There’s a distinct chill between Canada’s two most western provinces, with Alberta linking some of its financial despair to British Columbia’s refusal to cooperate in moving oil sands crude to the Pacific Coast for export to Asia.
The longer uncertainty persists over plans by Enbridge and Kinder Morgan to increase shipments from Alberta by a combined 1.1 million barrels per day the more Alberta suffers from a ballooning budget deficit tied to the discounted price its producers are paid for heavy oil and bitumen.
“As a landlocked province with limited access to markets for our oil resources, Alberta is continuing to face serious challenges to our bottom line,” Alberta Finance Minister Doug Horner said in painting a bleak budget outlook that could see a deficit of C$3.5 billion-C$4 billion for the 2012-13 year ending March 31 — quadruple the goal set last February and reflecting a C$2.4 billion drop in resource revenue.
The revenue decline is “for the most part, a result of Alberta’s market access problem,” he said
In addition to the pipeline bottlenecks, Alberta, Saskatchewan, the Canadian government and the industry did not foresee the “speed at which production in the Bakken would happen,” eating into Alberta’s long-established markets in the United States, Horner said.
C$50 billion forfeitPeter Tertzakian, chief energy economist at ARC Financial Corp., has estimated the Canadian industry will forfeit C$50 billion in upstream revenue this year as a “direct result of selling hydrocarbon products to Americans at deeply discounted prices to world markets.”
In his energy commentary, he said “current tax forfeitures are multiples more than what will actually be realized by (Canadian) governments — C$1.6 billion (estimated actual) versus C$5.1 billion (assuming no forfeiture) in 2012 and an estimated C$1.6 billion versus C$5.3 billion in 2013.”
Underscoring the importance of the petroleum industry to the Canadian economy, Tertzakian noted that the sale of upstream oil and gas commodities is now more than 10 times larger than all of Canada’s agriculture and forest products.
Alberta’s current budget was initially based on an average wellhead price for Alberta light, medium and heavy crude of C$90.18 per barrel, which it has since scaled back to C$79.46, while its average Alberta natural gas reference price has been slashed to C$2.26 per gigajoule from C$3.
Danielle Smith, leader of the Alberta Wildrose Party, said the original 2012-13 budget is “completely unravelling. We knew it did not contained projections that were remotely within the realm of achievable. The budget was an absolute farce.”
BC resource adversitiesBritish Columbia, which shows no signs of ending its opposition to crude oil pipelines from Alberta, faces its own resource adversities.
In releasing the province’s 2013-14 budget, which underpins its shaky hopes of re-election on May 14, Finance Minister Mike de Jong announced higher natural gas royalty rates and corporate taxes to offset a downturn in projected gas revenues caused by an uncertain North American market.
The changes attracted only mild concern from the Canadian Association of Petroleum Producers which said the introduction of a 3 percent royalty on gas produced from deep wells and the phasing out of incentives to stimulate summer drilling would be unlikely to reduce capital investment.
British Columbia’s gas royalty program is adjusted according to the time of year when wells are drilled, the location and depth of the wells and well productivity. In order to encourage drilling during a period of low commodity prices, the current royalties are zero for wells drilled to a vertical depth of 6,200 feet and a horizontal length of 8,200 feet.
Geoff Morrison, CAPP’s British Columbia operations manager, told reporters the new royalty rate was not unexpected.
“Because of the low commodity-price environment a number of wells are paying virtually no royalties,” he said. “That’s not a sustainable situation for the government as resource owner.”
Morrison said the province has promised to control costs in other ways through regulatory improvements.
De Jong said that because of the anticipated drop in gas royalties, the corporate tax rate for companies reporting more than C$500,000 a year in taxable income will rise effective April 1 to 11 percent from 10 percent.
He doubted the adjustments in royalties and taxes would deter overall drilling, particularly as the industry geared up “for an expected boom later this decade related to the development of a liquefied natural gas export industry.”
Gas price disparityThe government has projected an average gas price for the new fiscal year of C$2.69 per gigajoule compared with an expected C$2.15 in the current year which ends March 31, C$2.66 in 2010-11 and C$2.90 in 2009-10.
Tim O’Neill, an independent economic consultant hired to assess the budget gas projections, said the C$2.69 target was “too robust” given that the average price of 20 private sector forecasters utilized by the government was C$2.13.
He suggested a more realistic price range would be C$1.80-C$1.90, because the U.S. economy “remains sluggish” and shale gas development in the U.S. and Canada could “further dampen” a recovery in gas prices. About 60 percent of British Columbia’s annual gas production of 1.26 trillion cubic feet (compared with Alberta’s output of 4.18 trillion cubic feet last year) is exported to the U.S.
Gas royalties are projected to generate C$108 million in government revenues in the current fiscal year, five years after peaking at C$1.25 billion.
Meantime, Morrison said the industry has received no more clarity on the government’s proposed tax on exports of LNG, warning that prolonged uncertainty will “cause (LNG proponents) to take time to reflect on their potential investments.”
The British Columbia Ministry of Energy, Mines and Natural Gas released two consultants’ reports Feb. 19 to endorse its forecast that LNG operations could generate C$130 billion-C$260 billion in government revenues over 30 years. The two government-commissioned reports were produced by Grant Thornton and Ernst & Young.
De Jong said there is strong demand for LNG around the Pacific Rim, giving the government a “huge incentive to move forward aggressively to develop LNG.”