G. Why is Alberta different from Newfoundland and Labrador?This question has been asked many times in relation to oil and gas development. In some senses, it is like asking why a duck is different from a horse. Two significant differences are important to bear in mind when assessing oil and gas resources.
First, note that Alberta’s resources are on onshore. They are physically within the jurisdiction of the Government of Alberta. More importantly, however, and with the exception of the tar sands, Alberta’s oil and gas resources are relatively easy to develop. A small group of middle-class investors can raise the funds - scarcely more than $100, 000 - needed to drill an oil well in Alberta. Located as they several hundred kilometres out to sea in the North Atlantic, oil and gas resources offshore Newfoundland and Labrador can only be exploited by the combined efforts of multi-national oil companies able to invest the hundreds of millions needed for a comprehensive exploration and drilling program. A structure like Hebron/Ben Nevis which is fragmented and contains heavy oil demands even greater investment to bring to on stream.
Second, note that Alberta’s oil and gas resources have been exploited since the late 1940s. As such, Alberta is home to a well-established oil industry with secondary and tertiary development and a sophisticated, experienced support system of government and business. By comparison, the Newfoundland and Labrador offshore is scarcely seven years old if measured from the time of first oil production. It takes time to develop fully a mature oil and gas industry. Newfoundland and Labrador is still in the early years of its growth.
In that light, the Atlantic Accord offset provisions are also deficient. They fail to account for the relative underdevelopment of the offshore industry in this province. They also fail to consider the length of time which was likely required to bring existing fields on stream or that would be required to find any new, commercially-viable fields.
H. The federal share of HiberniaWhen Brian Mulroney first proposed a deal on offshore oil and gas resources to Brian Peckford, it was done in the context of the National Energy Program. That program included significant federal revenues from oil and gas developments throughout the country and, at one point, anticipated the federal government would hold a 25% interest in every development on what was termed frontier lands. Mr. Mulroney proposed that “[i]f, on assuming office the new government decides to vest in itself the Crown carried shares offshore Newfoundland and Labrador, then these rights and shares will be shared equitably by both governments.”
This Crown share proposal survived in the Atlantic Accord as section 40, however, by the time the Accord implementation act was drafted and passed, the Mulroney government had eliminated federal shares in oil and gas fields except as may have been obtained through PetroCanada.
The Hibernia shares held by the federal government are not the type of shares anticipated by the Atlantic Accord. Hence, their disposition cannot be governed by any intentions signaled by the Accord. The Government of Canada invested in the Hibernia project as a means of salvaging it, at a time when one of the commercial partners withdrew. The federal government invested in Hibernia under very specific circumstances, not as part of a broader government policy on oil and gas resources. Moreover, these shares would not exist as Crown shares if the project had proceeded as originally proposed by the consortium of oil companies or had other commercial partners emerged who were willing to purchase the interest owned by Chevron in Hibernia. As a consequence, the federally-owned shares fall outside the scope of revenues to which the Government of Newfoundland and Labrador could reasonably have expected to have some portion.
It is interesting to note that the overhead slide presentation makes no reference to transferring the federal shares. The only publicly available reference to share transfer remains the Blue Print and letters to the three federal Conservative leadership candidates and the letter inadvertently sent to New Democratic Party leader Jack Leyton.
The Hibernia shares carry with them a prospect of immediate cash return either through their sale or through a transfer from the Government of Canada to the Government of Newfoundland and Labrador. They also carry with them liabilities; the owners of the shares must be prepared for the costs associated with closing the Hibernia field whenever it runs out. It would be foolhardy for any Government of Newfoundland and Labrador to acquire shares in Hibernia without considering, and disclosing publicly, all the implications of owning a portion of the Hibernia field.
I. Being the “Principal Beneficiary”The Atlantic Accord is as much a child of politics as it is one of policy. Brian Mulroney was leader of the Progressive Conservative Party and Leader of the Opposition when he wrote to the premiers of Nova Scotia and Newfoundland and Labrador to propose an agreement that he believed would settle the ongoing negotiations on offshore resource development.
The Mulroney proposal “would recognize the right of Newfoundland and Labrador to be the principal beneficiary of the wealth of the oil and gas off its shore, consistent with a strong and united Canada.” This sentence appears in the second paragraph of Mulroney’s letter. It sets one of the basic principles underlying the Accord. This phrase is particularly interesting since the idea of “principal beneficiary” had not previously appeared in public discussions of offshore resources.
While the phrase “principal beneficiary” is undefined in Mulroney’s original correspondence, it is clear from a reading of the original proposal and the subsequent Atlantic Accord, that the province as a whole was to benefit in at least four significant ways.
First, the provincial government would gain the right to manage the offshore jointly with the federal government, particularly with respect to setting the mode of production. This had significant implications for local benefits, as evident from construction of the gravity-based system (GBS) for Hibernia. Second, the provincial government gained the right to collect revenues from the resources as if they were on land. This established that the provincial government would determine its own revenues to be collected from offshore oil and gas development and production just as a province like Alberta is able to do. These revenues would, de facto, be treated as “own source” revenues like income tax, sales tax and other similar levies.
Third, the province as a whole would benefit from the development of local jobs. Mulroney committed that oil-related infrastructure would be sited in the province, where possible. This was no small matter. Mulroney’s letter contains strong language and conveys a deliberate intent on the part of the future Prime Minister to provide this province with significant job and business benefits. “Local job creation and labour development would be of paramount concern.” Fourth, the province would benefit since the provincial government would not see a dollar-for-dollar loss of Equalization payments that would naturally result from growth in the government’s own-source revenues. The Government of Newfoundland and Labrador would receive all of its own-source revenue, potentially a portion of any federal shares in the offshore, and as well, additional payments to offset any losses from Equalization.
The same general approach was taken by the Liberal administrations which preceded Mr. Mulroney. For example, the comprehensive proposal made by the Government of Canada in 1982 stated that “it is recognized that Newfoundland should enjoy the major share of the revenue that offshore resources are expected to generate…” and that “the people of the province would realize the greatest and the most direct benefits from the development of offshore oil and gas resources in terms of growth and income, jobs, opportunities for new businesses, and significant new provincial government revenues.” The federal Liberal proposal on revenue sharing was linked inextricably to the overall performance of the provincial economy and hence may be taken as further evidence of the extent to which the federal government before 1984 viewed the benefits from the offshore to this province to be greater than just the sums flowing to the provincial government’s treasury.
While local job benefits merited two short paragraphs in the original Mulroney letter, both the Accord itself and the enabling legislation provide an elaborate structure aimed at managing local benefits. No one can underestimate the value of local industrial benefits to the province; nor can anyone easily dismiss the contention that the architects of the Atlantic Accord saw local industrial development as a significant factor in establishing this province as the principal beneficiary of offshore oil and gas development.
The Atlantic Accord and enabling legislation predate both the North American Free Trade Agreement and various inter-provincial accords on free trade. The Schedule of Canada, Annex 1, “Reservations for Existing Measures and Liberalization Commitments” of the North American Free Trade Agreement (NAFTA) specifically exempts the Atlantic Accord implementation legislation and its local benefits provisions from NAFTA.
It has long been the contention of those familiar with the Atlantic Accord that any substantive change would negate the reservation or, at least, give an interested party sufficient grounds to challenge the reservation established when NAFTA was signed. The Williams administration has not addressed the issue of the Accord and NAFTA, likely since it believes the changes to the Equalization offset section are not sufficient to trigger a NAFTA-related review of the Accord or jeopardize the Accord’s current NAFTA exemption. A simple change to the offset provisions would not normally constitute a significant change to the Accord itself and hence the NAFTA reservations would remain intact.
A change to the Accord’s fundamental principles would constitute a substantive change to the Accord. The objectives of the Accord are enumerated in Section 2 and include the commitment that Newfoundland and Labrador is to be the principal beneficiary of offshore resource development. Their ordering is no accident or whim; the words used are not selected by happenstance. They reflect the considered view of the signatories as to the major purposes the agreement is to achieve.
It appears that the Williams administration is seeking to alter a fundamental principal of the Atlantic Accord. By linking the argument on Equalization offsets to the objectives of the Accord, the provincial government may well open the industrial benefit provisions of the Accord will be lost and offshore Newfoundland and Labrador will be subject to international free trade for goods and services. If this is an objective of government policy, then it should be debated in full so that the general public can make an informed choice. If it is not, then the provincial government must make clear the scope and impact of the changes it is proposing. The overhead slides are not sufficient.
J. Amending the offset: an alternative approachAs presented by the Williams administration, the proposal to amend the Atlantic Accord Equalization offset provisions is founded on somewhat shaky ground. It relies primarily:
- on general confusion over what benefits currently are provided by the Accord;
- an argument about supposed “clawbacks” that is either flawed in theory or which ties the province to other logical arguments that would work against the province’s overall revenues;
- a re-definition of the concept of “principal beneficiary” that may jeopardize substantial benefits to the province as a whole;
- an approach that ignores the intentions of the Government of Canada through two administrations; and that,
- ignores the practical circumstances affecting development of resources offshore Newfoundland and Labrador.
The Atlantic Accord Equalization offset provisions are clearly deficient when viewed from the standpoint of development of the province’s economy. The existing Accord approach is built on a simple calculation that makes no allowance for issues affecting development of the fields or the overall impact which offshore oil and gas resources have had and will continue to have in developing and diversifying the economy of one of the country’s financially weakest provinces.
Based on the foregoing, the provincial government should reformulate its proposal to the federal government to produce an amendment that is simple, based on logical, practical and historical premises and which will have a definite termination. Disentangle the Accord proposal from other arguments and make it as straightforward as possible. What remains is a robust concept:
Amend the Atlantic Accord offset provisions to give the provincial government a full Equalization offset, as currently calculated by the Accord for the first four years, until such time as the province’s fiscal capacity reaches 110% of the national average and its employment rate meets or exceeds the national average or for a period of 25 years, which ever comes first.
It is hard to imagine that any Liberal administration in Ottawa could reject a proposal that is founded on the very ideas it predecessors advanced 20 years and more ago. The proposal leaves intact the broader benefits which two national governments have intended for this province to receive from oil and gas resources off its shores. It is a proposal that is divorced utterly from the extreme and often partisan rhetoric which has surrounded recent discussions of public policy in this province.
K. Conclusion The commonplace conclusion mentioned at the outset of this paper is based on mistaken information or incomplete information. The provincial government sets its own revenues for offshore oil and receives its revenues in total. The Atlantic Accord is clear on this point and no one has publicly suggested that the Accord provisions on this point are not being followed. As for the supposed Equalization clawback, losses in Equalization are offset under the Atlantic Accord according to a formula agreed to by the provincial government in 1985. The formula appears to be working as intended. No one can make a thorough assessment of this matter however, since the provincial government has not released thorough, accurate information on revenues, on the Accord offset provisions nor on provincial government expectations in 1985.
In general, however, the following can be said with confidence:
1. The Government of Newfoundland and Labrador currently receives 100% of provincial revenues from offshore oil and gas resources.
2. The Equalization offset provisions of the Accord are functioning as intended, although amending the Equalization offset provisions is desirable for the provincial government. A better deal is attainable based on the stated intentions of the Trudeau administration before 1984.
3. Altering the definition of “principal beneficiary” to refer only to provincial government revenues may jeopardize other benefits the Accord provides to the province.
4. Disposition of the federal government’s share of the Hibernia project is outside the Atlantic Accord. Acquiring the shares must be examined in greater detail since they carry responsibilities and financial implications once the field is exhausted.
Brian Peckford’s phrase “One day the sun will shine and have not will be no more” is now part of our political vocabulary. That phrase, about sun and “have not” embodied for many people their hopes about the future of Newfoundland and Labrador and the unprecedented opportunity offered by oil and gas for ending our status as a people dependent on hand-outs from richer cousins in the rest of Canada. The very term “have not” derives from the Equalization program – receiving provinces are said to be “have nots”; the money comes from the “haves”.
Peckford’s goal was to use oil and gas wealth to end the indignity of a proud people living on a form of national dole. At the time he spoke, more than 60 per cent of the province’s annual budget came from federal transfers, much of that from Equalization. The Atlantic Accord may not be perfect, it may not cover all contingencies, but it is the deal that has produced tremendous economic and social benefit in Newfoundland and Labrador. We tinker with it at our peril. The percentage of provincial revenues coming from federal transfers has declined. This is due in part because of federal changes to transfer programs, but also in part because of growth in new industries like oil production. As Rob Strong wrote recently, though, it is important to remember that the East Coast oil and gas industry is still growing. There is much more to come.
The Williams administration is proposing to alter a landmark document in the province’s economic and political history, the net effect of which, at the very least, would increase federal transfers to the province. The Atlantic Accord is not holy writ, but it is a large part of the province’s current wealth. More importantly, it holds the prospect of providing considerably more wealth with future discoveries in the Orphan Basin and the Laurentian sub-basin. The Premier is proposing his changes, however, without an informed public discussion, without releasing a concise statement of the provincial government’s position and, as it would seem, without relying on the plain meaning of words. Given the importance of the Accord to the province, we should be careful in seeking adjustments to it.
It should not escape notice that in making its proposal, the Williams administration is merely picking up where the Grimes government left off. In fact, there is precious little difference among the three political parties in the province on this issue. In itself, that should be cause for concern, as Mark Twain warned. The absence of debate or substantive discussion carries with it greater implications than the denial of contrariness. Without a clear understanding of what is being sought< how can anyone – politicians, reporters or the public at large - judge the government’s success or failure?
Getting more cash from Ottawa is one thing. If it comes at a larger cost, namely bringing the Accord under NAFTA, then the Premier will need wider public support to continue on his path. Newfoundlanders and Labradorians have a right to know what is being talked about because they are the ones who will either reap the reward of these changes or bear the burden.
Figure 1, above, compares the government "take" across several jurisdictions. Locke defines the government "take" as government revenues divided by net cash flows.
Figure 2, above, shows the change in government "take" as oil prices increase per barrel. Note where Newfoundland and Labrador falls in relations to the other jurisdictions, including Alberta.
Figure 3, above, compares net cash flows among the two orders of governments and the companies.
