Non-renewable resource revenue in Alberta in 2022-23 is estimated at $13.8-billion, the second-highest amount recorded by the province.Todd Korol/Reuters
Alberta says its push to diversify the economy and reduce its dependence on oil and gas is bearing fruit. The province’s latest budget forecasts that corporate and personal taxes will make up an increasing portion of government revenues by 2025.
But in the near term, at least, oil will continue to hold its grip on the Alberta’s finances – for the good and bad. In fact, the budget released on Thursday shows the province’s finances for the coming year will become even more sensitive to swings in North American pricing for oil.
Oil prices rise in volatile geopolitical times, and the Russian invasion of Ukraine will – beyond the devastating human tragedy playing out – add to the costs and demand of essentials, including oil and natural gas. Even without war in Europe explicitly factored into the price of oil in budget documents drafted weeks ago, the Alberta government lookahead to the 2022-23 fiscal year finds the province is actually going to feel changes in the price of crude more acutely than ever.
“We have a royalty structure in this province that’s very sensitive to changes in energy prices,” Alberta Finance Minister Travis Toews told reporters in announcing the budget.
“I’m thankful right now that we have significant revenues coming from our energy industry. But it’s not an either-or. At the same time, we’re doing all we can, and seeing actually really great results on economic diversification in this province.”
The highlights from Alberta’s latest budget announcement
Alberta projects first surplus in eight years as high oil prices drive dramatic turnaround
Non-renewable resource revenue in 2022-23 is estimated at $13.8-billion, the second-highest amount recorded by Alberta, coming mostly from bitumen. The government forecasts that it will post a $500-million surplus in the coming year – emphasizing this is based not just on oil revenues but also on broader economic growth and holding the line on the cost of government services.
West Texas intermediate crude is trading at about US$93 a barrel, compared with about $55 a barrel one year ago. In the current fiscal year, every US$1 increase in the average price of WTI (the North American benchmark for pricing oil) over a full fiscal year produces an extra $230-million in revenue. But with Alberta oil production going up – moving toward an average of 4.2-million barrels a day by 2025 compared with about 3.6-million barrels a day in 2021 – every US$1 increase to WTI in the 2022-23 fiscal year will mean a $500-million bump to Alberta government revenues.
It’s not only volumes of oil affecting these numbers. More oil sands projects are hitting the momentous status called payout. 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 initial costs for a project. If oil prices are high, oil companies recoup those costs more quickly.
The difference in royalty payments is significant. A royalty rate of between 1 and 9 per cent is applied on gross revenue until a project achieves payout. After payout, the project pays a royalty rate ranging from 25 per cent to 40 per cent on its net revenue.
The government says in the next two years, four oil sands projects are hitting payout status more quickly than the government had forecast because of higher-than-expected oil prices. While government officials weren’t immediately able to provide details of the financial effect of the change, three-quarters of Alberta oil sands production will be in the payout phase by 2025, as opposed to about 65 per cent today.
“The higher energy prices go, and the more oil sands projects that move from pre- to post-payout, the more sensitive the Alberta government revenues, royalty revenues, become relative to WTI prices,” Mr. Toews said.
Of course, oil is always a good news/bad news story. In the fiscal year 2020-21, “when the COVID-19 pandemic shocked the world, crushing economies and activity, the impact was particularly hard on Alberta,“ government budget documents note. And revenue declined by more than $3-billion from 2019-20. And now, the government expects commodity prices to moderate before the end of the next fiscal year and non-renewable resource revenues will drop in the years ahead.
Other forms of revenue are supposed to help fill the gap. The government argues its 8-per-cent corporate tax rate is spurring investment and broader business activity, and those revenues will continue to rise. (Of course, a lot of those corporate revenues are for energy or energy-adjacent companies.) The Calgary Chamber of Commerce noted Thursday that budget initiatives – including money for worker skills upgrades, a Clean Hydrogen Centre of Excellence, the Alberta Film and Television Tax Credit, and agriculture tech and food processing – will all help diversify the province’s economy.
Meanwhile, most other Canadian governments are likely to post deficits this year. Alberta’s still-singular strength and dilemma compared with other parts of the country is that a fiscal disaster can be gone, or reappear, in an instant.
The budget documents state that “due in large part to the role of resource revenue, Alberta revenue growth has been more than twice as volatile as Ontario, Quebec and British Columbia since 2000. This clearly makes government fiscal planning challenging.” It’s a lament for what public servants in Alberta have and will contend with, for at least several more years.
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Kelly Cryderman