Alberta’s oil-dependent budget has gone from bleak to relatively bountiful, in a matter of months.
In February, the United Conservative Party (UCP) government predicted it would take until 2023 for non-renewable resource revenues to fully recover. But with global oil and natural gas demand surging for a good portion of 2021, those resource revenues will likely hit $10.9-billion this fiscal year – edging in on records set in the heady boom period around 15 years ago. Royalties paid on bitumen from the province’s oil sands are set to comprise 70 per cent of Alberta’s non-renewable resource revenues, the highest percentage on record.
According to a second-quarter fiscal update released on Tuesday, revenues from higher crude prices and increased economic activity mean the deficit is now likely to be less than one-third the $18.2-billion estimated in the budget nine months ago. The deficit for 2021-22 is now forecast at $5.8-billion. In the next two years, the government is forecasting more manageable deficits of $3.3-billion and $2.3-billion.
“While revenue continues to exceed expectations, we are keeping a steady hand on the wheel when it comes to spending,” Alberta Finance Minister Travis Toews told reporters, saying his government is still committed to bringing Alberta’s higher per-capita expenditures in line with other provinces.
Total spending is forecast at $63.7-billion, which is $1.8-billion higher than the budget. Money was added to the disaster contingency fund for the extreme drought conditions experienced by the agriculture sector.
Recent energy forecasts have said the world was set to soon return to its regular oil-consumption patterns of about 100 million barrels a day, or more. West Texas Intermediate oil, the North American benchmark, had been trading above US$80 a barrel earlier this month.
But increasing concern about the Omicron variant of COVID-19 is creating new global turmoil, including a dramatic drop in the price of oil since Friday. Oil was trading at about US$67 a barrel by Tuesday. Mr. Toews said his government is offering what is a prudent new oil-price forecast to average US$70.50 a barrel for the fiscal year, taking into account the unknowns the pandemic continues to present.
“This new COVID variant reminds us that we’re still in a period of great uncertainty and volatility.”
At this moment, however, drilling and oil production are increasing, and investment outside oil and gas is also recovering. Finance officials say private-sector forecasters expect Alberta to lead the provinces in economic growth this year, and also predict that the province’s unemployment will average 8.8 per cent in 2021 – down from 11.4 per cent in 2020.
“The energy sector continues to be among the most productive and highest paid industries in Canada,” Mr. Toews said.
The finances of the province are a ray of hope for Premier Jason Kenney’s UCP, which is sitting as one of the least popular governments in the country. It has been hammered by questions about its handling of the economy and the pandemic, as well as environmental issues such as coal mining, and labour relations with the province’s health care workers, teachers and other public-sector workers.
As oil prices and investment in the province sank in recent years, Alberta’s governing party has become more preoccupied with, and has paid more lip service to, economic diversification and global climate concerns.
Still, the province’s NDP said the fiscal update does little to manage the inflation pressures Albertans are facing, and those opposition MLAs continue to point to the government’s poor handling of the fourth wave of the pandemic, which came close to overwhelming the health care system in September.
“This cost hundreds of lives, led to tens of thousands of cancelled surgeries and also damaged Alberta’s economy,” Alberta NDP finance critic Shannon Phillips said.
Still, there is a lot of good fiscal news for the province in this update. Lower oil prices and lack of investment since 2014 have contributed to years-long economic weakness and unemployment in Alberta. Oil and gas investments plummeted in the first year of the pandemic. But now the province says total oil and gas investment is forecast to grow nearly $4.3-billion, or 26 per cent, in fiscal 2021-22.
For government coffers, what was originally forecast to be about $1.5-billion in royalties from bitumen production is now forecasted at $7.6-billion. That’s because of strong production growth over the past five years, and more oil sands projects reaching the postpayout phase of their operations.
Oil sands projects have massive upfront investment costs. So Alberta’s oil sands royalty system is based on a model that’s designed to encourage investment, where royalty rates only jump up after years of production – once a company has covered a number of initial costs and earned a certain return on investment. If oil prices are high, oil companies recoup those costs more quickly, and then hit the postpayout period.
The province is expecting five oil sands projects to reach payout this year. Mr. Toews said more projects hitting payout means increased predictability for Alberta’s revenues.
“It’s having a material impact on non-renewable resource revenues this year, and it will certainly into the future as well,” he said.
Cenovus Energy Inc., for example, has hit payout on three of its oil sands projects: Foster Creek in 2010; Christina Lake in 2018; and Tucker Lake in 2020. The company’s chief executive Alex Pourbaix told The Globe and Mail recently that higher oil prices have been a boon to the province, driving huge royalty increases.
The royalty cheques that go to the government every month, he says, are “eye-opening.”
It’s not purely bitumen royalties that are leading to the changing fortunes in Alberta: Personal and corporate taxes are now forecast to be higher than in they were in the February budget, along with natural gas and byproducts royalties.
The government also says that non-energy investment will expand 6.6 per cent this fiscal year and another 7 per cent in 2022. Federal transfers of $11.4-billion are also forecast for 2021-22, $1.2-billion higher than estimated in the February budget.
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