Reality Check

Is Alberta going broke?

CBC News Online | July 5, 2006

By most forecasts, Alberta will still lead the country in economic growth this year. Calgary is bulging at the seams, and phenomenal growth in the oilsands and service industries is luring the young and the mobile to Wild Rose Country by the tens of thousands every few months.

Still, there is a problem in the oil patch — in the heavy-oil patch to be precise — and it is big enough that the Alberta government is starting to wonder, when it's not electioneering or trying to choose a new leader, how it's going to pay its bills in the future.

In a nutshell, 2005 was a freak year for government revenues in Alberta. A series of Gulf Coast hurricanes and a hot muggy summer pushed gas and especially oil prices unusually high ($71 US a barrel). But this was, in all likelihood, a last gasp.

Prices are moderating and should continue that downward trend, most analysts say. But that's the least of Alberta's worries. What's more important is that production from so-called conventional oil and gas reserves is dwindling noticeably, and has been for a few years — and with that comes a similar reduction in the up to 40 per cent take the province pockets from royalties on these conventional resources. Resource revenue alone totalled a record $14.3 billion last year, slightly more than half of all government spending.

Alberta Premier Ralph Klein walks by a rear tire of a Caterpillar 777F Off Highway Truck on The National Mall in Washington on June 30, 2006. The truck was part of the Alberta section of the Smithsonian Folklife Festival.(Nick Wass/ Associated Press)

Stepping into the gap, and buoying the current boom, are the many oilsands projects finally kicking into gear, which now account for about a quarter of Alberta's energy production. But from a government revenue perspective, these resources are substantially less valuable. To spur the massive amount of investment needed to dredge tar-like bitumen out of the often frozen earth and transform it into usable fuel, the Ralph Klein government negotiated a new royalty regime in 1996 with the heavy-oil industry, or any producer of unconventional energy resources, requiring only a one per cent royalty on revenues until their capital costs (which tend to continue) are accounted for.

The bottom line: Of the big bundle of resource money that landed in the Klein government's lap last year, only $905 million came from the oilsands and is, as Alberta Liberal Leader Kevin Taft had the temerity to observe, less than the province took in from lotteries.

A structural hitch

Alberta, of course, has stashed some rainy-day money in its Heritage Trust Fund and other accounts, so it is not in immediate danger of running out of cash. (Over the last dozen years it's put away a whopping $26 billion, though looked at another way, that's not quite one year's spending.)

But down the road, the province's revenue picture becomes murkier, because there are three structural components to the box it finds itself in, none of which is easy to change.

The first of these is the oilsands royalty regime, which the province entered into in good faith and doesn't want to be seen as changing in midstream, now that it's lured all this investment (in excess of $45 billion in the oilsands sector alone since 1996).

Under the royalty scheme negotiated in 1996, oilsands operators pay one per cent on any revenue they earn until profits exceed their capital costs. After that, the royalty is supposed to rise to 25 per cent of net revenues, which is more in keeping with traditional royalties, but there is a hitch: Operators can choose, within limits, to pay royalties on either the raw bitumen — which most do because it sells for substantially less — or the upgraded synthetic crude.

A barrel of $50 bitumen earns the province only about a quarter, the Globe and Mail calculated recently. And this looks to be a real concern over the next several years, because as the Canadian Association of Petroleum Producers points out, the oilsands are expected to account for 90 per cent of Alberta's oil production within the next 10 years. (Similar royalty breaks were also extended in the 1990s to what's called unconventional oil and gas production, which is now quickly becoming the norm.)

The oilsands are clearly the engine of economic growth in the province. But (structural obstacle No. 2), Alberta prides itself on not having a provincial sales tax — indeed it's almost an article of faith — so it's only the feds who are collecting GST revenue from those 41,000 new houses being built (and probably distributing it to all those have-not provinces).

Alberta also has (No. 3) the lowest tax regime by far of any province — a flat 10 per cent — something it calls "the Alberta advantage." This is great for luring people to the province and turning them into instant Albertans. But total income tax revenue is expected to rise by only a modest 1.7 per cent this year, despite the huge number of arrivals. Little wonder the province has been trying all these years to keep the lid on health-care and education spending.

What to do?

Klein has ruled out any major revamping of oilsands royalties, a position he seemed to underline when he went to the U.S. capital last week, where a gargantuan oilsands dump truck was parked at the Washington Mall for good measure. But Klein will be leaving by the end of the year and his energy minister, Greg Melchin, has been hinting about trying to do something on the bitumen front, to firm up markets and royalties.

So far, the question of Alberta's revenue future and how to sustain services in an era of declining resource royalties does not seem to have grabbed the spotlight among those running for the Conservative leadership. They have some fiscal breathing room, of course, and they can always pray for another big spike in prices. But for the foreseeable future, the province's share of the resource pie is shrinking.

In the past, Alberta has expected to reap roughly 25 per cent as the province's share of oil and gas revenues. But according to the Calgary Herald, even Alberta Energy has acknowledged that rate has slipped to 19 per cent as of 2004, while other analysts have put it closer to 15 per cent.

With all that's going on, someone is getting rich in the Alberta oil patch these days. Contrary to popular opinion, and last year possibly excepted, it ain't really the provincial treasury.