04 November 2015

Admission of failure: Conservative offshore negotiations #nlpoli

The news release on the government’s generic offshore royalty  wasn’t exactly a model of clarity and accuracy.

The headline and first sentence referred to the announcement of a “framework.”

The first quote claimed that “establishing the enhanced generic offshore oil royalty regime” was an achievement for the current administration. 

The problem is that none of it is true.

Generic royalty established in 1994, revised in 1996

The official offshore royalty regime legally in place today is the one established before October 2003. It is a development of the first generic royalty regime established in 1994 when Rex Gibbons was natural resources minister. 

1996 generic offshore royaltyIn 1996,. Gibbons unveiled a revised generic regime and that one has been the basis of all subsequent offshore development deals.  While you will have a hard time finding it on the provincial website these days, the regime is there, if you look.

Gibbons and his colleagues established a generic royalty regime to provide the foundation for the mature development of offshore discoveries.  It balanced the corporate interests with the interest of the people who own the oil, namely the people of Newfoundland and Labrador.

The 1996 generic regime provided for a stepped increased in royalty before payout.  The steps were triggered by cumulative production. The more oil the field produced, the more royalty the provincial government got.  Once the companies recovered their development costs,  the royalty changed to a new set of calculations tied to production and profitability.

The new generic regime provided the industry with stability and predictability.  The generic regime worked well for for the provincial government across all price scenarios since it deliberately didn’t link the provincial government royalty to any specific price for oil.

The generic royalty regime in place before the Conservatives took office in 2003 served as the basis of their subsequent development deals on the White Rose extension, and Hebron.  In fact, the bulk of the royalties those fields will produce will come from the generic royalty regime established before the Conservatives took power in 2003.

So when Conservative cabinet ministers praise the concept of generic regimes for the stability they bring, they are acknowledging the strength of the policy they deliberately abandoned in 2003.  Danny Williams fancied himself a better negotiator than anyone else alive.  He believed he knew better than everyone else.  As it turns out, Williams was wrong.

What Williams and the Conservatives actually introduced into the marketplace was uncertainty and that uncertainty adversely affected development. In 2005 and 2006,  Williams set arbitrary demands for Hebron development and changed them during the course of the negotiations. He broke off talks in 2006 and by the time the companies agreed to a development, Williams had given away a great deal.

He allowed the companies to take a royalty holiday at the beginning of development by giving them a fixed rate of a mere one percent until payout.  Natural resources minister Kathy Dunderdale said at the time that the government gave away royalties at the front end to protect the companies.

Dunderdale claimed we’d make it back with the new super-royalty that the Conservatives had negotiated.  The problem was that their add-on kicked in based on a price for oil.  To make matters worse, they used a benchmark price that wasn’t related to the oil we produce offshore.  The problem with the approach was obvious at the time, just as it was obvious that the flexibility of the generic regime is what would produce cash in the public treasury day after day.

If that wasn’t bad enough, the provincial government also gave away possible local industrial benefits.  They accepted the bare minimum that the companies offered in exchange for a so-called equity stake that was far less than Williams had set as a minimum.

The equity stake did produce a fundamental conflict of interest for the provincial government that didn’t go away. The government had to act both as the custodian of the public interest as a regulator and as a partner to business.  The final Hebron agreement Sacrificed the public interest to the corporate one. The agreement forces the provincial government to side with the companies if the governments proposed any regulation that the companies didn’t want.

In the Hibernia South  example, the revised royalty regime negotiated around 2000 produced the lion’s share of cash. Neither equity nor the Williams add-ons had any serious impact on provincial revenues. News reports at the time the provincial government announced the final deal simply repeated the false government claims. While the Hibernia royalty regime isn’t the same as the generic one,  the generic royalty was derived from the Hibernia approach.

The provincial government announced it had a draft revision to the province’s existing generic royalty regime.  The official news release created the false impression this was a new idea.  The government announcement also false implied that the new generic royalty was actually in force.

None of that was actually true.  What the provincial government did announce, though, was that the policy they abandoned was actually the right one all along.  It will now be up to the party that forms the government after the next election to finish cleaning up the mess crated by Paul Davis and his colleagues.

But at least Davis and his crowd admitted they screwed things up before they left, even if you had to wade through a pile of misinformation to see the truth..