Plunging natural gas prices are gutting the Alberta treasury, with the once-booming province staring at a deficit of almost $7-billion, its biggest ever.
The price of natural gas has fallen by more than half this year, steadily sliding each month as a flush of new supply in the United States smashes against weak demand because of the recession.
It has been a "real kick in the head," said Alberta Finance Minister Iris Evans, as she announced a budget update and the new deficit of $6.9-billion for 2009-2010, $2.2-billion worse than predicted in the April budget.
The chasm between the natural gas revenues Alberta expected just four months ago and the reality today is a sobering prelude to what British Columbians can expect next Tuesday. The B.C. government has prepared a whole new second budget - not an update - for 2009-10 as it grapples with the recession. B.C., Canada's No. 2 gas producer, is expected to shoulder a deficit of more than $3-billion, six times greater than the $495-million projected in the February budget. Big spending cuts loom.
Resource-dependent economies such as Alberta and B.C. tend to get caught in a cyclical trap. Revenues boom in good times, and then quickly evaporate. Alberta has been criticized for decades for not saving enough during booms to prepare for busts.
This time, however, the province has $17-billion in a "sustainability fund" to soak up deficits, though the $6.9-billion shortfall will make a major gouge in the rainy-day fund. "This is a traditional pattern Alberta has found itself again and again. Even though it's unpleasant, this is familiar territory. This is how it's always been," said economist Todd Hirsch at bank ATB Financial in Calgary.
In a province that had grown accustomed to easy multibillion-dollar surpluses when natural gas and oil prices were far higher, almost all of the deficit increase is because of natural gas. It's the same as surprise surpluses arriving when the commodities rose more than expected.
Of the $2.09-billion revenue shortfall from the original budget, Alberta said $1.83-billion is because of lower natural gas prices. This is important because even though most Canadians know Alberta for its oil sands, natural gas is the province's main product and most important source of resource revenue.
For each $1 decline in the gas price, Alberta sees $1.3-billion in annual royalties vanish.
In B.C., it is similar, though less extreme: a $1 decline hacks $300-million from revenue. But with forestry in a deep depression, B.C. has come to rely on money rolling in from the increasingly prolific gas fields of the province's rugged and remote northeast.
Higher royalties on natural gas are another big reason the Alberta treasury is suffering. The province did not specify how much lower natural-gas volume was this year, but private-sector numbers from investment bank FirstEnergy Capital Corp. show significant declines.
Alberta produces about three-quarters of Canada's gas and volume is down 5 per cent in the past year and 9 per cent since the controversial royalty hike was announced in late 2007.
While part of the decline can be pinned on low gas prices, given that prices were high last year, a large portion of the production decline can be attributed to higher royalties, which energy companies have said are unreasonably steep.
Ms. Evans blamed prices yesterday. "There is nothing we did to make gas go into the cellar like this," she told reporters in Edmonton.
Knowing that gas was imploding, Alberta has moved to encourage new drilling this year, introducing and then extending an ultra-low royalty on the important first year of production from gas wells. B.C. recently copied Alberta with an even lower royalty on first-year production for wells drilled by next June.
On oil, Alberta is slightly ahead of where it budgeted, looking at $1.28-billion rather than $1.25-billion. However, in the oil sands, because of lower-than-expected production and higher-than-predicted costs, royalties stand at $644-million, rather than $1-billion.
While spending cuts will be made, the province is committed to its $2-billion plan to develop carbon capture and storage, a nascent technology that could improve the environment performance of the greenhouse-gas spewing oil sands. "It shows the world a clear signal that we intend to be prudent about our environment," Ms. Evans said.
ALBERTA'S BUDGET BALANCE
CANADIAN PRESS / THE GLOBE AND MAIL
SOURCE: GOVERNMENT OF ALBERTA