Victoria faces free-fall in resource revenues

Of Note:
- Natural gas/ Prices are now at $2.90 a unit, half the $5.87 a unit the shown in the February budget. The budget showed that every $1 change in the price of gas has an impact on revenues of $275 million to $325 million.

- Last year, the gas industry contributed $2.6 billion in land sales and
$1.3 billion in royalty revenues to the provincial economy. This year, both those figures will be off significantly

Gordon Hamilton
Vancouver Sun
August 27, 2009

The collapse of British Columbia's resource industries is expected to push provincial government revenue projections into a steep decline, far deeper than the $2.8-billion drop forecast in last February's budget.

Revenues from all sectors except mining are tumbling as global demand for many of the province's natural resources continues to drop.

"It's the great disappearing act," Jock Finlayson, executive vice-president of the Business Council of B.C., said of the province's resource revenues.

"The fact of the matter is, almost all categories of provincial revenue are going to be down significantly from what Finance Minister Colin Hansen forecast in his budget a few months ago."

The February budget forecast a $2.8-billion decline in resource revenues over the next three years.

Since then, natural gas prices have plummeted to half what they were and revenues from forestry, which would normally pump $1 billion a year into the budget's bottom line, have dried right up.

Hansen acknowledged the magnitude of the economic downturn on the province's revenue stream last Thursday when he told reporters it was "far beyond what we previously had anticipated."

The forest industry normally contributes $2 billion a year to revenues.
After costs of running the ministry of forests are deducted, the net contribution is $1 billion. This year, the net contribution is likely to be zero, despite a $100-million cut expected in ministry operations.

Stumpage payments collected on Crown timber have been hit by a double
whammy: Both log prices and harvest volumes are down. Ministry figures show stumpage revenues for the period March 31 to July 30 at only $34 million this year, down 72 per cent from $123 million collected in 2008.

Further, corporate taxes have vanished and taxes collected under the Softwood Lumber Agreement are down an estimated 40 per cent.

The clearest indicator of the revenue crunch facing Hansen comes from figures on lumber shipments to the U.S. and on revenue estimates from the natural gas sector, which are based on the price of gas.

Lumber shipments are down 28 per cent year-to-date from 2008, which was a poor year, and 45 per cent from 2007, according to Statistics Canada.

"There's nothing I can see out there that would reverse this slow downward trend," said John Allan, president of the B.C. Council of Forest Industries.

Rick Jeffery, president of the Coast Forest Products Association, said logging on the Coast is sporadic because of the collapse in demand and a prolonged forest-fire season. The manufacturing side is operating at about 50 per cent capacity. On top of that, stumpage payments are down 75 per cent, and other revenue streams are weak.

"Nobody is making any money, so we are not paying any corporate taxes."

Also, unemployed workers pay no income taxes, noted Finlayson.

In the energy sector, natural gas has also taken a hard hit. Prices are now at $2.90 a unit, half the $5.87 a unit the shown in the February budget. The budget showed that every $1 change in the price of gas has an impact on revenues of $275 million to $325 million.

B.C. will benefit once gas prices turn around, said David Pryce, vice-president of operations for the Canadian Association of Petroleum Producers. Interest is high in two new gas fields but low prices mean capital to develop them is difficult to raise.

Last year, the gas industry contributed $2.6 billion in land sales and
$1.3 billion in royalty revenues to the provincial economy.

Pryce said land sales are "down significantly" this year. Just how significantly is shown in the ministry of energy's August auction for natural gas and oil exploration rights. It attracted only $37 million in bonus bids. By comparison, the August, 2008 auction brought in $501 million.

Only mining remains profitable as demand for copper and coal from China have taken an unexpected surge. Payments from the industry to all levels of government in 2008 were $545 million, according to a PricewaterhouseCoopers report on the mining sector.

"No one expects it to be comparable to last year, but it's fair to say we are going to be paying because companies are making money," said Pierre Gratton, chief executive officer of the Mining Association of B.C.

ghamilton@vancouversun.com

WAY, WAY DOWN

Provincial revenues from stumpage fees paid by forest companies so far this fiscal year, compared to the same period in 2008.

2009: $34.4 million

2008: $123 million

-72%

Source: Ministry of Forests and Range

Falling energy revenues push Alberta $6.9 billion into deficit

Province still in better shape than others, finance minister says

The Alberta government tried to put a happy face on its dire budget outlook Wednesday as it released details of the record $6.9-billion deficit it's now projecting for this fiscal year.

The province unveiled a first-quarter update that predicts a massive drop in energy royalties and income-tax revenue.

The total shortfall -- $2.2 billion more than initially expected -- is largely due to energy royalties totalling only $3.9 billion, when the April budget had non-renewable resource cash pegged at $5.9 billion.

The state of the province's economy one quarter into the 2009-10 fiscal year shows a sharper period of recession than expected, Finance Minister Iris Evans said, but she added the province expects a stronger recovery next year.

"It's still a better news story in Alberta than anywhere else in the country," she said. The finance minister said interpreting the economic picture in "doom and gloom" terms would be "belittling the entrepreneurship of Albertans."

One of the few bright spots in Wednesday's financial update was the Heritage Savings Trust Fund -- Alberta's so-called RRSP -- which saw unexpected gains in the first quarter, bouncing back from a $3-billion loss by the end of last year.

The savings fund raised about $1.1 billion in the first quarter of the fiscal year -- but the province has no plans to lock in the savings.

"You can't really save money while you're spending your emergency savings," Evans said Wednesday.

The province plans to funnel about two-thirds of the increase directly into general revenues for future spending, leaving the fund with just a $328-million net increase to $14.3 billion. Wednesday's deficit announcement stands in stark contrast to the situation a year ago, when Premier Ed Stelmach's government was predicting an $8.5-billion surplus.

Once the envy of every provincial government, with record-high oil prices driving a massive expansion of public infrastructure spending, Alberta lost its grip on the boom when the global recession shattered the energy market.

As expected, tanking natural gas prices are eroding the government's revenue stream. The province predicts it will generate $1.9 billion in natural gas royalties during the 2009-10 year, well off the $3.7 billion identified in the budget.

Projected oilsands royalties are also much lower than expected, at only
$644 million compared to the $1 billion predicted in April. The government is also reeling from a $532-million hit to its personal income tax revenue, now pegged at $8 billion this fiscal year.

So far, there is no sign of how the province plans to head off an economy that's running red. The deficit puts Stelmach in a bind, politically. He has promised there will be no new taxes on his watch, which has led to speculation about layoffs or deep program cuts.

"As long as I'm premier of this province, there will be no tax increases,"
Stelmach told reporters at the Calgary Stampede last month. "You cannot tax your way out of a recession, and we're not going to do that."

Liberal deputy leader Laurie Blakeman blasted the government Wednesday.

"What is the plan? As a citizen of Alberta what does this mean for me?"
she asked. "The message we're getting is, 'Stay tuned; we'll tell you in six months.' But as a citizen of this province, I have to know."

The budget picture in Alberta is grim on several other fronts:

- Lower land sales for oil and gas production add up to a projected $153 million loss compared to budget expectations;

- Gambling revenue is expected to be down $84 million from budget predictions;

- Lower than expected fuel purchases make for a $20-million loss;

- Weak housing starts and lower vehicle registration numbers add up to a projected $10-million reduction; and

- A slowdown in hotel stays and rates make for a $3-million projected loss in tourism levy revenue.