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Not all is well in Alberta Province undershoots oil and gas revenue target, faces decline in oil sands take, but expects C$4.1 billion budget surplus Gary Park For Petroleum News
The vaults are bulging and the budget surplus for 2005-06 should average about C$2,300 for every one of its 3.2 million residents thanks to non-renewable resource revenues of C$14.36 billion.
But there are low-level rumblings of disquiet in Alberta, where royalties are missing the government’s targets by a wide margin and returns from the oil sands could slide by as much as 20 percent within three years.
The province’s share of net production revenues amounted to 19 percent in 2002-2004 — the latest year for which statistics are available — sizably short of the 20-25 percent goal set by the Ministry of Energy and a sharply off the 24 percent collected in the 1999-2001 period.
Had the royalties met the upper limit of the government’s target range they would have pumped C$14 billion into government coffers in 2005-06, C$3.2 billion higher than the actual returns.
However, Energy Minister Greg Melchin said the decline is partly attributable to the regime that allows companies to pay only a nominal royalty of 1 percent while they recoup capital costs, after which they pay 25 percent of net revenues.
What camouflaged the shortfall was the C$3.4 billion windfall from record sales of oil and gas leases.
Contributing factors include the concentration on shallow natural gas wells, including coalbed methane wells, whose lower production rates yield reduced royalties, although that could be corrected as operators turn increasingly to deeper prospects.
But land sales are not expected to prop up revenues to the same extent in the new fiscal year.
Revenues expected to drop in 2006-07 The budget is predicting a slide of 55 percent to C$1.48 billion in 2006-07, closer to more normal levels, although proceeds from the first five sales of the calendar year have totaled C$1.53 billion.
Although overall resource revenues are pegged at C$11.35 billion for the new fiscal year, the budget contains troubling signs ahead.
It predicts a slide in royalties from synthetic crude and bitumen to C$1.35 billion in fiscal 2008-09 from C$1.71 billion in 2007-08, despite a 40 percent increase in oil sands output over the next three years.
The shift is tied largely to the sector’s two pioneering companies, Suncor Energy and Syncrude Canada, who will start paying royalties on bitumen, which sells for much less than synthetic crude.
Until that turnaround, the government will enjoy steady growth in synthetic crude and bitumen royalties from C$718 million in 2004-06 to C$1.18 billion in 2005-06, and C$1.72 billion in 2006-07.
An even steeper decline is forecast for natural gas, which surged from C$6.44 billion in 2004-05 to C8.24 billion in 2005-06, before starting a descent to C$7.15 billion in 2006-07, C$5.58 billion in 2007-08 and C$4.94 billion in 2008-09.
Royalty revenue projections were based on average 2005-06 prices of US$60 per barrel of WTI and C$8.40 per gigajoule of natural gas.
Believing that global oil supply will grow faster than demand, the government has targeted WTI prices of $50 per barrel in 2006-07, $45 in 2007-08 and $442.50 in 2008-09.
North American gas production expected to be flat
On the gas front, Alberta is counting on the North American market remaining “relatively tight with flat production,” although it forecasts a retreat in average prices to C$7.50 per gigajoule in 2006-07, C$6.50 in 2007-08 and C$6.25 in 2008-09.
A government sampling of several forecasting agencies, investment dealers and industry analysts yielded an average oil price forecast for the current calendar year of $59.59 per barrel, followed by $55.06 in 2007 and $52.50 in 2008, while the government is betting on calendar-year numbers of $54.27 this year, $45.38 in 2007 and $43.13 in 2008.
The private sector analysts set average Henry Hub gas prices of $10.50 per million British thermal units in calendar 2006, $9.49 in 2007 and $87.85 in 2008, compared with the government’s prediction of $8.58 this year, $7.78 in 2007 and $7.28 in 2008.
Resource revenues are expected to account for 35 percent of Alberta’s revenues for 2006-07 and contribute to a budget surplus of C$4.1 billion.
General corporate tax rate cut to 10% To keep the province’s economic engine humming, Finance Minister Shirley McClellan slashed the general corporate tax rate to 10 percent from 11.5 percent as of April 1, lopping C$265 million off the overall tax bill for business this fiscal year and C$300 million next.
She “absolutely” believes the cut will draw business and possibly corporate head offices to Alberta.
“Alberta has to be able to compete not only with the rest of Canada, but the rest of the world,” McClellan said. “Larger corporations face growing pressures to compete not only here in Canada but on a global basis.
“Alberta is the place to be. There’s no chance that we can be dismissed.”
To gear the province for anticipated growth, the government has earmarked C$13 billion for hospitals, public transit, schools and highways, although Ken Kobly, chief executive officer of the Alberta Chamber of Commerce, cautioned that the government will end up paying more than it should for these projects because of the shortage of labor and materials.
The unemployment rate hit 3.1 percent in February and the government believes it will remain below 4 percent over at least the next three years, even with an in-migration of 20,000 workers a year.
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