22 June 2015

No equity? No surprise. #nlpoli

It didn’t take long for Paul Davis to get the comparison he was looking for last week.

The Telegram - not surprisingly – offered it up in the editorial on June 17:

“Premier Paul Davis pulled a Danny Williams Tuesday,”  the editorialist wrote.

Davis told the annual NOIA oil and gas industry conference that a deal to develop Bay du Nord was mere weeks away.  Never mind the complexity of the project:  500 kilometres offshore,  in very deep water,  very deep under ground.  Never mind the complexities of international law not fully resolved yet.  Never mind the project economics – whether it can be developed profitably -  are still unknown.

Never mind anything.

The goal was the comparison.

Magic Man

The provincial Conservatives hosted a fundraiser later in the week.  They called it Mingle with the Ministers.  They used the chance to chat with provincial cabinet ministers as an incentive for business to cough up cash for the party.

The guest speaker at the event was a fellow who hasn’t been a cabinet minister since late 2010.  Old Twitchy still does it for some people.

‘Danny Williams was awesome last night,”  one Tory supporter gushed in the morning-after glow on Twitter. ‘he has such a great outlook for our province.”

What was so awesome,  your humble e-scribbler wondered.

“It is refreshing,”  came the breathless reply, “to hear someone talk positive about our province for a change instead of all the doom and gloom.”

Never mind, apparently,  that the doom and gloom – record levels of public debt,  record deficits of $2.0 billion for the foreseeable future  - are the direct result of Williams’ incompetence. No need to bother with that.  Just listen to Williams and refresh.


Refreshing is what Paul Davis was looking for last week. A refreshing of his political fortunes. That’s why he tossed out the Bay du Nord deal that was mere “weeks away” with development coming within four years or sooner.  Williams used the same technique a few times:  twice with Hebron, and once with the Lower Churchill, for sure.  Toss out the idea of a deal while the other parties to the talks are talking it down.  Then deliver – in the Hebron case – a deal that miraculously happened in August when Corporate Research Associates was polling.

Not once.

But twice.

How Williams got the deals,  what he had to give away,  caused few to lose sleep. Didn’t then.  Doesn’t now.  Better to be refreshed than suffer the doom and gloom, apparently.

What Williams got factors hugely in the Telegram editorialist’s mind.  The ‘Williams doctrine” of equity stakes,  initially 4.9% and then 10%, was supposedly condemned at the time by the “conservative media” according to the editorial but was “retrospectively vaunted as a new way of doing business.”

The “heady days of equity stakes and super-royalties” may now be gone,  the editorial frowns.  Paul Davis may not take such a stake in the Bay du Nord.  “It doesn’t help, though, that we’re in election mode, and Davis is under extreme pressure to seal a deal before the fall.”  All the same,  it will be interesting,  the editorial finishes,  to put Davis’ deal besides Williams’ ones for comparison.

Objects in Mirror are Smaller than Remembered

Those great equity stakes were retrospectively vaunted.

By whom?

Well, not by too many, except whoever wrote the Telegram editorial.  As with many things from the Williams years,  the equity stakes were a lot less in hindsight than they were cracked up to be at the time.

When the provincial government first staked out its position on Hebron (2005)  equity wasn’t part of the package.  The provincial government talked about improved royalties,  a second refinery, and improved benefits for local contractors.

Equity didn’t turn up as an issue until 2006.  By that time, Williams publicly staked out three key demands.  He said he’d settle for two of the following three:
  • an oil refinery,
  • better royalties for the province, and/or,
  • an equity position in the project.
What we didn’t know at the time  - February 2006 - was that the companies and the government had reached a tentative deal on most issues in late January.  Williams made his public demand after they started talking about some additional provincial demands.

That new detail – equity – only assumed the significance it did when talks fell apart in April 2006.  The companies couldn’t agree among themselves on equity so they wanted to revert back to the January deal.  Williams wouldn’t have any of it and so he walked away. He even denied there was actually any agreement in January.  Much as he did in 2004 with the federal government,  Williams made a lot of noise and a lot of claims. That’s what people remember. In the end, though, what he settled for was a lot less.  That’s the part people forget.

How much is that equity in the window?

Initially, it wasn’t even clear how much equity Williams considered to be crucial.  In interviews at the time Williams talked about five percent as a magical trigger that would give the partner an “absolute veto” over development.  That’s how he rationalised the 4.9% stake he subsequently accepted along with royalty give-aways and other concessions on local benefits.

Williams explained the importance of equity as the Telegram editorial noted.  Supposedly equity was crucial because “we” needed a window on the industry, to learn how it operated.  Williams uses the royal “we” a lot.  He was doing so when he talked about equity.  We,  as in the rest of us, already knew how the industry worked.  We,  as in the rest of us, already had developed a sophisticated management scheme based on the experience of Norway and others in the North Sea.

Williams and his Conservative colleagues also talked of the importance of ownership.  Equity was ownership, they said. That remains a curious idea since the people of Newfoundland and Labrador already own 100% of the subsea energy resources.  They make money by renting the resources out to others to develop.  They don’t need an absolute veto over any project:  they already had it without spending a penny.

How much equity did one need to get this window shifted over time. In 2006, Williams’ target was 8.5%. He settled for 4.9%. The 10% target came from the 2007 energy plan.

If ownership and control and money were so important,  it remains a mystery as to why the provincial government settled on a mere 10% equity in the energy plan.  It may have had something to do with industry reaction to the effort to claim even more money from the offshore when the existing royalty regime provided the provincial government with a substantial portion of project cash flows.

The Lower Churchill Connection

Where it came from specifically doesn’t really matter.  The thing about equity is that it was never really about ownership, control, or windows.  It was about financing Williams’ legacy project on the Lower Churchill. 

The equity stake had a cash value.  Williams could mortgage the equity stakes  for cash to pay for the dams. He could use the money from oil to cover loan payments if times got tight.  In a worst case scenario – and as he inadvertently let slip in the House in 2008 -   Williams could just sell off the equity stakes off for cash if need be.

That last bit is one you may not have heard tell of before.  Regular readers will know it.  There’s no doubt Williams said it.  And you know it was something Williams was sensitive about by how quickly and how frantically Williams worked over the news media at the time not to report his words. 

They didn’t.

The equity stakes were a lot less, in other words, than Williams and his colleagues led people to believe.  If you don’t believe that read the 2007 energy plan.  The equity stakes aren’t absolutely guaranteed.  There is a tiny, but very significant caveat:  “where it fits our strategic long-term objectives.”  Those six words tell you that equity was something very small and very specific.

And since the Telegram editorialist apparently missed the point, Paul Davis didn’t tell us anything new when he said the government might not take an equity stake in Bay du Nord. Nalcor actually indicated in 2013 that equity in Bay du Nord wasn’t on their list of priorities.

As SRBP noted then:
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.”
The Other Impossiblist

We don’t need to wait around to see if Paul Davis cuts a deal on Bay du Nord.  We can make comparisons right now with what happened on the Hebron project a decade or so ago.

Danny Williams’  interest in equity stakes was two-fold.  They were never about ownership,  a piece of the action, or whatever other great claims he and others made. 

For Williams, equity was a way to finance his dream of building something on the Lower Churchill.  That was the practical aspect of it and, if you look at the size of the equity stake you can see the extent to which equity was devoid of principle.  It was just another example of the conversion of principle to cash.

The other value of equity for Williams lay in the illusion he created by his public pronouncements starting in
February 2006.  He knew he was close to an agreement.  He made grandiose public demands and, as in 2004 in the talks with the federal government , Williams waged a largely imaginary fight.  The heady days that the Telegram editorialist  recalled are actually about Williams’ theatrics, not what Williams’ was actually doing with equity stakes.

For Paul Davis, the Bay du Nord project is the theatrical prop. It’s like his fight with the federal government over the European trade talks. Davis wants to present an image and Bay du Nord fits the bill.  He wants the comparison with Williams in the hope that some of Williams’ electoral mojo might rub off on him.  Truth be told,  Davis’ posturing is so familiar,  it wouldn’t be a shock to find out he’s been taking advice from Old Twitchy himself.

As for the equity stakes,  they are already spent. They’ve done their job on the Lower Churchill and the provincial government has no use for them any more.  That’s why there’s a caveat in the energy plan. The only people who think the equity stakes are a big deal are people who were hypnotised in 2006 by the best conjurer to thrill the crowds in the province since Reveen.  They just missed the cue to wake up in November 2010.