07 February 2005

Second, we assume a can...

Now that I have had some time to go through Wade Locke's slides on the Atlantic Accord, I have a better idea of what he said last week in the"independent" assessment of the Accord deal. The slides and some other documents can be found at the Harris Centre website, along with a bunch of other interesting reading. This follows on my other post on this, First we assume a can-opener.

I've also checked a couple of details on my earlier postings. Apparently, Locke he does include higher revenues for Terra Nova in his projections, but it still seems he does not include Hebron or other revenue sources in his projections of whether or not the province will qualify for Equalization at any point under the January agreement. I am curious about the Terra Nova thing, though, since Locke's version of the revenue chart actually is more extreme than the provincial government one. It has an oddity, too. As revenues get higher and, in one Locke slide, as oil prices get higher, provincial oil revenues drop. There must be something I am missing.

If you check the Terra Nova site, for example you will see there is a plan to plateau production for a period. Logically one would accept that this should be a fairly steady revenue stream, assuming, as Locke does, that oil stays at constant price. Why the big peak, then?

Why the big peak, too, if we are actually bringing on fields in sequencerather than simultaneously?

Admittedly, I am working without the benefit of his actual comments on the night so I may misunderstand some of his points. That said, with his slides and with the media reports, I think I can offer some further observations on his presentation.

Generally, his comments are accurate but that is so solely within the information, context and assumptions that he uses. Shift any of those and his comments are anything from less accurate to completely off base.

Let's just take some key issues:

1. A logical comparison would be between what was sought and what was obtained. Wade Locke deliberately avoided this comparison and the reason is by no means obvious. There is no logical or legitimate reason to do so. He can easily model what was sought. It was a simple proposition: double revenues for the life of oil production. Poof! Instant slide. Then compare that to the January deal. Poof! Instant set of lines on instant chart. Compare both. Measure gaps, if any. Make observations. Make it more complex. Compare the pre-June 5 proposition: double oil revenues for eight years. Poof! Another instant line for comparison. Repeat measurement and observation steps above.

Locke didn't do that, though. Nope. Instead, he looked at each of the federal propositions. This presents some difficulties. The biggest one is that Locke isn't actually making a solid judgment on the apparent success or failure of the Premier's campaign. It would seem like both the most logical comparison and the most productive one for people looking for an independent assessment on which to base their personal judgment. It is curious that he wound up with a presentation that joins the chorus of cheers, hence my suggestion in an earlier post that Locke situated the estimate.

The next biggest difficulty is that Locke is working without the benefit of all the deals, details and counter details. One can only make the kind of observations Locke did make - like that each proposal was better than the one before - if he actually had details of every single nuance and detail in the discussion. For example, we know the Premier had some kind of long-term deal in June which he repudiated by his letter of January 10. Locke doesn't discuss this idea at all, preferring to completely ignore this deal. Locke also ignores the changing provincial position too. These considerations all call his final assessment into serious doubt.

What we wind up with is a case where our economist not only assumes a can-opener, he also assumes a can of beans. He then proceeds to open then figuratively and reveal their magical contents. No matter how you look at, Wade Locke's entire approach doesn't add up to a genuinely thorough assessment of the provincial position. We still have imaginary beans and a can opener

2. Locke concludes (if I gather correctly) that each federal offer from October to January got better, to the point where the province accepted the last one.

Well, as the post from Thursday shows, on paper there is actually very little difference between December and January. There was noticeable improvement from October to December after much negotiation, but the variations between December and January are anything but big. I'll highlight some specifics.

- In the core issue, the federal position remains the same: collect revenue plus offsets until past the Equalization threshold. After that, the existing Accord provisions apply. This is emphatically not what the provincial government sought in any of its three proposals and this is a point Locke apparently does not make at all. This leaves a huge gap in Locke's presentation.

- The lump sum payment concept is simply an adaptation of an October concept to the new deal. It doesn't materially enhance the January offer since, as I have argued elsewhere, the October deal could have netted out the same cash - if they tried for it. December was an improvement on October, but there was very little of substance changed between the December offer and January. The second-phase could be seen as unattainable, depending on your assumptions about economic performance that far out (2010-2012). Therefore, October might not have been that bad after all.

- The cash value of the deal in the short-term and long-term fluctuates with the price of oil. Therefore many of the deal's benefits are simply theoretical. It all depends on which scenario plays out; it's based on which can-opener you assume.

Of course, Locke has conveniently ignored the most obvious point: Danny Williams said yes to less despite his claim that he woudn't.

3. In order for this deal to pay off as Locke projects, oil prices have to remain at or below $32 a barrel for the life of the agreement, especially in the years when oil revenue supposedly peaks (06-08 depending on pricing). Locke's assumption appears to be based on an average price per barrel of oil. fair enough; most projections work this way. However, over the span of eight years, the average price could be US$32, with a low period at the beginning and peaks in between such that it averages out at $32. Unfortunately, if those peaks also push the province beyond the Equalization threshold, this deal won't pay off in the way Locke suggests. Assume a different can opener and you might not be able to open the can of magic beans.

4. Locke appears to assume no other economic activity exists. It is obvious from the slides that Locke assumes no Hebron/Be Nevis development and it would appear he also assumes no other projects such as Voisey's Bay will impact on provincial own-source revenues. As such, other economic activity could make this a really short-term deal as I have said elsewhere. In that case, Locke's praise of this deal would be...Well...Premature.

5. Clawbacks, clawbacks, clawbacks. Locke persists in the clawback mythology which only serves to confuse the issue and mask what actually occurs. For example, in slide labeled "What was the January Offer Worth?", Locke's presentation makes it appear that the maximum revenue is the red line, the oil revenue line. In the scenario being described, though, the revenue is actually cumulative and would be considerably higher than the $1.1 billion shown at peak. The oddest part of Locke's presentation is his claim that even though the supposed "clawback" climbs steadily from 14% currently toward 100%, at some magical point, when the province no longer qualifies for Equalization, the "clawback" magically disappears. What should be a 100% clawback, as Danny Williams logically used to argue, Locke says the clawback disappears. What a crock!

6. Problems/Uncertainties magically disappear. There is precious little difference between the December and January offers. Yet, Locke makes different conclusions on each. For example, in the slide "Issues with Respect to the December Agreement in principle", Locke lists as his first point that the province might not qualify for Equalization after 2006 depending on oil prices and "other things going on in the province". While this acknowledges one of the major shortcomings of Locke's assessment the same could be said of January as well. Where did you concern go, Wade? It's not like this is a minor issue.

7. Funky Math and Funkadelic Logic. In the slide on what was achieved in the January deal, there is some funky math. The "upfront payment" does not have a value of up to $400 million per year as Locke suggests. It is only $250 million for sure; any other value, such as interest, will vary widely depending on how the money is used. That looks like funky math to me.

As for funkadelic logic, Locke praises the change in the criteria for qualifying for the second eight-year phase of the offset deal. He apparently didn't notice that an "either/or" provision - meaning the province met one of two criteria, suddenly became an "and" criteria - meaning the province will have to meet two criteria simultaneously. Add in a more realistic assessment of the economy over thee next eight years and you can start to see some difficulties with hitting both criteria that we wouldn't have had with hitting one.

As for his comment about a clause for Phase 2 preventing the province from "falling off a cliff", Locke knows that the existing Equalization program has sufficient insurance against this ever occurring. It was a cute phrase Danny liked to used - maybe he got it from Wade - but it is a dubious concept at best. Of course, it won't be a benefit at all if, as Locke noted in his critique of the December deal, the province doesn't qualify for Equalization anyway.

Nasty things, those funkadelic assumptions.

I wish I'd ame the session at Memorial last week, if for no other reason than I could have heard the comments from political scientists Steve Tomblin and Chris Dunn. As it is, from Wade Locke's slides and his media interviews, I'd say his "independent" assessment fell as far short of the requirement as that offered by most news media in the province.

Too bad, really. It is difficult to have a participatory democracy when people are fed assumptions in place of analysis.

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