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Shrinking Gas Revenues Strain Alberta's Budget

Hard-times natural gas prices crumbled an Alberta political pillar by prompting the province's Conservative government to discard a popular home-heating subsidy, saying it no longer has money to burn.

After pouring about C$2 billion (US$1.6 billion) into its natural gas rebate program over the past six heating seasons, the Tory regime announced the scheme will expire permanently as of March 31. Energy Minister Mel Knight pointed out prices fell so far this winter that they failed to trigger any payments and ended a string of provincial budget surpluses.

Alberta gas currently trades in a range of C$3.50-$4.00 (US$2.80-$3.20)/gigajoule (GJ), well below the C$5.50 (US$4.40) level that automatically triggered subsidy payments every Oct. 1 through March 31. Provincial rebates, adjusted each month of the heating season to track markets, peaked at C$7.29 (US$5.80)/GJ in January of 2006, when North American prices spiked above US$15 after hurricanes damaged production platforms in the Gulf of Mexico.

Alberta gas royalties -- the provincial treasury's biggest single money-earner -- have withered along with prices. The annual take -- usually 20-30% of gross wellhead revenues, calculated with a formula driven by prices and well production volumes -- has dropped by nearly one-third.

Since peaking at C$8.4 billion (US$6.7 billion) in 2005-06, annual Alberta gas royalties for fiscal years ending every March 31 have tumbled to an officially forecast C$5.9 billion (US$4.7 billion) for 2008-09. But the drop is expected to turn out to be much deeper because the government's current projection was made before prices fell off a cliff in the first quarter of this year.

The revenue decay, combined with stubbornly high spending on other Canadian political mainstays such as universal health care insurance, has prompted the Alberta government to forecast its first budget deficit since the 1990s for the current fiscal year. But the province's ruling Tories are not canceling a pledge to enrich an even more popular -- and much more essential -- program than the gas subsidy. A commitment to abolish health care insurance premiums as of Jan. 1, thereby making Medicare coverage free, is being kept.

The home heating subsidy was an Alberta institution with a pedigree dating back to the 1970s. The founders of the province's 38-year-old Conservative regime introduced a rebate program as a partly symbolic case of ensuring the population shared in wealth generated by the period's oil and gas price increases. The first version of the scheme, called the Natural Gas Price Protection Program, also died of hard times when markets tumbled, provincial royalties dried up and Alberta had a string of budget deficits starting in the mid-1980s.

Despite name of the 2000s reincarnation of the program, it paid no cash rebates directly to consumers. Instead, the money went to local distribution companies to reduce their monthly charges during heating seasons. But Alberta households were constantly reminded of their good gas fortunes by special entries explaining the effects of the subsidy on their monthly gas bills. During cold snaps and spells of high prices, the scheme's value often rose into the range of C$100 (US$80) a month for many households.

Benefits were the same for all, regardless of household income and the sizes of homes being heated. In affluent suburbs of Edmonton and Calgary, jumbo houses with two furnaces to ward off the often bitter cold of Alberta winters are not unusual.

Alberta's energy minister indicated a revival of household energy assistance is conceivable as the provincial finances recover along with the economy. But the next incarnation of home heating help is expected to be more in tune with the times by appealing to a sense of environmental virtue that polls say is taking root even in Canada's main fossil fuel producing province.

The rebate scheme was frequently criticized by conservationists as encouraging waste and supporting an Alberta lifestyle renowned nationally for lavish use of energy in ever bigger houses and personal vehicles. The province is Canada's leading market for pickup trucks and Alberta families in good economic times routinely buy mini-fleets of jumbo cars, recreational vehicles, heavy motorcycles (Harley-Davidsons are the favorites) and power boats.

Times are changing, the energy minister told the provincial legislature in explaining the demise of the gas subsidy. "We think the way forward is to move on efficiency and conservation, so there will be pieces that will fit together that will assist in those areas."

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