Pegging the price

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Budgeting in Alberta is far from an exact science

When the Alberta government opened up its books for the first quarter earlier this month, it had brought in $2.7 billion more than it anticipated.

During the course of the 2010-2011 fiscal year, it brought in $886 million more than expected. Most of those gains this year and last have come on the back of oil and gas royalties and land sales, neither of which the government has been able to predict.

Every year, the government uses a variety of outside sources, as well as its own analysts, to try and predict the cost of oil and natural gas.

“You look at world economic growth, you look at impact on demand and forecasts on supply, so there is a variety of different forecasts out there,” said Alberta Energy spokesperson Jay O’Neill.

Over the course of the 2010-2011 fiscal year, oil prices fluctuated wildly, but averaged US$83.27, which was $4.32 higher than the government’s projection.

This year, the government pegged the price of oil at US$89.40, but in the first three months of the fiscal year, the price averaged $102.56 and the government has now revised its estimate to $97.85. On Tuesday, the price closed at $88.90.

O’Neill said the government does what it can, but it doesn’t possess a crystal ball for these things.

“That’s why they are called forecasts — you take all of these things into consideration and then there are things you can’t predict.”

Scott Hennig, Alberta director of the Canadian Taxpayers’ Federation, admits the government has a hard road in trying to estimate the economy and the price of oil a year at a time.

Hennig said the only thing the government can do is lowball the estimates, going with a low price for oil and hoping for a better return.

“If you are going to err, err on the side of being too low, err on the side of coming in with a surplus instead of a deficit,” he said. “I would like to see them under for all of them, then you are at least giving yourself some wiggle room. Accuracy on these things is not as important as being conservative.”

Good land prices

One other area where the government’s wildest financial dreams have continued to be surpassed is the price of Crown land.

The government sells lease rights to oil and gas companies at auctions and over the past year business has been very good.

The last fiscal year brought in $2.6 billion, $2 billion more than the government expected when it released the budget in March 2010. In the first quarter of this fiscal year, it was more good news, with the government doubling its estimate for this year to $2.4 billion from $1.3 billion just a few months ago.

The government broke records selling land in the first quarter and O’Neill said a sale just last week brought in $464 million, with one large parcel alone bringing in $123.5 million.

O’Neill said these sales can be even more tricky, because prices can vary greatly at an auction.

“Nobody can really predict what is going to happen when you put this land out for sale.”

Travis Davies, with the Canadian Association of Petroleum Producers, said the industry is interested in land for a lot of reasons, including some steps the government has taken and good prices for commodities like oil and natural gas.

He also gave a lot of credit to technology that makes some land a lot more valuable.

“These are reserves that we have known were there for a long time, but we didn’t have the technology to get out of the ground and now we do,” Davies said.

The roll-out of new technologies can be really hard to predict so that might have been a factor in the government’s assumptions about land sales, he said.

“It is always tough to gauge technology breakthroughs or how quickly a technology is going to move once it gets into a commercial space,” he said.

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