17 February 2010

Hibernia benefits overestimated: economics prof

“The oil industry success we enjoy today is not what many expected… many people could not believe in the vision of Newfoundland and Labrador as a successful oil producing province.”

Whoever wrote those words for Kathy Dunderdale to read at the re-announcement of the Hibernia South project could hardly know the truth of them.

Nor could the writer likely understand how close to home some of those negative nellies were.

As managing editor of the Telegram in 1992, Bill Callahan believed the project was best scrapped since it represented “large-scale exploitation of non-renewable petroleum resources without adequate or perhaps any return.”

Then there was Peter Fenwick. The former New Democratic Party leader lambasted Hibernia in 1992 as a “give away”:

The money we taxpayers are throwing away on Hibernia is equal to a hundred Sprung greenhouses.  In future, Brian Peckford, Clyde Wells and Rex Gibbons will be vilified by generations of Newfoundlanders for the enormous waste of taxpayers’ money.  Unfortunately we, and the rest of Canada will be stuck with paying for it with our tax dollars.

None, though, could match the pessimism, negativity and sheer crap about Hibernia coming from none other than Wade Locke. 

Yes, that’s right:  Wade Locke,  the same Memorial University economist who is the darling of the current provincial government administration and who was, it should be said, looked on rather favourably by their Tory forefathers in their day too.

As Locke told The Telegram’s Pat Doyle in September 1990, only a few days before Wells, Gibbons, John Crosbie and others signed the final agreements in St. John’s that started the Hibernia project rolling:

"While it may be true that the sun will shine one day, it does not appear that 'have-not' will be no more because of Hiber­nia."

Those words by Wade Locke, an assistant professor of economics at Memorial University, appear to sum up the realistic view now held by experienced observers on the potential benefits of the large offshore project.

But that wasn’t all. 

Locke was extremely pessimistic about the revenue likely to come from the project:

"That is, each dollar of offshore oil revenue going to the provincial trea­sury will result in an increase in the province's ability to spend by two to three cents," Mr. Locke said.

Provincial government estimates suggest the equalization payments would fall by somewhere in the range of 90 to 95 cents.

Mr. Locke said using his calcula­tions, if the project were to generate 13.8 billion In direct revenue for the treasury, for example, after adjust­ing for equalization losses and equali­zation offset grants, the province's net fiscal position would have changed between 176 million and $114 million over the life of the project or an average of $3 million to $4 million in net revenue a year over the 26-year project.

To put that in perspective, Mr. Locke noted the province expects to spend $3.3 billion In the current fiscal year.

“This means that the average net revenue from Hibernia is equivalent to about one tenth of one per cent of the 1990 projected government expen­diture,” said [Locke in] the paper [printed in the Newfoundland Quarterly.]

"Thus, one should not expect that the provincial government will, as a result of Hibernia, have an enhanced ability to improve our road system, education services, health services or any other government services that are of primary concern to the aver­age Newfoundlander."

Yes, when you read stuff like that you just have to chuckle at all the Kreskins who took turns peeing all over the Hibernia project. Heck even Dunderdale and her boss used to refer to it as a massive give-away.  Used to, that is, until they used the deal as the basis for their own negotiations over the extension project.  The old Hibernia deal actually delivers the largest bulk of the cash they claim will come from the extension.  Honesty would prevent Dunderdale and her crowd from doing anything but acknowledging the old deal for its value.

Meanwhile Locke now gets invited to speak in glowing terms about the great offshore oil industry at an event marking the 25th anniversary of the deal on which it is all based:  the 1985 Atlantic Accord.

And that original Hibernia deal they all loved to hate? 

Well, based on the same numbers used by the provincial government and quoted by CBC in the supper-hour news tonight, that 1990 deal will produce more money for the people of Newfoundland and Labrador than Hebron, the White Rose extension and Hibernia South combined.

And it exists today, unlike the Lower Churchill dams or mythical aluminum smelters drawing power from them.

The billions coming from Hibernia will continue for more than another decade to pay for road improvements, education services, health services and any other government services that are of primary concerns to ordinary Newfoundlanders and Labradorians. 

The money from Hibernia has helped wean Newfoundland and Labrador from its financial dependence on hand-outs from Ottawa. The dignity and self-respect that comes from that accomplishment alone was worth the gamble. The only people who seem to lament that fundamental change in the province and its people are those who never did  - deep in their hearts - look forward to the day when the hand-outs stopped. How laughable that some of those people get credit for a change they fought against.

The creation of a new industry and the transformation of a people.

That’s not too bad for a project whose benefits an expert told us were overestimated.



David123 said...

Hibernia has worked out superbly well. No question.

The reason is that the price of oil went up...a lot. In 1990, the price of oil was around US$23 a barrel. It wasn't until 2004 that the price averaged more than US$30 and it's been a very pleasant ride ever since.

Not many people with an interest in maintaining their professional credibilty would entertain ideas of more than $50 a barrel, let alone say it in public. So before we throw Locke under the bus, and instead of praising our politicians for a mythical business savvy they simply did not have, let's just realize how lucky we got. Technological considerations aside, Hibernia couldn't have been developed at a better time in the age of oil, as it turns out.

Now if oil was still at the $25 or $30a barrel that the world had been lulled into accepting for far too long, Hibernia would still be a viable project for its owners.

But for Newfoundland, our premier wouldn't be walking around like the guy who won the lottery and now thinks he's an investing genuius. He (or more likely someone else) would be losing some sleep over the state of the fishery.

Ed Hollett said...

Hibernia was a gigantic risk. It had very high capital costs and with oil actually being less than the figure you gave the chances of making any real cash looked slim.

In point of fact oil hit US$8 per barrel in 1992 when Gulf bailed.

Both governments and the oil companies looked on it as a case of them being heralded as prophets or fools with no clear sense of which it might be.

Two things changed the longer term prospects. First the changes to the royalty regime improved the government's position immensely. Second, the rising price of oil made the thing more likely to pay off. What happened over the past five years has been just bonus on top of gold.

We need to get to the point in this province where the tendency to hype or to harry is gone. We have seen people like the current administration criticise, belittle and condemn all that went before based on nothing other than their own immediate political interest. We have seen things which are far less significant hyped to a degree where it has become laughable.

In the process most people simply no longer have any sense of reality. And that reality is that there were some good people making tough decisions before and the crew right now aren't geniuses and aren't led by a genius. They are as mortal as any others.

That doesn't diminsh anything currently unduly and it certainly should give people a healthier respect for what has been accomplished by others in the past, regardless of political stripe.

In Locke's case, those quotes show the severe limitations of his analysis then and now. They show the extent to which a unidimensional analysis (the net financial state) misses so much which is of wider value.

Now frankly that limitation isn't confined to Wade alone: other economists and other analysts from other disciplines suffer or potentially suffer the same limitations.

But fundamentally whether it the hint of some mystical project in labrador or a supposed $11 billion "loss", we should learn to take some prognostications with all the salt Campbell's has cut from their soup.

David123 said...

Oil companies do their full-cycle economics based on their best estimates of future reality. Unlike governments or their economists, they can suffer real and painful consequences for being optimists or gamblers. Because of this, their decisions are made systematically, and in the context of a portfolio of competing global opportunities to which Newfoundland is entirely oblivious.

Governments can get away with being optimistic cheerleaders ...besides simply being unaccountable liars at the best of times, the one-sided gig of being a royalty holder as opposed to an equity investor permits such behavior. (Backing in on an equity stake after virtually all the technical risk is removed from a project is also a pretty nice plum reserved for governments).

Hibernia makes all its proponents look like geniuses...in fact, the more irresponsibly optimistic the prediction at the time, the smarter they now appear. Who knew that the Mayor of Marystown, or a St. John's realtor, could know more about the value of the Hibernia project than Mobil or Chevron did?! It boggles the mind.

Responsible decision-making should never be characterized as a limitation. We'd be a lot better off if at least some government decisions were made with a similar, professional approach.

Ed Hollett said...

There are a number of things about the way oil companies operate that would serve as a good guide for decisions about oil-related projects.

One of them is to pay attention to costs and to employ a project management system which is relentless in its drive to produce top quality on time and under budget.

In the current administration, they have found costs on projects escalating. Their response has been to do anything else but fix the fairly obvious manageent problems they have. As it turns out I working on a post which discusses just that sort of idea.

David123 said...

On this topic of government decision-making and disturbingly common unrequited optimism, one has to look no further than the Vancouver Olympics.

The lies and empty platitudes served to B.C. citizens was a heist of mythical proportion. No analyisis rooted in any sort of financial reality could possibly justify that 16-day money orgy. But of course, financial realism has no place in Olympic bidding. The justification is wrapped up in the fake buzz word "legacy", which is Latin for 'how much BS will these peasants actually swallow?'

THAT'S what unbridled optimism and lack of limitations does to decision-making.

Let's hope Danny doesn't come back from Vancouver with a glint in his eyes and a grin on his face.

Ed Hollett said...


Gee, that word appears in the Hibernia South documents somewhere.