The Premier of Alberta is staking the province’s fiscal health on surging growth in the oil sands, betting that bitumen royalties will more than double in five years despite uncertainty about energy prices.

Production of oil sands bitumen is set to climb sharply in the coming years, as energy giants spend billions to build new projects and tap the province’s vast reserves. The growing revenue from bitumen royalties will help replace natural gas revenue, and support the government’s expanded spending while warding off new taxes.
Bitumen royalties will reach $9.916-billion in 2014-15, more than double the forecast for 2011-12, according to the province’s budget released Thursday. In total, non-renewable resource revenue, which includes cash from land sales, will hit $15.971-billion by 2014-15, the government said.

The oil sands boom is in full swing, as companies rush to complete projects and capture strong prices for crude oil.

But Alison Redford’s oil-based budget is a gamble, since factors beyond the new Premier’s control could thwart her plans.

“The big one is obviously the pace of development. If companies decide to scale down, that’s going to be a big impact,” said

Justin Bouchard, an analyst at Raymond James in Calgary. “If oil prices go down, then companies get cold feet, then development slows. That is kind of a double-whammy.”

The provincial government is forecasting both healthy oil prices and expanded production, but should either of those pillars wobble, the bitumen budget may need to be revamped. Oil companies are pumping out as much crude as they can, but the ability to ship it to refineries will become strained if planned new pipeline capacity doesn’t overcome political regulator obstacles. Ample supplies of oil from Canadian producers is currently weighing on the price they can fetch.

Alberta predicts it will pocket $4.355-billion in bitumen royalties in 2011-12, $5.653-billion in 2012-13, $7.617-billion the following fiscal year, and $9.916-billion in 2014-15. The royalty bonanza comes as relatively new oil sands projects hit a key milestone, triggering higher royalty rates. As companies pay off their capital investments, they must pay more to the province’s coffers, and a slew of projects will soon pass this marker. Further, the province expects bitumen production to climb by 14 per cent in 2012-13, 8 per cent in 2013-14, and 8.8 per cent in 2014-15, the budget said.

The province was sideswiped in recent budgets as the price of natural gas plummeted. The same volatility rattles the oil market. For example, bitumen sold for about $70 a barrel about three weeks ago, and now trades for about $50 a barrel, Mr. Bouchard noted.

And because commodity prices are difficult to predict, royalty projections vary greatly. The Canadian Energy Research Institute, for example, believes oil sands royalties will be worth $5.398-billion in 2012, $6.68-billion in 2013, $8.237-billion in 2014, and $11.102-billion in 2015.

ARC Financial Corp., on the other hand, is much cooler on royalties. It estimates Alberta will pocket $5-billion in oil sands royalties in 2012, $5.36-billion in 2013, $5.62-billion in 2014, and $5.87-billion the year after that.

The Tories, who are expected to call an April election, predict a barrel of oil will be worth an average of $96.25 (U.S.) a barrel in 2011-12, then climb to $99.25 per barrel in 2012-13, $106.25 a barrel in the following fiscal year, and hit $108.25 a barrel in 2014-15. These forecasts are “slightly less” than the average industry estimates the government examined when formulating its budget, and higher than the average of all private predictions, the government said. The government expects natural gas to trade for $3.11 per gigajoule in 2011-12, $3 the following year, $3.50 in 2013-14, and $4.25 in 2014-15, well above current levels.

Alberta expects to spend $41.1-billion in 2012, with revenue totalling $40.3-billion in 2012.

Despite bullish predictions, Alberta’s ruling party acknowledges the dangers of counting on bitumen.

“We all recognize that we are too reliant on non-renewable resource revenue. We saw what happens when we had the dip [in commodity prices],” Ron Liepert, Alberta’s Finance Minister, told reporters Thursday. “We now see what potentially can happen as our industry strengthens.”