“Back of the envelope calculations”, a recent Telegram story assured us all, “put royalties for the first three months of the [current] fiscal year on pace with government’s $2.1-billion target.”
But, the Telegram headline says, that’s because “surging production” is offsetting “softer” prices.
Unfortunately, the Telegram didn’t see fit to show us the back of the envelope so no one can tell exactly how they came to that conclusion. It must be a provincial government envelope, though because the numbers don’t quite add up.
As forecast
As it looks, revenue projections are likely to be on target with the forecast.
The provincial government’s oil royalty is a function of oil prices and production. The Telegram reported - quite rightly - that the provincial government forecast oil royalties of $2.1 billion based on total production of 90 million barrels and and average price of oil at US$83 a barrel. The provincial government also allowed the Canadian dollar would be close enough to the American dollar that there wouldn’t be any sizeable windfall from a cheap Canadian dollar.
The Telegram also reported that oil production is on track to come in around 101 million barrels. The offshore regulatory board’s actual figures for the first four months of 2010 (April to August) show oil on track to hit 99 million barrels. Still, that’s 10% above the government’s spring forecast.
As for crude oil prices, they have not averaged US$83. The Telegram puts the average price of Brent crude at US$80 a barrel the week the story appeared. This is where it gets interesting.
For the first four months of the current fiscal year, Brent crude has averaged US$77.71 a barrel. That’s about six percent below forecast. If you take out the April average of $84.98 – because it is the only month averaging above $80 dollars this year – you get an average price about 10% below the government’s forecast average.
With production above and price below, the one pretty much cancels out the other.
No surge
Production isn’t actually surging, though. In fact, production at about 100 million barrels is only slightly above last year’s production total of around 97 million barrels. As for price, there’s no surge there either. The average currently showing in 2010 - including April - is only about a dollar above the 2009 fiscal year average.
In other words, everything is tracking to bring in the same average price and the same yearly production as 2009. The provincial government forecast an increase in royalties to $2.1 billion from $1.8 billion.
All three fields should be in payout and according to the pre-2003 royalty deals, that means they’d be paying more to the provincial treasury. Hibernia didn’t hit payout until June last year, so it appears the extra cash is solely the result of having the big field paying higher royalties for a whole year instead of just part of it.
That means that the slightly higher royalties are coming from old development deals, not from something happening to oil prices and production.
Still on track for another big cash deficit
And what does that mean for the provincial budget? if you relied only on the Telegram story you might be fooled into believing that the provincial government might balance its books this year. It might do so using accrual accounting, but there won’t likely be a balanced budget on a cash basis.
In fact, the current fiscal year looks a lot like the last one, including the fact everything is on track for another whopper of a cash shortfall.
For some unfathomable reason, the Telegram decided you didn’t need to know that the provincial government’s budget forecasts a cash deficit of nearly a billion dollars. Nor did they mention that last year the provincial government had a cash deficit of about $500 million.
Instead, they left you with the Pollyanna-ish view that everything is looking great.
Maybe it is, but one thing is for sure: it has nothing to do with “surging” oil production or “soft” oil prices.
- srbp -
