Tallying Alberta's oil revenue losses from Fort McMurray wildfires
Total oilsands production loss could hit 40 million barrels, according to FirstEnergy Capital
Alberta is still many months away from knowing exactly what the wildfires around Fort McMurray will mean for the economy, but some costs, such as the royalty revenues the province will miss out on this year, are starting to take shape.
The numbers, perhaps surprisingly, may be smaller than you might think.
When the threat of the wildfires was at its peak in the last month, more than 1.1 million barrels a day of oilsands production was shut down. That amounts to nearly 30 per cent of Canada's total daily oil production, a disruption to supply that was big enough to play a role in the recent rise by oil prices around the world.
When you have a deficit, a dollar is not minimal.– Barry Rodgers, former Alberta government official
"[The wildfires] impacted the global market leading to the increase in prices up to $50 US a barrel," said Nicole Leonard, with Platts Analytics Consulting. "A full month is a long time to have your production shut-in."
By the end of June, the cumulative production loss from the wildfires will likely approach 40 million barrels, according to an estimate in a recent research note by FirstEnergy Capital analyst Martin King.
Figuring out what 40 million barrels of oil means for Alberta's royalty take isn't straightforward.
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A number of moving parts go into calculating the amount the province collects from the oilsands, including whether a project has been profitable long enough to pay back the costs of getting up and running — a split known in the industry as pre-payout and post-payout — as well as the price that companies actually fetch for their bitumen.
For those reasons and others, Alberta Finance Minister Joe Ceci isn't yet ready to put a number on what the wildfires will mean for royalties.
"It's too soon to know," Ceci told reporters on the sidelines of an energy conference in Calgary this week. "But we're working on those projections."
Crunching the numbers
Using a conservative estimate for bitumen prices, courtesy of Sarah Dobson, a research associate at the University of Calgary's School of Public Policy, as well as assumptions for the royalty rates paid by projects that have curtailed production, the wildfires could cost Alberta as little as $17 million in oilsands royalties.
A full month is a long time to have your production shut-in.- Nicole Leonard, Platts Analytics Consulting
"I would expect [the impact] would be rather minimal. Although, in this day when you have a deficit, a dollar is not minimal, I suppose," said Barry Rodgers, a former high-ranking Alberta civil servant in the energy department.
Crunching the numbers using the government's forecast, the potential royalty hit works out to about $27 million.
Even at that amount, the foregone royalties are relatively small for a province that's expecting total revenues of more than $41 billion this year.
The wildfires do, of course, come with other wrinkles that could affect the government's eventual royalty take.
"If these oilsands companies can look at starting to deduct some of the expenses they have incurred as part of the evacuation or the restart, those are things they may be able to use that rightly reflect their cost of doing business," said Benjamin Dachis, who has researched royalty systems for the C.D. Howe Institute. "That could result in some short-term reductions in [government royalty] revenue."
The figures could also be affected if the wildfires, which are still burning, take another turn for the worse.
Earlier this week, for instance, Cenovus Energy briefly evacuated its Pelican Lake heavy oil facility, about 300 kilometres north of Edmonton, after a fire drew within a kilometre of the project.
Currently, though, most oilsands facilities are seeing the threat of the wildfires dissipate. Much of the production that was shut down, if it's not already back online, is expected to be by the end of June.