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Oil sands underpin Alberta’s finances Conventional oil, gas edged out by sands, with production in both forecast to decline as production, revenues from oil sands rise Gary Park For Petroleum News
The reasons for the Alberta government’s refusal to cave in to demands and slow the pace of oil sands development are now coming into sharper focus.
The province’s budget for the fiscal year 2010-11 estimates that oil sands royalties are edging out the traditional keystone revenue sources of conventional oil and natural gas.
Stronger oil prices, higher production and the maturing of the sector show that synthetic crude and bitumen revenues will recover in the upcoming budget year to C$3.2 billion from C$1.9 billion in 2009-10.
Conventional crude will yield C$2.1 billion, up C$300 million from the fiscal year that ends March 31, and gas royalties are forecast to reach C$1.9 billion in the upcoming fiscal year compared with C$1.7 billion in 2009-10, but a far cry from C$5.8 billion in 2008-09.
Government land auctions are expected to generate C$630 million, down about one-quarter from the last budget year.
Overall, nonrenewable resource revenue is projected at C$6 billion in 2009-10, about half the previous fiscal year, and is expected to grow by C$1.3 billion in the new budget year.
Natural gas prices are forecast to average C$3.40 per gigajoule at the AECO trading hub in the 2009-10 budget and C$4.25 in 2010-11, while West Texas Intermediate oil prices are set at US$78.75 per barrel, up US$8.80 from 2009-10, and bitumen prices are pegged at C$56.38 per barrel in 2010-11, an increase of C$7.02.
For 2010-11, the government anticipates raw bitumen production of 1.7 million barrels per day, 200,000 bpd more than the previous year, rising to 1.9 million bpd in 2011-12 and 2.1 million bpd in 2012-13, a more optimistic outlook than the Canadian Association of Petroleum Producers, which does not expect 2 million bpd before 2015.
Conventional crude is forecast to continue its decline to 419,000 bpd in 2012-13 from 454,000 bpd in 2009-10 and gas production is on a similar path, dropping to 4.3 trillion cubic feet in 2010-11, a loss of 200 billion cubic feet in a year, then declining another notch to 3.9 tcf in 2012-13.
Importance of oil sands Against that background, the importance of the oil sands to Alberta’s economic well-being is evident in the financial year that is just winding down, with royalties from the bitumen deposits expected to edge ahead of conventional crude by C$35 million as the first step toward 2012-13 when they will make up 53 percent of the province’s royalty stream, or about 25 percent of the government’s total revenues.
Aside from the declining role of conventional oil and gas, the oil sands royalty structure is just starting to yield results.
Under the Alberta structure, the government collects only 1 percent of profits until the capital costs of projects are paid off, when royalties rise to 25 percent. That threshold is being crossed as a number of projects reach maturity by covering the multibillion-dollar upfront costs of their development.
Gary Leach, executive director of the Small Explorers and Producers Association of Canada, said it is now time to pass the crown to the “massive resource endowment in the oil sands.”
He said the arrival of the oil sands as the leading resource contributor to Alberta coffers is likely permanent and also illustrates why it is important to improve the investment climate for the conventional sectors.
No details on royalty plan Finance Minister Ted Morton, during a conference call to discuss the budget, indicated that a change maybe in store when details of the government’s review of its competitive standing in North America is released in early March.
However, he would not confirm what most industry leaders and analysts expect — that royalties will be reduced.
“The purpose of the competitiveness report, which will include the royalty review, is to stimulate and increase investment in our oil and gas sector.
“In other words, it’s to grow the (revenue) pie. If the pie grows and we take a smaller slice, our revenue situation still should be good. And I’m confident that will be the case.”
Whatever emerges from the review “obviously could swing things” by bringing in new investment that in turn would result in greater personal and corporate income tax revenues, he said.
Leach said the collapse of gas royalties is the major reason the government reopened royalty discussions with the industry.
He said Alberta is not so far behind that it can’t catch up to British Columbia and the United States by deploying its large resource endowment.
Evolution to shale Greg Stringham, vice president of the Canadian Association of Petroleum Producers, agreed the gas evolution to shale deposits over the past year has shown how important it is to Alberta’s revenue and employment and the need to be more competitive in the marketplace.
Shale gas discoveries have drastically changed the gas supply dynamic and that has an impact on Alberta’s ability to attract investment, he said.
In the meantime, Alberta faces an overall budget shortfall of C$3.6 billion in 2009-10, then C$4.7 billion and C$1.1 billion in the next two years before regaining a surplus of C$505 million in 2012-13.
To avoid breaching its own anti-deficit legislation, the government will draw on a sustainability fund, which will shrink to C$2.8 billion at the end of 2012-13 from a peak C$16.8 billion in 2008-09.
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