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Alberta unloads a bundle
The Alberta government has taken the axe to its 2008-09 budget, chopping C$6.5 billion off a recently forecast surplus of C$8.5 billion, with Finance Minister Iris Evans warning there is “still some potentially sobering news on the horizon.”
Just the perfect time to unload a report that has been sitting on the shelf for a year — one that effectively gave a failing grade to the government’s handling of the Heritage Savings Trust Fund that has been running on idle for most of its 32-year existence.
The government also found time to clean up one bit of unfinished business with its royalty overhaul, striking an agreement with Syncrude Canada, the world’s largest producer of synthetic crude.
Evans tried offering the full range of soothing message in the midst of what she also conceded was a “very difficult week … I’ve never seen anything like it.”
She estimated the provincial surplus will shrink to C$2 billion by the end of the fiscal year on March 31, 2009 — a staggering roller-coaster since the budget, when unveiled in April, predicted a surplus of only C$400 million.
When the numbers were updated in August, based on the staggering rise in oil prices, Evans was comfortable hiking the surplus target to C$8.5 billion.
Just three months later, surrounded by a slump in commodity prices and market chaos, those expectations were tossed out the window.
Even so, she tried to reassure Albertans by telling them that despite “dramatically deep” recessionary conditions they were “in better shape than almost anywhere in the world.”
Total oil royalties for the fiscal year are now pegged at C$5.9 billion, off C$2.6 billion from the August budget update, and natural gas royalties are expected to generate C$7.1 billion, C$1.6 billion down from the August estimate.
The government now forecasts WTI crude prices will average US$93.50 per barrel for the full year, a drop of US$25.75 from the August forecast and natural gas is targeted at C$7.50 per gigajoule, a drop of C$1 from August.
Regardless of the turmoil, Evans said the government won’t back down from its plan to spend C$2 billion to help develop carbon capture and storage technology and C$2 billion to promote greater use of public transit systems.
Syncrude terms settled At the same time it delivered this news, the government announced it had settled royalty terms with Syncrude Canada, which currently produces about 350,000 barrels per day of bitumen, just six weeks before a deadline and nine months after a similar pact was reached with Suncor Energy, the other pioneering oil sands producer.
Both companies operate under 1997 agreements that cover their royalty payments through 2014, but other producers are subject to the new royalty schedule that takes effect on Jan. 1, 2009.
To level the playing field, the government insisted on renegotiating the Syncrude and Suncor deals. As a result, Syncrude will pay an additional C$975 million over a six-year transition period to the end of 2014 when it and Suncor will join the rest of the oil sands sector in paying 1 percent-9 percent until project costs are recovered, then 25 percent-40 percent depending on oil prices.
Marcel Coutu, chief executive officer of Canadian Oil Sands Trust, the largest of Syncrude’s seven owners with a 36.74 percent stake, said the new terms provide a clear and stable regime that allows owners to proceed with expansion plans.
Fund growth recommended While the outside world was trying to make sense out of these developments, the government also dropped a report completed in December 2007 recommending that Alberta should boost its Heritage Fund from C$15.8 billion to C$100 billion by 2030, noting that a similar fund in Norway, which saves 96 percent of its petroleum revenues and invests the money outside the country, has grown to C$350 billion since its inception in 1991.
A special commission, named by the government in 2007 to assess the Heritage Fund, completed its work before a June report by the Organization for Economic Cooperation and Development that said Alberta should invest and save its energy revenues, rather than lowering taxes.
“To preserve today’s prosperity and pass on the benefits to current and future generations of Albertans, we urge (the government) to make savings the new fiscal anchor for Alberta,” without which Alberta could face provincial tax hikes of 40 percent by 2030 as a results of declining oil and gas revenues.
Evans denied the government had deliberately held back release of the report while it rolled out a major infrastructure spending program during the March provincial election, promising — without offering details — that “several and maybe more or most” of the recommendations would be adopted.
—Gary Park
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