05 June 2007

Energy plan as political plan

Looking at the Globe and Mail story on the Newfoundland and Labrador energy plan, it gets easy to see just how out of touch the Globe is with what's going on outside some very narrow confines.

There isn't anything in the story that qualifies as news.

For example, the provincial government has been saying for some time what local politicos have been figuring, namely that the energy plan will be a key part of the Williams administration's nationalist platform for the fall general election.

The energy plan isn't about economic development any more. It's about politics.

That's the news in the piece, but the Globe seems to have missed it.

The energy plan will be framed as a battle between Newfoundland and Labrador and Big Oil. It will be about hanging tough and looking for what is "reasonable."

Dunderdale merely repeated to the Globe what Danny Williams has already said: Big Oil better come back to the table because once the energy plan is released, the oil companies will have to pay a lot more than they would have a couple of years ago.

It's talking smack and talking tough for domestic political consumption.

But as both Williams and Dunderdale both know already, the oil industry is taking the view expressed by Paul Barnes local manager for the petroleum producers association in the Globe piece. Equity is fine if the provincial government wants to farm in and shoulder the costs - a la Statoil and Norsk Hydro - but anything else is likely to discourage outside investment.

Predictable positions on both sides. It really doesn't matter which one is right. The energy plan is now pure politics. Pure talk.

Take, for example, the Globe referring to the tough document that will demand "at least" a 5% equity position in all future oil and gas projects in the province. By some comparisons, five percent is actually pretty small, and that's likely why the number is being tossed out there: it sounds innocuous.

But, the Globe needs to do its homework.

The real number is likely to be 10%. Word from the oil patch and other places has it that the draft natural gas royalty regime has already been handed back to the provincial government with the polite advice that the government's plans would scare away investment. That's because the 10% equity position would come on top of the considerable share of cash flows the provincial government already receives.

The chart at right shows relative shares of cash flows for the local offshore, as presented by MUN economist Wade Locke in a public presentation last fall.

All things considered, it gets fairly obvious that the Great Battle Against the Foreign Demons of 2007 isn't really the same battle of 25 years ago.

What we are talking about today are fairly fine shifts of cash that look tiny. However, those fine adjustments of cash may tip the very sensitive investment balance against exploration investment in the local oil patch for some period of time.

If the equity demand will be applied to every new development, as the Globe reports, then we may also see impacts on existing significant discoveries. Hebron is already off the table until sometime in the next decade. Hibernia South: ditto.

Small developments like Norsk Hydro's West Bonne Bay would also be affected, especially if the results of Norsk Hydro's exploration program on the field shows oil reserves are much larger than current estimates.

Even White Rose would fall under that sort of requirement. Husky Energy has been working hard to cultivate a strong, positive relationship with the Premier. However, if White Rose turns out to be larger than currently estimated, that is, if there is an opportunity for the province to get more, then that relationship could change dramatically.

Delaying those developments aren't really important as the energy plan morphs into a political document. The government's real issues are bigger and look ahead over longer time spans.

The new energy corporation is likely to become the focus of export energy developments, some of which are tied to oil and gas. It wouldn't be surprising, given the corporation's mandate, to see it take control of the Lower Churchill project which may be generating power before the middle of the next decade. Part of that project will likely be the construction of the transmission infrastructure - sub-sea cabling - that would carry electricity to markets in the United States.

The new energy corp might well be the license holder at the end of the bid for Labrador parcels next year. With some exploration work - potentially carried on by the energy corporation on its own - the natural gas available from the Gudrid, North Bjarni and Bjarni fields could double in size. That gas, as much as eight trillion cubic feet (8 tcf) including the three existing significant discoveries, could be brought ashore and used to generate electricity in a new facility on the coast of Labrador. The power would be sold down the Lower Churchill lines to markets in the United States.

None of that would really be affected by the equity issue.

That bit on the energy corporation is speculative, of course, but it certainly fits with public statements by provincial officials. It also fits the Premier's concern about shipping natural gas directly to market without some form of added local value.

All of these plays or possible plays are well in the future, of course. In the short- to medium- term, the provincial government knows that it will have significant cash flows from existing oil production. There's no risk in the rhetoric. There may not be an economic gain either, even in the longer run, but the energy plan is increasing something other than economic development.

There really isn't any risk for the provincial government in using part of the energy plan for political purposes. Whatever consequences come will come so far in the future as to be irrelevant to any of the politicians currently making decisions or likely to make decisions on these issues over the next decade.

But to give credit where credit is due, the provincial government's posturing on oil and gas - with all the distortions and misrepresentations about revenues to date and who makes what - is a masterful example of framing a discussion in a way that can't be counteracted simply by anyone, political or industrial.

It will produce the political effect desired in October.

As a political plan, the energy document is already working its magic.

As an economic plan?

Well, that remains to be seen.