“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 -
7 comments:
Hi Ed...
My numbers as of the end of July had it so oil would have to seel at $87.50 a barrel US in order to break even. Numbers don't jive here also. As a matter of fact, they do show a rough ten per cent lower than the expected, as your numbers do.
For August month, they are also in the hole, and that means that oil will have to seel for greater than the $87.50 per barrel that I had for July. I haven't worked out the numbers yet, but it does look like it's going to have to seel for closer to $90 US to meet the budget requirements. In the face of a possible double dip recession being talked about in the news and ample inventories worldwide, it's hardly likely we're going to see any rapid increase in price to head off any budget shortfall!
The reality is, is that they could have budgeted on lower oil prices and then gleamed with an "excess" at the end of the fiscal year, practising a little caution in their fiscal spending a year ahead of an election, but they didn't.
I think I said at budget time that this was the first time gov had used the highest oil price projection available. Even though they lowballed production numbers, they wound up with a prediction of where oil was likely to be.
That left them with a guaranteed heavy deficit and not much chance they could produce some sort of miracle again.
This isn't the only question about royalties. The other one will have to wait though until i can collect some more detailed information.
Mr. Hollett ; Could you please elaborate on price elasticity , inelasticity , demand-side , supply-side of oil ., in layman's terms .
Well, certainly Ursula but there is a great deal of plain language information available on the Internet and from other sources. I'd only be repeating that, for the most part.
Is there some particular reason you are asking about those issues, particularly as they relate to this post and George's or my comments?
Mr. Hollett ,special education was my field and being a senior citizen , I find it difficult to understand economics .
I am interested in the theories of supply and demand .Most information I can find would require a degree in economics to understand .
I would appreciate any help you can offer .
Okay.
Well right off the bat, I just want to let you know that for the discussion here, the ideas you asked about are only very indirectly related to the discussion.
Price elasticity is basically this: if you keep the demand for a product or service the same, [people want and buy the same amount all the time] then price should go up if you make less of it available to buy (reduce supply) and the price should go down if there is more of it (supply goes up).
Inelasticity - not elastic - would mean the price didn't change or didn't change as quickly or as steeply. Supply has less of an effect on price.
You will find plenty of debate about what is driving crude prices, but again, that's another issue.
Here we go again...
More evidence to reinforce your item here...
August oil average of $76.68 for the month.
That's for WTI.
My understanding is that the Newfoundland and Labrador basket is four dollars less, so that means a rough $72 US a barrel, well below what the province requires to balance the books and to come in on target with the last budget.
How much of a cash shortfall are we really going to have at the end of the day, I wonder?
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