Weaker-than-expected oil prices will likely have a negative impact on the finances of the big energy-producing provinces, Alberta, Saskatchewan, and Newfoundland, says a report published on Thursday by Toronto-based rating agency DBRS Ltd.
According to the report, the outlook for commodity prices has weakened, with most forecasters now the recovery in oil prices to take longer than previously expected.
“The weaker recovery is likely to weigh on provincial revenue and could adversely affect investment and production in the energy sector over the medium term,” the report says.
In particular, the current price outlook suggests that resource revenues in Alberta, Saskatchewan and Newfoundland “may be modestly lower” than planned in 2017-18, the report says.
Stronger economic conditions “are likely to help offset some of the revenue shortfall resulting from the weaker energy prices in 2017-2018,” it adds.
“Over the medium term, however, the challenges appear more pronounced as the price outlook is now meaningfully lower than budget forecasts,” the report says.
DBRS says its base case scenario is consistent with the consensus forecast, which now projects West Texas Intermediate (WTI)/Brent will average US$50 to US$55 through 2019. Yet, government revenue projections were based on the assumption that the price of WTI would rise to US$65 and Brent would rise to US$69 in 2019–2020.
“The weaker outlook for oil prices suggests considerable revenue could be at risk for the resource-producing provinces ranging from $160 million for Saskatchewan and $300 million for Newfoundland and Labrador to $3.0 billion for Alberta in 2019–20,” the DBRS report says.
“Over the coming months, DBRS will be looking for guidance from all three provinces as to how they plan to address the potential revenue shortfalls over the medium term,” the report says, noting that the weaker outlook for oil prices may put pressure on provincial credit profiles, too.