Alberta, which blew through last year’s budget projections after overestimating energy prices, is sticking with its forecasting strategy despite facing a sizable deficit caused in part by its recent miscalculations.
The Progressive Conservative government, however, is planning a summit this summer to explore how it can better estimate energy prices, even as it says last year’s retreat in resources, particularly for bitumen, was impossible to predict.
Alberta Premier Alison Redford’s government has moved away from the more conservative practices of the Ralph Klein regime, which traditionally used lower-than-projected oil prices when budgeting. That contributed to the swelling deficit last year, as it left the province more exposed to a downturn.
The government expects to run a $1.975-billion deficit in 2013-14, saying cash expected to roll in from energy royalties is down sharply because of transportation bottlenecks and a production explosion out of North Dakota. This marks the province’s sixth-straight deficit.
Alberta relies heavily on oil and gas revenue, and royalties dictate its fiscal health. The government is banking on West Texas intermediate oil to average $92.50 (U.S.) a barrel in fiscal 2013, down from its calendar 2013 estimate of $94.05 a barrel, according to the budget it released Thursday. The government relies on industry forecasts when coming up with its own estimate, and the average in the survey, including confidential sources, rang in at $94.28 a barrel, the government said. The confidential estimates alone averaged $94.65 a barrel.
Should WTI drop $1, Alberta’s coffers will be $142-million short of Thursday’s estimate. If the differential between heavy Canadian oil and the North American benchmark grows by 1 per cent, the government will be another $139-million shy of its financial prediction. Interest rates, the exchange rate, and household incomes also affect the government’s budget numbers.
The difference between WTI and the heavy oil produced in Alberta, however, is what hammered Alberta last year. The province now predicts the spread between WTI and Western Canadian Select will be 29 per cent, while the industry believes it will average 27 per cent in the year.
“This is not an optimistic projection,” Minister of Finance Doug Horner told reporters. “When you take $6-billion [Canadian] out of the revenue projection, we’ve made a very conservative estimate of where the differential will be.”
Official Opposition leader Danielle Smith argues the province is still under threat even though the government’s estimates are less aggressive than last year.
“They are still a little bit rosier than usual. In the past, the way they managed to have a surplus is they would take a low end of what the budget projections are,” she said. “They are better than last year, but we still think there is a possibility they may be in a problem on that.
“They are still running a $5.5-billion shortfall,” Ms.. Smith, who leads the Wildrose Party, said. “They haven’t solved the true nature of the problem – and it is on the spending side. We don’t see any evidence that they are going to get their spending back under control.”
Jack Mintz, chair of the School of Public Policy at the University of Calgary, said the government is betting energy prices will rebound. “I would say this budget is built on hope,” he said. “There is a serious structural hole.”
The Tories have long argued they, along with private forecasters and governments in Regina and Ottawa, were sideswiped by the speed at which North Dakota’s prolific Bakken light oil play developed. Pipeline shortages deepened the pain. But despite the problematic price predictions, the government will continue with its current budgeting system.
“When we do our projections, we don’t do it. We actually get the industry and the public sector forecasters to give us their numbers, we average that out, we go a little under the average – there’s the number we use for the budget purposes,” Mr. Horner said.
The government’s oil projection last year was slightly less than the average of its confidential forecasts and slightly higher than all private forecasters. That was slightly more aggressive than the approach from the previous Progressive Conservative government led by Ed Stelmach, and much more aggressive than that of Mr. Klein’s government, which used estimates well below the private sector average.
Alberta plans to host an “energy forecasting summit” this summer, bringing “experts from around the world to explore and share best practices and fresh ideas on forecasting,” Mr. Horner told the legislature, according to his prepared speech.
/can trim from here./ The province will also begin borrowing heavily to build capital projects, such as schools. This year alone, it will take $2-billion from its rainy-day fund to make ends meet while raising another $4.2-billion more in debt to pay for infrastructure. It means pouring money into savings funds while at the same time borrowing, saying the funds earn a higher interest rate than the province pays. Over the next three years, Alberta will borrow $11.6-billion for infrastructure, while increasing the value of its two savings funds by just $3.1-billion.
All told, the province’s total net assets – including infrastructure projects the government says are needed to maintain economic growth – are projected to increase by a modest $1.2-billion over the next three years, or a total of 2.8 per cent.
With files from Josh Wingrove and Dawn Walton