29 January 2005

He said yes to less (revised)

While Premier Danny Williams' supporters will be lauding the agreement on offshore revenues as a triumph, a closer examination reveals something very different.

The following comments are based on the position which Premier Williams stated in 10 June 2004 and which he has maintained as the provincial position until 28 January 2005.

Objective 1: A new offset mechanism delivering to the Government of Newfoundland and Labrador a transfer from the Government of Canada equal to 100% of direct offshore oil and gas revenues, continuing over the life of offshore oil and gas production, irrespective of the provincial government's Equalization entitlement. [Williams to Martin, 10 June 2004]

Note: By current estimates offshore oil and gas production will continue until 2025-2030, or a maximum of 25 years from the current date. This does not include any future discoveries and assumes that the Hebron field will be brought on stream within the next five years.

Shortfall 1: The deal reached with Ottawa is for eight years, with a possible further extension of eight years, for a maximum of 16 years.

Shortfall 2: There is no provision to cover future fields, nor for the extension to the full life of existing offshore oil and gas production. In the conversation with the Prime Minister on 5 June 2004, the Premier had secured "ongoing additional monies available as this goes on into the future and as new fields come on." [Premier Williams, House of Assembly, 7 June 2004]

Objective 2: End the "clawback" of oil and gas revenues under Equalization, for a period of at least eight years (Williams January to 5 June, 2004) and, as the Premier has argued since 05 June 2004, for the life of oil production since "why should we get less than 100% of our revenues after we're equalized?"
[Interview with Carol MacNeil, CBC Sunday, 29 October 2004]

Shortfall 3: The current Equalization system continues to apply. If Newfoundland and Labrador no longer qualifies for Equalization within the initial eight year period it receives no added offsets beyond the cash advance, and particularly, if the province is not receiving Equalization between 2010 and 2012, it does not qualify for the second eight year offset period.

Shortfall 4: Under this agreement, once the provincial government no longer qualifies for Equalization, its oil and gas revenues are assessed under the Equalization program as they are currently using the generic solution. (30% shielded from Equalization)

Objective 3: Secure "principle beneficiary" status by amending the existing Atlantic Accord to contain new offset provisions.

Shortfall 5: There will be no amendment to the existing Atlantic Accord under the new arrangement. This is actually not a shortfall, since it secures the agreement against challenges to its current exemption from the North American Free Trade Agreement arising from a redefinition of the strategic objectives of the Accord.

General comments:

* The cash advance of $2.0 billion represents a mid-point between the October estimated value of the offsets based on then-current oil prices and more recent assessments. Fluctuations in the price of oil will affect the cash value of the agreement. It is important to note that the quantum (amount of money) is not as important as the underlying principles on which the money is received. As the above assessment indicates the Premier did not secure any changes to principles but did secure added money, albeit with limitations and restrictions.

* The Telegram story by Rob Antle (Saturday 29 January 2005) contains the comment that this agreement has "no ceiling" on the offsets. This is incorrect. The offsets are very clearly capped based on the provincial government's Equalization status. If oil prices remain at high levels over the next eight years, the provincial government will no longer qualify for Equalization. Thus the total offset amount will remain at $2.0 billion and will not increase.
The cash advance effectively forestalls a cut-off of offsets that would likely occur as the province moves to the point where it no longer qualifies for Equalization.

* The cash advance represents approximately $500 million more than the total provincial direct revenues from the White Rose project alone. That is, based on current oil prices and extrapolating from the 2001 Strategic Concepts assessment, the provincial government direct revenues for White Rose will be approximately $1.5 billion. The cash advance actually doubles the total revenues from that single project plus a small amount in addition.

It does not achieve the original objective of doubling revenues from all projects.