Weak gas price squeezes Canada budgets

Gary Park

For Petroleum News

Canada’s three leading natural gas producing provinces are feeling a budget pinch from weakened gas prices over the last year, with all of them coming in under budget forecasts for 2006-07.

The Saskatchewan government is the latest to update its budget forecasts and has taken only a modest hit compared with Alberta and British Columbia.

Its third-quarter projections for gas revenues are C$179.6 million, down from the budget prediction of C$186 million — a modest setback when stacked up against Alberta, which now expects gas royalties for the year of C$5.6 billion, C$1.6 billion lower than the budget number, while British Columbia has been similarly sideswiped, lowering its anticipated returns to C$1.4 billion from C$2.3 billion.

On the flipside for Saskatchewan, its overall non-renewable resource revenues are now C$1.6 billion, C$100 million better than the budget numbers.

Crude oil is forecast to generate C$1.2 billion, up C$210 million, helped by a larger-than-forecast share of total production paying higher royalties, a lower exchange rate for the Canadian dollar against its US counterpart and a reduced light-heavy crude price differential.

Alberta estimating C$7 billion budget surplus

The province is now counting on a budget surplus of C$7 billion, including non-renewable resource revenues of C$11.7 billion, beating the budget by C$391 million.

That includes C$2.4 billion from the sale of oil and gas rights, up C$955 million from the budget.

The slippage in gas royalties is expected to be almost offset by crude oil royalties of C$3.8 billion, C$1.1 billion above the budget prediction.

The crude total includes C$2.4 billion from synthetic crude and bitumen and C$1.4 billion from conventional oil.

Finance Minister Lyle Oberg painted a less cheerful picture for the near future, saying the government anticipated a drop in oil and gas prices, as gas and conventional reserves start declining, leaving unconventional oil to counteract the drop.

There was some encouragement for gas producers in a new study by the Conference Board of Canada, which said industry profits will be little changed in 2007, but will rebound in 2008.

“A decline in production and lower prices led profits to tumble in 2006 and, with both prices and production expected to be flat this year, profits will not improve significantly,” said board senior economist Michael Burt.

Overall profits in the gas extraction sector dropped almost 25 percent last year to C$9.5 billion.

Output is expected to rise by only 0.2 percent this year and, with prices relatively unchanged partly because of continuing high inventories, profits will increase by only 0.3 percent. But 2008 should see a dramatic recovery, with profits climbing to C$14 billion, the study said.

Alberta will remain the production leader, but its share of total Canadian volumes is forecast to drop from 77 percent in 2006 to 72 percent in 2011, not helped by extreme competition for labor and materials which saw extraction costs grow by 10.1 percent in 2006.