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September 2007

Vol. 12, No. 35 Week of September 02, 2007

Good times roll in Alberta

Oil royalties allow government to hike resource revenue forecasts for 2007-08

Gary Park

For Petroleum News

For a population of 3.5 million, a budgeted average per-capita return of C$3,000 from oil and natural gas revenues puts Alberta in a rarified atmosphere among petro-dollar economies outside the Middle East.

That’s what the Alberta government now figures it will rake in from its natural resources in the current fiscal year, which ends March 31, 2008.

It is projecting a natural resource “take” of C$10.5 billion — C$237 million more than the original budget — raising its surplus target to C$2.5 billion, almost C$300 million above the April calculation.

Although projected returns from natural gas royalties and bi-monthly land sales are lagging behind the initial forecasts by C$123 million and C$144 million, respectively, returns from oil royalties are now expected to be C$505 million higher.

Also taking a bite out of export revenues is a stronger Canadian dollar, which reached US93 cents in the first quarter, up US7 cents from the budget.

The government has also tweaked its commodity price outlook, hiking oil to US$64 per barrel West Texas Intermediate, up US$6, but trimmed gas prices to an average C$6.50 per gigajoule, C25 cents less, because of record gas storage and the higher currency exchange outlook.

The overall numbers are enough to make any North American jurisdiction envious, but they require an adjustment in Alberta’s fiscal planning, following resource revenues of C$12.3 billion in 2006-07 and a record C$14.4 billion in 2005-06.

Land sales sharply down

With two-thirds of the year gone, land sales total C$969 million, a sharp drop from C$2.55 billion at the same time in 2006.

If the trend holds up, the government will collect C$1.4 billion for the calendar year from its auctions, about C$2 billion under last year’s record C$3.43 billion.

Government and industry sources say the decline stems from weak gas prices which have drastically curtailed drilling, the high capital cost of oil sands projects which has slowed the pace of development and the inability of junior E&Ps to raise new equity.

Average prices per hectare (one hectare is 2.47 acres) have slumped this year to C$478 from C$834 over the first eight months of 2006, while the total rights acquired this year cover 2.03 million hectares vs. 3.05 million hectares over the same period of 2006.

Oil sands parcels in northeastern Alberta dominated the Aug. 22 sale, fetching almost C$41 million for about 60,400 acres.

But the oil sands total for the year so far is C$450 million, off 66 percent from last year’s C$1.33 billion.

Royalty report due Sept. 14

Whether the swings in resource revenues will influence the government’s thinking when it wraps up its current royalty review is not certain.

Finance Minister Lyle Oberg said only that he does not expect to receive the findings of an independent panel until Sept. 14 and will need another one or two weeks to decide whether the province is getting a fair deal from its oil and gas production and what action to take.

He said the “unexpected” surplus revenue will be divided between one-third for savings and two-thirds for capital spending to provide for future generations while meeting “more immediate infrastructure needs.”

Based on the first-quarter fiscal update, C$575 million is available for dispersal, including the C$297 million surplus increase and C$278 million after changes to various cash adjustments.

As a result C$192 million is destined for the Alberta Heritage Savings Trust Fund — Alberta’s close relative to the Alaska Permanent Fund — which had an estimated “fair value” of C$16.3 billion on June 30 and is forecast to earn net income of C$1.3 billion in 2007-08.

Another C$227 million will be deposited in a Heritage Scholarship Fund and C$150 million will go to a medical research endowment fund.

The government projects overall revenues for 2007-08 of C$36.2 billion, up C$830 million including an extra C$411 million from personal income taxes, while expenses are targeted at C$33.7 billion, up C$533 million, mostly due to higher construction costs, firefighting and flood costs.

“When you take a look at our labor requirements, what we’re seeing is still a very tight labor market out there,” Oberg said. “We need people coming into Alberta.”






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