “basic” industries either directly, in support industries such as construction, transportation, and wholesale supply, or in a wide range of indirect services such as retail and accommodation.

As BC’s population reached a critical mass, a plethora of new industries also blossomed independently, generating more rounds of direct and indirect jobs and earnings.

With population inflow has come the development of public and private infrastructure and services throughout BC, attracting capital investment and generating further job creation. In short, the traditional resource industries served as a starting point for population and economic growth in BC, spurring on development in both good and services sectors.

It continues to do so today, but for many residents of the Lower Mainland a combination of the knowledge economy, tourism, and a vast array of services seems to dominate the landscape, while our province`s historic role in the resources recedes into the past. This is echoed by an overall assumption of many BC residents that the resource sector is a matter for the interior and northern regions, and in particular for those in the Lower Mainland, they have minimal interests in BC’s resource development.[i]

We have lost sight of the importance of resources in our economy, particularly in the Lower Mainland and major urban centres. However, they still constitute a large part of the economic foundation of this province, not only in resource-dependent communities such as Prince George, Slocan, or Port Alberni, but in Vancouver and across the Lower Mainland.

Let’s look more closely at the ways in which the resource sector generates economic and social benefits in BC, and how it connects to other industries, especially in the service sector.  

A snapshot of the resource industry today

The forest products industry is a major employer on the BC Coast and BC Interior, with dimension lumber accounting for most exports. The forest industry has seen periods of boom and bust throughout the decades as markets and prices varied, with commensurate effects on company revenues, [ii]employment, and earnings. The forest industry’s fortunes began to wane in the late 1980s, when the industry began a phase of rationalization. Forest industry revenues slumped and many mills closed, with thousands of jobs lost permanently throughout the province. The forest product share of the value of BC global exports declined from 57% in 1988 to 32.3% in 2012.

However, this industry’s fortunes have recently changed. In 2013, solid wood product exports from BC rose by 25.5%, stimulated by renewed demand in the US. At the same time, however, pulp and paper exports declined slightly. Employment in wood product manufacturing rose for the second year in a row.

BC’s agriculture and fisheries began with the indigenous people, but accelerated with the arrival of Europeans seeking out other resources. BC’s most productive farmlands lie in the Fraser Valley, the Peace River Valley, and the Okanagan Valley, producing a range of dairy, livestock, grain, fruit, and vegetables for domestic consumption and national and international export. With the massive consolidation of farms, employment in this sector has remained static for the past decade.  In the late 19th and early 20th century, BC’s fisheries grew significantly, particularly for salmon. In the 1990s, factors such as oceanic change, loss of fish habitat, and overfishing led to a collapse of the Pacific salmon catches. Most salmon canneries were closed, and the government reduced the fishing fleet in 2004, exacting an economic toll on dependent communities. Nevertheless, BC still sustains a strong seafood sector, both commercial and aquaculture.Altogether, the value of British Columbia’s agriculture, seafood, and agrifood sector has risen over the past 25 years. In 2013, BC producers exported $2.9 billion worth of products to more than 140 countries.[iii]

Activity in BC’s mining industry spans the province. Metal mining is concentrated in the southern, central, and northern Interior, as well as northwest BC. Coal mining takes place predominantly in southeast BC (east Kootenays) and the Peace River Region in the northeast. In the past few years, several major mining investments have been proposed—including the Blackwater Gold project in the Cariboo (capital cost of $1.5 billion) and the resumption of operations at the dormant Quintette coal mine near Tumbler Ridge (with a capital cost of $500 million).[iv] But a 2013 downturn in both gold and coal prices have in some cases delayed capital investment decisions. Nevertheless, there continues to be many new proposed metallic and coal mines throughout BC.

BC’s energy sector offers some of the largest provincial economic opportunities in a generation. As of early 2014, over one dozen liquid natural gas (LNG) and pipeline projects in Northeast and Northwest BC, all at different stages of environmental approval, were proposed but none have yet been given the go ahead. In 2013, gas prices were low, but a cold winter in the US renewed demand for Canadian natural gas and boosted prices in early 2014, and gas prices are predicted to rise over the next year.[v] In the longer term, with the advent of pipelines to and shipping facilities on the north coast (Kitimat and Prince Rupert), the Asian market holds enormous export potential for BC and Alberta producers. But this is an opportunity with a finite window – BC lags behind its US and Australia competitors in developing its gas reserves. In addition to its natural gas reserves, there are several hydro and wind power projects either proposed or underway in BC, particularly in the northeast. By far the largest project would be the $7.9 billion Site C Clean Energy Project, which is a third dam and hydroelectric generating station on the Peace River.

Finally, we cannot exclude the benefits of the northern Alberta oil sands, which continues to generate a great deal of employment, earnings, and business revenue not only in Alberta, but in BC and throughout Canada. In fall 2012, a survey of oil sand producers demonstrated that there were at least 322 suppliers to the Canadian Oil Sands projects located in BC, with most of these located in the Lower Mainland.[vi]

What benefits does the resource sector generate?

        Local employment, income, and business effects

Major projects undertaken by resource companies draw significant capital investment into communities, generating economic and social benefits that last for several years or even a generation or more. The resource sector attracts huge amounts of capital investment into BC annually from both domestic and foreign sources. In the fourth quarter 2013, for example, there was $29.2 billion worth of projects proposed, started, completed, or on hold in the Northeast Development Region, mostly in mining, oil and gas extraction, and utilities.[vii] This capital is used to purchase materials and equipment, pay for construction, and ultimately project start up. For example, Encana, a North American energy provider with an interest in the Montney gas fields in northern BC, has invested approximately $1 billion annually in BC for the past decade.[viii] In 2013, Encana spent approximately half of their operational and capital expenses on the Montney project in BC, with the rest going to Alberta and elsewhere. 

At the local level, the construction, extraction, processing, and transportation of resources generates jobs and income. These jobs are generally full time, and pay well. Through local hiring and the purchase of local goods and services, resource industry operators contribute directly and indirectly to local community economic activity by supporting businesses, during both the construction and operations phases. Spending by highly-paid resource workers and those who work for their suppliers on consumer goods and services creates induced employment and income effects within the community or nearby communities. This benefits both First Nation and non-aboriginal workers and their families.

Local economic benefits also accrue in the form of worker training. For example, in Fort St. John, the natural gas industry has worked with post-secondary education providers to implement programs that update and boost workers’ skills, thereby increasing their productivity and wage potential. This contributes to a local labour force with a higher educational attainment level. Many employers have a policy of hiring and training First Nation workers, and ensuring that they and their communities realize the benefits of resources.

        Provincial employment and income effects

While the employment and income effects of resource extraction are important at the local community level, they extend far beyond this. Resource companies often have offices in the Lower Mainland, where they generate more direct jobs. These companies may also hire workers from other parts of BC who choose to live temporarily in camps or hotel accommodation while they work for construction and/or operations, and spend their earnings elsewhere in the province.

Generally speaking, resource companies do a lot of outsourcing to other industries, particularly in the service sector, and they do not import a large share of their inputs. Many workers are employed indirectly throughout BC in businesses that serve the resource sector, primarily in finance, insurance and real estate; professional, scientific and technical services; transportation; business services; and accommodation and food.

The distribution of expenditures on material, equipment, and services depends on the industry, the operation, and mode of transportation necessary for shipping supplies and the final products. For example, in 2000 the Kemess gold mine, which is situated 280 km north of Smithers, spent 63% of its payroll in the Bulkley-Nechako and Peace River Regional Districts, while its expenditures on goods and services were distributed across several regions. Approximately 50% of goods and services were obtained from businesses in Prince George, the Okanagan, and Vancouver, while Ontario and Alberta supplied another 27.4%.[ix]

Labour and materials for the construction phase of new pipelines and gas processing plants in northern BC would likely be sourced primarily from BC and Alberta, depending on costs and transportation logistics. New economic opportunities in communities like Prince Rupert (where population has been declining for at least a decade) and Kitimat would attract temporary workers who live in camps as well as new workers and their families, and new businesses, who intend to stay.

Purchasing patterns during both construction and operations phases generate province- and nation-wide indirect and induced effects.

What share of the benefits generated by BC’s resource sector goes to the Lower Mainland? A study undertaken in 2014 demonstrates that 55.5% of all jobs generated by BC’s resource industries—direct, indirect, and induced— are in the BC Lower Mainland.[x] In other words, the part of our province that seems most dominated by the service sector is still very much dependent on resources.

        GDP

It is estimated that the resource industry’s output in BC was $21.4 billion in 2010, or 11.2% of provincial GDP.[xi] The natural resource sector has myriad linkages to other sectors of the domestic economy. Data from the Statistics Canada I/O model shows that if BC’s resource sector boosted its output by 10%, this would expand BC’s GDP by $2.2 billion, and Canada’s GDP by $4.5 billion. Over 40% of the increase in BC’s GDP would be in mining (including natural gas extraction), and 20% in resource-based manufacturing. 

        Government revenue

Resource industry operators also generate municipal, provincial, and federal government revenues in the form of royalties and corporate taxes, property taxes, and personal income taxes paid by their employees.[xii] These government revenues are used to build infrastructure, and support a myriad of social and health care programs, bettering the quality of life of all British Columbians.

The BC government’s most recent budget predicts a small fiscal surplus during the next two years. This will be achieved through a combination of reduced spending and higher taxes (e.g. tobacco and MSP premiums), but it does not take into account the significant future royalties and corporate taxes that would be paid if at least one of the proposed LNG projects goes ahead. The provincial government forecasts that royalties from the new LNG industry could amount to over $100 billion during the next 30 years.[xiii] These new revenues would put the provincial budget well into the black, and help support the growing costs of health care and education. 

        Advances in technology

The resource sector’s effect on BC’s technology industry is not simple to quantify, but it has been profound. Out of necessity, resource operators worldwide have rapidly adapted new technologies to harvest or extract, transport, and add value to their commodities more efficiently and cost effectively. This has spawned a new generation of BC-based technology providers who tailor their products for resource applications. Advanced technology is being used in all stages of operations in agriculture, sawmilling, mining, and oil and gas, and energy production. Here are a few examples:

• The development of new extraction and processing technologies in the mining industry has had a direct impact on BC’s gold production, which has tripled since 1980.[xiv]
• Sawmills are achieving better operating and capital investment decisions through the use of software optimization systems.
• Natural gas producers combine hydraulic fracturing (“fracking”) with horizontal drilling to access unconventional gas deposits in shale. This produces affordable and reliable quantities of natural gas, although there is growing public concern about associated environmental effects on groundwater.
• Farmers now use computer monitors and GPS locators to make tractors more accurate and less wasteful in the use of seed, fertilizer, and fuel.

By continually investing in new technology and refining the production and transportation chain throughout BC and Canada, operators are able to stay competitive and better process and transport raw materials. In addition to improving competitiveness, resource operators are using new technology to address another key concern— environmental protection and mitigation. In the advent of tighter government regulations pertaining to environmental and social impacts and a corporate trend towards more accountability and transparency, the resource sector is one of the biggest users and implementers of environmental technology. A wide array of cleantech companies has been developed in BC with the goal of helping their clients reduce environmental impact, achieve lower costs, and boost performance.[xv] Clean technology (cleantech) developers’ biggest customers are conventional oil and gas, energy and oil sands production, mining and related services, renewable energy, and utilities companies[xvi].[xvii] Resource producers have partnered in many cleantech initiatives, and implemented the technology in a variety of ways. For example:

• In New Westminster, Kruger Products (a tissue manufacturer) replaced its natural gas boiler with biomass gasification to produce process steam, with the goal of attaining lower emissions and costs, and reducing its carbon footprint. This technology was developed by Nexterra Systems Corp. of BC.[xviii]
• Vancouver-based MineSense™ Technologies has developed an ore recovery process that enhances the sustainability and longevity of mining operations.
• NuWave Research of Burnaby has developed NuGenesis™ a method for continuous vacuum microwave drying that could be done at farms or food processing plants to minimize food waste. This would reduce energy and transportation costs associated with transporting food to drying facilities.

The cleantech industry is expanding in BC, creating challenging and high-paying jobs in the service sector. These producers are also achieving a worldwide reputation for innovation and leadership, and further contributing to BC’s exports of goods and services.

        Conclusions 

Due to more complicated corporate structures, electronic communications, and changing trade patterns, the dependencies between the resource industry and the rest of the economy have strengthened and become more complex. The untold billions of dollars in capital that have flowed into BC’s resource sector over the past century have disseminated jobs, income, and business revenues not only in resource towns but throughout the provincial economy, with the Lower Mainland a major beneficiary.

There is no denying that some resource industries, like forest products, experience cyclical booms and busts by virtue of their dependency on world commodity prices. Nevertheless, these industries have generally sustained many BC communities for several generations, through good times and bad, and they continue to seek ways to reduce their vulnerability to world markets. Moreover, resource operators have become far more attuned and responsive to social and environmental effects, one reason that the cleantech industry has gained traction so quickly in BC.

In a world where most people are employed in the service sector and where high technology is regarded as the beacon of the future, it is easy to lose sight of what really makes our economy tick. The resource sector is the foundational stone upon which the BC economy was built, and it is as important today as ever. 

        About the BC Check-Up

Since 1999, the Institute of Chartered Accountants of BC (ICABC), have benchmarked the province’s economy in the BC Check-Up. This tradition is being continued by the Chartered Professional Accountants of BC joint venture, on behalf of ICABC, the Certified Management Accountants Society of BC, and the Certified General Accountants of BC.

The BC Check-Up uses selected economic and social indicators to evaluate BC as a place to work, invest, and live. In order to provide context, BC’s progress levels are compared with those of Alberta and Ontario, as well as Canada as a whole. The data is obtained from Statistics Canada, and supplemented with information from other credible published sources.

NOTES

[i] Philip, Cross (April 2014), “High Impact: The Importance of Natural Resources to the Economy of British Columbia”.

[iii] BC Stats, BC Origin Exports to All Countries, Selected Commodities. Review April 4, 2014.

[iv] Quintette project deferred April 2014.

[v] TD Bank Economics Observation February 24, 2014), Finally Some Good News for Canadian Natural Gas Producers?

[vi] Source: Canadian Association of Petroleum Producers, Fall 2012, BC Suppliers to Canadian Oil Sands.

[vii] BC Ministry of Jobs, Tourism and Skills Training (December 2013), BC Major Projects Inventory.

[viii] Source: Encana, March 19, 2014.

[ix] McInnes, Donald, Presentation, The Case for Hydropower Development in the Highway 37 Corridor.

[x] Cross, Philip (April 2014), The Impact of the Growth of Natural Resources on the Economy of British Columbia, undertaken for Resource Works Society of BC.

[xi] P. Cross, Op. Cit

[xii] This is not a complete list of taxes paid by companies and employees.

[xiii] BC Government, LNG in BC, http://engage.gov.bc.ca/lnginbc/b-c-s-lng-story/#market-value-for-lng (accessed June 2014)

[xiv] BC Technology Industry Association, Outlook 2020 Initiative, BC’s Advanced Technology Sector – Reaching for the Next Level, March 2009,

[xv] Cleantech companies develop products, services or processes that enable industrial users to harness renewable materials and energy sources, reduce the use of natural resources, and minimize or

eliminate emissions or waste.

[xvi]

[xvii] Deloitte and Sustainable Technology Development Canada, Clean Tech, Positioned for Growth, Western Canada Clean Tech Report, 2009.

[xviii] Pulp and Paper Canada, Kruger’s Biomass to Syngas Venture Pays Off, May/June 2010.