25 January 2009

10 years to turn around: Newfoundland and Labrador oil royalties

Oil started flowing from the Newfoundland and Labrador offshore a little over a decade ago but in that short time, provincial oil royalties have propelled the provincial government unprecedented financial wealth.

The royalties are set by the provincial government under the 1985 Atlantic Accord.

royalties The table at left comes directly from the auditor general’s annual report for the fiscal year 2007 (ending 31 March 2008). 

Note that the auditor general consistently misreports the fiscal year and this can lead to considerable confusion.

The year called 2003 in the table is actually 2002;  the auditor general labels the year by the calendar year in which it ends, not begins.  Thus, the auditor general writes FY 2002 as “2003” since the end of the year is March 31 2003 

The noticeable jump in royalties from Hibernia show the impact of skyrocketing crude oil prices coupled with the escalating percentage royalty applied to the project before payout. 

Hibernia still hasn’t paid out, that is, the initial costs haven’t been recovered, but between 2004 and 2005 – actually 2003 and 2004 - royalties doubled.

That same approach applied to each of the other two projects currently in production.  In those projects, the high price of crude oil allowed the operators to recover development costs in two to three years.

The trebling of royalties in 2006 (actually 2005) from Terra Nova and the astounding jump at White Rose in 2008 (actually 2007) are entirely due to the combined impact of the royalty regimes negotiated before calendar year 2003 and historically high crude oil prices.

oil royalties In order to correct this confusing date labels and to give you another visual of the royalties, the chart at right shows the royalties by project for each fiscal year (correctly labelled).

The projected cumulative royalties for the current fiscal year will be over $2.2 billion, up from the more than $1.7 billion collected in 2007.

However, lower oil prices and lower production puts likely oil royalties for 2009 at a level only slightly higher than what Terra Nova itself contributed in 2007.

That should give a sense of the fiscal problem facing the provincial government.  As noted here before, though, that’s a problem entirely of its own making.  The provincial government has consistently boosted spending to meet the astronomically high revenues.