25 February 2007

Defining a fair share of oil and gas revenue

Wade Locke's presentation to a Harris Centre public meeting last November is now available through Newfoundland Quarterly as a five page article.

To start with, Locke notes the vagueness of the "fair share" position:
While it is feasible to calculate the level of benefits currently received by the province, especially those flowing to the provincial treasury, and also possible to estimate how those benefits evolve over time as the industry grows and matures, it is not at all obvious to determine with any degree of precision, what would constitute a "fair share" of those benefits from the perspective of Newfoundland and Labrador. Moreover, many individuals arguing for a "fair share" of benefits fail to specify explicitly the benefits benchmark that needs to be surpassed.
That pretty much describes the provincial government's approach: there is a claim but no definition. That's exactly the same way the provincial government approached the idea of principal beneficiary, oil revenues and transfer payments from Ottawa.

Then there is Locke's consideration of the value of timely development:
With all four fields being developed to their potential, provincial revenue from the oil and gas sector would peak at $1.4 billion in 2012, generate more than $1.0 billion to the provincial treasury for another 12 years [beyond that] and yield in excess of $500 million per year for at least another eight years. ...

However, at this point the following caveat is important to bear in mind: these tremendous impacts may never be realized. They are contingent on Hibernia South and the Hebron project proceeding. If these developments do not proceed, then the revenue from the oil and gas industry will fall from $23 billion to $9 billion. In other words, while enhanced prosperity is within our grasp, there is a real risk it may not be realized. Furthermore, this risk is directly affected by decisions that are within the control of the Government of Newfoundland and Labrador. [Emphasis added]
That makes it pretty clear: no Hebron and Hibernia South and benefits drop dramatically. Elsewhere in the article, Locke makes it clear that leaving the oil in the ground runs the risk of drastically diminishing benefits compared to what would accrue from timely development.

Locke noted in his presentation that oil revenues account for more than 18% of the provincial government's total annual revenue. However, Locke doesn't point out that if one looks at own source revenues, i.e. the provincial government's direct revenues, not including transfers from Ottawa, offshore revenues account for about 26% of the government's haul.

Locke's presentation was specifically aimed at the "fair share" question. Putting Hebron and Hibernia South in the slings (White Rose expansion may suffer the same fate) has an impact on the province's fair share, as Locke notes.

Those cancellations also have an impact on other economic issues. As noted previously, the provincial government's own economic forecasts put the province into a period of stagnation (near zero growth) or recession for 2008 and 2009. The primary cause of that downturn is the lack of development offshore.