Following are extracts from the Premier's comments, followed by commentary.
1. On the equity position:
The reason we went from 8.5 per cent to below 5 per cent was because 5 per cent was a critical turning point in the joint venture agreement. The partners could not unanimously deliver more than 5 per cent to the Province of Newfoundland. Under that circumstance, there would be absolutely no agreement whatsoever. Four point nine percent is critical because when you get to 5 per cent there is an absolute veto right on all decisions.Comment: Two new significant pieces of information here.
This Province, in order to achieve 4.9 per cent, which could probably give us $1.5 billion additional return over time, was prepared to concede a veto right. We are not interested in a veto right on the project. That is the reason.
First, we learn for the first time that an equity position above 5% would have given the provincial government a veto over management decisions. From other public comments by the Premier and others it appears that the companies either could not would not alter the joint operating agreement, hence the government's decision to accept a piece of the operation beyond royalties and other revenues at 4.9%.
The Premier's remark at the end that the province didn't want a veto is moot since the province could never have obtained one under the circumstances without likely forcing a complete renegotiation of the joint operating agreement signed in April 2005 among the corporate partners.
Second, we learn for the first time that the equity position was estimated to yield $1.5 billion in revenue that was over and above the $8 to $10 billion going to the province in royalties.
2. A. Was there a January 26 agreement or a position taken by the corporate proponents?
It was a January 26 position. That is exactly what it was. It was a position that had been negotiated down from their position over the course of two months. That is what was done between Mr. Martin and Mr. Bates, with intervention by us at certain points in time. What they did on last Thursday night, when we finally got down to the two final issues - which was equity and super royalty. When we had agreement on those issues, they reverted to the January 26 position, which included investment tax credits, which would have cost the Province about a half billion dollars. So, you had four companies that, collectively in revenues last year, made $590 billion and were looking for our Province to give them another half billion dollars. That simply was not on.Comment: There are two new pieces of information here as well.
A. Recall that yesterday the Premier referred at one point to a January 26 agreement. The Premier categorically states today that in fact there was no January 26 agreement. He notes that there were negotiations which latterly dealt with the equity position and so-called super-royalties.
On Tuesday, the Premier said, describing the companies position: "Oh, yes, but we want all the terms that are in the January 26 agreement, with the exception of these two." Even if we grant that there was no formal agreement on January 26, it appears likely that ultimately the companies did not accept the provincial government's position on equity and super-royalties.
The Premier has said there was an agreement on equity and super-royalties; evidently there wasn't, otherwise the companies would not have reverted to their position on January 26 less two items, namely equity and super-royalties.
Part of the difficulty in assessing the Premier's comments may come from the different definitions he seems to apply to agreement depending on when he refers to his position and when he refers to the position taken by the companies. The negotiations do not seem to have followed a pattern in which items were settled and formally noted as settled. Thus, the parties - particularly the provincial team - could make a fundamental error in believing that some issues were settled when in fact they had not been.
When the Premier states there was an agreement up to this past weekend and that January 26 was a position, he is stating his interpretation of events. The companies may well have felt that from their standpoint, the January 26 position represented the basis for agreement given discussions up to that point.
We do not know when the Premier formally presented the demand for an equity position, however it appears likely that negotiations did not begin on this point until after January 26. Note that the premier did not publicly indicate that equity was a condition of an agreement until after January 26. Note as well that the Premier indicates the January 26 "position" was the result of two months of negotiations from a previous position put forward, presumably by the companies. One can easily see how such a process could lead to this document - if it is a document - being called an agreement, especially if the provincial team did not reject it formally or proceed to amend any of the contents.
By the same measure, the companies could conduct discussions in good faith, as it appears both parties did, have some legitimate misunderstandings and see the whole deal collapse at the last minute to everyone's evident consternation.
B. Was there an inherent conflict of interest in the provincial negotiating position?
The Premier refers to negotiations conducted by two representatives, namely Mr. Martin on behalf of the provincial government and Mr. Bates on behalf of the Hebron consortium.
Mr. Martin is Ed Martin, a former oil industry executive and currently chief executive officer of Newfoundland and Labrador Hydro.
These negotiations had two elements: one focused on the demand for an equity or partial ownership position in the operating consortium. The second was on royalties and other revenues to be paid to the province as economic rent for oil production as well as local industrial benefits as defined in the Atlantic Accord (1985).
To date, the Premier has not indicated how the shares in the operating company would have been managed. They could be held by an corporation like the Canada Hibernia Holding Corporation which reports to the federal energy minister. His officials would represent the federal government in making any decisions related to the federal government's shares in Hibernia, for example.
More likely, the shares would have been held by Newfoundland and Labrador Hydro as the province's new energy corporation or in a holding company managed by the revamped Hydro corporation. This would be consistent with the Premier's comment to the National Post:
With Newfoundland's business community anxiously holding out hope that negotiations will be revived on the Hebron Ben Nevis offshore oil project, Premier Danny Williams yesterday made it clear he is prepared to make the province a full-fledged partner in the multi-billion-dollar venture.There is the strong possibility that by combining these two very different sets of negotiations in one that the province placed itself in a position whereby acquisition of shares in the operating venture could be inappropriately related to the province's royalties and other similar revenues. This would be similar to the Hibernia negotiations in which the province essentially traded off the gravity-based structure costs against future royalties.
"We are prepared to have a full stake and, if necessary, at some point we will get involved in frontier exploration, whatever the opportunities are," Mr. Williams said in an interview.
Mr. Williams said his government is prepared to participate in all aspects of developing his province's offshore oil and gas resources through the provincial hydro corporation. He said he would like to model Newfoundland and Labrador Hydro after Quebec Hydro and Norsk Hydro, Norway's state-controlled energy company. [Emphasis added]
Such a situation is implied in the Premier's comments on Tuesday that suggest the request for $500 million in tax concessions reduced the overall benefit of the equity position, even though the two issues should actually be considered separately. The equity stake had an intrinsic public policy value separate from the other "provincial benefits". As such the cost of the tax concessions ought to have been weighed against the $10 billion in royalties, not the $1.5 billion returned by the shares, or any combination of the two.
Of greater concern, though is the potential that in the second share management scenario, Mr. Martin was effectively placed in a conflict of interest during the negotiations themselves. Had the negotiations been successful in the second share management scenario, Mr. Martin would have been, for all intents and purposes, a co-owner of the Hebron development. As such, he would have naturally been concerned to lower the start-up costs of the project in an effort to maximize corporate profits. These profits would then be turned to whatever purpose the Crown-owned agency determined, including development of the Lower Churchill.
There is no question that in a typical situation, Mr. Martin as an operator, would naturally look positively on a request to lower start-up costs such as requesting forgiveness of certain taxes or the seeking of certain tax credits. No matter what a company's overall financial position, a project such as Hebron would be expected to operate as efficiently as possible, with the lowest costs and hence the maximum profits.
At the same time, though, Mr. Martin was operating as the province's chief negotiator on behalf of the public treasury. In a manner of speaking he was functioning as the tax collector. As such he would seek to maximize the revenue flowing to the public treasury; naturally this is separate from the Hydro corporate treasury. Thus, his negotiating brief ought to have given him clear direction to minimize concessions, except in so far as those concessions would bring a greater return in such things as local jobs. His public treasury role ought to have carried with it considerations separate from those of his brief as a co-owner of the development along with the major oil companies.
Under the second share management scenario, Mr. Martin appears to have been in a conflict of interest. He was on the one hand seeking to maximize the treasury returns while at the same time negotiating his way onto the Hebron management team, with its obvious concern to lower costs and maximize profits.
It is irrelevant that Mr. Martin would have been placed in this position by the provincial government itself. The provincial government appears to have been trying to achieve two separate public policy goals in the same set of negotiations. This may have contributed to the collapse of the negotiations.
