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NatGas Star Fading in Alberta's Revenue Constellation

Natural gas still stands out as Alberta's revenue star, but the provincial government expects it to fade gradually despite royalty increases as aging production naturally subsides and sales competition grows in international markets.

A new 2008-2009 budget set by the freshly reelected Conservatives forecasts slow but sure slippage in gas royalties by as much as 23% over the next three years. New royalty rates, set on a price-sensitive scale at a series of increased levels, are scheduled to go into effect Jan. 1, 2009, but they are expected to be more than offset by slipping prices and eroding output.

For the current provincial fiscal year, which started April 1, the government expects gas royalties of C$5.7 billion (US$5.6 billion), up from C$5.2 billion (US$5.1 billion) in 2007-2008.

Oil royalty expectations are lower at C$5 billion (US$4.9 billion) for this fiscal year, up from C$4.5 billion in 2007-2008, then gently slipping to C$4.7 billion (US$4.6 billion) in 2009-2010 and recovering slightly to C$4.9 billion (US$4.8 billion) in 2010-2011.

The budget acknowledged that its oil price projection -- West Texas Intermediate averaging US$78/bbl this fiscal year, $74 in 2009-2010 and $72 in 2010-2011 -- is low by the heady standards of current private forecasts. But the province warns that it would be foolish to build a government budget on current enthusiasm for oil as a financial asset, with prices that long ago stopped measuring only the product's value as fuel. "These prices appear to be partly driven by market speculation," the Alberta budget documents say. "This makes it extremely difficult to assess what the price of oil will be over the next three years."

About 75% of Alberta drilling targets gas, and it has borne most of the provincial royalty burden for a generation as conventional production was deemed to be the least expensive side of the province's energy industry.

Oil increasingly comes from the high-cost northern oilsands belt. Fully "upgraded" or manufactured synthetic crude fetches prices close to the global benchmarks of British Brent and West Texas Intermediate. But royalties are levied on after-cost net revenues from low-grade bitumen priced at discounts as much as 50% off the premium grades of conventional liquid production.

All the credit for this year's anticipated gas revenue gain goes to firming prices, which are forecast to average C$6.75/gigajoule (GJ) (US$6.95/MMBtu) over the coming fiscal year compared to C$5.88 (US$6.05) in 2007-2008. The province foresees gas slipping back to C$6.40/GJ (US$6.58/MMBtu) in 2009-2010, then to C$6.25 (US$6.43) in 2010-2011.

The anticipated flat to slipping performance of prices is blamed on expectations that growing global traffic in liquefied natural gas will set a cap on markets everywhere and tend to generate more risk of cuts than increases.

The government also accepts forecasts by the Alberta Energy Resources Conservation Board that production will gradually decrease by depletion of aging conventional wells too fast for new sources, such as coalbed methane, to make up the difference.

The new budget says total Alberta annual gas production peaked at about 5.3 Tcf in 2005 and 2006, slipped to 5.1 Tcf in the 2007-2008 fiscal year, and will continue eroding to 4.9 Tcf in 2008-2009, 4.8 Tcf in 2009-2010 and 4.7 Tcf in 2010-2011.

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