That's because for the first time in history, the provincial government failed to discuss important issues with oil companies before a project went to the board for decision.
Since the 1980s, every single provincial government - Progressive Conservative and Liberal alike - has negotiated with the oil companies on royalties and benefits. If there were questions or concerns they were raised at the outset and resolved.
Except, that is, in the recent case of Hibernia South.
And Newfoundlanders and Labradorians should wonder why.
In truth, there's no logical reason for it.
The provincial government was aware at least a year ago that the Hibernia partners were planning to develop the 300 million barrels in the southern extension of the massive Hibernia field. In her letter to the offshore board rejecting their decision, natural resources minister Kathy Dunderdale acknowledged that government knew a project was under consideration. She saw the expressions of interest calls for work related to the project. Officials in her department knew what everyone else in the oil industry locally knew.
Yet at no point until December 2006 - fully six months after public consultations closed on the development application - did Dunderdale go looking for information.
The result is that the Hibernia South project is shelved with no indication when it might come back for re-consideration. Provincial officials will meet with Hibernia representatives before the end of January. Maybe the provincial government can resolve its concerns.
Most likely it won't. Premier Danny Williams long ago declared his interest in seeing Hibernia South treated as a new project, separate from Hibernia. He wanted a new royalty and benefits deal, a new production platform and whatever else could be squeezed out of it.
Williams' negotiating track record is abysmal, at least when it comes to closing a deal. He's been all fight and no win, as one wag put it. Part of the problem is that he seems unwilling or unable to define his objectives. It's hard to know when you reach a goal if you don't know what the goal is. In interviews over the past two days both Williams and his natural resources minister haven't been able to give any indication of what their objectives are beyond vague platitudes.
Both Williams and Dunderdale did dangle the carrot of more work and jobs in front of the president of the offshore industry association and in front of the general public. Some fell for it, out of pollyannaish optimism as much as anything else.
But many fell for the simple palaver - experienced reporters included - because of what the y don't know and Premier is loathe to discuss: the potential cost of his gamble on a new production platform, even if the companies were willing to go along with his plans.
The cost would be - inevitably - reduced royalties for the provincial treasury. As with every project offshore, the companies would expect and would likely receive agreement that the province's royalties would be about 5% until the costs of development were recovered. In a project like Terra Nova, low costs and high oil prices allowed that project to pay off early. As a result, the provincial government receives 30% of the price of every barrel pumped.
On Hibernia, that same target is within sight. By 2011 - if current projections hold - the province will get those higher royalties. Those higher royalties will apply to at least half of the recoverable reserves, including Hibernia South, which the Premier rightly noted is now estimated to hold about 1.9 million barrels of proven, probable and possible reserves. Hibernia - with more oil than the other producing fields combined - could pump more cash into the province treasury after 2011 than anyone ever imagined.
Treat Hibernia South as some sort of new project - even by negotiating a new set of royalties and benefits in the context of the original development agreement - and that higher royalty target will likely slide back significantly. Someone will have to pay for the extras demanded solely by a politician's whims and that someone will be taxpayers.
Beyond that, though, the little game of chicken the Premier is playing sends a very bad message to the oil industry globally and to businesses generally. What they see is a place where the costs of doing business are completely undefined. In a world where there is far more oil to discover and develop than there is capital to develop it, competition is high. Uncertainty discourages investment. In Danny Williams' case, the potential costs can't even be guessed at. His demands are not only a constantly shifting target, the outermost edges of the target screen itself can't even be seen. Money doesn't get spent in places like that.
Now, on top of that, for companies looking to develop existing fields, there is the added likelihood that at the very end of the already long regulatory process, the provincial government will suddenly reset the clock to zero and start the whole thing over again.
The Premier's actions have costs that can be readily seen. In the short- and medium- term , the oil industry isn't investing locally, certainly not at the levels we'd expected. House prices are slumping and over the next year and more, the economy in St. John's will contract. Even locally-owned supply and service companies have scaled back their local investments since they have no idea when a new project might actually be approved. Optimism a year ago is replaced with caution and skepticism today.
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In the medium to long term, there are other costs. Provincial government forecasts show that without Hebron and more production at Hibernia, oil revenues will drop suddenly before climbing back up. But after that, there's a pretty rapid drop-off, as Wade Locke's estimate [left] shows.The longer Hebron sits in the ground, the long Hibernia South remains undeveloped, the more money the provincial treasury loses. Sometimes you don't need to make a deal to make a giveaway.
Interestingly enough, that's what Loyola Sullivan talked about just before his Christmas resignation. Sullivan told vocm.com that it is very important for the province to see orderly development of its offshore industry. He said there will be three years of good revenues but after that, the money drops off.
Sullivan's right.
Too bad his wise words were drowned out by his resignation the same day those comments were published. Too bad that Sullivan's colleagues didn't heed his good advice.
Instead, we had an unconscionable, let alone unfathomable failure by a government that can ill afford political mistakes in a province that - in a few short years - will be hard pressed to pay the bills for blunder and folly in 2006 and early 2007.
