30 July 2014

Mullet Policy #nlpoli

Government is like a lot of things in life:  it’s about finding solutions to problems.


If that upsets your cynical sensibilities,  think about it as about finding answers to questions.



Now matter what way you want to look at it,  that’s basically what government is supposed to do.  There’s a problem.  Government comes up with the answer.  Ideally, they ponder the problem.  They look at it from a whole bunch of angles.  They figure out if it really is a problem first and then come up with a way to deal with it.  They might even come up with a bunch of ways of dealing with it

Back in the 1970s,  even before they found oil at Hibernia,  there were a bunch of people working in the provincial government trying to figure out all the different problems, questions, and issues about oil that thought they’d have to deal with.

Like the pace of development.  Left to their own devices, the oil companies could swoop in, pump out all the oil, and then leave a mess behind.  That could cause a whole raft of problems, from leaving a whole bunch of oil trapped in the ground to having a short period where there was cash everywhere, followed by a quick return to a whole lot of nothing.

So these smart people in government and outside government figured they needed a way to control the pace of development.

They also needed to think about how to collect the money from the government’s share of development.  They could set rent and taxes.   They could take the oil and sell it.  or they could do some combination of the two.

One of the ideas they settled on as an answer to a whole bunch of questions was a government-owned oil company.  They even passed a piece of legislation in 1980 to let the government create a petroleum corporation.  Governments use state-owned oil companies as the answer to a whole bunch of questions.  In some countries, like say one  where government administration is under-developed,  it’s actually easier for the oil company to serve as the way the government gets its cash.  If the government makes the state-owned company the majority owner of every oil development by law, then the government company can control the pace of development.

There’s no one pattern that’s common to all, incidentally.  In some places,  the state oil company is basically fused with the government in such a way that it is very hard to know where one ends and the other begins.

In other places,  like Norway,  the government is one thing and the oil company is something else.  The company isn’t even totally owned by government.  The government just has a majority share.  The company is incorporated under the same laws that apply to every other company and it basically pays taxes,  royalties and all the other things normal companies do.

Back in Newfoundland and Labrador,  the government had a whole different set of answers to its oil questions by the mid-1980s.  The Atlantic Accord addressed all the major policy goals the province government had set out in 1975.  They didn’t really need an oil company and so the thing passed into history as a relic.

That’s one of the reasons why it was so odd in 2003 when all three political parties talked about turning the existing provincial electricity corporation into a company that also did oil and gas development onshore and offshore.  In their 2003 policy manual,  the provincial Conservatives said that they would either restructure Hydro or create an entirely separate company “with a mandate to retain equity” in the offshore  “on a go-forward basis.”  The company’s mandate would be “to absorb all the expertise it can from the major oil companies, so that the Province will have the capacity and expertise to participate in and benefit from decisions regarding exploration, production, and processing of oil and gas in the Province.”  [capitalisation in the original]

That sounds pretty sensible except for one rather curious thing:  the provincial government already had by that time, about 20-odd years of just that.  And with the creation of the offshore regulatory board in the 1980s,  the provincial government had at its finger-tips the expertise needed to regulate the offshore industry in every respect.  The government had negotiated three large, successful offshore projects and between the provincial government and the offshore board,  they had all sorts of technical knowledge to assess how much oil was in a field,  how best to get it out, and generally appreciate what the oil companies proposed to do.

If that wasn’t enough, the Conservatives said that this new oil company would hold “sufficient ownership in production licences to influence development decisions.”  Under the Atlantic Accord, the provincial government could halt development.  They could refuse to allow an increase in production requested by the companies.  In short, they couldn’t just influence decisions, they could control development in just about every respect imaginable.

The Conservatives did act on their plans for the new oil company.  They acted twice, in fact.  The first time was in 2006.  They opened the House and announced Bill 1,  to amend the Hydro corporation law.  Then the talks with the oil companies fell apart of Hebron.  The Conservatives introduced a simple amendment anyway to let Hydro get into oil and gas.

Ed Byrne,  the energy minister at the time,  introduced the bill at second reading.  he spoke at some length about Hydro and electricity.  As far as the new oil business, Byrne didn’t say a great deal.  What he talked about was the great potential:

we see significant opportunity, through our Crown corporation, to have an opportunity, and an excellent opportunity, not only to get into that business but to get into it in a significant way to grow our industry and for Newfoundlanders and Labradorians to be owners of their own house in this Province.

The Conservatives took a second crack at the energy corporation legislation the very next year. It was a much more extensive law and in some sort of perverse inversion,  Byrne’s successor  - Kathy Dunderdale - said very little about the bill at all.

Whenever one of the Conservatives did speak about the energy corporation, they talked about something like owning part of our own resource,  or getting insight into the oil business or something else along the same lines.  The thing is, though, that every one of those questions already had a perfectly serviceable answer from the 1980s. 

That’s the basic question we should ask about any kind of government initiative:  what problem does it solve?  In this case,  the answer that you kept getting is essentially one that was already answered.  None of the energy corporation supporters ever explained how their idea worked better than the one we had:  they simply ignored the existing solution in the first place.   It’s almost as though the world the Conservatives lived in had stopped in 1979, only to start up again in 2003. 

And when it came to the ownership issue, that one too had been settled long ago. The people of the province owned the whole shooting match, one way or the other. The equity stakes simply had us buy what we already owned.  If the government needed more money, there were other ways to get it, most obviously by changing the oil royalty scheme.

What the equity stakes did wasn’t an improvement.  Rather, they created a raft of problems for which there was no easy answer.  For one thing,  the equity stakes added a huge element of risk onto taxpayers’ shoulders they never had to bear and they didn’t offer any great new benefit to offset the risk..  They created a fundamental conflict of interest that has repeatedly put Nalcor’s corporate interests ahead of existing public policy and the public interest. 

As Nalcor has grown in power and influence,  the provincial energy department has shrunk into the background.  Nalcor has negotiated development deals on behalf of the province. Meanwhile, the natural resources department remains woefully behind in its audits of offshore royalties.  It has trouble finding staff.  Nalcor is now so influential, by contrast,m that it can single-handedly change government policy that its own parents brought in.  Equity stakes are no longer mandatory.  Nalcor will only take them on if it wishes.

Maybe the Conservatives were hiding something in 2006 and 2007 when they legally created the energy corporation we now call Nalcor.  Maybe that’s why they didn’t explain anything about what they were up to.  That doesn’t mean they had a nefarious plan or even a plan at all.  What they may have been hiding is that they were making stuff up as they went along.

It would explain an awful lot, especially why the Conservative rhetoric was only missing were hula hoops, bell bottoms,  and a Fonzie thumbs-up to take us all back to the era of mullet-rock.