10 October 2013

Government Abandons Energy Plan … quietly #nlpoli

These days, you have to hunt around the government website to find the provincial energy plan.  That’s despite the claim on the website – once you’ve found it – that the 2007 document “guides and defines Newfoundland and Labrador’s vision for energy resource development”.

The first pillar of that policy is something called “equity ownership.”  It’s right there on page 18:

Taking equity ownership in projects to ensure first-hand knowledge of how resources are managed, to share in that management, to foster closer government/industry alignment of interests and to provide an additional source of revenue.

Pretty clear?

No fear.  If the term isn’t clear, you can find a definition on page 19:

Equity ownership means taking an interest stake in development projects, through our Energy Corporation, as a partner with the private-sector developers.

The Cornerstone of Empire:  owning what we already own

Carry on reading.  The provincial government will take a 10% share of every development.  There is a caveat – “where it fits our long term, strategic interests” – but there’s no place where the plan explains what the proviso might mean.   Since the notion of taking a piece of the development is a fundamental part of the government’s strategic plan,  you’d have a hard time  imagining a situation where doing what’s in the strategic plan might not be the strategic thing to do, speaking strategically.

Bit of a contradiction.  

In fact, it’s such a blatant contradiction that we could safely disregard the caveat entirely.  We will take a piece of every development.  Number One strategic objective.  After all, this 10% stake apparently let’s us – they don’t really explain who the “us” is either – do all sorts of marvellous things including make even more money than just collecting royalties.

The Cornerstone No More

That was 2007. 

Flip ahead to 2013.

Over the past couple of weeks, some people in the province are all agog at the news Statoil has found more than a half a billion barrels of recoverable light, sweet crude oil in the Flemish Pass basin.  Multiply that by about $100 a barrel to figure out what that could be worth.  A big chunk of that will come to the provincial government as royalties. In addition to royalties,  there will be extra money coming to the province from that 10% equity stake mandated by the energy plan.

Well … maybe not.

According to Nalcor vice president Jim Keating, Nalcor might not take an equity stake after all. Keating told CBC that once Statoil and Husky put together what they believe “to be a commercial-grade project,  we’ll make a determination at that time …to acquire that 10 per cent.”

Nalcor won’t make that decision based on the energy plan.  Instead, the company  – and the provincial government (to use Keating’s way of putting it) – will decide whether or not to buy the equity position once they get some kind of plan from Husky and Statoil.  To make the decision, they won’t rely on official government policy.  Instead, they will be using a “business determination, based on cost, revenues, and risks.”

What is different is actually still the same

On the face of it,  people should be taken aback that provincial government energy policy has changed and no one bothered to tell the people of the province.  We are not talking some sort of vague wording here.  Keating is quite clear that Nalcor will not take the equity stake unless it makes “business” sense, no matter what the 2007 policy stated.

Now that someone has pointed out the implications that flow out of Keating’s statement, don’t be surprised if people at Nalcor insist that nothing has changed.  They’ll just blow it off as nonsense, just like everyone in the administration arrogantly insists as the starting point of any comment that only they speak truth.  Everyone else is just wrong, all the time.

If pressed, they’ll likely add the 2007 plan actually says that Nalcor may not take the equity position. Ask them for the section of the plan that shows government crossed it’s fingers on the promise and whatever spokesperson gets the job will tell you that the new, different policy is implicit.  Even if the words aren’t on the page, they are really there.  You just can’t see them with your non-government eyes.

And lots of people will believe that, just like they believed Nalcor’s assurances that Hydro-Quebec couldn’t do anything with this water management thingy to frig up Muskrat Falls.

More Nigeria than Norway

Now let’s look at another implication from Keating’s statement.  This time it is in the way he lumps the provincial government and Nalcor together as one single, creature. 

Note that Keating doesn’t say that Nalcor will make an assessment and recommend a  decision to the board of directors of Nalcor.  That’s what you’d expect in a state-owned enterprise following the Norwegian model of governance.  In Norway, the government sets goals for its companies and then lets the companies figure out how to meet the goals. The government is one thing, setting royalties and taxes and the like. 

The government-owned companies are something else.  In Norway,  state-owned companies follow the same laws as any other company in the country. They pay the same taxes and they pay the same royalties.  They follow the same rules.

Not in Newfoundland and Labrador.  Since 2003, the provincial megaproject building company has been following something more like the Nigerian model:  there’s no difference between the government and the state-owned corporation

The New Petro-State

These days, it seems as though the provincial energy department, the one that should be running negotiations and setting policy has been pushed aside so that Nalcor can run everything.  The provincial department seems to have been slowly stripped of any real ability to assess, analyse, and advise cabinet about what good government policy should be for energy. 

As a reflection of that, note that for the longest time, the department had a weak minister  - Kathy Dunderdale – while the Premier’s Office actually ran things, with Nalcor giving the Premier his advice.  In between, the department got a couple of stronger ministers – Shawn Skinner and Jerome Kennedy – then they got a less energetic minister, Tom Marshall. 

Now they have Derrick Dalley.  Imagine him going toe to toe with Ed Martin over Muskrat Falls.  As it seems, Nalcor slipped into the vacuum over the past decade and now it is hard to tell where government ends and the corporation begins, at least when it comes to energy policy.  It’s also hard to know whether government directs Nalcor or if Ed Martin and his crowd control the cabinet. 

Newfoundland and Labrador has evolved into a totally new form of petro-state.

You can find examples of it everywhere.  Take the Abitibi asset seizure, for example.  Nalcor wanted the power plants and couldn’t buy them legitimately.  So the government seized them.  Now Nalcor has the lucrative assets paid for entirely by taxpayers. It just sells electricity and splits the revenue with the provincial government 50:50.  There’s even a provincial regulation – revised just this past September - that allows cabinet to control who gets the money.

Then there’s Muskrat Falls.

Nalcor is building Muskrat Falls based on the premise that the only sales of electricity will be to taxpayers in Newfoundland and Labrador.  They’ll cover 100% of the costs of the entire project through their electricity rates while using something like 40% of the output. The rates will cover any loans to creditors outside the province, plus interest, for the creditors, of course.  All that is in addition to the billions in oil revenues the provincial government will give to Nalcor gratis.

Nova Scotia-based Emera will get a block of electricity without having to pay any annual cost for it. It’s basically free of charge.  In addition, Emera will get a piece of every kilowatt transmitted between the mainland and the island, plus interest, even the stuff that isn’t going on to Nova Scotia.

To protect Nalcor even further, the provincial government pushed a law through the House of Assembly last December that allows cabinet to set electricity rates in the province without any public discussion, public hearings, or any of the openness that people expect as a right in other parts of North America.  To set electricity prices, cabinet will meet in secret,  hear a request from Nalcor alone, and then decide.

Just to make absolutely sure Nalcor is protected and consumers aren’t that same law also outlawed competition in the electricity market in Newfoundland and Labrador.  On the mainland, Nova Scotians can look forward to a new government that has promised to introduce the sort of competition for electricity that has lowered consumer costs dramatically in other parts of North America.  In Newfoundland and Labrador, consumers have no protection whatsoever from increasing electricity costs.

To give a sense of how much money we are talking about, just recall that one private sector analyst estimated that Muskrat Falls won’t turn a profit – all construction costs paid - until sometime after 2041. Until then, any money coming from electricity sales - that are only coming from taxpayers - will cover the money spent building it plus annual operating costs plus interest to lenders who are, for the most part, likely to be outside the province.

Unlimited Public Risk.  Unlimited Public Cost.

Taxpayers get the full risk and the cost for all of Muskrat Falls just like they do for the equity stakes Nalcor controls.

That’s what makes it almost laughable when Keating told CBC that this arrangement “protects Nalcor – and the people of the province – from our exploration risk. We don’t take any risk in dry holes.”

They may not sink any money into exploration, but are certainly taking the full risk in the event of an oil spill of any kind.  And of, course, they are also footing the bill for the equity stakes that Nalcor alone controls.

The cost of buying those stakes is significant, especially in these days of government financial problems.  As CBC reported, Nalcor has already spent “nearly $530 million” on the three equity stakes it already has.  “Nalcor expects to spend an additional $830 million to bring all projects on stream by 2017.”

That’s right.  At the same time that the public is shelling out upwards of $6.0 billion or more to build Muskrat Falls for Nalcor, it is also paying $1.5 billion in costs to cover the costs of building  Hebron, Hibernia South, and the White Rose extension.

Right now the money for Hebron is coming from Nalcor’s operations and the money from the existing oil shares.  There’s no indication the provincial government expects Nalcor to repay any of the public cash the corporation is using, let alone pay interest.

And what’s more there’s no indication when the provincial government could theoretically get any revenue from any of Nalcor’s operations to fund government spending.  The provincial government line is that any talk of dividends paid by Nalcor to its shareholder the provincial government is a matter for some future government and will be based – obviously - on the situation in the future.  In the meantime, the cash is flowing only one way:  from taxpayers to Nalcor.

The Flemish Pass Problem

All those other issues to one side, Keating’s comments don’t sound like Nalcor is too keen on the Flemish Pass equity stake.  They might have good reason.  For one thing, the find is in very deep water.  The resulting cost of developing the project could rival any of the megaprojects on the much shallower Jeanne d’Arc basin.  Given the dubious financials of Muskrat Falls and the current state of the provincial government’s finances, Nalcor might very well have big problems raising the cash to buy the equity stake.

Then there’s the issue of the royalty regime.  The provincial government has one for the shallower Jeanne d’Arc basin.  It’s been the basis of development offshore so far and it has produced the lion’s share of the $15 billion and more the Conservatives have burned through since 2006. 

The 2007 energy plan said the government would  develop a new one but so far the provincial government, Nalcor, or the pair simply haven’t gotten around to developing in the past six years. Right now, no one outside of government  - and likely no one inside either – has any idea of what the future oil royalty regime will look like.

Then there’s the specific negotiations that would have to happen for the Flemish Pass project.  If past practice holds, Nalcor will lead the talks. If the company decides to take an equity stake, they’ll be sitting on both sides of the table at the same time. Gigantic conflict of interest.

Will the companies look for concessions on local benefits, as the Hebron partners and won from Nalcor boss Ed Martin who was negotiating on behalf of the provincial government despite the obvious conflict of interest he was in? Good question.

Maybe Nalcor won’t take equity on this project.  There’ll still be a problem since Nalcor is in business with the oil companies on other projects.  The conflict of interest won’t go away because that’s the way the provincial government set everything up.

Will the oil companies be looking for a huge royalty break?  Another good question.  The project in the Flemish Pass will be expensive.  On Hebron, the provincial government agreed to a huge royalty break at the front end.  Maybe they’ll do it again.

And then there’s the Article 82 problem. That’s the best question of all.

For those who don;t know what that is,  Article 82 of the Law of the Sea Convention requires coastal states to pay a percentage of offshore oil and gas revenues into a fund that will distributed among the parties to the Law of the Sea, primarily to the land-locked and disadvantaged.

Clause 2 of the Article states:

The payments and contributions shall be made annually with respect to all production at a site after the first five years of production at that site. For the sixth year, the rate of payment or contribution shall be one per cent of the value or volume of production at the site. The rate shall increase by one per cent for each subsequent year until the twelfth year and shall remain at seven per cent thereafter. Production does not include resources used in connection with exploitation.

The Flemish Pass finds comprise the better part of a billion barrels of oil, if you add them together and allow for some additional finds.  On the face of it, the companies and the provincial government will be paying about seven percent of the value of production into that fund.  That decreases their collective take considerably.  We can expect the companies to drive a hard bargain over that money, especially if the development costs are as high anyone might expect from a project that far offshore and under that much water.  The companies may well expect the provincial government to cover that percentage for the United Nations. That’s going to complicate things, especially with no set royalty regime to cover the area.

Lots of questions.

Not a lot of answers right now.

That’s about the only thing that is clear.

Well, that and the fact that the energy plan seems to be out the window.