The scary monster lurking in Alberta's closet: Deficit

Globe and Mail, June 18

Alberta's energy industry, the envy of the nine other provinces unblessed by such natural wealth, is getting roughed up. Employers and environmentalists decry a boom gone berserk. Workers are almost impossible to come by at any price, costs are soaring and infrastructure, from roads to housing, is lacking. Environment Canada this week reported that the Suncor and Syncrude oil sands plants are among the country's top five industrial emitters of greenhouse gases.

All true, but never mind. The wealth from the oil and gas honey pot continues to propel the Alberta economy to new heights. The government wallows in billions of dollars of budget surpluses. Tax rates are the lowest in the land. Every Albertan bagged $400 in "prosperity" cheques, better known as Ralphbucks, earlier this year. With oil reserves second only to Saudi Arabia's, the bonanza should continue for generations.

But hold on. Did someone mention the "d" word -- deficit? Even as the province pumps more oil, income from royalties, the biggest single source of government revenue, is on the wane. As the population expands and as government spending soars to meet the demands of health care, infrastructure and the like, the deficit scenario goes from the unimaginable to the possible, even likely. When? Not this year or next, but maybe not long after. All bets are off if energy prices plunge.

The Alberta budget papers give a hint of trouble ahead. Forget oil. As far as the government finances are concerned, Alberta is a natural gas economy. Gas royalties were $6.4-billion in the 2004-05 fiscal year. The royalties then went up as gas prices rose. Now prices are falling. And guess what? Production is falling too as Alberta runs short of conventional gas. The government expects gas royalty revenue of $5.6-billion in the 2007-08 year (based on an assumed price that's slightly lower than the current market price).

Royalties from conventional crude oil, that is, production outside of the oil sands, are also drying up as reserves do the same. In 2004-05, the royalties came to $1.3-billion. They are expected to fall to less than $800-million in the next fiscal year.

The conventional oil and gas production slack, of course, is being replaced by the burgeoning oil sands. Oil sands output was about one million barrels a day last year. With dozens of new projects under way, the figure will double by end of the decade. But royalty revenue is not rising in lockstep with production. That's because the royalties on new oil sands projects are among the lowest, perhaps the lowest, in the world.

In 1996, with oil prices languishing below $20 (U.S.) a barrel, Alberta lowered the oil sands royalties to 1 per cent until producers recovered their capital costs. Beyond that point, the rate jumped to 25 per cent of revenues, less costs. Before 1996, Suncor was paying 30 per cent, less costs, on its oil sands output. The Alberta government expects to collect a mere $1.7-billion (Canadian) in oil sands royalties in 2007-08, about the same as in the current fiscal year. Actual royalties per barrel are dropping.

If the trends continue -- rising population and government spending, falling royalties -- Alberta's glorious budget surplus will certainly shrink and may disappear, to be replaced by a deficit at some point. Premier Ralph Klein is getting out at the right time. His successor (most likely Jim Dinning) won't have the luxury of buying votes with prosperity cheques.

Alberta hates deficits; they're in fact illegal. So what is the province to do to avoid dipping into the red? It will have to raise taxes or raise royalty rates.

In a province inspired by Texas, raising taxes is about as likely as the Greens turfing out the Conservatives in the next election. Alberta has a flat personal tax rate of 10 per cent and wants it lower yet. Alberta is the only province without a retail sales tax -- a point of pride for government.

That leaves royalties, and raising them could create trouble. If oil prices, now just under $70 (U.S.) a barrel, stay the same or rise, the industry might not squawk loudly about higher royalty rates. But imagine if prices fall. Government revenue would fall too, doubling its desire to replace the lost income with higher royalty rates. This scenario would deliver a doubly whammy to the energy industry. Remember, the oil sands are the highest-cost production on the planet. Some energy consultants think an oil price in the $40 to $50 range would damage more than a few of the oil sands projects. Add in higher royalties and you might have recipe for genuine industry and investor pain.

Politicians in Alberta don't talk about the possibility of budget deficits, or rising royalties or taxes. That would spoil the party. Enjoy it while it lasts.

...oil sands companies now drive Canada's environmental policy because both the prime minister and minister of the environment are from Alberta...

If Canda takes every one of these plants and multiplies them by 20 timies,
20 more rivers,
20 more provinces ruined,
20 times the neighbors upset,
then amrica can be covered in her excesses.

Canada is a third world whorehouse. If you've got the money, she's got what you need. From the forests of British Columbia, to the tar sands of Alberta, to the cod of Nova Scotia. Just bring your money and Canada will bend right over for you.

Producing one barrel of oil from the treasured sludge consumes enough natural gas to heat a home for five days.

In a recent report, federal environment commissioner Johanne Gelinas said emissions from the oilsands, which have risen by 50% since 1990, have the potential of cancelling out any other efforts at reducing greenhouse gases.

What's more, the projects are consuming twice the amount of water annually used by the City of Calgary. And while much of the water consumed by Calgarians can be treated and returned to the watershed, that used by the oilsands is largely fouled when it ends up in massive tailing ponds, says Woynillowicz. His group expects the withdrawals from Athabasca River to grow by 50% over the next half-decade.

Whats the feel in Canada for what is happening to their forests and ecosystems? Only people stop this shit but it sounds like the true guradians that have been there for centuries have given up thier customery rights for jobs. When the locals give up its shit uphill.

I dont have the answers to those questions exactly but I believe only 10% or so of the tar sands is exposed and the rest is buried.

This is the "easy" stuff.

I have a buddy who lives near these developments and works in the business.

Doomer - he cares but thinks the world is all shot to hell anyways so screw it better make his money while it lasts - mentality.

Maybe the tar sands operations are just far enough away from most people that they have an "out of sight, out of mind" attitude towards it.

They are also in the part of the province that is populated by more mosquitoes than other forms of wildlife. This is hardly the picture postcard " magestic mountains" people associate with Alberta....low lying, muskeg scattered, low lying shrubs and grasses. Outside of the occassional adventurer canoing down the Athabasca the area is not wildly popular for outdoors enthusiasists. Doesn't mean it shouldn't enjoy standard environmental protection restrictions....it's just not on anyones list of destination resorts.

Fucking idiots. I hope this is only happening in a small area, and becomes uneconomical quickly.