Alberta: budget surplus, still borrowing

Non-renewable resource revenue up 32%, turning projected deficit into surplus; finance minister rates Alberta as ‘shining light’

Gary Park

For Petroleum News

The Bitumen Bubble, the term created by the Alberta government last year to explain a C$6 billion drop in oil revenue, might finally have burst.

Instead of blaming the province’s fiscal hardships on its inability to get oil sands bitumen to market and being forced to swallow discounted prices in the United States, Alberta emerged sunny-side up from the 2013-14 budget year.

The originally forecast budget deficit for the year of C$1.97 billion turned into a C$755 million surplus, despite having to carry C$1.2 billion of an estimated C$6 billion in damage from record mid-2013 floods in southern Alberta.

The shift in Alberta’s economic fortunes included C$9.6 billion in non-renewable resource revenue, which was up 32 percent from the target, benefitting from higher oil prices, a lower differential between bitumen and West Texas Intermediate oil and a decline in the Canadian dollar.

The price of oil for the fiscal year averaged US$99.05 per barrel for West Texas Intermediate and C$80.11 for Western Canada Select, the oil sands benchmark, with raw bitumen production increasing by 14.5 percent to 2.09 million barrels per day.

Conventional crude revenues rose C$444 million to C$2.48 billion, while production edged ahead by 40,000 barrels per day to 580,000 bpd.

Bitumen wells up, conventional down

Natural gas revenues were up by C$105 million to C$1.1 billion and average prices rebounded to C$3.27 per gigajoule from C$2.29. Marketable production dipped by 100 million cubic feet to 3.5 trillion cubic feet and the number of conventional gas wells for the calendar year totaled 1,109, up 136 from 2012.

Revenues from auctions of exploration land continued their slide in recent years, fetching C$590 million compared with C$1.05 billion the previous year.

Returns from the province’s C$17.5 billion Heritage Savings Trust Fund - the long-term investment vehicle for surplus resource revenues - rose 50 percent, adding C$3.2 billion to government coffers, while total tax revenues increased 6 percent to C$20.3 billion.

Agreement lacking

David Eggen, finance spokesman for the New Democratic Party, argued that the Bitumen Bubble has been exposed as a fabrication since bitumen sold for an average US$80.11 per barrel, up US$12 from the budget prediction, with bitumen alone pumping C$1.9 billion more into the treasury than expected.

The opposition parties in the Alberta legislature feel they have even more reason to doubt the Conservative party government’s budgetary methods, with the latest figures coming only two years after a similar turnaround.

For 2011-12 there was a projected deficit of C$3.4 billion, which ended up shrinking to a C$23 million shortfall.

The fiscal year which ended March 31 generated more than C$45 billion in revenue, 17 percent more than forecast, while spending was up 10 percent to C$42 billion.

In addition to the Heritage Savings Trust Fund, Alberta also has a “rainy day contingency account,” which stands at C$4.7 billion and is expected to grow in the near-term to C$6 billion, with anything over C$5 billion required to either stay in the account, go to capital spending, or go to savings.

Borrowing continues

Wildrose Party financial spokesman Rob Anderson said “it’s disappointing and an insult to Albertans that, at a time of amazing prosperity and revenues, the government continues to borrow billions and play a financial shell game with taxpayers’ dollars.”

Budgeting has become the key issue in the Conservative Party’s leadership contest to replace former premier Alison Redford in June, with Jim Prentice and Rick McIver - two of the three candidates - calling for a revamping of the budget format.

It’s pay up time for Alberta

As many have predicted for years, the Alberta government is now faced with paying the price for its determination to refine and upgrade more of its heavy crude production within the province.

The only survivor from a long list of corporate proposals to build facilities in Alberta is now dipping deep into the pockets of its patron.

The fees the government will pay the operators of an Edmonton-area refinery to convert raw bitumen to transportation fuels are now estimated at C$26 billion over 30 years, up C$7 billion from original estimates.

In its 2013-14 fiscal report, the government disclosed the staggering increase was contained in a previously unannounced revised “processing agreement” that was executed three months ago, putting the processing fee at about C$63 per barrel, although the province did warn in late 2013 that a hike was in the cards.

However, under the restructured agreement, the province gets a 25 percent voting right on aspects of construction and operation.

The higher tolls reflect cost overruns for the Sturgeon Refinery, whose price tag is now C$8.5 billion, up 50 percent from the forecast in 2010. The government is supplying 37,500 barrels per day, or a total of 410 million barrels, of heavy crude over 30 years as feedstock for the refinery in lieu of oil sands royalties it would otherwise have collected.

Analysts have consistently argued there was no chance the refinery — a joint venture by North West Upgrading and Canadian Natural Resources — would go ahead without the government’s backing, although Premier Dave Hancock has insisted the facility remains a viable development for the province.

But members of opposition parties in the provincial legislature have described the facility as “corporate welfare.”

The refinery is due to start refining 75,000 bpd of bitumen in September 2017, a year behind schedule. Even if the partners do take the next design step to 150,000 bpd, the refinery will still be one of the smallest in Canada.

—Gary Park