Better more, and better #nlpoli

The provincial government has a very serious financial problem. 

The forecast deficit for the current year is the second highest on record at $916 million. 

No one knows how big the deficit will be next year,  but with oil prices forecast to stay in their current range for the next couple of years,  odds are very good that the provincial government will turn in a record deficit next year.

That is saying something.  The forecast in 2004,  the first year the Conservatives took office, was for a deficit of $840 million.  Finance minister Loyola Sullivan called it “the largest deficit in our province’s history.”  He was a wee bit off.  The actual accrual deficit in 2003 was $958 million.

Could be right. Could be wrong. #nlpoli

If you accept the provincial government’s version of things, spending a half a billion dollars more than you are collecting is a responsible decision.

That’s the headline the government’s communications people put on the news release covering the release of the fall budget update.

And if you look at either the Telegram or the CBC version of the story,  the biggest thing to notice is that the provincial government deficit is $100 million less than originally forecast.

Let’s take a deeper look and see what is there.

Oil production figures

BP gave you the numbers in November 2009.

Turns out the provincial finance department’s statistics division did a run of the same figures in October but didn’t make them public until January 2010, three months later.

Still, they projected oil production over the whole fiscal year would be down 21% from the previous year. They changed the exact numbers from 98 million barrels forecast in March to 101 million barrels by December and – in true political hyper-torque mode -  in the December financial update this was pushed an an increase compared to the forecast.

It was – obviously -  an increase compared to the forecast; but that only masked the fact they were actually forecasting a drop of 21% in production regardless of how you looked at it.

That, almost inevitably, will translate into a substantial drop in revenue as well.  Yet,  the December financial statement claimed there’d be only a modest drop in oil revenue from the blockbuster year in 2008.  The finance officials never did show how they came up with that calculation.

The BP forecast for revenues used used actual royalty figures from the federal natural resources department. They show the provincial government’s royalties tracking below the March forecast.

And while the treasury will pocket close to $200 million from the Hibernia transportation dispute settlement it’s still a bit hard to see how oil prices are going to rebound sufficiently to produce the extra $520 million in oil revenues – compared to March’s forecast  -  that the revised treasury forecast said would be in hand by the end of the year.

Still, the final tally on the budget update in December only shift the figures around slightly.  If it holds on track, the provincial government will still wind up borrowing close on a billion dollars in cash – either from the banks or from its own temporary cash reserves – in order to balance the books.

-srbp-

Oil production remains lower than forecast

Provincial government oil production forecast remains way off track.

Budget 2009 predicted oil production would total 98 million barrels in 2009.  In December, the financial update raised the forecast to 101 million barrels.

But as of the end of November the offshore had produced only 59 million barrels and with only four months left in the fiscal year, it would take a miracle to hit the spring projection let alone the December number forecast by the provincial finance department.

Offshore oil production in October 2009 was 32% below the same month in 2008 and November production was down by 28.4%, according to actual production figures from the offshore regulatory board.  BP presented earlier figures in November.

To give a sense of of how far down current oil production is compared to previous years, take a look at this chart that compares April to November for each of the past three fiscal years.  The grey bars are 2007.  The back is 2008 and the red is 2009.

In order to meet the provincial government’s Budget 2009 target, oil production in the last four months of the current fiscal year would have to run higher than April 2009 in each month.

To hit the December projection, production would have to run at levels of about 10.5 million barrels a month, and that’s a figure the offshore hasn’t hit this fiscal year at all. 

Overall, if production is running below forecasts, it will be that much harder for the provincial government to hit its revenue forecasts. After all, even the finance minister admitted in a year end interview that virtually every major sector of the provincial economy – he didn’t really mention oil - was in decline.

“The recession, particularly the way it hit the U.S., impacted their ability to buy products from us and that hurt the fishing industry, that hurt the pulp and paper industry in a major way, and it hurt the mining industry,” the MHA for Humber East told The Western Star.

He said the major losses of revenue from those sectors, combined with losses of personal income tax and sales tax, impacts government’s ability to spend in other areas such as education and health care.

Of course, regular BP readers have a better sense of what’s going on with oil production than the anything the finance minister has said.

And just think about it for a second:  if the finance department’s offshore production forecasts are so far out of whack with actual production, what else in the December forecast was off in a bad way as well?

-srbp-

If it looks too good to be true…

While gross domestic product in Newfoundland and Labrador is now forecast by the provincial finance department to shrink by 8.5%, finance minister Tom Marshall today forecast he expected to receive $520 million more than budgeted last year in oil royalties.

That’s pretty much typical of the incongruity between what the  “mid-year” financial update said about the economy and Marshall’s prediction of higher than expected revenues.

Here’s a summary of the 2009 economic performance to date in Newfoundland and Labrador, as presented by the finance department:

• Real gross domestic product is now expected to decline by 8.5% compared to 2008.  That’s worse than the 7.7% drop forecast last spring.
• Oil production in the first nine months of calendar 2009 is down 20.6% compared to the same period in 2008.
• Despite that, the revised budget projection is for an increase in oil production to 101 million barrels by the end of March 2010 compared to the spring projection of 98 million barrels.
• The value of oil production is expected to decline by 45% compared to last year.  That’s on a calendar basis. 
• Government oil royalties on an accrual basis is expected to be $1.813 billion, an increase of $520 million over the forecast in Budget 2009.
• The value of mineral shipments is expected to be down by 56% compared to 2008.
• Mining employment down by 9% compared to 2008.
• Paper production is expected to be about 47% lower than in 2008.
• Retail sales and personal income are up slightly compared to 2008.

Some quickie observations:

Apples and oranges comparisons: Most of the economic information presented in the update compares performance over a calendar year while the budget works on a fiscal year. 

To illustrate how this can have a distorting effect, consider that oil production in the first three months of calendar 2009 remained at 2008 levels of 10 and 11 million barrels per month.  However, during fiscal 2009 thus far (starting in April) , monthly production has averaged about 30% below that.  The first three months artificially inflate the average for the calendar year compared to the fiscal year.

Triple the year-to-date oil revenues and then some:  As BP reported earlier, oil royalties in the first half of fiscal 2009 (Apr to Sep) totalled about $488 million.  September’s royalties were 60% below the monthly average needed to hit the spring budget projection of $1.3 billion on an accrual basis.  Overall, royalties are running about 15% below forecast.

The fall update now projects oil royalties at $520 million higher than forecast. That’s 40% higher than forecast, despite the prediction that the value of oil production will be down by  45% and that production will be down by at least 20%.

Oil royalties are function of price and production.  Even if the royalty rate is higher in 2009 than 2008, lower production and lower average prices should produce lower royalties. 

As it is, the revised oil royalty is only 8% below 2008’s figure despite a projected 45% drop in value and a 20% drop in production.

A missing chunk:  On page nine of the budget speech from last spring, then finance minister Jerome Kennedy blamed the deficit on two things:  the impact of the stock market on pension investments (about $380 million) and lost Equalization revenue owing to changes in the formula for 2009.  That part was supposed to account for about $414 million.

There isn’t a single word about the pension plan investments and their current valuation in the update.

Hmmm.

Read the fine print:  While things might just turn out to be as rosy and wonderful as the budget forecast, it might be useful to bear these words in mind.  They come from page five of the budget update document itself:

However, at this time, there are four months remaining in the fiscal year, and there are many factors and uncertainties which may impact year end results.

Uh oh.

This wouldn’t be the first government that blew smoke to try and keep consumer wallets open through a rough patch.  There are plenty of things in this budget update that don’t add up.  Maybe they aren’t supposed to unless you realise that this update was less about the facts and more about the torque.

Whatever happens, we’ll know for sure in the spring.

-srbp-