|
Energy strongholds under assault Plunging natural gas sector forces Alberta, B.C., to make drastic budget changes; Alberta blames deep, sustained economic turmoil Gary Park For Petroleum News
The backbone of Canada’s natural gas industry is starting to buckle.
In the process the once-overflowing coffers of Alberta and British Columbia are drying up as their largest single source of revenue evaporates.
The two provinces, which account for more than 90 percent of Canada’s gas output, are suddenly facing dire economic circumstances after being blind-sided by the stunning setback in the gas sector.
With commodity prices close to an eight-year low and forecast to slide under C$1 per gigajoule, government-run land sales in freefall and industrial gas demand showing no sign of a recovery, Alberta and British Columbia are revealing budget upheavals that are unprecedented in Canadian history.
15 years of budget surpluses After 15 straight years of budget surpluses, including a total C$26.9 billion in the four fiscal years up to 2007-08, Alberta is projecting a record C$6.9 billion deficit in the current fiscal year which ends March 31, 2010, resulting from a massive drop in energy royalties and income tax revenues.
The shortfall is C$2.2 billion more than was forecast when the budget was unveiled in April.
Gas is taking out the biggest chunk, falling from a projected C$3.7 billion in April to C$1.9 billion (a far cry from the record C$8.4 billion collected in fiscal 2005-06) and Finance Minister Iris Evans is not prepared to say the decline will stop there.
She said the gas sector has delivered a “real kick in the head” to a government that has been the financial envy of Canada for the past two decades.
“What we’re faced with is a darkening on the clouds of resource revenue,” she said. “There’s nothing we did to make gas go into a cellar like this.
“Global economic turmoil is deeper and more sustained and natural gas prices remain far lower than originally forecast,” Evans said.
Alberta has savings But Alberta can offset its budget shortfall by dipping deep into a C$16.8 billion Sustainability Fund, created from surplus resource revenues to help the province survive tough economic times.
British Columbia, which started five straight years of budget surpluses in 2004-05, has been similarly blindsided, forcing the government to introduce legislation this fall allowing it to run deficits for the next four years.
In February, Finance Minister Colin Hansen forecast only two years of deficits, targeting C$495 million for 2009-10. On September 1, he drastically revised the 2009-10 budget, hiking the deficit forecast to C$2.8 billion, after saying the recessionary impact on British Columbia’s revenue stream “has been far beyond what we had previously anticipated.”
Alberta has scaled back its gas price forecast for the current year to C$3.75 per gigajoule at the AECO hub from C$5.50 per gigajoule in April after prices averaged C$3.17 per gigajoule in the first fiscal quarter from April to June.
British Columbia is now counting on average 2009-10 gas prices of C$3.51 per gigajoule at the plant gate compared with the C$5.87 per gigajoule contained in its original 2009-10 budget, lowering its anticipated natural gas revenues to C$522 million from C$1.3 billion.
For every C$1 per gigajoule decline in average prices, Alberta loses about C$1.3 billion in annual royalties, while the impact on British Columbia revenues ranges from C$275 million to C$325 million.
Compounding the outlook in Alberta is a C$333 million downturn in forecast oil royalties to C$1.9 billion, although oil prices are forecast to average US$61 per barrel, up US$5.50 per barrel from the budget estimate, with oil sands royalties shrinking by C$356 million from the forecast C$1 billion.
Land auctions suffering Government land auctions, the earliest sign of industry confidence and drilling intentions, are also suffering in both provinces.
Evans said bonuses and lease sales are now expected to return C$478 million in 2009-10, C$153 million lower than budgeted, due to an industry pullback from conventional oil and gas activity, which the industry attributes partly to Alberta’s new royalty framework.
For the first eight months of the calendar year, Alberta generated only C$182 million in successful bids, compared with C$820 million in the same period of 2008. Sales for all of 2008 were C$1.23 billion, down for the second year in a row after hitting an all-time high in 2006 of C$3.43 billion.
Land auctions in British Columbia, which is almost exclusively a gas province, yielded C$322 million in the January-August period, off from the year-earlier C$2.08 billion, when companies engaged in a heated bidding contest for rights to the Montney and Horn River tight and shale gas plays, propelling the province to a 12-month record of C$2.66 billion.
Ample gas supplies, weak demand Martin King, an analyst with FirstEnergy Capital, said in a research note that Alberta’s C$3.75 per gigajoule prediction “certainly seems a lot more reasonable than what it was before,” while Fadel Gheit, an analyst at Oppenheimer & Co., said the revised figure is a “realistic expectation,” given North America’s ample gas supplies and weak demand.
Todd Hirsch, economist at the government-owned ATB Financial, said the resource downturn is a trap Alberta “has found itself in again and again. Even though it’s unpleasant, this is familiar territory.”
Ron Kneebone, an economist at the University of Calgary, said the province’s rising deficit is no surprise because the government of Premier Ed Stelmach has become far too dependent on cyclical energy revenues in its budgeting.
He told the Calgary Herald the government’s plight was predictable because it did a “poor job of risk management.”
| 