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Alberta Premier Alison Redford is quietly building support among her provincial colleagues for a national energy strategy, saying Canada’s prosperity hinges on forging a united front on exploiting the country’s vast natural resource riches.John Lehmann/The Globe and Mail

Alberta is veering toward a deficit as high as $3-billion this year, more than three times larger than expected, as a slump in oil prices forces the government to find ways to slash spending.

Finance Minister Doug Horner, who delivered the first-quarter fiscal update Thursday, blamed a shaky global economy and said Alberta's bottom line for 2012-13 has been hammered by weak royalties from bitumen and conventional oil, and low land lease sales to energy producers.

Unless commodity prices improve, it could mean a provincial deficit of $2.3-billion to $3-billion, Mr. Horner said. He pledged to keep the province on track to reach a surplus position, as previously promised, by 2013-14.

The surprising deficit forecast shows Alberta has been too optimistic about resource revenue as the province fails to capture the full benefit of strong global oil demand. Though prices for Brent and West Texas Intermediate crude are firm, Canadian producers have been suffering through a prolonged period of discounted domestic prices because of oil export bottlenecks that often cause an oversupply.

For Alberta, that contributed to a $400-million drop in revenue for the quarter ended June 30.

When the Progressive Conservative government delivered its budget in advance of April's provincial election, the projected deficit of $886-million for fiscal 2013 was based on an average private sector oil forecast of $99.38 (U.S.) per WTI barrel.

But during the first quarter, private sector analysts downgraded their original estimates to an average of $93.62 a barrel.

Critics and industry watchers aren't so sure Alberta can get back to surplus any time soon.

Alberta will continue to face steeper-than-usual discounts for its crude as long as there is no access to world markets via pipelines to the west coast, said Patricia Mohr, Scotiabank's commodity economist in Toronto. She calculated the 2012 discount on Canadian crude has been roughly $6 per barrel greater than normal, costing producers $3-billion. That is $3-billion less in revenue on which they pay taxes.

"My concern is that to guarantee world prices for the crude, we do need to tap the faster growing markets in Asia," Ms. Mohr said.

But Canadian producers are also competing with a booming supply in the U.S., which will see production grow by 1 million barrels per day between 2009 and the end of this year, with another 500,000 barrels per day of growth in 2013.

The Fraser Institute, a public policy think-tank, recently issued a report titled "Alberta's 2012 Fiscal Time Bomb," which projected a higher-than-expected deficit due to the government's "unrealistic resource revenue" and economic growth forecasts.

Leader author Mark Milke said the province has banked on "overly optimistic oil and gas prices" and continues to spend beyond its means.

"They must restrain and pare per-capita program spending sooner rather than later," he concluded, "If they find such direct action unpalatable, they could hold program spending to a rate of growth below that of government revenues generally."

Alberta's ministers have now been asked to review capital spending, examining each program's intent and cost. Mr. Horner wants departments to save at least $500-million combined.

"We are not going to cut for the sake of cutting," he said. "We are tightening our belts.

"We will cap overall operating spending to budget allocations and we have asked departments to operate lower than budget."

There will be no new money for public sector negotiations, he continued. The government will not impose new taxes or make "drastic cutbacks" or affect day-to-day services. Spending cuts haven't been ruled out.

Opposition parties, which all described Premier Alison Redford's original budget as too spendthrift and too optimistic, were quick to say they were right.

The Wildrose Party, the official opposition in Alberta, described it as "Alison Wonderland" accounting.

"We're in a situation where we're going to see a massive return to debt or severe cuts in social spending and infrastructure," said Wildrose finance critic Rob Anderson, "It's a sad story."

The Liberals called it a "fudget budget" based on "overly rosy" resource projections.

Mr. Horner insisted the Tory government would still meet its original budget since there is still the rest of the fiscal year ahead.

"This is a snapshot of a certain point in time – and doesn't tell the whole story."

With a report from Shawn McCarthy in Ottawa