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Saskatchewan braces for BHP's move on potash mine

Saskatchewan braces for BHP's move on potash mine

Tim WImborne/Reuters/Tim WImborne/Reuters

The potential delay of a huge potash project is dampening some of the excitement around Saskatchewan's boom.

BHP Billiton Ltd. hinted this week that it might postpone digging at its Jansen mine, as global demand for commodities weakens while costs remain high. Because the mine isn't producing, Saskatchewan has yet to forecast its royalties, but even tweaks to Jansen's timeline will be felt in the resource-rich province.

The potential delay, along with sliding oil prices, serves as a sharp reminder that although Saskatchewan and Alberta are booming, they have limited control over the health of their economies.

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Potash and oil reserves make up major chunks of Saskatchewan's budget, while Alberta leans on bitumen from the oil sands and conventional crude. Troubles at one project are enough to spook number-crunchers.

"When you get in the smaller provinces, one or two projects can have a big impact on the [economic]forecasts," said economist Robert Kavcic of BMO Nesbitt Burns in Toronto. "The bigger message is that one project is probably a broader indication of what's happening in the sector."

BHP is the world's largest mining company but lacks experience in potash. If it puts the brakes on the $12-billion Jansen project, Mr. Kavcic said it would "temper the enthusiasm a little bit" about Saskatchewan's growth prospects.

BMO predicts the province's economy will grow close to 3 per cent this year, and slightly more in 2013. "A lot of that is based on the activity in the potash sector," he said.

The Saskatchewan government expects potash royalties to total $705.2-million in 2012 – a significant part of its budget.

While Saskatchewan may be a small province, it is helping to boost the country's economy and keep unemployment in check. Any woes it feels would reverberate beyond its borders.

Murray Fulton, an economics professor at the Johnson-Shoyama Graduate School of Public Policy at the University of Saskatchewan, said the most immediate impact if BHP were to slow mining activity would be related to jobs. About 400 people are employed at Jansen now; for work to continue, BHP would have to commit to further spending.

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Although the potash market can hurt Saskatchewan, it also gives the province an advantage over neighbouring Alberta. Both depend on oil : Saskatchewan expects to bring in $1.6-billion this year in oil royalties, excluding land sales; while Alberta hopes to rake in $11-billion, or roughly a quarter of its total budget, from non-renewable resources (including land sales and leases). Of that, $5.6-billion is expected to stem from bitumen.

About 20 per cent of Saskatchewan's revenue flows from resources, according to BMO, compared with 25 per cent for Alberta. So although falling oil prices would ding both provinces, it would hit Alberta harder.

"It definitely hurts Alberta disproportionally more simply because our resources are not as diversified as Saskatchewan," said Todd Hirsch, an economist for ATB Financial. "Oil is about the only show in [Alberta] which puts us in a more dangerous position than saskatchewan if those prices plunge."

The benchmark price for North American crude closed at $86.53 (U.S.) a barrel Thursday. A barrel of oil was worth $106.17 on May 1. Growth in Alberta's oil patch is scheduled to come primarily from the oil sands, and new projects would face serious trouble if oil continues to skid.

Canadian Natural Resources Ltd. predicts some projects would need oil to trade as high as $85 to break even. Meanwhile, producers in Saskatchewan's Bakken zone, which involves different geology and a different quality of crude, can make money at much lower prices.

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About the Author

Carrie Tait joined the Globe in January, 2011, mainly reporting on energy from the Calgary bureau. Previously, she spent six years working for the National Post in both Calgary and Toronto. She has a master’s degree in journalism from the University of Western Ontario and a bachelor’s degree in political studies from the University of Saskatchewan. More

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