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UPDATE 2-Canadian province Alberta increases 2019-20 budget deficit forecast

By Nia Williams

(Adds budget details)

By Nia Williams

CALGARY, Alberta, Oct 24 (Reuters) - Alberta, Canada's main oil-producing province, said on Thursday its budget deficit would increase in the 2019-20 fiscal year because of a provision made for potential losses on crude-by-rail contracts that were signed by the previous government.

Alberta's deficit is expected to reach C$8.7 billion ($6.7 billion) in the fiscal year ending March 31, up from C$6.7 billion in 2018-19. The government said it would return to a surplus by 2023.

Alberta's real GDP is forecast to grow 0.6% in 2019, down from an estimated 2.2% in 2018.

It was the first budget delivered by Alberta's United Conservative Party government, elected in April with promises to cut spending and revive the economy.

Alberta is home to Canada's vast oil sands, which hold the world's third-largest crude reserves, but the province has struggled to recover from the 2014-2015 global oil price crash because of delays in building new export pipelines and falling capital investment.

The previous New Democratic Party government signed C$3.7 billion in crude-by-rail contracts with rail and midstream companies to help move oil from the landlocked western province. Congestion on oil pipelines led to a glut of crude building up in Alberta and sent the discount on Canadian crude spiralling to record levels.

Premier Jason Kenney slammed the contracts as an unacceptable risk to taxpayers and his government has been in talks with oil companies about the private sector taking over those crude-by-rail deals, although no agreements have been announced so far.

The budget contains a C$1.5 billion provision to "extricate taxpayers" from the crude-by-rail program.

"I am hopeful that in fact by the time we have passed off these contracts to the private sector, that cost will be less, but we had to recognize a risk to Albertans," Finance Minister Travis Toews told a news conference.

He said the Energy Ministry was working on offloading the contracts and he believed there would be an announcement in coming weeks.

Alberta has run deficits every year since 2015 when the province was badly hit by falling global crude prices. It has the smallest outstanding debt-to-GDP ratio among Canadian provinces, but the pace of debt accumulation is growing.

Since the beginning of 2019, Alberta has imposed curtailments on the province's largest oil producers to ease congestion on export pipelines and support crude prices.

The government expects non-renewable resource revenue to grow in 2019-20 to C$6.5 billion, up C$1.1 billion from the previous year, as a result of increased bitumen royalties from the oil sands.

Alberta is assuming an average discount of $14.20 per barrel for Canadian heavy crude in 2019-20, against an expected WTI price averaging $57 a barrel.

The province's overall spending in 2019-20 is expected to stay largely flat at C$56.5 billion, compared with the previous fiscal year, while it would collect C$50 billion in revenue.

The government plans to reduce operating expenses over four years by shrinking Alberta’s public sector and cutting administrative red tape. It pledged to maintain health and education spending. ($1 = 1.3068 Canadian dollars) (Reporting by Nia Williams; Editing by Leslie Adler and Peter Cooney)