Bitumen fuels Alberta

Alberta government expects royalties of C$9.9B in ’15, more than double current budget, with oil sands offsetting crude, gas returns

Gary Park

For Petroleum News

Because of complications relating to their sheer bulk — proving up reserves, evaluations, approvals, construction and invariable startup hitches — the mega-projects in the Alberta oil sands have been slow leaving the starting gate and hitting their stride over the past decade.

But the big pay-off day for the Alberta government is now within sight.

As more facilities come on stream and royalties rise as capital costs are paid off, the province is now expecting a steady stream of incoming revenue, short of a dramatic plunge in oil prices.

The government’s 2011-12 budget and forecasts for the next three years show how much Alberta is now dependent on bitumen from the oil sands.

It forecasts bitumen royalties will climb to C$9.9 billion in fiscal 2014-15 from an expected C$4.36 billion in the current year which ends March 31, with production rising over the same period to 2.4 million barrels per day from 1.79 million bpd.

That underpins projected economic growth of 3.8 percent for the next fiscal year, double Canada’s national average.

However, Finance Minister Ron Liepert injected a note of reality. “We all recognize that we are too reliant on non-renewable resource revenue. We have seen what happens when we have dips (in commodity prices),” he said.

The latest budget targets are based on an estimated average price for Western Canada Select, a blend of conventional and oil sands crude at the Hardisty hub in Alberta, of C$92.94 a barrel in 2014-15 compared with this year’s C$77.98.

Over the same period, the government projects West Texas Intermediate will increase to US$108.25 a barrel from $96.25 and Alberta Wellhead prices will grow to C$99.04 from C$89.27, with the Canadian dollar expected to remain within one cent on either side of the U.S. dollar.

Conventional crude in Alberta is projected to grow in successive years from 492,000 bpd in the current budget year to 524,000 bpd and 529,000 bpd, then dip back to 515,000 bpd in 2014-15.

Gas production tracking down

Alberta’s AECO benchmark gas price is targeted to make a gradual recovery from a low points of C$3.11 per Gigajoule in the current year and C$3 in 2012-13 to C$4.25 in 2014-15, raising gas royalties over the forecast period to C$1.64 billion — only one-fifth of the record set four years ago — from C$1.23 billion in the current fiscal year.

Combined bitumen, crude and gas royalties, along with returns from government land sales, are expected to generate C$15.8 billion in 2014-15, C$4.7 billion above the 2011-12 forecast, with land sales hitting a breathtaking C$3.3 billion in the current fiscal year, then sliding back to either side of C$2 billion for three years.

The Conservative Party government of recently installed Premier Alison Redford is expected to use the budget as its platform for an election this spring.

The anticipated surge in bitumen revenues is targeted to turn an C$886 million deficit in 2012-13 (down C$432 million from the year that is winding down) into surpluses of C$952 million in 2013-14 and C$5.2 billion in 2014-15. No or fee increases and no major program or service cuts are scheduled for the new fiscal year, with government spending pegged at C$41.1 billion.

Institute more bullish

Analysts also vary widely on their gas price outlook, with Martin King of FirstEnergy Capital predicting C$1.73 per thousand cubic feet for 2012, while Chad Friess of UBS Securities is counting on C$3 per Gigajoule for the 2012-13 fiscal year based on a recovery this fall.

Friess said in a note that “producer discipline has been fairly pronounced and we are starting to see the production impact,” while Alan Knowles of Haywood Securities does not expect production cuts and shut-ins to strengthen gas prices until 2013.