Alberta hopes for better, prepares for worst
Conservatives’ first budget forecasts a slight uptick in most oil and gas industry measures, but also includes planning for a ‘doomsday scenario’
The governing United Conservative Party (UCP) released its first Alberta government budget in late October 24. The party’s focus is very much on fiscal discipline, as it sees better times ahead for the province’s economic bellwether oil and gas industry, but only slightly. And it also scenario planning a worst-case scenario for the industry.
Conventional Albertan oil and gas production is forecast to remain relatively flat over the 2019-2022 fiscal years period (April 2019-March 2023), but raw bitumen production is expected to increase by 500,000bl/d to 3.5mn bl/d. This assumes Canadian midstreamer Enbridge’s 370,000bl/d Line 3 Replacement coming online by early 2021, the federally-owned 590,000bl/d Trans Mountain Expansion by the fourth quarter of 2022 and Canadian infrastructure firm TC Energy’s 830,000bl/d Keystone XL the year after.
This almost 17pc boost in bitumen production will thus play a significant part in revenue growth from non-renewable resources forecast by the new Alberta government. It predicts these revenues to increase by almost a third to C$8.6bn ($6.45bn at current spot exchange rates) by the end of the forecast period–which coincides with the UCP’s expected four-year term in office. Non-renewable resources revenue’s share of total government revenue is expected to increase from 13pc to 15pc over the period.
The Jason Kenney-led government is also relatively optimistic about natural gas prices
Modest price increases are the second plank of the assumed revenue growth. The UCP government is forecasting the price of West Texas Intermediate (WTI) to average $57/bl in fiscal year 2019, and to gradually increase to $63/bl by fiscal year 2022. The critical discount of Canadian crude benchmark Western Canadian Select (WCS) to WTI– which blew out to over $40/bl last autumn, prior to the Alberta government imposing crude curtailment on the industry–is projected to average just $14/bl in fiscal year 2019, increasing to around $20/bl the next two, before falling back to $17/bl in the final fiscal year of the forecast as “full market access is achieved” with new pipeline capacity coming online.
The Jason Kenney-led government is also relatively optimistic about natural gas prices, forecasting the Alberta Reference Price to gradually increase from a historically low $1.30/GJ this fiscal year to an albeit still modest $2/GJ in fiscal year 2022.
Kenney is committed to returning Alberta’s books to a modest surplus by 2022, after the administration of his Liberal predecessor Rachel Notley ran substantial deficits each of its four years in office. Spending cuts are key for getting the province’s financial house back in order. “It has been decades in this province since we have actually seen a budget that has resulted in a reduction in operation[al] spending," says UCP finance minister Travis Toews.
But the Alberta deficit is still projected to increase this fiscal year to $8.7bn, compared to $6.7bn in fiscal year 2018, primarily due to the UCP government taking a $1.5bn charge to sell crude-by-rail contracts, signed by Notley during her last month in office, to the private sector.
$8.7bn - Alberta's projected deficit in 2019
We are “working on offloading those contracts right now as we speak”, says Toews. “I believe there will be announcements in the upcoming weeks.” The program would have seen the Alberta Petroleum Marketing Commission purchase and ship 120,000bl/d of oil from the province for roughly four years, starting on 1 July.
For the first time ever, the Alberta government included alternate scenarios within its budget, including a doomsday ‘no market access scenario’ where all three of the assumed crude pipeline projects are permanently cancelled. “[A]ll three pipeline projects are facing regulatory hurdles, and Canada has already seen two pipeline projects terminated in the last decade—Northern Gateway and Energy East,” the UCP government’s budget document noted.
In an attempt to instead increase market access—necessary if capital investment and oil production in the province are ever to materially rebound—the Kenney government is investing in a ‘fight back strategy’. In particular, it is planning to spend C$30mn annually on the Canadian Energy Centre, previously known as the ‘energy war room’, to combat disinformation about Alberta’s oil industry, and a one-time $2.5mn on an inquiry looking into foreign funding of anti-pipeline, anti-oil sands groups.