That ‘pop!’  was the bursting of this particular balloon.

Having crafted the painful 2013/14 provincial budget in March around anticipated low royalties from oilsands oil (bitumen) and natural gas, the Redford government was delighted to see a recent upward jump in the price of bitumen.

Four factors have come into play.

The gap between the price of bitumen and North America’s lighter crude oil has dramatically narrowed.

“The Diff” as energy analyst Peter Tertzakian suggests, may finally be gone. “Are the days of a 40% (bitumen) discount behind?” he writes in his weekly ARC Financial Research newsletter.

At the same time, North America’s regular crude oil has jumped in price – by some 5%. It’s been below world prices for years, but today the North American price is just about on par.

Meanwhile, oilsands bitumen production is growing as new or expanded oilsands plants come on stream. Royalties jump once construction costs have been recovered from the initial flow of oil.  

Woo hoo! The Alberta government’s royalty income – a percentage of gross oil and natural gas sales – must be jumping from a trickle to a gusher! Billions in non-renewable royalty revenues must be flowing into the provincial treasury!

The 2013/14 budget, with its estimated $6 billion deficit, could end up being balanced! Happy times could be here again!


Energy economist Paul Precht of Edmonton-based P2 Energy Economics cocks his head and looks at me funny.

Ain’t going to happen, the independent expert says.

“If I went out on the longest, slimmest limb I could find,” he says, “Alberta might see an extra $1 billion in unanticipated royalties.”

Which, out of a $38.6 billion budget, is nice but not a game changer.

Why burst this balloon?

Because, Precht says, the bean counters and analysts in Alberta Finance who forecast royalty revenues are smarter than we think. Precht should know. He was once one of them.

The bean counters added most of these “unexpected” factors into the estimated $7.25 billion they expect the energy industry will directly contribute in royalties to the government’s 2013/14 revenues.

That $7.25 billion has already taken into account increased oilsands production, and a shift to higher “post-payout” royalties. It also accounts for low natural gas prices, and steady conventional oil prices.

The bean-counters had anticipated a strengthening of oilsands oil prices. For the 2013/14 budget, the Finance Department estimated the price of the oilsands benchmark “Western Canadian Select” (WCS, a blend of 70% bitumen and 30% diluent) over the fiscal year would be $68.20 a barrel for the year.  The actual price of Western Canadian Select oil in the first quarter of the fiscal year (April, May and June) was $67.67.

Even if Western Canadian Select oil  stays in the new $75 to $85 per barrel range, energy economist Precht doesn’t see how additional royalties could translate into any more than an extra $1 billion.

So don’t expect any windfall royalty bonanzas, off-setting Southern Alberta’s flood costs, or restoring 6% cuts to post-secondary education in this year’s budget.

Do expect non-renewal energy royalties to give the province an extra $1.2 billion, to $8.45 billion in 2014/15, rising to $9.25 billion in 2015/16.

Nothing like an independent expert to take the air out of a balloon.

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Oilsands royalties:
From startup “pre-payout” producers, 1% to 9% of gross revenue.
From “post-payout” established producers, 25% to 40% of net revenues, based on price.
Estimated price of oilsands benchmark Western Canadian Select oil back in March, $68.20 a barrel.
Actual  price for first quarter of fiscal year (April, May and June), $67.67.

Estimated revenue from royalties for 2013/14 fiscal year.
Bitumen,                 46%  or  $3.4 billion
Conventional oil,   22%  or  $1.6 billion
Natural gas,            13%  or  $ .965 billion
Other,                      19% or  $1.23 billion

Total estimated review from royalties for 2013/14 fiscal year, $7.2 billion 

Total estimated provincial 2013/14 budget, $38.6 billion

Percentage of revenue from non-renewable royalties, 19%    

Graham Hicks,
780 707 6379