It seems that not so long ago Alberta was facing a provincial budget deficit of $24 billion.
It was the summer of 2020, after crude prices briefly dipped into negative territory, unemployment soared, COVID-19 was a threat of unknown wave cycles – and an oil-dependent province and a prime deficit-hating minister seemed mired in ongoing fiscal woes.
Flash forward and watch out for the boost to the summer of 2022. That same figure, $24 billion, is coming back, but this time as a deeply positive financial indicator.
Welcome back, chests
Prominent energy economist Peter Tertzakian predicts that’s the amount the province will collect in natural resource royalties in 2022, completely eclipsing all previous records.
Soaring oil prices pushed Alberta’s budget into a modest surplus this spring, but that budget was based on US$70 a barrel, not the nearly $120 observers are gobsmacked at this week. A provincial budget that had recently reached balance this spring with a projected surplus of $511 million for the 2021-2022 fiscal year could easily exceed $10 billion this yearor possibly beyond $12 billion, according to Tertzakian.
As Prime Minister Jason Kenney yo-yoed over mask rules and vaccination mandates, he liked to label handling the pandemic as decision-making among the only dire choices. The impending era of massive surpluses brings with it a multitude of options, but it won’t be there to do them. The questions could be those that define the post-Kenney era, in the United Conservative leadership race and next year’s general election – if our future leaders are serious about discussing them.
This tsunami of money pouring into provincial coffers isn’t just due to soaring oil prices, Tertzakian says.
Tertzakian should know: in addition to having written numerous books on oil and being Chief Energy Economist at ARC Financial, he chaired the last review of royalties, under the NDP government in 2015 and 2016.
Of course, when oil is worth more, producers earn more per barrel and royalties collect more. But what is really tipping Alberta into the black ink era is that more and more oil sands projects are now reaching the point of maturity, where their revenues have offset all of their huge start-up costs. .
At this point, known as the “payout,” oil sands companies pay much higher royalty rates per barrel. If the price of oil reaches C$55 per barrel, the prepayment rate is 1% of gross sales, while it increases to 25% of net sales after payment, or up to 40% when prices reach current levels.
According to preliminary estimates by Tertzakian’s team at the ARC Energy Research Institute, what in recent years has been closer to a 50/50 split between start-up rate oil sands royalties and at maturity rate, reaches 25-75 this year and closes at 20-80 next.
“It’s just a complete paradigm shift. We’re getting maximum royalties,” Tertzakian said in an interview.
The $24 billion royalty estimate covers this calendar year, not the April-March fiscal years used by Alberta budgets. But to give you an idea of the severity of this reversal, it represents more than five years of royalty income in Alberta between 2016-17 and 2020-21, the bulk of Rachel Notley’s tenure and the beginning of Kenney’s. It smashes the previous record of $14.35 billion, set in 2005-06, when natural gas was the Alberta government’s big rainmaker and Ralph Klein was nearing the end of his premiership.
Klein used that overflow to distribute his $400 Ralph Bucks to every Albertan. Within months, Conservative members were pushing him into early retirement and sparking a broader debate about how a premier should smarter handle Alberta’s booms, both economic and fiscal.
If I had 10 billion dollars (or more)
There are so many options for dealing with surpluses that until recently seemed unimaginable – but which, thanks to post-payment royalties, will continue to flow even if oil prices “collapse” again to 70 or $80 a barrel.
A prime minister could use the windfall to hand out Premierbucks or tax cuts, though that would only increase Alberta’s reliance on energy revenue to pay its program bills, creating sharper angles pronounced on the fiscal roller coaster.
There’s debt reduction, Klein’s other favorite option. We could invest in services and infrastructure, perhaps opening the door to the NDP or even a Conservative to commit to spending large sums without threatening a return to deficits.
The government might remember the savings methods of Peter Lougheed and the long-neglected Heritage Savings Trust Fund, as most Albertans now realize the short-lived nature of these booms. (Kenney, before announcing his resignation plans, had begun dropping hints about it in some speeches.)
The oil companies that pay these royalties may well be asking for money back in the form of grants for carbon capture projects or other technology spending to reduce emissions and help them get to net zero. The argument they could make: Albertans’ ability to enjoy this prosperity in the future will depend on the low carbon footprint of the energy sector, so they will end up paying for themselves by converting some of the excess in green grants.
Before these questions are answered, let’s ask out loud if this will even be a big argument between the contenders for the Kenney throne.
Fallout management did not emerge as a major topic of discussion among members of a party that was largely driven by issues such as reassessment of pandemic decisions, pipelines, curriculum and how to protect Alberta from the influence of Ottawa.
A base and cabinet that until recently were obsessed with cutting spending and erasing deficits the hard way — without an oil price boom — may be slow to focus on this new situation. And while continuing to demand more transfers for Alberta’s ‘fair deal’ and less for have-not-province equalization, it could suddenly start to look like an act of ‘poor little rich kid’, this talk is pissing off the Tories. united like nothing else.
There is also the fact that this time around, the oil price hike and fiscal recovery did not lead to a full recovery in employment or a boom in wage growth that could keep pace with inflationperhaps dampening the mood in large areas of Alberta.
Either way, that is the reality that the next prime minister will have to take advantage of. These may be easier decisions to make than Kenney, but they could have more implications for Alberta’s future.