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Low Gas Prices Crush Alberta Royalty Revenues

The Alberta government stepped forward last week and highlighted itself as the biggest single Canadian casualty of the natural gas price slump, with a financial statement confirming that royalties are being gutted.

In a first quarter update on the provincial fiscal year that started April 1, the forecast for the treasury's 2009-2010 gas revenue has been cut to C$1.86 billion (US$1.7 billion). If the dark expectations come true, the annual total will be down by 78% from the 2005-2006 record, when Alberta netted C$8.4 billion in gas royalties.

The new forecast makes a 50% cut in projections by the spring provincial budget, which held out hope that gas prices would average C$5.50/gigajoule (US$5.30/MMBtu) for the 2009-2010 fiscal year. The new revenue outlook anticipates an annual average gas price of C$3.75/gigajoule (US$3.62/MMBtu).

Gas royalties are the Alberta government's biggest single revenue source. Effects of market slumps are compounded by a formula that automatically cuts royalty rates as prices decline. In a good year high-productivity wells pay royalties exceeding 30% of gross revenues, but the take drops into the 5% area in lean times. A hotly contested overhaul of the regime increased rates for periods of high prices but also made them drop faster during market lows.

The gas price slump is the key factor in driving the province's forecast 2009-2010 budget deficit up by C$2.2 billion (US$2 billion) to C$6.9 billion (US$6.3 billion). But provincial Finance Minister Iris Evans reported that the Alberta government will not yet have to resort to borrowing to cover its expenses. Instead, the province will draw down a sinking or "sustainability" fund that contains C$17 billion (US$15.6 billion) set aside as a rainy day savings account while gas and oil prices generated mammoth treasury surpluses in 2003-2007.

The gas price low is liable to go deeper before the market turns around, FirstEnergy Capital Corp. predicted in a research note. The Calgary investment house expects that full storage, surplus production capacity and soft demand across North America will make Alberta prices below C$2 (US$1.84) common over the next few weeks.

"Remember the really bad old days when prices were under C$1/gigajoule (US$0.97/MMBtu)? You might just get to relive that one as well before the [storage] injection season is over," FirstEnergy analysts said.

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