10 July 2005

Ask a simple question...[Update II]

Ignore the simple answer.

You have to hand it Ryan Cleary.

He is relentless in his pursuit of something or other.

The real problem for readers of the Independent is that it is hard to know sometimes what he is after or why he can't seem to find what everyone else has already uncovered.

But he keeps digging.

And reporting that he and his staff can't find stuff.

And blaming other people for not telling them what they should have been able to find out on their own.

Like Ryan's column in this week's Independent in which he complains that the Spindy crew couldn't find out the answers to a few questions. There's a front page story by Clare-Marie Goose on the whole thing, but more of that later.

Well, here are the questions and the answers.

1. How much does the federal government make from the oil industry on the Grand Banks?

I don't have the most up-to-date figures right at hand but I can give you a decent idea of what the federal and provincial government are taking in; at least I can give you a sense of the proportions. In fact, this information has been posted to the Bond Papers before and, if memory serves, I e-mailed a chart to Ryan when he was making up his six part series on how Canada bleeds us white. Even though the tables I sent Ryan are factual, nothing even close to it ever appeared in print.

When Husky presented the White Rose development proposal they paid local economist Wade Locke to estimate the treasury impacts for both governments of the project over a 15 year life-span. The figures for provincial royalties are based on a price per barrel of US$20.

(A) Provincial:

Of direct revenues, only the province collects royalties from offshore production, just as in Alberta and exactly as the Atlantic Accord (1985) provides. As well, the province collects corporate and personal income taxes and the payroll tax.

Locke estimated that provincial direct revenues from White Rose would be $908 million over the life of the project. Annual royalties were estimated to be a little under $30 million.

(B) Federal:

Direct federal revenues consist only of corporate and personal income taxes. Locke estimated the feds would make $741 million in direct revenues.

But here's an important point to recall. Provincial royalties are tied directly to the price of a barrel of oil; federal corporate taxes are not. With oil trading at three times the figure in Locke's estimate, provincial royalties alone jump dramatically while federal revenues won't.

There are also some indirect revenues as well, resulting from spin-offs from the oil business and from the impact economic growth has on things like reduced social assistance costs or increased premiums for employment insurance. Ms. Gosse's story points that out - sort of - but only mentions the indirect federal revenues; the provincial government collects indirect cash as well, like say its portion of the HST on refined petroleum products.

Incidentally, Jim Wright from Memorial University is right when he suggests the offshore has larger impacts on the federal treasury than the provincial one. In Locke's analysis, it is easy to see that the most significant source of federal revenue comes from its corporate income taxes. After all, the feds can tax a corporate head office in Calgary or a sub-office or business in Ontario that someone can add in as being revenue from the offshore. That just reflects the fact that the feds can tax across the country, but provincial governments only tax within their provinces.

[By the way, using that same sort of approach, Ralph Klein actually makes cash from Hibernia through his provincial taxes. Is he next on the hit list for cash?]

The second biggest treasury impact for the feds comes from Canada Pension and Employment Insurance premiums that result solely from increases in employment levels. The Newfoundland and Labrador government doesn't have any program even vaguely like that so it would be hard for it to collect the same type of revenue.

For the sake of at least starting to answer the Spindy question, let's just stick with the direct figures since they are...well...direct. Armed with that information, the Spindies could certainly get a sense of how the revenues flow to Ottawa and St. John's, even if the exact figures weren't readily available.

2. How much does the federal government collect from Alberta's oil? What's Ottawa's take of a dollar of crude in Alberta versus here?

In both, Alberta and Newfoundland and Labrador, Ottawa does not make any money from a barrel of oil, that is if we look directly at royalties.

Under the real Atlantic Accord, offshore oil is treated exactly as if it were on land.

Pretty simple so far?

Therefore, the federal government doesn't collect a penny from royalties in either province.

If you are asking something else, go back to question 1.

3. How does Ottawa own "our" oil?

Part of the problem here may be that Ryan doesn't actually want to read anything that has been written on the two offshore decisions from the early 1980s. Ryan just likes to mention the Supreme Court of Canada decision in 1984 but something tells me he is ignoring the answers on this one because they interfere with his pre-conceived editorial slants.

Here's a link to the 1984 so-called Hibernia reference to the SCC from the Government of Canada. The Supreme Court of Newfoundland decision on the provincial government reference isn't online but a trip to the province's library system will get it easily. There are enough mentions of it in the link I just gave, though, that you can get a good sense of it.

Anyway, here it is in a nutshell.

Offshore oil actually doesn't belong to Canada (or any part of Canada) in the same way oil under land does.

Under international law, Canada has exclusive rights to exploit sub-seabed mineral resources.

The Supreme Court of Newfoundland determined and the Supreme Court of Canada upheld in two completely separate references that since the right to exploit the resources is a result of Canada's external sovereignty, under the Constitution, exclusive legislative rights to the offshore rests with the Government of Canada.

BUT, under the real Atlantic Accord, the Government of Canada agreed to share management rights and gave this province certain powers under the real Atlantic Accord that basically give the provincial government virtually all the benefits of offshore oil without actually having legal title to them.

Pretty neat idea, huh?

It's actually not hard to understand at all, unless you want to deliberately misrepresent stuff for some reason.

Any oil on land, though, is treated exactly the same here as anywhere else in the country. The rig that is busily pumping oil from a couple of wells on the Port au Port is pumping royalties directly to St. John's. Here's a little quirk though. Any of that oil out to three miles from shore belongs to this province and this province alone. That puts us in a position unlike any other coastal province.

Guess who decided that.

The Supreme Court of Canada upheld a decision from the Supreme Court of Newfoundland in the ruling Ryan likes to ignore. That too upsets his anti-Ottawa slant, so I guess there's an answer and a question both of which can get ignored down in a building that ironically housed a place called "The Light"..

I could probably tackle the other questions furrowing Ryan's editorial brow but I just thought I'd deal with the major ones.

As a final point, it is really strange that in Claire-Marie Gosse's story, the Spindy reports provincial revenues this year from oil as being only $215 million.

For one thing, anyone who paid attention to the March budget knows that the province based that projection of royalties on a relatively low price of oil. The whole issue was well-dissected in the media at the time (not in the Spindy though) and here at the Bond Papers.

It gets better. If I recall correctly, CBC news reported just last week that current estimates of provincial revenues will add about $400 to 500 million to that figure.

Back in the winter, Wade Locke used these figures when discussing provincial offshore revenues. Note that the figure for this year is somewhere around $600 million.

How in the heck did the Spindy miss that one?

Ms. Gosse also neglects to point out that the Terra Nova project will move to a higher royalty tier this year, largely as a result of oil prices coupled with the lower start-up costs from not building a gravity based structure. Either Clare-Marie didn't know that information - it was widely reported - or she knew better than to write something that would praise a project her boss hates.


Ryan's column started out just fine. He pointed to the different ways reporters get information, noting that at the Spindy they try asking questions.

Ok. I'll buy that.

After filling up lots of space with many words, he ends with a flourish:

"In the end, the Independent is left with a choice: scrap the story about how the offshore pie is divided or point out the shortage of facts and the trouble it takes to get them.

Either way it's a story."

As with so many Spindy pieces, neither Ms. Gosse's writing on the offshore nor Ryan's column are stories.

Unless, that is, one was reporting on the bizarre inability of a newspaper that prides itself on investigative journalism, yet which can't seem to find it's backside in broad daylight with both hands.

[UPDATE: A regular reader pointed out in an early morning e-mail that I forgot to include the federal shares in Hibernia.

Yep, I did. No excuses.

That would have to be added in to a calculation, but oddly that was missing from the Indy piece as well, so I don't feel quite so bad.

The offshore is an issue which is greatly misunderstood and most of the public commentary over the past two to three years has been founded on more myth than fact. As my morning correspondent noted, each project has to be examined differently for a number of reasons. Again, he is spot-on.

The Bond Papers grew out of my own frustration with the high level of noise and very small signal found in the offshore discussions.

All that does, though is point to the need for an investigative newspaper like say...ooooh...the Indy... to invest some time and energy in an investigation, followed by the reporting. Report the facts - not the preconceived ideas. Actually explain stuff to people.

That would be awesome news.]

[UPDATE II: Another faithful reader of these e-scribbles fired off an e-mail to point out that if the fed's share of Hibernia is included in a calculation, then consideration has to be given to its cost of acquiring those shares.

Again, another valid point.

Two things occurred to me after writing the original post and the first update.

First, if one were to include the federal government Hibernia shares, then one might actually want to look at what share of a typical offshore barrel of oil is claimed by the oil companies themselves. This might actually be a more interesting study. One must take into consideration the economics of the thing, such as the relatively high costs and of course one must admit that the party taking the financial risks is naturally entitled to a handsome share of the revenues.

In that respect, the federal Hibernia shares are not substantively different from the Exxon ones. As I believe I noted in the early days of this blog, it is passing strange that the Premier has not to date complained about the oil companies revenue shares. Yes, I know he is trying something on with Chevron but until now, it is an issue he hasn't bothered with. More importantly though, I don't recall hearing the Spindites, the Open Liners or any of the pseudo-nationalists attacking the oil companies with any vigor.

Second, if one is to divy up relative revenue shares of all types, then one will actually be dealing with a notional barrel of oil that is worth a lot more than US$60.

No matter how you slice it, the information is out there. One merely has to look for it and accept what one finds.

And that really was the point of the original post.]