Brian Zinchuk is editor and owner of Pipeline Online
Minister of Finance Donna Harpauer delivered the provincial budget on March 23. Legislative Assembly of Saskatchewan
REGINA – In the years after the oil downturn hit in late 2014, the deficit hole in the Saskatchewan budget was typically almost exactly the equal to the decline from previous oil revenues. And now that hole is closing.
That’s apparent in the 2022-23 budget tabled by Finance Minister Donna Harpauer on March 23, entitled “Back on Track.”
Oil and potash are back, and the two non-renewable resources are having a big impact not only on the upcoming budget, but the closing out fiscal year. Oil and natural gas revenue is forecast to be $383.7 million higher than budgeted last year.
First off: The Ministry of Finance is using conservative estimates for its forecasts in oil prices and potash.
Government of Saskatchewan
For the West Texas Intermediate benchmark, the forecast is US$75.75 per barrel WTI. That’s just 75 cents more than the forecast of what will have been received for the current fiscal year ending March 31.
That number is also considerably larger than what was budgeted last year, when the province expected oil prices to average US$42.43 per barrel.
As Saskatchewan’s natural gas production has fallen considerably in recent years, the province no longer includes the natural gas price estimate in media briefing documents. You have to dig into the budget to find the 2022 forecast price of C$3.9 per gigajoule, and $3.4 per gigajoule for 2023.
Government of Saskatchewan
The light to heavy oil differential, the bane of provincial finances for several years, has also dramatically reduced. At times during the seven-year downturn the differential was over US$40 per barrel. Next year’s budget is putting it at 14.5 per cent of WTI. That’s down from 16.9 per cent forecast in last year’s budget, but a little worse than the 13.7 per cent forecast to have been the actual number for the current fiscal year about to end.
“Oil and natural gas royalties are budgeted at $867.5 million in 2022-23, a decrease of $21.3 million from the 2021-22 forecast. The decrease is primarily due to a wider light-heavy oil price differential, partially offset by higher West Texas Intermediate (WTI) oil prices and a slight increase in oil production,” the budget document stated.
Oil production is anticipated to increase very slightly. Last year’s budget pegged oil production at 152.5 million barrels for the year (417,808 barrels per day), but the budget forecast is showing that number to be 163.5 million barrels actualized (447,945 bpd). The new budget is expecting nearly identical production to 2021-22, with 163.7 million barrels forecast (448,493 bpd).
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The budget states, “At present, new well drilling is still well below historical norms as industry focuses on paying down debt incurred in the 2020 downturn and returning capital to shareholders.”
The wellhead price is budgeted at C$74.19 per barrel, down slightly from the 2021-22 forecast of C$74.62 per barrel. Last year’s budget had pegged a wellhead price of C$36.54 per barrel.
All these budgeted price numbers are considerably lower than what is happening on the market. Oil has seen a tremendous spike since Russia, one of the top oil exporters in the world, invaded Ukraine on Feb. 24. That also happened to be the week that the Ministry of Energy and Resources locked in its estimates for the Ministry of Finance.
According to Bloomberg, at 1 p.m. on budget day, WTI was trading for US$114.98 per barrel, while Western Canadian Select (WCS) was trading for US$102.28 per barrel. That made for a differential of US$12.70 per barrel, or 11 per cent.
And explanation is found in the budget document, stating, “While the current WTI forecast may appear low compared to recent market prices, and WTI has been increasing throughout the 2021-22 fiscal year (from daily prices below US$60 per barrel in April, to highs of over US$95 in February), the current forecast assumes that these price spikes are temporary and reflect brief supply and demand imbalances. It is anticipated that if WTI oil prices remain elevated for an extended period, it will bring U.S. crude production back online and OPEC will look to retain market share and make production adjustments to prevent this from happening. The current major risk to world oil markets is the continued uncertainty surrounding the ongoing impacts of COVID-19 and the geopolitical tensions in eastern Europe.”
And this is where the volatility in the markets can have a direct impact on Saskatchewan’s finances. The Ministry of Finance is saying that for every U.S. dollar oil goes up or down, it will either improve or lessen our revenue by C$14 million. But if the Canadian dollar rises in value against the U.S. dollar, the value drops in an inverse manner. For natural resources combined, the difference is C$39 million for every cent change against the American dollar.
If the dollar remains the same, and if WTI oil averaged US$110 for the year, in the increased oil revenue alone would come in around $479.5 million, in excess of the projected deficit of $463 million.
And none of that factors in what’s been happening in potash, which is seeing its best prices in years. Russia, and its ally Belarus, are the third and second largest potash producers in the world after Canada, and economic sanctions, along with the war, is threatening that supply. In 2022-23, potash is budgeted to bring in $1.451 billion, up over a billion dollars compared to what was budgeted a year ago for 2021-22. The forecasted revenue from potash for the closing fiscal year is now expected to be $1.031 billion, an increase of $599 million over what was budgeted.
Finance minister speaks
In an embargoed briefing on budget morning, Pipeline Online asked Harpauer about that volatility and the government’s projects on oil price. She replied, “We use industry to give us their projections on what they think it will be, on average, throughout the entire year. Right now, a moment in time, and obviously, unusual circumstances oil is as high as it is. But there are some expectations it’s going to be higher than it was last year, and we have built that with the average forecasters $75.75. Only time will tell. It’s a volatile. The challenge with resource revenue is it’s volatile.”
Asked by reporters about the increased resource revenues and how they factored into consideration for this budget, Harpauer said, “It was actually a positive experience because revenues are strengthening that we didn’t anticipate, obviously, a year ago, when we were in the heat of the pandemic and the economy has taken a huge sigh. But it was very much around, ‘Let’s go into the trap that we’ve been in the past, which is to become totally reliant on resource revenues.’
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“Right now, those resource revenues are extremely high. We don’t know how long that will last. There are a number of factors driving these prices, and they’re not going to hold forever. So, the discussion very much was around we need to increase, we need to increase our investment in a number of areas. But let’s be mindful that we’re doing it with the economic growth in mind that is stable and ongoing year over year.”
She added, “I do think that people do want to see a stable base to their government budgets going forward and that we’re not knee jerk reacting to the price of oil each and every year.”
Regarding volatility in commodity prices and possible windfalls, she said this past fiscal year Saskatchewan “did experience a bit of a windfall. We used it to write down the operating debt by $450 million in this particular fiscal year.”
Harpauer continued, “It’s very hard to project what will happen in the next fiscal year. We’re not even in this budget yet. And so, you’re projecting what the average will be over the year. Should the product, in particular, potash and oil prices, be much stronger than we’re projecting? That will be future discussions as what would be a wise decision on how that money will be spent. What I really don’t think we’re going to do is fall in the trap of putting it into ongoing year-over-year operating costs, because we fell in that trap before, and it does not bode well for the province.”
Asked about the Ukraine War, as well as ongoing COVID-19, she said there was an additional $95 million for pandemic pressures for health care, but the real risk is inflation. “The risk definitely in the budget and for all of us going forward is going to be how high will inflation go due to circumstances both with the pressures and ending through the pandemic, as well as the global issues. There’s no doubt that the political climate, due to what’s happening in Ukraine, is a risk. Disruptions to the supply chain which was already there is being even more accelerated due to the war.”
The budget forecasts deficits for the next several years, but Harpauer said, “I’m optimistic that we can maybe not have the debt deficit as much as projected, but we’ll see how that goes.”
She pointed to significant unprecedented private sector investment, particular in canola crushing and forestry. Indeed, there is so much planned in Saskatchewan for this year, the government purposely did not announce large capital projects in this budget, instead choosing to finish off projects in the works. Harpauer expressed concern about there being enough labour to go around if the province added to the capital mix at this time.
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