Canadian energy powerhouse Alberta plans to pay down government debt and cut income tax rates if a predicted windfall in oil and natural gas royalty revenue pans out, provincial officials said last week.

aeco price graph

Assuming oil and gas prices remain at current levels through the province’s fiscal year, which ends March 31, 2023, a new government quarterly report on public finances concluded the province would achieve a C$13.2 billion ($10.6 billion) budget surplus for the 2022-23 period.

“For too long, governments in Alberta refused to exercise fiscal discipline during boom times,” said Finance Minister Jason Nixon. “Those days are over.”

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Alberta’s government is earmarking its royalty windfall to cover a planned C$13.4 billion ($10.7 billion) debt repayment and an indexing program that would cut income tax rates to counter consumer price inflation.

“Now, we’re paying down debt so future generations won’t have to, saving more for a rainy day, and putting more money in Albertans’ pockets,” said Premier Jason Kenney.

To be sure, officials said the rich outlook relies on a 74% year/year jump in royalties, from C$16.2 billion ($13 billion) in 2021-22 to C$28.4 billion ($22.7 billion) in 2022-23.

An expectation rather than a sure thing, the projected windfall would depend on prices to average $92.50/bbl for oil benchmark West Texas Intermediate and C$5.60/GJ ($4.70/MMBtu) for Alberta natural gas.

“There remains significant uncertainty with respect to energy and financial markets, global economic prospects, inflation concerns and the war in Ukraine, adding even more risk to Alberta’s unique forecast volatility,” acknowledged the report.

Not Ironclad

Alberta’s notoriously variable budget performances stand out in Canada given the province’s status as the national fossil fuel production mainstay, with royalties from provincially owned natural resources playing an outsized economic role.

If officials’ commodity price projections hold true, oil and gas royalties would make up 37% of the provincial treasury’s forecast C$75.9 billion ($61billion) 2022-23 revenue total.

At the forecast high prices 2022-23 oilsands bitumen royalties would surge to C$20.1 billion ($16 billion), compared to C$11.6 billion ($9.3 billion) from the year-ago level.

Provincial 2022-23 royalties on oil from flowing wells would nearly double to C$3.7 billion ($3 billion) from C$1.9 billion ($1.52 billion) in 2021-22.

Alberta’s 2022-23 natural gas and liquid byproduct royalties would also nearly double year/year to C$4.1 billion ($3.3 billion) from C$2.2 billion ($1.8 billion).

The Alberta gas market already confirmed that the provincial royalty forecast is not ironclad, with producers reporting soft spot prices stemming from a coincidence of increased supplies with eroded pipeline capacity tied to summer maintenance and construction.

Mixed Global Signals

The global economy and international oil and gas markets are also sending mixed price signals, observed Nixon’s quarterly budget report.

“Renewed COVID-19 lockdowns in China and a slowing global economy have dampened the outlook for demand,” officials stated. “These factors are expected to weigh on oil prices in the second half of the year, but low inventories and tight global crude supplies will provide some support.”

Alberta’s fossil fuel price forecasts also assume that LNG exports from the United States remain strong, with the Russia-Ukraine war continuing to erode European supplies and cause a scramble for waterborne cargoes.

“The war in Ukraine and sanctions against Russia have led to disruptions in global natural gas supply,” officials reported, noting that shrinking westbound gas pipeline flows from Russia have caused European prices to surge.

“This has led to a significant increase in demand and prices for ocean-transported liquefied natural gas, which in turn has boosted exports of U.S. liquefied natural gas and pushed prices higher in North America,” officials said.

Home to the gassy Montney Shale, Western Canada is gaining new infrastructure to become a significant LNG exporter.

Matthew Veazey contributed to this story.