The Alberta government expects to generate nearly $10-billion in bitumen royalties alone by 2014-15, as the province bets on an almost uninterrupted surge in oil sands investment and rising production.

Bitumen royalties are forecast at $5.7-billion in 2012-13, an increase of $1.3-billion, or 30%, from 2011-12 and are expected to increase by an average of 32% a year, reaching $9.9 billion by 2014-15, the government said in a 2012 budget report.

“Bitumen royalties are forecast to account for just over half of non-renewable resource revenue in 2012-13,” the report noted.

Overall, the government expects to generate nearly $6.5-billion in 2011-12 from conventional and unconventional oil royalties, a figure that will steadily rise to $12.2 billion by 2014-15, as Alberta expects to benefit from the capital and investment flow into the province’s booming oil industry.

The Alberta government figures are slightly higher than Canadian Energy Research Institute estimates of nearly $11-billion by 2015.

The opposition finance critic Rob Anderson says the Tory government’s oil and gas price projections are ‘outrageously optimistic’ and putting Alberta’s economic health on the edge of a knife.

“If oil were to dip to even $70 a barrel our provincial balance sheet would implode, our savings fund would completely evaporate, and we would be forced to take on unprecedented levels of debt,” Andersen said.

WTI Vs WESTERN CANADA SELECT

The government has based its figures on West Texas Intermediate, which currently trades at an $18-20 discount from Brent crude — the government expects the spread to hover around $15 for the next few years.

However, Canadian producers are suffering as the Western Canada Select trades at an even deeper discount to the WTI, and currently trades at $33 below the U.S. crude.

The government admits that its heavy dependence on hydrocarbons carries significant downside, especially if oil companies slow down or oil prices decline significantly.

“Alberta relies heavily on revenue sources that can be volatile and unpredictable, including non-renewable resources, corporate income tax and investment income,” the report notes. “Like energy companies, banks and other investors, Alberta must assess the degree of risk it is willing to take associated with its revenue outlook and spending decisions. Revenue in 2012-13 could be as much as 10%-20% higher or lower than estimated, depending on variations in energy prices, exchange rates, economic growth or equity markets.”

OIL PRODUCTION

The province’s oil production is also expected to rise as more projects come on stream, growing by 14% in 2012-13, and then by 8% in 2013-14 and 8.8% in 2014-15. Total oil production to climb to nearly three million barrels per day by the end of its forecast period of 2014-15. Non-conventional production will increase from 1.78 million bpd in 2011-12 fiscal year to 2.4 million bpd by 2014-15.

The government also expects the province’s conventional oil capacity to cross the 500,000 bpd mark by 2012-13.

“The changes to the royalty system have encouraged the use of new technologies to drill wells that previously would have been too costly to develop,” the Alberta report notes. “For the first eleven months of 2011, 41% more oil wells were drilled than in the same period in 2010.”

GAS ROYALTIES

In sharp contrast to oil, the Alberta government expects gas production to decline by 5.6% in 2012-13 and then a further 4.8% and 4% in 2013-14 and 2014-15 respectively.

As a result, gas royalties will decline as a share of non-renewable resources.

As recently as 2008-09, natural gas and by-product royalties accounted for nearly half of total non-renewable resource revenue, but are now forecast to account for only 11% of the total in 2012-13, as gas prices continue to decline and unconventional oil production surges.

Still, the government expects to generate $1.2-billion in gas-related revenues in 2012-13, a figure that will rise to $1.64-billion by 2014-15, as a decline in production is offset by higher royalties for natural gas by-products.