The next Alberta premier's big decision: What to do with a tsunami of cash

It doesn't feel long ago that Alberta was staring down the barrel at a $24-billion provincial budget deficit.

It was summer 2020, after crude prices briefly went into negative territory, unemployment spiked, COVID-19 was a menace of unknown wave cycles and an oil-reliant province and deficit-loathing premier seemed to be mired in permanent fiscal woe.

Flash forward and mind the whiplash to summer 2022. That same figure, $24 billion, comes up again, but this time as a profoundly positive financial indicator.

Welcome back, coffers

Prominent energy economist Peter Tertzakian predicts that's how much the province will collect in natural resource royalties in 2022, utterly dwarfing all prior records.

Surging oil prices lifted Alberta's budget into modest-surplus territory this spring, but that was based on $70 US per barrel, not the nearly $120 watchers are agape at this week. A provincial budget that had newly crossed into balanced territory this spring with a $511-million forecast surplus in fiscal 2021-22could easily push past $10 billion this year, or possibly beyond $12 billion, according to Tertzakian.

As Premier Jason Kenney yo-yoed on mask rules and vaccine mandates, he liked to term pandemic management as decision-making among only terrible choices. The looming age of massive surpluses brings with it a bounty of options, but he won't be around to make them. The questions could be the defining ones of the post-Kenney era, in the United Conservative leadership race and next year's general election if our would-be leaders care to seriously discuss them.

This tsunami of cash rolling into provincial coffers is not due only to the rocketing oil prices, Tertzakian explains.

Tertzakian should know about this: In addition to writing numerous books on oil, and being chief energy economist at ARC Financial, he was a member of Alberta's royalty review advisory panelunder the NDP government in 2015 and 2016.

Of course, when oil is worth more, producers make more per barrel, and the royalty taxes collect more. But what's really tipping Alberta into the black-ink era is that more oilsands projects are now reaching the point of maturity, where their revenues have made up for all their massive startup costs.

At that point, known as "payout," oilsands companies pay much higher royalty rates per barrel. If oil's up to $55 Cdn per barrel, pre-payout rate is one per cent of gross sales, while it jumps to 25 per cent of net sales at post-payout or up to 40 per cent when prices rise to current levels.

According to preliminary estimates from Tertzakian's team at ARC Energy Research Institute, what for the last few years has been closer to a half-and-half split between oilsands royalties at the startup rate and the mature rate, reaches 25-75 this year and close to 20-80 next.

"It's just a complete paradigm shift. We're getting maximum royalties," Tertzakian said in an interview.

The $24-billion royalty estimate covers this calendar year, not the April-March fiscal years Alberta budgets use. But to give you an idea of how dramatic a reversal that is, that's more than five years' of Alberta royalty revenue between 2016-17 and 2020-21, the bulk of Rachel Notley's tenure and the beginning of Kenney's. It crushes the previous record of $14.35 billion, set in 2005-06, when natural gas was the Alberta government's big rainmaker and Ralph Klein was nearing his premiership's end.

Klein used that overflow to dole out his $400 Ralph Bucks to every Albertan. Within months, Tory members pushed him to retire early, and kick-started a bigger debate about how a premier should more intelligently manage Alberta's booms, both economic and fiscal.

If I had $10 billion (or more)

There are so many options for handling the surpluses that seemed unimaginable until recently but will now, thanks to post-payout royalties, continue to roll ineven if oil prices "crash" to $70 or $80 per barrel again.

A premier could use this windfall to give Premierbucks or tax cuts, though that would only further increase Alberta's reliance on energy income to pay its program bills, creating steeper angles on the fiscal roller-coaster.

There's debt reduction, Klein's other favourite option. One could invest in services and infrastructure, perhaps opening the door for the NDP or even a Conservative to pledge big spending without threatening a return to deficits.

The government could recall the saving ways of Peter Lougheed and the long-neglected Heritage Savings Trust Fund, given that most Albertans by now realize the fleeting nature of these booms. (Kenney, before he announced his resignation plans, had taken to dropping hints about this in some speeches.)

The oil companies paying these royalties could well request some money coming back their way as subsidies for carbon capture projects or other technology expenditures to curb emissions and help them get to net-zero. The argument they could make: The ability of Albertans to enjoy this prosperity into the future will hinge on how small the energy sector's carbon footprint is, so they'd ultimately be paying themselves by converting some surplus into green subsidies.

Before these questions get answered, though, let's ask aloud if this will even be a big discussion among the contenders for Kenney's throne.

Windfall management hasn't come up as a major talking point among folks in a party that has largely been animated by issues like reassessing the pandemic decisions, pipelines, curriculum and how to wall off Alberta from Ottawa's influence.

A grassroots and cabinet that was until recently obsessed with curbing spending and erasing deficits the hard way without an oil price boom may be slow to come around to fixating on this newer situation. And while continuing to demand more transfers for Alberta's "fair deal" and less for equalization to have-not provinces may suddenly start to look like a "poor little rich kid" act, that discourse gets United Conservatives riled up like little else.

There's also the fact that this timethe oil price boom and fiscal upswing haven't brought along a full jobs recovery or a wage growth boom that can keep pace with inflation, perhaps dampening the mood among large swaths of Alberta.

Either way, this is the reality the next premier will have to enjoy. These may be easier decisions than Kenney faced, but they could be more consequential for Alberta's future.