Friday, November 22

Mid-year Financial Update- more spending, less revenue

Between the first quarter update at the end of August and the mid-year update of November 25th? a new premier took charge. In the tbf-2022-23-first-quarter (as its PDF is known) the province expected to collect $75.9 billion in revenue. In tbf-2022-23-mid-year total revenue is $76.9 billion. The Mid-term Update was called “Strong economy, strong Alberta” equating Alberta to economy. The press conference video is here.

Spending

Spending has increased from $62.1-billion in the 2022 Budget, including COVID-19 recovery spending, to $64.7-billion in the fiscal update or by $2.6-billion. Increased spending comes from $300-million in electricity rebates, “affordability initiatives” of $1.2-billion, $308 million for higher costs of selling oil, $340 million for Health including $174 million for the Alberta Medical Association agreement, $126 million for other collective bargaining agreements, and $40 million for various other programs, including primary care nursing, resident physicians, homelessness, and the addictions and crisis hotline, $50 million for Justice and Solicitor General including $22 million for judicial compensation, $15 million for victims services, and $6 million for legal aid (Fiscal Update, p. 8). The new regime will continue to use the windfall to strategically invest in initiatives both through its operating budget and its capital budget to shore up support in contestable constituencies.  For example on 30 November Graham Construction was awarded a contract to build a major interchange at Queen Elizabeth II Highway and 65th Avenue of Leduc.  Construction is expected to begin in late 2022. and will cost $112-million.  Leduc-Beaumont was a riding won by the NDP in 2015 and will be closely fought during the election period.

Finance Minister Travis Toews Source: CBC

Revenue

Bitumen royalty revenue was actually down $733 million from the Q1 update. Bitumen royalties now constitute about one-quarter of total government revenue including federal transfers. All non-renewable resource revenue constitutes a whopping 37 per cent of total government revenue. As reported in Abpolecon.ca only four producers account for 25 to 30 per cent of all government own source revenue.  Offsetting the good news on royalties was a drop in Investment income of $2-billion as financial markets are expected to perform poorly.

This analysis will dive a little deeper into the calculations in determining how much money the Alberta government takes from only four oilsands producers. According to the mid-year update bitumen royalties are expected to fetch $19.353-billion. The mid-year update also estimates that bitumen production will average about 3,297,000 barrels per day. Table 1 below records the first step is to ascertain the Big Four’s portion of total bitumen production.  This data was drawn from Oilsands Magazine in early November.

Big Four- Royalties

Oilsands Magazine reports production capacity which is different from actual production. The table below shows estimated capacity.

 

Table 1- Total Production Capacity (bbl/day)

Producers

In-situ

Mine

Athabasca

          32,000

 

CNRL

        387,500

       620,000

Cenovus

        500,000

 

CNOOC

          92,000

 

Connacher

          20,000

 

Conoco-Phillips

        148,000

 

Everest Canadian Resources

          12,000

 

Greenfire Resources

          30,000

 

Harvest Operations

          10,000

 

Imperial Oil

        270,000

       240,000

International Petroleum Corp

                500

 

MEG Energy

        100,000

 

PetrocChina

          35,000

 

Strathcona Resources

          66,000

 

Suncor

        333,000

       494,000

Sunshine Oilsands

             5,000

 

Imperial Oil -Syncrude

25%

       101,250

Sinopec Oil Sands partnership

9%

          36,450

CNOOC Oil Sands Canada

7%

          29,160

Suncor

59%

       237,735

Syncrude

 

       405,000

Totals

2,446,000

    1,354,000

Total in-situ and mine production

3,800,000

 

Source: https://www.oilsandsmagazine.com/projects/bitumen-production

 

As table 2 below shows the Big Four holds 84 per cent of the production capacity in the in-situ and mining segments of the oilsands industry.

Table 2- Big Four Production Capacity

Company

(bbl/day)

Cenovus

500,000

CNRL

1,007,500

Imperial Oil, incl. Syncrude

611,250

Suncor, incl. Syncrude

1,064,735

Total production per Oil Sands magazine

3,800,000

Total production Big Four

3,183,485

Percentage Big Four

84%

The next table shows the actual bitumen production of the Big Four in the July1-September 30 quarter. This confirms that the 84 per cent estimate is a realistic estimate to use since there will be variances depending on shut-downs etc.  

 

Table 3- Big Four Production -Actual

Company

bbl/day

 

Cenovus  bbl/day

585,000

Third Quarter MDA, p. 20.

CNRL  bbl/day

959,185

Third Quarter, MDA p. 10

Imperial Oil  bbl/day w/o Syncrude

414,000

Third Quarter, Financial Statements p.  18

Suncor  bbl/day

764,100

Third Quarter, Interim Report p. 1

Sub-total bbl/day

2,722,285

 

Alberta estimated Bitumen Production (bbl/day)

3,297,000

Mid-year report p. 19.

Per cent of Big Four bbl/day

82.6%

 

Sources: Interim financial statements and Management Discussion and Analysis (MDA) of Cenovus, CNR, Imperial Oil, Suncor.

With expected bitumen revenue of $19.4 billion the Big Four would account for about 83 per cent of total bitumen royalties or about $16.1-billion. This  figure also assumes that the Big Four’s timing of “full payout” makes no material difference to royalty payments of the other bitumen players.

Taxes payable

I assume that virtually all provincial taxes would be paid in Alberta since production, sales and number of employees are heavily weighed to Alberta.  Companies would have an incentive to book as much taxable income in Alberta since corporate marginal rates are the lowest in the country. Of the 100 per cent of taxes payable I assume one-half of taxes go to the federal government. We also assume that there might be 10 per cent of taxes payable to governments outside Canada. Assuming that federal tax which is a 13 per cent rate and a 8 per cent Alberta tax means Alberta’s share should be about 38 per cent of federal taxes.  This would equate to about 34 per cent of total taxes payable (which are not the same as cash taxes paid). 

In order to calibrate whether 34 per cent of taxes is paid to Alberta in a 2019 report

Alberta Corporate Income Tax NAICS historical

prepared by Alberta Treasury Board and Finance showed the distribution of corporate taxes from 2014-15 to 2020-21 by sector.  Surprisingly the oil and gas sector only accounted for less than 10 per cent of taxes payable. This probably understates a normal cycle  because some of those years oil and gas producers were bleeding money and raising debt desperately. In addition, oilsands producers like Cenovus (Husky), Imperial and Suncor have significant refining operations which dominate Alberta’s manufacturing sector. which would add to the taxes paid by these companies. The calculations show that taxes by the Big Four would be upwards of 45 per cent of all corporate taxes.  This estimate is less precise that the bitumen royalty calculation.

Table 4- Total Big Four Taxes payable and Royalties ($billions)

Company

$millions

Source

Cenovus

             2,028

Third Quarter, Interim Financial statements p.3. 

CNRL

             2,957

Third Quarter, Interim Financial statements p.2. 

Imperial   

             1,592

Third Quarter, Interim Financial statements p.2 

Suncor

             2,442

Third Quarter, Interim Report p.51

Subtotal

             9,019

 

less international taxes

              (902)

 

Estimated Canadian taxes payable

             8,117

 

Canadian statutory rate

15%

 

Alberta Statutory rate

8%

 

Alberta portion

35%

 

Alberta taxes payable

2,823

 

Estimated royalties @ 83 per cent

          16,063

 

Total estimated royalties and taxes

          18,886

 

Alberta Own Source Revenue (excluding federal transfers-$billions)

          64,414

Mid-year report, p. 4.

Big Four Per cent of Total Own Source Revenue (excluding federal transfers)

29.3%

 
Danielle Smith makes a comment during the United Conservative Party of Alberta leadership candidates’ debate in Medicine Hat, Alta., Wednesday, July 27, 2022. THE CANADIAN PRESS/Jeff McIntosh

This analysis shows that nearly one-third of Alberta’s own source revenue comes from four companies. With total revenue of $76.9-billion, including federal transfers, the Big Four still contribute a whopping one out of every four revenue dollars to the Alberta Crown. It is little wonder that, writing in June 2021 before political ambition set in, Danielle Smith argued Alberta’s principal problem was  “not a lack of diversification in industry… (but) “ is a lack of diversification in the provincial government’s source of revenues, and a lack of innovation in the public service as a whole. (p.6)”

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