That's Millions With a "B" Ladies and Gentlemen

The Toronto Sun

April 04, 2007, 11:45 pm est

ST. JOHN'S, N.L. (CP) - Newfoundland and Labrador will end up getting $5.6 billion more under the federal government's proposed equalization formula than under the status quo, says a Memorial University professor.

In the first attempt at crunching the numbers, Memorial University economist Wade Locke - one of the province's leading experts on offshore revenue deals - has found that if Newfoundland were to stick with the Atlantic Accord and the old equalization formula until 2020, it would receive $18.5 billion in combined revenues.

But if the province follows an optimal strategy - where it would leave the accord in 2009 and opt into a formula where a fiscal cap is implemented and 50 per cent of non-renewable natural resource revenues are included - it would receive $24.1 billion over that same period, Locke said.

Locke said he chose 2009 as the best year for the province to jump out of the accord because that's when it will no longer qualify for equalization.
Premier Danny Williams has been roiling because the federal budget delivered two weeks ago only allows the province access to a newer, more generous equalization program if it gives up the Atlantic Accord.

That accord, signed with the previous federal Liberal government, generated millions of dollars of revenue each year for the province because it excluded oil revenues from equalization calculations.

Williams has claimed the province could lose, over time, billions of dollars if it opts out of the Atlantic Accord, which could expire as soon as 2012, though his government has not provided figures since the budget was released March 19.
The federal government has said Newfoundland can simply avoid any penalty by sticking with the existing formula under the Atlantic Accord.

But Williams has argued the accord was never at issue, and he shouldn't have to give it up to gain improvements in the new formula.

Williams has accused Prime Minister Stephen Harper of breaking a campaign promise by introducing a new equalization formula that includes 50 per cent of non-renewable resource revenues, as well as a fiscal cap.

But Harper has said he has broken no promise because Newfoundland has the option of sticking to the principles of the Atlantic Accord, which protects the province from clawbacks in equalization until at least 2012.

If Harper delivered on his promise, as defined by Williams, Newfoundland would receive $28.6 billion, according to Locke's estimates.

Locke, who stressed in a presentation he delivered late Wednesday that he made his calculations without political interference, acknowledged that his figures would likely serve as a source of contention between federal and provincial number crunchers.

"I can't control how people use this presentation," Locke said.
"Suppose you disagree with what I had to say here tonight, you being the province, you being the feds. Well boy, let's put your numbers out, let's all have a look at them."

Locke based his calculations on a range of factors, including a two per cent inflation rate and a $51US barrel of oil price, and said his numbers were reasonable estimates.

The Independent

How much is a fair share?
By Ryan Cleary (St. John's)The Independent
Friday, February 23, 2007

Wade Locke sees the offshore as our “golden goose,” and warns us not to kill the poor bird before its opportunities hatch. The Grand Banks will eventually be cooked, there’s no avoiding that, but the Memorial University economist says if we handle the offshore right it could put a hell of a lot of eggs in our basket before the arse drops out of ’er. Surprise, surprise — we’re on our way to becoming a have province within five years and surviving on our own without handouts from Ottawa for the first time in forever, but only if we don’t shag it up.

All we want is our fair share, sure any Newfoundlander will tell you that. But who’s to say what our fair share is? Locke attempts to answer the question in a fascinating article for the Newfoundland Quarterly’s most recent issue. His findings are worth review …It’s easy enough to see where the call for a “fair share” comes from, considering the high price of oil and the profits posted by Big Oil.

ExxonMobil recorded the largest annual profit in U.S. history in 2006 at $39.5 billion, up from the previous record of $36.1 billion in 2005.

Those kinds of numbers strengthen the resolve of leaders like our Danny to ensure the primary beneficiaries are governments themselves and the people, like us, that they represent. “It is easier to agree with the view that the owners of the resource — the people of the region in which the oil and gas resources are located — should receive a fair share of the benefits than it is to identify a specific share that is fair,” Locke writes. He asks how much more would make it fair? And more of what — taxes, royalties, jobs, spinoffs?

By 2005, Big Oil had invested $19 billion in Newfoundland and Labrador exploring for, developing and producing offshore oil and gas. When it comes to the three fields currently in production — Hibernia, Terra Nova and White Rose — the province received roughly 40 per cent of the spending associated with developing the projects and 50 per cent of the spending to keep them going. Indeed, the oil and gas industry accounts for 15 per cent of all economic activity in the province and 18 per cent of all government revenue. According to Locke, those numbers pale in comparison to the highs we’re expected to hit within the next five to 10 years.

Based on a barrel of oil at $50 US, over the next 20 to 25 years the provincial treasury can expect to rake in $15 billion in royalties and corporation taxes from the three existing fields, and up to $23 billion should Hebron come on stream. With all four fields up and running, Locke says provincial revenues should peak at $1.4 billion in 2012. That sort of revenue, most people will be surprised to know, will “propel” Newfoundland and Labrador to have status within five years. Which isn’t bad considering we’ve been in have-not status for 57 years.

Writes Locke, “This is a significant benefit that is often overlooked when accounting for the impacts of the oil and gas sector on the provincial economy.” But — and this is a big but — those “tremendous” impacts will never be realized unless Hibernia South and Hebron proceed. If they don’t move forward our revenues will drop to $9 billion from $23 billion.

“In other words,” Locke says, “while enhanced prosperity is within our grasp, there is real risk that it may not be realized.” He points out that the risk is directly affected by decisions that are within the control of the provincial government.

So how does our government’s take compare to Big Oil’s or that of other jurisdictions around the world?

For the three offshore projects currently up and running on the Grand Banks, the oil consortium can expect to make between 45 and 49 per cent of pre-tax net cash flow generated by the projects over the life of the fields. The federal and provincial governments can expect to collect between 51-55 per cent of the projects’ pre-tax net cash flows. (Ottawa’s cut is a whole other story.) The government cut, when compared to other countries, is somewhere in the middle, “neither the largest nor the smallest.” It falls short of Norway’s 77 per cent, but similar to the shares found in Alaska, Alberta and Australia, and exceeds the 50 and 43 per cent shares calculated for the UK and Gulf of Mexico.

In fact, Locke says

"our generic offshore oil fiscal regime is one of the most progressive fiscal regimes when compared to jurisdictions that compete for the same investment dollars."

Locke says the absence of a clear vision — i.e. energy plan, which Danny is expected to hand down in the spring — makes it hard to assess fully whether the province is getting its fair share.

Even in the absence of an energy plan, it’s clear the province wants more — not fewer — benefits. At the same time, Locke says Newfoundland and Labrador isn’t the only oil game in town. Our daily production amounted to one-half of one per cent (0.5%) of world daily production in 2005.

As for the argument that the oil should remain in the ground until it’s to our advantage to remove it, the failed Hebron negotiations mean there is now, for the first time in 15 years, no new project on the drawing board. The break in continuity will impact the transfer of technology, translating into lower productivity, as well as the continued out-migration of skilled workers.

In the end, the benefits flowing to Newfoundlanders and Labradorians will be lower than they could be, even if our share is perceived to be fair.

“In other words,” says Locke, “while the pie might be sliced more to our liking in the short-term, it may mean that the size of the pie is smaller in the future and we will benefit less."

He says there are both constraints on how far we can increase our share and consequences for our actions. To quote the great Ray Guy, who also has a piece in the latest Quarterly, “Happiness, to me, is being prepared for the worst and happily surprised by the fair-to-middling.”

*emphasis mine*

Oil closed today at $64.38 and by the way Wade Locke, I like the way you present your predictions.