|
Alberta embraces austerity
Kenney government clings to hope of increased O&G production, new pipelines, higher royalties; sees no budget surplus before 2023 Gary Park for Petroleum News
Travis Toews, finance minister in the freshly minted Alberta government of Premier Jason Kenney, introduced his first budget with a blunt understatement: “This is not a boom-time scenario.”
The forecast for the next five years includes a modest recovery for the province’s petroleum sector, stemming from hopes of rising oil and natural gas production, new pipelines (Trans Mountain expansion, TC Energy’s Keystone XL and Enbridge’s Line 3) and higher royalties.
But Toews’ message of restraint echoed through the budget, which targets a return to a C$600 million surplus in 2022-23 as the province claws its way out of Alberta’s own recession that will result in deficits of C$8.7 billion, C$5.9 billion and C$2.6 billion over the next three fiscal years.
The government expects the economy and employment will get better next year, with jobless numbers dipping below 6% in three years as housing starts and retail sales edge up.
Risks ahead But it concedes there are risks, including downturns in commodity prices, the possibility of a global recession and ongoing policy and regulatory barriers, such as a continuation of opposition to new oil pipelines.
In an effort to head off those negatives, Toews announced deep cuts involving a widespread spending freeze, government layoffs and warnings of worse to come if new pipelines aren’t built.
The first round outlines C$1.3 billion in cuts and the elimination of 2,100 public-sector jobs (7.7% overall), setting the stage for showdowns with public unions.
The plan to shrink operating expenses will lower the predicted debt of C$97 billion in 2023 by C$4 billion.
The government expects that increased pipeline capacity and crude-by-rail shipments will boost crude oil production by 178,000 barrels per day, while in-situ production is targeted to add another 197,000 bpd, raising overall output to 4.1 billion bpd in 2023.
Natural gas is expected to continue its struggles to remain over 4 billion cubic feet per day.
West Texas Intermediate prices are forecast to post measured gains from US$57 a barrel next year to US$63 in 2023, while the light-heavy differential is targeted to slide back to US$14 per barrel in 2020 from this year’s $23.
Natural gas prices at Alberta’s AECO trading hub are set at C$1.30 per gigajoule this year and expected to regain C$2 in 2023.
Bitumen royalties are counted on to contribute C$4.68 billion next year and to reach C$6.53 billion in 2023, while other resource revenues including natural gas are projected to add C$1.85 billion in 2020, rising to C$2.46 billion in 2023.
Resource revenues down Based on those numbers, natural resource revenues will account for 13% of Alberta’s total revenues in 2020, reflecting the drastic decline from peak years when they totaled close to 30%.
But revenues have been bruised by the Kenney government’s decision to cancel plans to finance crude-by-rail shipments, costing the treasury C$1.5 billion in the 2019-20 fiscal year.
Toews said the risks of that program were untenable, but denied the government was showing its bargaining chips by including the C$1.5 billion figure in the budget as it attempts to offload the contracts back to the private sector.
Kenney is now faced with trying to lure capital investors with his decision to lower corporate taxes from 12% to 8% over the next four years.
So far that move isn’t making much difference, starting with Hong Kong-controlled Husky Energy which reported a C$233 million benefit from the cut in its second quarter, at the same time it has moved spending to Saskatchewan, Newfoundland and the United States.
Husky Chief Executive Officer Rob Peabody, while saying Alberta’s tax changes are “really appreciated,” said his company’s strategy has shifted the bulk of its production growth in Western Canada to Saskatchewan, while announcing layoffs which sources estimate to be in the hundreds.
He said Alberta’s production quotas introduced by the province’s previous government “have held back a lot of people making investments in Alberta.”
Under the production limits, Peabody said “we could spend money to develop crude oil, but then Alberta wouldn’t let us sell it. So that doesn’t make any sense.”
He said the jobs cuts were designed to align Husky’s workforce with lower capital spending plans. “Eventually when you spend less, you need less people to spend that money efficiently,” he said.
| 