14 September 2020

The Husky Boys' Challenge #nlpoli

The Husky gambit last week presents the province’s leaders with a fundamental challenge.  Do we continue on the current path or do we change?  This is not just a question of oil development versus some nebulous, pseudo-intellectual gibberish called “decarbonization”.

It is the question from 1984:  who will control the Newfoundland and Labrador offshore and with it the future of the province itself? 


Husky is in such serious financial trouble that the company is thinking about walking away from established, profitable fields offshore Newfoundland and a project to expand one of them that is already more than halfway to first oil.

That is precisely what the company announced last week.

In a statement, the company said that delays in the West White Rose project caused by COVID-19 and what the company described as “market uncertainty” left it “no choice but to undertake a full review of the project and, by extension, our future operations in Atlantic Canada.”

What is most striking about the statement is that Husky acknowledges all the reasons why White Rose and the extension project are attractive financially now and in the future:  the field produces “light crude oil at low incremental cost and with lower greenhouse gas emissions intensity than other North American crude oil projects.”

In comments to media,  Husky CEO Rob Peabody said that the project’s fundamentals remained attractive.“

The common local reaction to this news was, in every respect, predictable.  The local oil industry association, headed these days by former finance minister Charlene Johnson, wants the federal and provincial governments to spend unlimited billions in tax incentives and bailouts to prop up the industry at the levels before the market down-turn that started before COVID hit. 

The figure tossed around specifically to salvage Husky’s role in White Rose was $3.0 billion.  The provincial government was quick to say it had no cash to spend, leaving people to look to Ottawa for the money.

Peabody was quick to liken his request for a bail-out to what happened at Hibernia in 1992.  The two situations are nothing alike.  For starters, crude prices in 1992 were US$8 a barrel – about $13 a barrel today, down from $10 to $12 dollars a barrel at the time the Hibernia partners approved the development deal in 1990.  At the time, no one expected oil to double in the foreseeable future let alone what is effectively quadruple the price today, adjusted for inflation.

Hibernia was the first project.  It was an enormous risk that paved the way for the rest.  No one expected oil prices to reach a point where the thing would pay out its development costs.

White Rose was third and has hit payout, meaning all development costs have been recovered. The extension only adds another development in a basin that is well-established, costs are low, and risks are predictable.  Today, oil is somewhere above US$40 and is forecast to go higher within the time the extension project would start producing oil. It is – as Husky has said – a very attractive project.

In 1992, the oil companies didn’t want government hand-outs.  They tried a private sector solution first.  The federal government only took a share when no other private sector buyer besides Murphy Oil wanted to come in and after the provincial government decided against its own involvement.

From the standpoint of the people who own the oil – namely the people of Newfoundland and Labrador - the 1992 solution is the best option.  Go to the market first and see if someone wants to buy Husky out not just for the extension but for everything the company has in the east coast Canadian offshore. 

The resource owners should take Husky at its word.  Despite all the things going for White Rose now and in the future, Husky wants out. So, let them go.  The company hesitated before committing to the extension. Maybe what is going on is something internal to the company, a change in focus that has nothing to do with Newfoundland and Labrador.

It doesn’t matter what the cause for Husky’s decision.  Increased government involvement is *not* the solution.

The original strategic goals for Newfoundland and Labrador was to secure de facto control of the pace and mode of development in the offshore.  It wanted to ensure that the development of the resource took into consideration above all else the best interests of the people of Newfoundland and Labrador.

So, in that context, slowing production or closing down a field if oil prices dropped too low is actually in the province’s best strategic interest.  Shutting down the White Rose extension might actually be the right move.

But notice the local reaction:  as oil prices drop and companies make the strategically smart decision of cutting losses and conserving assets (the oil) until prices are better), the province’s oil industry wants taxpayers to spend whatever it takes to keep oil flowing even at prices that would mean taxpayers would *never* recover their losses.  This is not just the idiocy of the Venezuelans.  This is the same stupidity that drove Charlene Johnson and her like-minded colleagues to plough ahead with Muskrat Falls despite the fact taxpayers would never recover their investment let alone profit from it.  The benefits went to others. And now they want to do it again.

In this case, we see the same logic again.  Any injection of government money into the project by way of deferrals, write-offs, or cash would effectively diminish the share the resource owners get from their resources merely so that the company can profit.  One version of the “ask” from government that floated around last week was for a total of $3.0 billion.  Not surprisingly, that is the total government tax take from the extension. Taxpayers would never get their money back.

Anyone who accepts that offer is a sucker. Giving up taxes and rents to let companies profit from local resources is an old scam in Newfoundland and Labrador.  For decades, that was the bargain companies made and government and government accepted.  Taxes or jobs.  Take your pick.

In the offshore developments of the 1990s and early 2000s and at Voisey’s Bay, Newfoundlanders and Labradorians finally rejected the old bargain.  They got both.

Things changed in 2003.  We went back in time. Government gave up the strategic goal of control in exchange for cash. SRBP described that change last year in a two-part series on the changed approach to the Atlantic Accord from 1984 to the most recent agreements. 

On the political side of things,  and as confirmation of the trend SRBP identified for both Liberal and Conservative administrations since 2003, politicians are now so disinterested in controlling the pace of development or exercising any sort of management that the PC Party last week said it would just stop funding the offshore regulatory board for a couple of years and instead give that money to oil companies.

Were the federal government to put money into the offshore – as many want – and the provincial government were to cut off funding for the regulator, the provincial government would be telling the federal government it is no longer interested in the 1984 Atlantic Accord.  The one who pays the piper calls the tune, after all.  Or to quote a famous politician, all principle converts to cash.

On the industry side, the provincial government has already shown its interest in subsidising the industry at the expense of taxpayers.  In Hebron, Danny Williams and Kathy Dunderdale deliberately gave oil companies a break on royalties in order to protect the private companies from price fluctuations.  They got nothing of comparable value guaranteed in return. They also subordinated the provincial government to the oil companies on regulatory issues.  More recently, Dwight Ball signed onto the expensive and risky Bay du Nord project with a minimum commitment of $1.0 billion in capital costs and the prospect that taxpayers would see no net profit from the project. 

The Husky gambit last week presents the province’s leaders with a fundamental challenge.  Do we continue on the current path or do we change?  

This is not just a question of oil development versus some nebulous, pseudo-intellectual gibberish called “decarbonization”.

It is the question from 1984:  who will control the Newfoundland and Labrador offshore and with it the future of the province itself? 

And in a wider sense, it is the existential question from 1933.  Do we want to control our own destiny or are we content to let someone else run the show as long as we can make a few bucks? 

In 1949, Newfoundlanders and Labradorians opted for self-government and self-determination as they did in 1984.

Since 2003, politicians and opinion leaders have consistently been willing to trade away everything for short-term cash. 

How will the answer the question in 2020?