The value of Alberta's Heritage Trust Fund has dropped $1.2 billion in the last six months, and this year's surplus is now expected to be $2 billion instead of $8.5 billion, according to the province's second quarter fiscal update, released by Finance Minister Iris Evans on Tuesday.

Alberta finance minister Iris Evans delivered the province's second quarter fiscal update Tuesday in Edmonton. (CBC)

The update is the first since oil prices dropped from a high of $147 a barrel in July to just below $55 a barrel on Tuesday.

The Alberta Heritage Savings Fund now has a value of $15.8 billion. It was worth $17 billion at the end of the last fiscal year.

Despite the bad news, Evans said Alberta is still in a very good financial position.

"I think we can consider ourselves lucky that we're in a province with the debt that's paid down, the lowest personal income taxes, no provincial sales tax, lowest corporate taxes and a province that will have a surplus, a $2 billion surplus," she said Tuesday.

The $2 billion surplus is $435 million more than what was in the original budget.

Revenues for 2008-09 are now forecast at $39.9 billion, an increase of $1.3 billion from the budget.

But expenses are up as well. They are now forecasted at $37.9 billion, an increase of $905 million from the budget due to increases in disaster and emergency funding, as well as "priority program and capital spending," according to the news release.

The government will no longer spend previously earmarked amounts of $1 billion for capital expenses and $3 billion in savings.

However, it will still spend $2 billion for carbon capture and storage research and another $1.8 billion for green transit initiatives, although that figure is $224 million less than what was originally allocated.

Liberal finance critic Laurie Blakeman said she was alarmed at what she called the government's "refusal to participate in a savings plan."

"This government insists that they will only contribute to the Heritage fund or to other funds when they have extra money, when there's a windfall or a lottery or a super duper surplus … As a result, we've now seen they won't be contributing any money towards that," she said. "So, their savings plan is completely out the window."

While Evans said there are no plans to make spending cuts right now, she said there could be more bad news in the third quarter, because Tuesday's update doesn't reflect the market declines that took place in October.

"There's still some potential sobering news on the horizon because we saw markets decline further at that time," she said. "Obviously, that will likely affect some of our funds, our heritage funds, our other savings and endowment funds."

Evans forecasted a $1.6-billion surplus for this fiscal year in her spring budget, partly based on oil averaging $78 a barrel.

That was bumped up to $8.5 billion in the summer when oil prices hit record levels.

With files from the Canadian Press