University of Calgary economist Trevor Tombe says non-renewable resource revenues in 2021-22 could be around $12-billion, edging toward a record high set 15 years ago.Larry MacDougal/The Canadian Press
What had been one of the worst fiscal stretches for Alberta, ever, is likely to be replaced with a windfall virtually no one saw coming.
The turnaround for the provincial government’s finances in the past eight months is nothing short of a stunning reversal of fortune to anyone paying attention, including Trevor Tombe.
Much higher demand for oil means that bitumen royalties are set to be many billions of dollars more than expected, said the University of Calgary economist. “That’s the thing about a resource roller coaster. Sometimes it goes down, and sometimes it goes up.”
It’s still a commodity-price minefield for a province reliant, to large extent, on the vagaries of the price of crude – a price that briefly went into negative territory in the early days of the pandemic in 2020 and, on Friday, dropped massively on market fears about Omicron, the new COVID-19 variant.
But even still, Prof. Tombe said the strong prices seen for much of this fiscal year mean non-renewable resource revenues in 2021-22 (which also includes other commodities such as natural gas and coal) could be around $12-billion, edging toward a record high set 15 years ago, when the province was in full-on boom mode.
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The per-barrel oil prices that the Alberta government forecast in its February budget (that Prof. Tombe said were in line with analysts’ predictions then) have been blown out of the water. In that budget, the Alberta government predicted the North American benchmark price for oil, WTI, would average US$46 per barrel this fiscal year.
In August, in the first fiscal update, Alberta Finance Minister Travis Toews predicted an average of just more than US$65 per barrel. The average oil price in October was above US$80 per barrel (but becoming much more volatile by the end of November).
The original estimate for the deficit – $18.2-billion – was knocked down to $7.8-billion in August. Now, with a second-quarter fiscal update for the province set to drop on Tuesday, Alberta is likely to announce a deficit of $4-billion to $5-billion, Prof. Tombe said.
It’s going to be a big shift in thinking for a province that has seen many years of dismal financial news. There will be new expectations for spending – including for an overwhelmed health care system, or to meet climate targets. And politically, at least in the short term, it will make it much more difficult for the Alberta government to make any forlorn arguments to Ottawa on the fiscal stabilization or equalization programs.
And to be sure, Premier Jason Kenney – facing low polling numbers, unhappiness about his government’s handling of the pandemic and other issues, and unrest within his own party – had all of this economic news in mind when he spoke to reporters following his party’s AGM last weekend. “I feel more confident about my leadership today than frankly I have in a very long time,” the Premier said.
An increasingly significant part of the budget boom for Alberta will be oil sands projects starting to pay significantly more in royalties. Royalties are the rates paid by companies to the owners of the resource: Albertans (managed by the provincial government on our behalf).
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. The system is price-sensitive. If oil prices are high, oil companies recoup those costs more quickly.
A royalty rate of between 1 and 9 per cent is applied on gross revenue until a project achieves “payout” – the point at which cumulative revenue equals costs (as laid out in the province’s 2016 royalty review report). After payout, the project pays a royalty rate ranging from 25 per cent to 40 per cent on its net revenue.
Ben Brunnen of the Canadian Association of Petroleum Producers, the industry lobby group, said total oil sands production this year is about 3.3 million barrels per day (bpd). Of that, 1.9 million bpd is currently in payout status, and the association expects another 300,000 bpd to enter payout by the first quarter of next year.
That’s six months to one year earlier than might have otherwise been the case with lower oil prices this year, said Mr. Brunnen, the vice-president of oil sands, and fiscal and economic policy for CAPP.
“Albertans have been patient owners of our resources,” he said.
Still, this will be a milestone that comes too late for some Albertans who believe royalty systems have long favoured investors over owners. In the 2015 provincial election, the NDP campaigned on conducting a full royalty review – a promise that riled the industry but in the end resulted in few changes.
However, the review noted there is a level of public distrust concerning the costs claimed by oil sands operators, in a bid to extend their low-royalty, pre-payout periods. “There is anecdotal evidence … that oil sands operators push the boundaries when it comes to costs, and that the Province has not enforced the rules with the ‘iron fist’ that Albertans might expect,” the report said. It recommended “stern, fact-based decision-making in respect of their allowable costs” – a piece of advice that remains pertinent today.
On the political front, a whole suite of higher energy revenues means that it’s possible the UCP government would be able to return to its 2019 campaign promise of a balanced budget by 2023, Prof. Tombe notes.
But the short-term boon to the province’s finances belies the ever-present bigger and longer-term problem of an overreliance on oil and gas revenues. And the province is still likely to take on debt for capital and infrastructure spending in the years ahead, and there is likely to be little room for badly needed savings in the near term. The UCP government is also still putting off any discussion about more sustainable forms of revenue, such as a sales tax.
As Prof. Tombe notes: “That long-term planning is not something that Alberta has historically done very well.”
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