NOW READ OUR ARTICLES IN 40 DIFFERENT LANGUAGES.
HOME PAGE SUBSCRIPTIONS, Print Editions, Newsletter PRODUCTS READ THE PETROLEUM NEWS ARCHIVE! ADVERTISING INFORMATION EVENTS

SEARCH our ARCHIVE of over 14,000 articles
Vol. 22, No. 13 Week of March 26, 2017
Providing coverage of Alaska and northern Canada's oil and gas industry

Alberta financial mess

Dragged by commodity price slide, debt-free status distant memory in oil heartland

GARY PARK

For Petroleum News

It was less than a decade ago that the government of Alberta was reveling in a gusher of oil and natural gas revenues, having already achieved the treasured goal of wiping out its debt and introducing legislation banning deficits.

Under then-Premier Ralph Klein, the province - widely known as Saudi Alberta - had slashed spending, shelved plans for roads, schools and hospitals and laid off thousands of public sector workers, in a case of Trump-style budgeting before anyone had given a serious thought to the possibility of Donald Trump occupying the White House.

The province reached the point where finance ministers from far and wide were dropping in to pick the brains of Alberta’s leaders and examine their budgeting strategies.

But that didn’t last long. Klein was ousted and his populist approach was scuttled, leading in 2015 to the toppling of 44 years of Conservative party rule.

In a staggering surge to power, the socialist New Democratic Party under the leadership of Rachel Notley almost wiped out what was seen as an arrogant and corrupt administration, only to find itself mired in a sudden collapse of oil prices that have since failed to do what everyone expected, or hoped, and make a rapid return to the US$100 a barrel level.

Approval ratings tumble

Approaching the second anniversary of its election, the NDP government has seen its approval ratings tumble well below 20 percent while it flounders to find answers.

The people of Alberta gave Notley a free pass to keep pouring money into the social infrastructure by running up a record deficit of C$10.8 billion in the 2016-17 fiscal year.

But forgiveness is now a scarce commodity, given the latest five-year budget plan that will see the government continue its losing struggle to bring the deficit and debt under control.

The projected deficit for 2017-18 is C$10.3 billion, accumulating a debt of C$45 billion that is forecast to balloon to C$71 billion in two years and likely surpass C$100 billion by about 2025.

Without flinching, Finance Minister Joe Ceci said the government will borrow C$6 billion this year to build capital projects such as schools and hospitals and borrow another C$6.4 billion to pay for its daily operating costs, including the wages of public sector workers.

“When the oil price shock hit our economy, Albertans were faced with a choice,” Ceci said. “Some said, and some still say, that government should make deep cuts to public services.”

Instead, the Notley government is pinning everything on a gamble that it can free Alberta from a fiscal jam by betting that oil prices will average US$55 a barrel in 2017-18 and climb to US$68 by 2019-20.

Despite the combined setback of oil prices falling below operating costs, combined with devastating forest fires a year ago, the government has budgeted for C$2.55 billion in bitumen royalties from the oil sands in the new fiscal year and C$5.27 billion two years out.

US shale industry resilient

But that is offset by the resilience of the United States shale industry, led by the imposing presence of the Permian basin in Texas and New Mexico, where breakeven costs run about US$10 lower than prevailing oil prices, and production is expected to grow by 400,000 barrels per day this year to 2.5 million bpd, than add another 500,000 bpd in 2018.

For anyone thinking the basin will go into decline, the U.S. Geological Survey made a case for the reverse to happen by estimating there are 20 billion barrels of undiscovered, technically recoverable oil in the Permian Wolfcamp shale region alone.

Private equity groups have started injecting increasing amounts of capital into the Permian, prompting Sam Burwell, an analyst with Houston-based Canaccord Genuity, to suggest that Permian could be followed by Eagle Ford and the Bakken if breakeven costs start to rise.

Highly respected ATB Financial said in a research note earlier in March that rising U.S. production will rule out “any meaningful increases in the price of oil this year.”

Message from leading players

The message from leading industry players is especially troubling for Canada given the latest developments, with ExxonMobil announcing it will double its Permian holdings through a series of acquisitions totaling US$6.6 billion; Royal Dutch Shell targeting the bulk of its US$3 billion shale program on Texas; Chevron earmarking US$2.5 billion for shale and tight oil in the Permian; and ConocoPhillips considering selling its US$2 billion of natural gas assets in Canada to shift more money to the U.S.

Those warning signals are compounded by the reality that Canadian oil and gas producers continue to struggle despite hope that crude prices will gradually rise, with the Conference Board of Canada forecasting total losses will reach C$1.1 billion this year, while capital spending is expected to remain low after hitting C$27 billion last year, down 43 percent from the 2014 peak.

For every US$1 drop in the annual average price of oil, Alberta government revenues drop C$130 million, underscoring the vital importance of Kinder Morgan proceeding with its Trans Mountain pipeline expansion that could absorb an estimated increase of 600,000 bpd of new oil sands production, boosting exports by 16 percent in the next two years.

These less than cheerful prospects generated a barrage of tough questions for Ceci, who was asked whether he thought the NDP could get re-elected on its latest budget, to which he ruefully replied: “I just want to win this news conference.”

Cenovus touting assets

However, not everyone is ready to run up the white flag. Cenovus Energy, which pumps about 165,000 bpd from the oil sands, plus 55,000 bpd of conventional crude, is touting its assets as longer-term, more predictable investments.

“We’re quite well positioned,” Judy Fairburn, vice president of business innovations at Cenovus, told Houston’s big annual energy conference earlier in March. “We’ve got the fight in us. Our business is competitive with light, tight oil.”

She said Cenovus trimmed its breakeven price across its operations in 2016 to US$45 per barrel. Other producers such as Imperial and Husky Energy have also reported falling oil sands break-even prices.

Fairburn said her company has lowered costs at its in-situ facilities by extending its wells to record length and injecting solvents to mobilize bitumen.

OPEC members have started talking up basins with longer lead times such as the oil sands and offshore plays, arguing those long-life anchor developments are vital for the overall health of the industry.

But the bulk of investors continue to seek refuge in U.S. shale plays, which may not leave enough time for Notley to redirect her storm-tossed ship of state before the next election in 2019.



Did you find this article interesting?
Tweet it
TwitThis
Digg it
Digg
Print this story | Email it to an associate.

Click here to subscribe to Petroleum News for as low as $89 per year.


Petroleum News - Phone: 1-907 522-9469 - Fax: 1-907 522-9583
[email protected] --- http://www.petroleumnews.com ---
S U B S C R I B E

Copyright Petroleum Newspapers of Alaska, LLC (Petroleum News)(PNA)©2013 All rights reserved. The content of this article and web site may not be copied, replaced, distributed, published, displayed or transferred in any form or by any means except with the prior written permission of Petroleum Newspapers of Alaska, LLC (Petroleum News)(PNA). Copyright infringement is a violation of federal law subject to criminal and civil penalties.