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* Western Canada Select oil has fetched $40 under WTI
* No new pipeline capacity expected in near term
* Government departments brace for spending cuts
By Jeffrey Jones
CALGARY, Alberta, Dec 19 (Reuters) - Depressed Canadian crude oil prices have the government of Alberta worried it might not meet its target of moving back to budget surpluses next year, the Western Canadian province's finance minister said on Wednesday.
As a result, all government departments will be examining ways to hold the line on spending in the coming weeks as heavy oil prices keep lagging expectations, Finance Minister Doug Horner told reporters.
"We have a situation here that is growing faster than anyone predicted, in the sense that the market access is causing us to back up even faster than we thought because of the new production numbers in the United States, because of the delay in the United Sates recovery and because they are our one customer for the majority of our business," Horner told reporters in Edmonton.
In the past month, the price of Western Canadian Select heavy oil has been $35-$40 a barrel less than that of U.S. benchmark West Texas Intermediate, a spread not seen for about five years, due to growing oil sands production and limited pipeline space to key markets such as the U.S. Midwest.
That put the price of Canadian crude at around $45-$50 a barrel in some deals for January delivery, compared with $85 and more for WTI.
No new pipeline capacity is expected in the coming months, leading analysts and oil traders to predict the pain will continue for producers.
Alberta, Canada's largest oil producing province, derives about a third of its revenues from the energy sector in the form of royalties, taxes and land sales.
Asked if Albertans can still expect a balanced operating budget for 2013-2014 as the government has targeted, Horner said: "Today I'm very concerned.
"But what I can control, we're going to be very aggressive on so we can meet those targets," he said.
Last month, Horner warned that the wide spreads, or differentials, on heavy oil prices were taking their toll on finances in the province of 3.8 million people and warned the deficit for the current fiscal year could be triple the initial estimate of C$886 million ($897.81 million).
"Every minister is going to have to make some very tough decisions in their own departments. We've modified their targets and we'll continue to do that as we see this thing unfold," he said. "We'll get a much clearer picture of that in the new year. Very early in the new year we'll get some better numbers."
Horner said he is hopeful that the U.S. government will make progress in the so-called "fiscal cliff" talks, which aim to slow the growth of the country's $16 trillion debt, and kick-start an economic recovery in Alberta's largest energy customer.
He pointed out that the oil price issue was also taking its toll on Canadian gross domestic product as well.
Alberta is an enthusiastic promoter of new pipelines that would take its oil sands-derived crude to new markets, including Texas, Asia and Eastern Canada, developments that are expected to raise returns for Canadian oil producers. But those projects are not close to being built.
The U.S. State Department is expected to make a decision before the end of March on whether to allow construction of TransCanada Corp's Keystone XL pipeline to the U.S. Gulf Coast.
Enbridge Inc 's Northern Gateway pipeline to the Pacific Coast, where the crude could be shipped to Asian markets, is still the subject of public hearings and regulators are not expected to rule on it until the end of next year.