Alberta says it will barely edge into the black next year, with a surplus of just $511-million – it’s first in eight years.
But the projection of a razor-thin surplus in the budget unveiled by Alberta on Thursday is built on conservative forecasts for oil prices. And that was before Russia began its invasion of Ukraine, adding the hazards of a European war to the uncertainties already pushing up crude prices.
West Texas Intermediate closed Thursday at US$93.13 a barrel, a third higher than the Alberta government’s full-year projection for fiscal 2022-23 of US$70 a barrel. If this week’s prices were to stick around for the entire fiscal year, the province’s revenues from non-renewable resources would nearly double, with an extra $11.6-billion flowing in and swelling the surplus.
Already, the turnaround in oil prices from a year ago has transformed the province’s finances. The forecast in last year’s budget of an $18.2-billion deficit in the current 2021-22 fiscal year has shrank to a shortfall of $3.2-billion. And what was an expected deficit of $11-billion next year has flipped to a $511-million surplus.
Of course, oil prices are notoriously and inherently volatile, as Alberta Finance Minister Travis Toews pointed out to reporters on Thursday when pressed on what effect rising crude prices might have on his budget forecasts. In mid-December, he said, WTI sat around US$85 a barrel but retreated toward US$60 by the end of the month. “Commodity prices go up, and down,” he said.
Now, however, oil prices are surging, in part because of the threat that war in Ukraine poses to oil supplies. “It’s having an impact, no doubt, adding a risk premium to energy prices,” Mr. Toews said, adding that his budget has “credible but cautious” energy price projections.
Bank of Nova Scotia senior economist Marc Desormeaux characterized the province’s forecasts as “pretty prudent and conservative,” saying that they were lower than his bank’s forecast of US$72 a barrel. Those estimates were made last month, before Russia’s move against Ukraine. Scotiabank will be revisiting those forecasts, Mr. Desormeaux said. But even the current Scotiabank forecast points to a modest (by Alberta standards) revenue upside of $1-billion.
Rising oil prices padding the Alberta budget is nothing new. That teeter-totter cycle has swelled the province’s revenues many times in past decades, from the 1973 oil embargo through to the Iraq war 20 years ago and most recently, the 2014 rally that sent prices climbing toward $120 a barrel.
But this ride up is different, with the maturation of the oil sands intensifying the volatility that is a central fact of life for Alberta finance ministers, and the province. Oil sands projects pay ultralow royalty rates until they reach payout status, when cumulative revenue exceeds cumulative costs, including capital investment. Those low rates were put in place to entice energy companies to sink tens of billions of dollars into developing the oil sands.
That delayed Alberta’s payday from the oil sands, but the subsequent increase in royalty rates is huge. Prepayout royalties range from as low as 1 per cent of gross revenue to 9 per cent. After payout, potential royalties jump to between 25 per cent and 40 per cent of a project’s net revenue (after operating, capital and other costs are deducted from gross revenue). High prices accelerate the pace at which projects move to payout status.
That trend shows up in the revenue-sensitivity figures in the budget, which specify how much additional cash the province gets from changes in commodity prices, among other things. Those figures indicate that Alberta is receiving a much bigger payday from rising energy prices than in the past. In part, that’s because royalty rates rise with prices; the higher prices go, the more upside there is for Alberta from any incremental increase.
But only in part. Eight years ago, when crude prices were even higher than today, Alberta received an additional $215-million for every US$1 increase in the price of West Texas Intermediate. Now, that sensitivity has massively increased: The province reaps $500-million for every dollar increase.
In the previous budget, that sensitivity figure was just $230-million, less than half of this budget’s figure. Price forecasts rose considerably in the intervening year, helping to explain some of the jump. But oil sands projects continue to tick over into payout status. Five projects hit payout status in 2021. And the government is forecasting that a massive 270,000-barrel-a-day operation will hit payout status this year, followed by another four projects in 2024 (up from the previous forecast of one).
That has positioned Alberta to grab a greater share of its resource wealth, just as oil prices are on the march upward.
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