22 March 2005

Oil money mysteries solved

In earlier posts on the new provincial budget I raised some issues that struck me as odd. I undertook to provide further information once I had obtained it.

Here it is, courtesy of two phone calls to people who understand these things far better than I do. I am in their debt; they know who they are.

Never let it be said I didn't correct information I provided or give the full and accurate answer to questions I raised.

1. The missing money isn't actually missing. As noted before, the provincial government changed the way it reports Equalization offsets in the new budget. It appeared that entitlements under the Real Atlantic Accord for this fiscal year were missing. They aren't, apparently, at least as it was explained to me this evening.

Under Section 39 of the Atlantic Accord, the provincial government is entitled to Equalization offset payments if the province experiences a decline in its Equalization entitlements resulting from oil revenue growth.

Since the federal government increased Equalization payments this year, there is no entitlement to offsets under the Real Accord. Therefore, the line in the budget is blank.

The only extra oil cash this year is the money negotiated under the January deal and set at $188 million under the deal. That combined with the $70 million increase in Equalization adds up to $250 million so we will likely come pretty close to doubling our oil revenues, as we should under the new deal.

On the face of it, I'd still wonder if there shouldn't have been some number inserted here since we do get a benefit or should get a benefit from the generic solution when the Equalization entitlements are calculated. Basically, though, that is a minor quibble.

A simple footnote in the budget could have explained this pretty neatly. Had the provincial government left the reporting of this money alone from last year's budget, I wouldn't have noticed it at all.

2. Lowballing oil prices actually makes sense. Loyola Sullivan is good with the numbers but not the explanations. Those are best left to finance officials who apparently laid out a simple explanation of this in the budget lock-in. I have heard a couple of interviews with Loyola and I sure didn't get this simple explanation out of what he said. If someone wants to send me the transcript of an interview where he did say it, I'll post it and eat crow. Deal?

The province bases its oil revenue estimates on Brent crude, but lowers the price per barrel by about $5 to allow for potential production slowdowns or other problems related to offshore production that might lower output. They work off a combination of estimates and basically took a price per barrel of around US$42, dropped it by five bucks or so and worked out a number. That sounds like a prudent practice.

In all likelihood, we'll make as much as $100 million more than the budget estimate if oil prices hold above US$45 per barrel this year. The higher the price of oil, the higher the Terra Nova-related revenues go because of the royalty regime. The same thing will apply if White Rose pays off its costs quickly, like Terra Nova did and oil prices continue at these high levels well into the future.

My suggestion: video tape the budget lock-in news conference with government officials and either broadcast the thing over the internet or on the government cable channel or post the transcript on the government web site after the budget speech is out.

Doing that would actually push a lot more hard information into the public domain and prevent people from asking well-intentioned but poorly informed questions. It also stops the Opposition or anyone else from getting excited over nothing.

All I will offer in my own defence is the old saying about a cynic being an idealist with experience. Having sat through one too many bulls*** budgets, I cast a cynical eye on provincial government claims regardless of which party is in power.

Just for the record, I didn't earn a lot of friends among Liberals in the late 1990s when I pointed out that Tobin was claiming financial miracles when he was actually running deficits masked behind a raft of one-time borrowing.