14 July 2012

Hebron Dispute: No more give-aways, indeed #nlpoli

When it comes to the Hebron project, Premier Kathy Dunderdale should know exactly what went wrong with the development deal between the province and the companies.

She should know every give-away in it.  After all, she was natural resources minister at the time.

Dunderdale made an oblique reference to the give-away in her scrum on Friday.  Here’s how CBC reported her words:

"All of that project gets paid off before we start to earn more royalties," she added. "So people of the province end up paying one way, or the other, either through the treasury or through Nalcor."

The reason we have to do that is because Kathy Dunderdale and her boss at the time decided it was in the province interest to protect the oil companies from a drop in oil prices.  Here she is in 2007 explaining why she agreed to let the companies pay a flat one percent royalty until they paid off their development costs:

“The rationale behind these changes was the companies needed some downside protection if the price of oil went very, very low.”

The province would make it up, Dunderdale assured us at the time, through these extra royalties at the back end.  Neither she nor her boss at the time bothered to explain how that might work if, as might well happen, oil prices fell after the companies recovered their development costs.

Dunderdale’s give-away in 2007 will cost taxpayers.  Under the generic oil royalty regime, royalties increased from one percent initially to a maximum of 7.5% before the companies recovered their initial costs. 

SRBP did a rough analysis of the possible implications in August 2007.  This is nothing more complicated than showing the effect of a flat rate versus an escalating rate over time:

generic royalty slide

At the very least, Kathy Dunderdale has now come back to understanding that she cannot recover what she gave away in 2007.  Her ruminations amounted to nothing.  After all, by her own account, any increase in project costs now will cost the province in delayed royalties and that is, to be sure, a direct result of her ruminations in 2007.

Now she is also letting go of the third module  - for a second time – partly because of the implications of the royalty give-aways. 

At the same time, the current “dispute” over where the companies will build the third module was also settled in 2007-2008.  The government’s negotiating team, led by Nalcor boss Ed Martin, secured only a few small scraps of local manufacturing work. 

The rest was left to the discretion of the companies, and, as Dunderdale let slip, Nalcor is siding with the companies’ discretion in this dispute.