Province sees low long-term natural gas prices

Alberta could be facing an extended period of low natural gas prices that will have an adverse effect on the province's finances for the foreseeable future, Finance Minister Ted Morton said in releasing the treasury's fiscal first quarter update Wednesday.

Although natural gas royalties are expected to be about $82 million higher than budgeted, at $1.9 billion, the government lowered its forecast 2010 reference gas price by 50 cents to $3.75 per gigajoule as a result of growing supply and low demand. In a news conference with reporters, Morton acknowledged low prices could be a fixture of the economic landscape for the next three to five years.

"I think that's a real possibility," he said. "And that's not good news for Alberta - either the government or the oil and gas industry."

The Alberta reference price is the calculation the province uses to determine natural gas royalties and is a weighted average of major indicies that is typically lower than New York benchmarks accounting for factors like exchange rates and transportation costs to North American markets.

Henry Hub futures lost almost four per cent on the New York Mercantile Exchange Wednesday, closing at $3.87 US per million British thermal units, the lowest since March.

On the oil side, the province bumped its oil price forecast $2 to $80 US per barrel from a previous forecast of $78. A gain of $231 million in oilsands royalties were offset by a $214-million drop in conventional oil royalties.

From a peak of $8.2 billion in 2005-06, natural gas revenues have fallen about 75 per cent and are expected to bring in $1.9 billion in the current fiscal year. Synthetic oil and bitumen, or oilsands royalties, are expected to contribute $3.48 billion compared to $1.2 billion five years ago.

"It's bad news on natural gas," Morton said. "But (it's) offset by growing production of and royalties from, bitumen."

Higher land sale revenues were offset by higher drilling incentives and a stronger Canadian dollar, the province said in its fiscal documents. Sales of Crown leases are expected to bring in $1.8 billion - more than three times the $630 million budgeted at the start of the fiscal year.

The province has already taken in more than $1.5 billion from the twice-monthly auctions since January, including a pair of record breaking auctions in July that netted a combined $557.8 million.

Greg Stringham, the Canadian Association of Petroleum Producers' vice-president, said the land sale results are a postive indicator that the province's royalty tweaks announced this spring have had the desired effect of increasing investment and activity in the oilpatch.

"To me that's a real strong vote of confidence that the government did the right thing with the competitiveness review. That has been helpful in getting the drilling going again this year and in years to come."

Morton said the higher land sale bonuses show Alberta is once again a competitive place for oil and companies to operate. But that competitiveness comes at a cost, with drilling stimulus expenses expected to reduce royalty revenue by $1.4 billion in the current fiscal year, more than double the $732 million originally forecast.

Morton described the holidays as "short-term pain for long-term gain" but the levels of the royalty relief rankled the Alberta Federation of Labour, which said the province has a "revenue problem" in its response to the budget update.

Nancy Furlong, the AFL's secretary treasurer, said the incentives create a "false economy" by increasing the government's reliance on the oil and gas sector to fund essential programs like health and education. Earlier this year, the AFL released a study that suggests every dollar in royalty holidays generates about one dollar in return, compared to six dollars for municipal works programs.

"They're (incentives) not necessary or wise," she said. "We tend to think the province relies too much on the oil and gas industry and needs to diversify."

Gary Leach, the executive director of the Small Explorers and Producers Association of Canada said higher land sales in particular point to the success companies are having revitalizing old oilfields with new technology, which will in turn lead to higher royalty revenues.

"In fact for the first time in many years it looks as though 2010 will see an increase in conventional oil production in Alberta as a result of this trend," he said.

Calgary Herald, Fri Aug 27, 2010
Byline: Shaun Polczer

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